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The Age of the Obvious: Thomas Piketty’s Capital

2014 March 27
by Ian Welsh

The economist Thomas Piketty, who along with Emmanuel Saez has done great work on the concentration of income, has written his magnum opus, Capital(pdf).  The title is an obvious reference to Marx’s Kapital, and the book is a huge survey of 200 years of economic history, specifically relating to what Piketty calls Capital.  It is here, as Galbraith points out in his excellent review, where Piketty starts moving away from Marx: for Piketty, capital is just anything that is valued in money: capital is wealth, whereas for Marx it is whatever allows Capitalists to control the means of production, and thus workers.

Piketty’s argument is that:

1) If national income grows slower than capital (wealth, really), then capital tends to concentrate.  If income grow faster than wealth, then capital tends to disperse.

2) Capital grows faster the more of it you have: so if you have a hundred thousand, you get more returns than someone with ten thousand.  A million gets less than a billion, and so on.  This contradicts orthodox economics, with its claim of diminishing returns, but it is a common sense observation of how the world actually works today, and Marx noted the concentration of money and capital in his time.

3) The long term growth rate for wages over the last 200 years has been about 2 to 2.5% (tech increase of a bit over 1%+ population increase).  The long term growth rate for capital (money/wealth), has been 4 to 5%.  There have been periods and places where this is not true, but it is generally true.

4) Wealth is wiped out by war, financial collapse and depression, or it is controlled by confiscatory taxation and inflation.  The good period after the war is thus created by the wars and depression, and the policies that followed from them.

5) The Industrial Revolution created a period where income grew faster than wealth.  That period was extended by the cataclysms of the early 20th century.  But the gains from the Industrial Revolution are mostly gone: once every part of the World has gone through it (China, India, Africa), that’s it—you return to an era where wealth grows faster than income and inequality is thus permanently high.

This is an important book: it marshals a lot of data, and puts it together in a coherent model.

But the model is not as new as it might seem. Piketty spends a lot of time distancing himself from Marx, and well he should, because this argument, even with a different model of what Capital is than Marx used, isn’t that much different from Marx’s view on the concentration of Capital, nor is his view of post – WWII history particularly different from a fairly orthodox reading of it: the financial collapse, depression, and two World Wars destroyed the wealth and thus power of the rich, and made it possible to put in place policies which were hostile to their interests and which made it so that more of national income was distributed to ordinary people.

Low inflation is bad for ordinary people (who tend to borrow) and good for the wealthy (who tend to lend).  Policies since 1979 have favored crushing inflation.  This has increased the power of the rich.

High marginal taxation is good for ordinary people (they don’t pay the taxes, they get the benefit of the money, and the rich are kept weak).

There is no fundamental analysis of the mode of production or the mode of violence, either, and without those you cannot determine how much power various groups have to take a share of the national income.  How many people are needed for production?  How many people are needed for violence?

Piketty’s book is important primarily because it proves the obvious, and this is the age of the obvious.  You must prove, beyond a reasonable doubt, what any educated individual already should know because there is a lot of money in obfuscating the obvious. It pays very well to be a conservative ideologue spouting off about economic freedom, because very rich people want the government to make them rich, bail them out, and not tax them.

Political decisions are important: in 1929 Hoover, the Fed, and later FDR did not bail out the rich.  They were allowed to lose their money, and thus much of their power.  That was a decision: another decision could have been made, and in 2008 it was made: the rich were bailed out.  It was made differently in 2008 because the rich have spent the last 80 odd years obsessing over what went wrong in 1929 that allowed FDR, the New Deal and everything which flowed from it. Ben Bernanke’s entire career was “how do we make sure the rich don’t lose their money so that FDR doesn’t happen.”  He was chosen to be the Fed Chairman precisely to ensure that the next Great Crash, which everyone who wasn’t an idiot knew was coming, wouldn’t wipe out the rich.

The cost of his actions is the actual drop in ordinary Americans wealth and income, the impoverishment of the south of Europe, the austerity in England, the failed Arab Spring, the Ukrainian Maidan revolution, and so on.  Yes, a Great Depression was forstalled, but a long Depression was created instead, and there were other options: other ways to forestall a depression.

History is not inevitable: decisions are made by people that change its outcome.

As for Piketty’s prescription: a wealth tax is fine as far as it goes, but the question isn’t whether the rich should be taxed, the question is how to create a world where they can be taxed.

That question, and questions like how we could increase the technological rate of improvement, increase the power of the commons, allow national policy by dismantling so-called “free trade”, and so on, are not dealt with.

But Piketty’s book is still important, because it proves the obvious beyond a reasonable doubt.  In this it is similiar to the mountain of evidence of climate change.  We can now say that climate change is happening and anyone who denies it is a fool.  Likewise we can now say that allowing returns on unearned wealth to be higher than labor income, in a capitalist economy, leads to high inequality and doesn’t improve the economy.  We should have known that already; we did know it already; now it has been proved to the point where we can say anyone who denies it is a fool.


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17 Responses
  1. confused permalink
    March 27, 2014

    “Piketty starts moving away from Marx: for Piketty, capital is just anything that is valued in money. For Piketty, capital is wealth.”

    Is this an editing error, and one of those “Piketty”s should be “Marx”?

  2. Ian Welsh permalink*
    March 27, 2014

    No, it may be unclear, but neither of those should be Marx. I’ll edit to make it clearer.

  3. Dan H permalink
    March 27, 2014

    That “age of the obvious” argument is gorgeous; easy to understand and dead to rights.

  4. The Tragically Flip permalink
    March 27, 2014

    “Capital grows faster the more of it you have: so if you have a hundred thousand, you get more returns than someone with ten thousand. A million gets less than a billion, and so on. This contradicts orthodox economics, with its claim of diminishing returns, but it is a common sense observation of how the world actually works today, and Marx noted the concentration of money and capital in his time.”

    I really shouldn’t be surprised that there are people who deny this, but it was always so obvious to me that wealth begets more wealth and poverty begets more poverty that I honestly never considered anyone dissenting.

    Yes, I’m glad we have the evidentary basis to make this point beyond the obvious and pervasive real world experience of everyone who’s noticed anything as simple as the bank offering higher interest for those with very healthy accounts, and waiving fees for same.

  5. Albertde permalink
    March 27, 2014

    I downloaded the French original edition, “Le capital au XXIe siècle” as a preview and bought after reading a bit. It costs $31.99 here in Canada + tax(es).

  6. Dan Kervick permalink
    March 27, 2014

    “There is no fundamental analysis of the mode of production or the mode of violence, either, and without those you cannot determine how much power various groups have to take a share of the national income. ”

    True, the very concepts of ownership and property only have meaning with in the context of a system of law and power capable of securing possession.

  7. Charles A permalink
    March 27, 2014

    A Marxist review of Piketty’s book is at
    http://mltoday.com/professor-piketty-fights-orthodoxy-and-attacks-inequality

  8. Curtis Fromke permalink
    March 28, 2014

    Debt based money probably makes it easier for the rich to gain their advantage. It would seem that it might all become moot if “The Limits to Growth” start to kick in. Read some The Archdruid blog to get a sense of a broader picture.

  9. March 30, 2014

    Actually, for Marx capital is M-C-M’ — capital is money employed so as to make more money.

  10. bob mcmanus permalink
    March 30, 2014

    There is a lot of stuff in the Piketty beyond the obvious that I find interesting:

    The fact that so much wealth was destroyed 1914-1945 and the importance of gifts made during an inheritor’s lifetime ( somewhere around 30-40% of inheritance and 20% of lifetime income) in addition to inheritance at the death…meant that “babyboomers were on their own” while people born after 1980 (given affluent parents) could count on a lot of help.

    This would affect social attitudes and politics among children of elites.

  11. bob mcmanus permalink
    March 30, 2014

    Or, another aspect that may or may be a factor in understanding the politics and economics of the 20th and 21st:

    For people born 1910-20, probably for the first time in history, “study, work and talent paid better than inheritance.”

  12. Bruce Wilder permalink
    March 30, 2014

    It’s a small, but politically important quibble, but the 1929 Crash, while it shifted political power considerably, by disabling the Republican Party coalition that had ruled since the Panic of 1893 (the immediate cause of the previous Great Depression), did not immediately shift the distribution of income away from the Rich. Although there were some famous losers in the Crash, overall, neither the megarich of the day, nor the Wall Street bankers, lost their outsized claim on national income, even as total national income plunged. If you look at Piketty’s chart, you see the proportion claimed by the top decile, continued to bounce around near 45% through the Depression years, only settling below 35% with WWII. The Great Compression in income distribution only happened with the onset of WWII, and the taking hold of financial repression measures, made particularly potent by the massive borrowing and spending of the Federal government.

    The Keynesian narrative, which emphasizes deficit spending, and claims WWII as vindication, is a selective memory. The New Deal during the Great Depression marked a prolonged stalemate in the political struggle over the distribution of income, a stalemate that WWII broke. And, the problem of a predatory financial sector was “solved” by a combination of institutional reform and a flood of sovereign debt, and not just willy-nilly deficit spending.

  13. Ian Welsh permalink*
    March 30, 2014

    Piketty’s numbers are pre-tax.

    Here are the top tax rates:

    http://tywkiwdbi.blogspot.ca/2011/07/top-bracket-income-tax-rates-1913-2008.html

    If people make more money, but get it taken away, well, so be it.

    Agreed that the full affect occurs exactly at WWII, and it occurs because the government spend a ton of money on ordinary people, including moving to full employment. Nation income increases because of deficit spending, and the structure of deficit spending is that it goes to normal people, not to the rich. Note also that War Bonds are sold to everyone, and don’t have usurious interest rates.

  14. April 6, 2014

    I have now read a significant part of this book and would dearly love to get back the time I spent. Are we in such deep shit that such a book is considered important?

    He might claim that his book is a sort of anti-Marx upgrade from the 1867 classic, but since it covers the same topics, it isn’t even very interesting. Here’s the deal! In order to meaningfully address the issue of climate change, we must spend in the neighborhood of at least $100 Trillion to replace the fire-based infrastructure we have now. ANY book on economics that claims to be remotely relevant MUST explain how a country already $17 Trillion in debt and a net importer of energy will get the money necessary for such an upgrade.

    I find it profoundly depressing that I got suckered into reading this POS.

  15. Tess permalink
    April 9, 2014

    Jonathan Larson,

    So the only two options are to ignore it and hope it goes away or to immediately launch a $100 trillion program to systematically replace all of our current hydrocarbon-based energy production?

    That’s preposterous. In fact, it’s so OBVIOUSLY preposterous that you should be embarrassed. There are enormous amounts of middle ground that can focus on gradual, cost-effective changes. It would have been even simpler if we had started 25 years ago when we realized it was a problem, but even now, there’s ample reason to think that incremental reductions of greenhouse gas emissions are valuable.

  16. Jonathan Larson permalink
    April 9, 2014

    What is preposterous is that we allowed the “50 easy ways to save the planet” crowd waste 30 years of our time. Climate change is not solved until we eliminate all the fires we start. It’s about time folks start thinking about how big that problem is. And how much it will cost.

    I am not preposterous and you need to grow up!

  17. Formerly T-Bear permalink
    April 13, 2014

    This is belated: The Guardian’s Sunday online has this on Thomas Piketty’s “Capital”:
    http://www.theguardian.com/commentisfree/2014/apr/12/capitalism-isnt-working-thomas-piketty?commentpage=1
    that may augment Ian’s post on the same.

    I need to study Piketty’s work in more detail, the one problem I sense is how the information required is obtained as well as its accuracy. It is well and good to state an obvious conclusion, e.g. “1) If national income grows slower than capital (wealth, really), then capital tends to concentrate. If income grow faster than wealth, then capital tends to disperse.”
    or
    “2) Capital grows faster the more of it you have: so if you have a hundred thousand, you get more returns than someone with ten thousand.”
    either obvious is logically supported but may be on thin ice as far as statistics are currently collected, otherwise these observations would have historic antecedents in the Keynesian tradition (Keynes cautioned of the inadequacy of the then collected statistics available for arriving at decisions on several occasions). That caution may stand in good stead here as well.

    Note for Ian: I shall be leaving commenting here henceforth. The pleasure of reading and responding is nullified by those of profound ignorance. It is not my desire to become a teacher of the handicapped and retarded victims of propaganda and educational malfeasance. I will leave it to others to direct off topic chatter to appropriate venues (like world series baseball). a-dios.

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