The Age of the Obvious: Thomas Piketty’s Capital

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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