Thomas Piketty is today’s most discussed economist. Not just a pedantic treatise on economic theory, Capital in the Twentieth Century is a political manifesto in the tradition of Henry George and Karl Marx. His literary references and indulgences in simple algebra, however, conjure Keynes’s stylistic spectre. Paul Krugman defends him by noting the responses to his thesis have come primarily in the form of “name-calling.” Hardly a valid point as this is the most common response to anything. One example of a commentator repeating vague neoclassical platitudes is The Cato Institute’s James Dorn. There is truth in his article, even though it amounts to little more than redundant rhetoric for an audience that never tires of the touting virtues of the unfettered market.
“Capital in Mr Piketty’s book includes forms of wealth, such as land, that would not figure in economists’ models of production; his rate of return is the pace at which such wealth grows rather than the benefit to firms of investing it. Mr Piketty’s data appear to justify this approach: in the past, at least, the rich have been able to shift resources into higher-yielding forms of wealth when over-investment slashes the return.”
“But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increasingly not from enterprise but from inheritance?”
“Gary Becker, the late Nobel laureate economist, showed the importance of human capital (i.e., the skills individuals acquire through education and training) for a person’s future income and economic growth. High marginal income tax rates and wealth taxes dampen incentives to invest in human and non-human capital—and when investment slows so will economic growth. ”
The United States has anxiously awaited a scholarly treatment of the acutely felt and easily exploited socioeconomic divide between the very rich and the rest of the nation. Appealing to envy is a time honoured tradition among politicians of the far left, but we should not dismiss the book’s thesis because of its political overtones or its ludicrous taxation scheme. Francois Hollande’s presidency has attempted to put Piketty’s policy recommendations into action. They didn’t work. Piketty himself admits to the problems posed by creative banking, which is why he envisions a global tax. A bit ridiculous, no? While other factors could be taken into account, Monsieur Hollande now knows his appropriation schemes are not without consequences. The catastrophe in 2008 had a marked influence on the entire world, but not surprisingly, an 80% income tax is a powerful disincentive in both good times and bad. A person who makes 10 million dollars a year may want to keep more than 2 million. This sounds like a huge sum of money, especially to someone who subsists in 20 or 30 thousand a year, but human wants are unlimited.
“For instance, we have this talk about tax havens. Five years ago, people were saying that nothing would ever happen; Swiss banks would keep their accounts secret and would never accept having automatic transmission of information. And then suddenly there were U.S. sanctions against Swiss banks and things began to change. I think these general moves will continue.”
Piketty views the uneven distribution of income and capital as the by-products of an unregulated economy. This is incontestable; the point of contention here is when this becomes harmful and whether the government should intervene. In his analysis he ignores the various programs in place in nearly all developed nations: social security, Medicare, welfare, unemployment benefits and foodstamps. He also forgets about insurance packages many employers offer. This does not mean the underclass in America is living in a worker’s paradise, but to base a damning prediction based on one’s own “laws of capitalism” seems short-sighted, particularly when innovation in many fields is growing at an exponential rate. Who in 1850 could have imagined crude oil, nasty stuff with few uses, would become one of the most sought out commodities in the world? Who could have foreseen the environmental and geopolitical ramifications of fossil fuels or the engines that created a tragically inelastic demand for them?
Like Steve Keen Piketty is critical of those who have tried to divorce economics from the other social sciences and use only simple mathematical models to “prove” their assertions. Yet his “laws of capitalism” seem to suffer from the same shortcomings as the neoclassical conceptions of employment, supply and demand Keen so deftly eviscerates in Debunking Economics. The entire palace this formerly obscure French economist is constructing relies strongly upon one equation: r > g. The rate of return on capital exceeds economic growth (and wages). As any good Austrian can tell you this is not a bad thing. When investment is too high (artificially high in many cases) it results in the overvaluation of assets, a bubble. This would be fine and dandy if bubbles didn’t pop.
“But the fact that r exceeds g is simply a necessary condition for an efficient allocation of an economy’s investment over time, whether in a capitalist or a centrally planned economy (the former Soviet Union and, arguably, China are examples of countries that over-invested, so damaging their own consumption opportunities), and is consistent with any pattern of inequality, high or low, rising or falling. “
“In particular, the leap from r>g to the conclusion of a growing role of inheritance in society seems too large to me. Many capital owners consume much of the return on their capital, so wealth does not grow at rate r. This consumption ranges from fancy cars and luxurious vacations to generous charitable giving. In addition, unless mating is perfectly assortative, or we return to an era of primogeniture, wealth per family shrinks as it is split among children. “
Let us give the man himself the last word, one can all agree upon:
“Private property and the market system are good not only to promote innovation and to promote growth; private property and the market system are good for our personal freedom.”