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Readers who are following the adulation of Thomas Picketty’s Capital in the 21st Century do not need much information about the book

One major theme of the book is that if the rate of return on “capital” exceeds the overall rate of return in the entire economy, then it follows that the rich and elderly gain in relation to everyone else. Ignore for now the major difficulty of such a claim – that it is not really clear what capital is, and how one might actually compare, value, and add-up different types of capital – that seems to me to be the major difficulty with the book. But what stands out about the claim above is that it, while has empirical backing (i.e. the rich and elderly HOLD a larger share of capital than the non-rich and non-elderly) I am not sure it has any practical meaning. The fear of Picketty is that of course this kind of accumulation of capital leads to a positive feedback of wealth accumulation, then inheritances, which lead to even more capital accumulation, and hence wealth, relative to those folks who do not obtain a large share of their income from capital, which exacerbates inequality, which leads to more capital for the rich and elderly, which leads to larger inheritances and so on. 

Such is why he concludes that a globally coordinated wealth tax is in order. Understanding correctly as he does that “the rich” are fairly savvy, and that capital is mobile, any one country that tried to ratchet up estate or wealth taxes on its own would find out that it collected no revenues and that it didn’t actually make inequality less, it perhaps may make it more severe. 

In thinking about this, one is led to wonder how capital ended up becoming “democratized” in the first place. After all, to the extent that there was any capital through history, it was ALL owned by the rich elites, and since the rate of economic growth through human history was zero, yes zero, then this condition of the rate of return on capital exceeding the rate of return on the overall economy seems to have existed prior to George Bush. So, what enabled the massive DECREASE in global inequality since modernization began? What has enabled ANYONE other than the nobles from hanging on to their castles and capital and passing it on to their children and exacerbating inequalities? Is it really only the ending of laws such as primogeniture and entail, worldwide, that are responsible for it? That doesn’t appear right to me. Was it a globally coordinated wealth tax that ended the horrific inequality the preceded Adam Smith’s time and place? Not at all. So what is different today that requires such a thing? 

Without belaboring the point too much, it seems of course that the book was written with the conclusion in hand, much like most books (on either side of the political spectrum). Kapitalism is convicted of horrible crimes (even if it has some good aspects) – it’s just the nature of the charges that changes from time to time. But what I find astonishing is the implication of the argument. If capitalism is bad, notice that the major proposal coming out of the most influential book of the 21st century is not central planning, or socialism directly, no. It’s just a coordinated wealth tax. Presumably this wealth tax would be distributed to the less wealthy. So in many respects this is not all that different than a Hayekian view of the world, though Hayek I am sure would have defended a far more efficient version of a tax than a wealth tax. But the real takeaway for me is the implicit admission that all of the lords of high knowledge have actually no idea how to fix things at the margin. There are not 10 chapters dedicated to green jobs programs, or the health care features of the rich countries, or the environment or anything like that. Maybe it couldn’t be, after all it is already 700 pages long.

In addition to what I think is glaring above, reconsider the main argument. So, rich guys and old guys have lots of the “good stuff” and the “good stuff” grows faster than the “regular stuff.”

  1. The book assumes a key. (students of mine likely get the joke). In other words, the book assumes that a globally coordinated wealth tax not only won’t reduce incentives to produce incredibly, but more important that those proceeds actually do get distributed to those who actually “deserve” them. And further, that there will be no government misuse of this new source of funds. Call me crazy for not buying that.
  2. Can’t people like me get in the game now? All I have to do is reduce my consumption a little bit and save my income in the stock market. How is that NOT being able to take part in the accumulation of capital? So, the argument against this would be that the rich guys start with a higher share of their income coming from the stock market, while mine is lower, so that even if we both see the same gains in capital as compared to our labor income, the wealth divide still increases, hence the need for a global wealth tax. Which brings me back to a regular point – this seems to be about equalizing outcomes. Because if it’s not, then why don’t we see policies proposed to address the supposed “power” that the landed rich have over the rest of us? My bet, and this is not empirically based at all, is that even if we ended up managing a successful wealth tax, these very same “former landed rich” would have just as much, or perhaps even more power over “us” than they did when it was clear that they did/
  3. An ancillary thought is that this sort of a book contains an argument that will HAVE to be dealt with should the machines ever take over. On the one hand, if machines make everything, from our medicines to our spaceships to our bacon and eggs, then we don’t “need” to work. And that’s nice because quite frankly work stinks (not to be confused with working), and moreso because when the machines take over, lots of stuff gets very very very cheap. On the other hand, you do need SOME income to purchase all the machine made stuff we want and need. So, how to we ensure that there are “jobs” for everyone when there are actually no laborers? I don’t think the question is too difficult, or is it. For those who love government, maybe you have a tax on capital that then is invested in a market portfolio of stocks – and every citizen is paid (or transferred) a share of such a portfolio. The point of course is that the challenge is to ask, “how to get non-capitalists cut in on a share of the capital income when that is the only source of income?”
  4. A somewhat related aside … What if technology and transactions costs evolved so much in the next 40 years as to make the forms of corporations as we know them today to be obsolete? We know that a corporation is just a fancy way to reduce transactions costs among people cooperating on a task. There is no reason, fundamentally, for example, why I couldn’t be an independent contractor teacher, who purchases classroom space, office space, chalk, etc. from independent entities, and then puts them all together myself to teach my classes. It’s just that given current technologies and consumer biases, it’s more efficient to have it done under one roof. I can easily see that world moving in the other direction. So, take that to the extreme. What happens to “workplace safety” regulations? What happens to “the power of unions?” and so on in that world. What happens to worker exploitation in such a world. After all, if we are all sole proprietors / independent contractors, we work for no one. Of course, good economics students can see that answer here … it is that being part of a corporation is no different. 

This is already too long, point 4 deserves its own post and various smaller parts of the book deserve much more attention. 

2 Responses to “Kapital in the 21st Century”

  1. Gabriel Wittenberg says:

    I think you made the most effective argument in a former post. What makes Piketty and his crew of fascists think that the solution to overwhelming political power attained by the economic elite is a problem that can only be fixed by distributing more wealth? From what I’ve read about his book, it seems that he doesn’t even entertain the idea of working towards limiting the size and power of government. Limiting the ability of the economic elite to purchase political power seems like a problem best dealt with by limiting what can be accomplished with political power. It’s the only solution we haven’t tried in any way shape or form, yet the intellegistia assume it can’t be done.

  2. Harry says:

    It’s a tautology that rich people and older people have a lot of capital, right? Savers have savings.

    Can one get in the game now, including WC? Of course, and many people are every day and not just by owning a mutual fund in an IRA or a 401-K. One can start a business, or two can partner to start a business. It’s a free country, right?

    I know the economic outlook is dismal, maybe more dismal than in previous times, but then pick a time when it has not been dismal, and don’t say when the Soviet Union was run by Leonid Brezhnev.

    Speaking of the Soviet Union and its dissolution, I wonder if WC has thoughts on why Russia turned out so poorly economically. ( I am sure he does have ideas.) I mean, we sent a boatload of economic experts over there and we gave the whole country to the Russian Mafia and the KGB. Why, for example, did we not give everyone title to their apartment, and equal shares per capita in all state enterprises like Lada and Gasprom? Then, if The People wanted something else — like gold coins, or shares in ExxonMobil, they would have their own capital in more liquid form.

    That is not just a rhetorical question. When the boys from the IMF move into a distressed country, they never deal with the underlying cause of the country’s bankruptcy, and I can think of no time they have proposed freeing up the economy. Usually, it’s austerity and higher taxes, followed with a bill payer loan. And I believe even Russia had a low flat income tax.

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