Capital in the Twenty-First Century

Last month, we noted that Leftist economist Thomas Piketty’s “Capital in the Twenty-First Century” had gone viral in the progressive intellectual sphere. We also noted that given the institutions lavishing praise on the book, and the hype echoing throughout the blogosphere, that the book could be of primary importance for years to come in justifying the left’s agenda on income inequality, taxation and economics more broadly.

As the book has climbed the charts to No. 1 on Amazon, the articles have not stopped coming, with two glowing profiles of Piketty just this week.

The left’s love-affair with Piketty’s Marx-inspired title should come as no surprise given that the book gives intellectual credence to the argument that inequality is the great problem of our time — the inevitable outcome of capitalism in Piketty’s view — along with a set of progressive policy “solutions” to counteract capitalism’s perceived deficiencies. These solutions include implementing a global annual progressive wealth tax, and levying an 80% tax on incomes of $500,000 or $1 million a year and up.

But various commentators have started to push back on the Piketty phenomenon.

Below is a round-up of some of the arguments being leveled against Piketty’s magnum opus thus far:

  • On TheBlaze TV’s Wilkow! program, University of Maryland Economist Peter Morici, King’s College Professor Brian Brenberg and host Andrew Wilkow recently challenged Piketty’s thesis:
  • Writing in Bloomberg, columnist Clive Crook argues in an article entitled “The Most Important Book Ever is All Wrong,” that as the title suggests, Crook’s arguments are illogical and his primary focus on inequality is misguided:
    • Piketty’s data and arguments are “schizophrenic”

“There’s a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he’s all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable.

This tendency is apparent all through the book, but most marked at the end, when he sums up his findings about “the central contradiction of capitalism”:

The inequality r>g [the rate of return on capital is greater than the rate of economic growth] implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying …

Every claim in that dramatic summing up is either unsupported or contradicted by Piketty’s own data and analysis. (I’m not counting the unintelligible. The past devours the future?)”

    • Piketty views inequality as the crucial issue of our time, which while satisfying a large audience, neglects the more important issue of wages and living standards 
koch protest 2

A Code Pink rally against Koch Industries. (Image Source: Gateway Pundit)

“Piketty’s terror at rising inequality is an important data point for the reader. It has perhaps influenced his judgment and his tendentious reading of his own evidence. It could also explain why the book has been greeted with such erotic intensity: It meets the need for a work of deep research and scholarly respectability which affirms that inequality, as Cassidy remarked, is “a defining issue of our era.”

Maybe. But nobody should think it’s the only issue. For Piketty, it is…

Over the course of history, capital accumulation has yielded growth in living standards that people in earlier centuries could not have imagined, let alone predicted — and it wasn’t just the owners of capital who benefited. Future capital accumulation may or may not increase the capital share of output; it may or may not widen inequality. If it does, that’s a bad thing, and governments should act. But even if it does, it won’t matter as much as whether and how quickly wages and living standards rise.

That is, or ought to be, the defining issue of our era, and it’s one on which “Capital in the 21st Century” has almost nothing to say.” [Note that Kevin Williamson of National Review piles on in a very insightful peace on poverty]

  • Writing in Foreign Affairs, Economist Tyler Cowen has a number of issues with Piketty’s book, including but not limited to the following:
    • Piketty’s main thesis that the rate of return on wealth will outpace the rate of economic growth — leading to growing wealth inequality — is questionable

“…in too many parts of his argument, he seems to assume that investors can reap such returns automatically, with the mere passage of time, rather than as the result of strategic risk taking. A more accurate picture of the rate of return would incorporate risk and take into account the fact that although the stock of capital typically grows each year, sudden reversals and retrenchments are inevitable…it is difficult to share his confidence that the rate [of return on wealth]…is likely to be higher than the growth rate of the economy. Normally, economists think of the rate of return on capital as diminishing as investors accumulate more capital, since the most profitable investment opportunities are taken first. But in Piketty’s model, lucrative overseas investments and the growing financial sophistication of the superwealthy keep capital returns permanently high. The more prosaic reality is that most capital stays in its home country and also has a hard time beating randomly selected stocks. For those reasons, the future of capital income looks far less glamorous than Piketty argues.”

    • We do not and cannot know what assets (including the capital Piketty focuses on like stocks) are going to provide the greatest return going forward

“economists, such as Friedrich Hayek and the other thinkers who belonged to the so-called Austrian School, understood that it is almost impossible to predict which factors of production will provide the most robust returns, since future economic outcomes will depend on the dynamic and essentially unforeseeable opportunities created by future entrepreneurs. In this sense, Piketty is like a modern-day Ricardo, betting too much on the significance of one asset in the long run: namely, the kind of sophisticated equity capital that the wealthy happen to hold today.”

    • Piketty’s fear of inherited wealth perpetuating itself for generations is misplaced; wealth circulates and grows
The Vanderbilt, like many other wealthy families throughout history squandered their wealth. (Image Source: Google News Archives/The Victoria Advocate, October 22, 1989)

The Vanderbilt, like many other wealthy families throughout history squandered their wealth. (Image Source: Google News Archives/The Victoria Advocate, October 22, 1989)

“Far from creating a stagnant class of rentiers, growing capital wealth has allowed for the fairly dynamic circulation of financial elites. Today, the Rockefeller, Carnegie, and Ford family fortunes are quite dispersed, and the benefactors of those estates hardly run the United States, or even rival Bill Gates or Warren Buffett in the financial rankings. Gates’ heirs will probably inherit billions, but in all likelihood, their fortunes will also be surpassed by those of future innovators and tycoons, most of whom will not come from millionaire families…

the success of certain immigrant groups suggests that cultural factors play a more significant role in mobility than does the capital-to-income ratio, since the children and grandchildren of immigrants from those groups tend to advance socioeconomically even if their forebears arrived without much in the way of accumulated fortunes…

many wealth accumulators never fully diversify their holdings, or even come close to doing so…over time such concentrations of financial interest hasten the circulation of elites by making it possible for the wealthy to suffer large losses very rapidly…And in the end, even the most successful companies will someday fall, and the fortunes associated with them will dissipate. In the very long run, the most significant gains will be reaped by institutions that are forward-looking and rational enough to fully diversify.”

    • A high ratio of capital (or wealth) to income is not necessarily a bad thing for society as a whole, nor is a low ratio the driving factor behind economic progress

“the nineteenth century, with its high capital-to-income ratios, was in fact one of the most dynamic periods of European history. Stocks of wealth stimulated invention by liberating creators from the immediate demands of the marketplace and allowing them to explore their fancies, enriching generations to come…

But his book does not convincingly establish that the ratio is important or revealing enough to serve as the key to understanding significant social change. If wealth keeps on rising relative to income, but wages also go up, most people will be happy. Of course, in the past few decades, median wages have been stagnant in many developed countries, including the United States. But the real issue, then, is wages — not wealth…

Two other factors have proved much more important: technological changes during the past few decades that have created a globalized labor market that rewards those with technical knowledge and computer skills and competition for low-skilled jobs from labor forces overseas, especially China. Piketty discusses both of those issues, but he puts them to the side rather than front and center.”

    • A global annual progressive wealth tax will have a number of negative effects, which Piketty discounts or completely neglects

“Although he recognizes the obvious political infeasibility of such a plan, Piketty has nothing to say about the practical difficulties, distorting effects, and potential for abuse that would inevitably accompany such intense government control of the economy. He points to estimates he has previously published in academic papers as evidence that such a confiscatory regime would not harm the labor supply in the short term. But he neglects the fact that in the long run, taxes of that level would surely lower investments in human capital and the creation of new businesses. Nor does he recognize one crucial implication of his own argument about the power of nondiminishing capital returns: if capital is so mobile and dynamic that it can avoid diminishing returns, as Piketty claims, then it will probably also avoid being taxed, which means that the search for tax revenue will have to shift elsewhere, and governments will find that soaking the rich does not really work.

    • Piketty trusts governments and politicians over successful citizens

“The simple fact is that large wealth taxes do not mesh well with the norms and practices required by a successful and prosperous capitalist democracy. It is hard to find well-functioning societies based on anything other than strong legal, political, and institutional respect and support for their most successful citizens. Therein lies the most fundamental problem with Piketty’s policy proposals: the best parts of his book argue that, left unchecked, capital and capitalists inevitably accrue too much power — and yet Piketty seems to believe that governments and politicians are somehow exempt from the same dynamic.

  • Writing in the New York Sun, the paper’s editors argue that the rise in inequality since 1971 — a key focus of Piketty’s book — happens to coincide with Nixon’s ending of any semblance of a gold standard, which Piketty et al overlook:
The New York Sun's argument in one chart. (Source: The New York Sun/Thomas Piketty)

The New York Sun’s argument in one chart. (Source: The New York Sun/Thomas Piketty)

“what about the possibility that it was in the middle of 1971, in August, that America closed the gold window at which it was supposed to redeem in specie dollars presented by foreign central banks [that income inequality began to rise]. That was the default that ended the era of the Bretton Woods monetary system.

That’s the default that opened the age of fiat money. Or the era that President Nixon supposedly summed up in with Milton Friedman’s immortal words, “We’re all Keynesians now.” This is an age that has seen a sharp change in unemployment patterns. Before this date, unemployment was, by today’s standards, low. This was a pattern that held in Europe (these columns wrote about it in “George Soros’ Two Cents“) and in America (“Yellen’s Missing Jobs“). From 1947 to 1971, unemployment in America ran at the average rate of 4.7%; since 1971 the average unemployment rate has averaged 6.4%. Could this have been a factor in the soaring income inequality that also emerged in the age of fiat money?

This is the question the liberals don’t want to discuss, even acknowledge. They are never going to get it out of their heads that the gold standard is a barbarous relic. They have spent so much of their capital ridiculing the idea of honest money that they daren’t open up the question. It doesn’t take a Ph.D. from MIT or Princeton, however, to imagine that in an age of fiat money, the top decile would have an easier time making hay than would the denizens of the other nine deciles, who aren’t trained in the art of swaps and derivatives.”

  • Writing at RealClearMarkets, Diana Furchtgott-Roth argues that Piketty is completely wrong on the minimum wage:
In this photo taken, Aug. 1, 2013, demonstrators protesting what they say are low wages and improper treatment for fast-food workers march in downtown Seattle.  (AP Photo/Elaine Thompson, File)

In this photo taken, Aug. 1, 2013, demonstrators protesting what they say are low wages and improper treatment for fast-food workers march in downtown Seattle. (AP Photo/Elaine Thompson, File)

“The political biases of Capital are nowhere more obvious than in Piketty’s errors in his account of minimum wage levels in the United States…

[After noting an error in Piketty's commentary on the changes to the federal minimum wage level from 1980-1990] One might overlook one isolated error as sloppiness to which we are all susceptible. But Professor Piketty’s supposed history of changes in the minimum wage is not tarnished by a single error, but by a vast array of systematic errors. His history is pure revisionist fiction, and revisionist fiction with a political purpose: making Democratic presidents look magnanimous and Republican presidents look uncaring…over the past quarter century, the period Piketty describes as showing a dramatic increase in inequality, Republican presidents signed into law larger percentage increases in the minimum wage than did Democratic presidents. Piketty’s analysis of the advantages of increasing the minimum wage neglects negative employment effects on low-skill individuals…Piketty fails to admit is that raising the minimum wage prevents people with skills lower than the minimum from getting jobs…

Piketty writes that “there is no doubt that the minimum wage plays an essential role in the formation and evolution of wage inequalities, as the French and U.S. experience show.” It also plays an essential role in employment. Without a job, you cannot be counted as a player in the income inequality game.”

  • Writing in the Wall Street Journal, fund manager Daniel Shuchman argues that the policy solutions that Piketty proposes are not meant to remedy income inequality, but to put an end to high-income earners altogether. To wit:
An image from Occupy Wall Street. (Image Source: talkingbiznews.com)

An image from Occupy Wall Street. (Image Source: talkingbiznews.com)

“Mr. Piketty urges an 80% tax rate on incomes starting at “$500,000 or $1 million.” This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply “to put an end to such incomes.” It will also be necessary to impose a 50%-60% tax rate on incomes as low as $200,000 to develop “the meager US social state.” There must be an annual wealth tax as high as 10% on the largest fortunes and a one-time assessment as high as 20% on much lower levels of existing wealth. He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation…

He views equality of outcome as the ultimate end and solely for its own sake. Alternative objectives—such as maximizing the overall wealth of society or increasing economic liberty or seeking the greatest possible equality of opportunity or even, as in the philosophy of John Rawls, ensuring that the welfare of the least well-off is maximized—are scarcely mentioned…

Mr. Piketty is not the first utopian visionary…He says that his solutions provide a “less violent and more efficient response to the eternal problem of private capital and its return.” Instead of Austen and Balzac, the professor ought to read “Animal Farm” and “Darkness at Noon.”