Thomas Piketty and CAPITAL

Overview

Many powerful leaders are proclaiming economic inequality the greatest threat to the world and the defining challenge of our time, lacking any plausible legitimacy, and calling for government intervention and redistribution of wealth.

Elites have been calling for redistribution of wealth in the name of “justice and equality” for over a century.  Now they think they've found “scientific” justification for it in Thomas Piketty’s book “Capital in the Twenty-First Century.”  “Capital” is being called a game-changer like Karl Marx’s book “Das Kapital”. 

Piketty believes he has found the simple cause of the income inequality “problem”, the "fact" that return on capital is higher than the economic growth.  So inequality will continue to grow forever unless high progressive global taxes are enforced to take the return on capital away from those who reap the benefits of investing and make it lower than the economic growth rate.

But, is the world that would result one you would want to live in?

Who is Thomas Piketty

Thomas Piketty , whose career has revolved around the study of income inequality, is a former staffer of the French Socialist Party and current columnist for the French socialist newspaper Liberation, as well as a professor at the Paris School of Economics which he helped create.  At the age of 22 he wrote his Ph.D. thesis on wealth redistributioin.  In 1912 he supported Fancois Hollande, the First Secretary of the French Socialist Party, in his successful bid to become the President of France.  Thomas Piketty is clearly a socialist who believes that income inequality is evil and must be done away on ideological grounds.  You will have to determine if he found the truth about income inequality or what he was looking for. 

One might wonder if the fact that Piketty will make a lot of money from his book and speaking engagements is giving him any concern, because it will certainly make him very unequal.  It will be interesting to see what he does with his own wealth instead of the wealth of others.  Will he voluntarily pay the high taxes he proposes, even if they are not legally required? 

Piketty's “Capital” Theory

In “Capital”, the elite Left believe they've found the “scientific” justification in Piketty’s theories to put their wealth redistribution plans on steroids, just as they found in Keynes’ theories the justification for massive deficit spending to fund popular programs without raising taxes. 

The book's title is remarkably similar to Karl Marx’s “das Kapital”, and so is its message – Like Marx, Piketty claims to have found the cause and cure of income inequality for all time.  For Marx the problem was class struggle and exploitation; for Piketty the problem is class struggle and the “return on capital.”  For both, the solution was/is socialism.

The cause of inequality, according to Piketty, is incredibly simple.  It is the result of the “fact” that return on capital (held by the wealthy along with everyone who has a private retirement plan) is higher than the growth rate of the general economy.  Hence, the wealthy have a built-in “capital engine” that just keeps growing more money, while the common guy only benefits minimally from the general growth rate.  Piketty expresses this problem as a simple equation, “r>g” (where “r” is return on capital and “g” is growth rate).  This makes it seem mathematically precise, settled, and unquestionable, like the simple but powerful equations of Newton and Einstein that have revolutionized the physical sciences.  From his equation he concludes, “Wealth accumulated in the past grows more rapidly than output and wages” and consequently income inequality will continue to rise unless another simple solution is implemented to stop runaway inequality – progressive world-wide taxes on capital that flatten the rich. 

Piketty’s Data

Careful analysis of Piketty’s work suggests that he was a candy maker and fudged the data.  The article Piketty findings undercut by errors and the following 4 minute video explain how he multiplied some figures by 2 because they weren’t high enough and how he created graphs that do not follow the actual data.  Even the Huffington Post, which likely supports Piketty’s proposals for greater redistribution of wealth, admitted that there are problems with his data. 

 

Doubts over Piketty inequality data

Financial Times

Considering the above, one might wonder if the problems with “Capital” are due to bad scholarship or intentional dishonesty? 

Dissecting the Analysis

Starting with, “What if inequality of capital is simply a proxy for other kinds of inequality—technological, intellectual, motivational? In other words, what if it’s the case that inequality is hardwired into everything?” and ending with, “Of course, the situation isn’t all bad for Piketty. He has a bestseller on his hands, and he will no doubt garner huge speaking fees as well. In other words, if he’s not careful, he could find himself piling up capital faster than others. So he, too, could be part of the phenomenon that he fears—or says he fears.”

Distinguished former member of the Britain’s Parliament and Harvard Business School graduate John Browne said Piketty needs to distinguish  between “State” Capitalism (businesses that are state owned, controlled or subsidized) and “Free Market” Capitalism. 

He says Piketty’s argument that capitalism causes inequality is only partlyright, because the type of capitalism that creates unfair income inequality is state capitalism, especially in Europe.  Piketty believes that "capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based." However, this can only become true if free markets become controlled, or distorted, by the establishment of government granted monopolies, whether they are privately or state owned. 

Piketty’s conclusion that capitalism causes increasing poverty around the world seems to be a “carefully planned case” for global socialism via the UN and IMF, etc.

Piketty concludes that income inequality has increased steadily because return on capital is greater than economic growth, which he expressed as “r > g”.  In the “hard sciences”, simple mathematical laws like EInstein's E= mC2 or Newton’s F=ma have reliable predictive power. But in social sciences that try to explain complex human behavior that is influenced by an unlimited number of factors, such simple mathematical equations simply don’t exist.  Is Piketty overlooking the complexity of life and trying to fit everything into formulas so he can justify his ideology of redistributive justice? 

Simple solutions to complex problems, especially when forced by government, almost always have serious unintended consequences.  Based on “r > g”, Piketty proposes a global taxing system with massive tax increases on the rich that would lower the return on capital (r), presumably below the rate of economic growth (g), because if “r” isn’t below “g” then, according to Piketty’s math, the process of increasing inequality would continue, just more slowly.  If we accept the statement of PBS News that for most of human history growth has been less than 0.1%, we would have to make the return on capital zero.  That is, there would have to be no return or interest on capital invested in the process of producing goods and services and funding innovation.  But if there was no benefit or return from investing, who would invest in new or expanding businesses that create jobs.  Without investment there would be no progress.  In fact, we would regress as previous investments in machines and infrastructure wore out. 

No doubt Piketty would tell you that central government planners would use the confiscated capital for investment in the businesses they believed were needed and thus promote even greater growth, the worn out promise of socialism.  But such bureaucratic management of business, particularly innovation, has a very poor track record. 

In reality, Piketty’s solution to the problem would have the unintended consequence of discouraging investment in production, which would stifle the growth and even cause negative growth (using up what has been saved in the past).  This means fewer jobs and fewer goods and services to satisfy people’s needs, and economic contraction (depression).  There would be little or no innovation, which has increased our life quality for hundreds of years.  It would produce the same result that socialism has produced everywhere it has been fully implemented: universal poverty, except for those with superior ability who would shift their efforts from creating wealth to transferring it to themselves and their friends through manipulation of government power.

Lesson

The conclusions of “Capital in the Twenty-First Century” are based on manipulated data to obtain an ideologically driven result.  Even if his equation “r>g” represents a part of the story of income inequality, Piketty has completely ignored all of the many other causes of inequality including the innovation and creativity that makes the world a better place for everyone.  His overly simplified mathematical “cause” and equally simplistic “solution”, that ignores unintended consequences, clearly label his work as ideologically driven rather than scientifically directed. 

Multiple studies have been attempted to show the relationship between income inequality as measured by the Gini coefficient and growth or prosperity, some of which are listed below.  What they find is no relationship at all, because the Gini coefficient it ignores the causes of income inequality and makes no distinction between fair and unfair income inequality and says nothing about the quality of life of the people it is measuring. 

If it wasn’t for the fact that Piketty will make a lot of money from “Capital” sales and related speaking engagements, one would have to feel sorry for Thomas Piketty because he has spent his life doing research on the causes of a statistical phantom (income inequality) based a fascist’s meaningless mathematical measure (Gini coefficient).  If he really cares about solving the problem of poverty, it is too bad he didn’t pick a better parameter of peoples’ well-being to study that related to improvement in the quality of their lives.

If Piketty named his book “Capital” to draw attention to its similarity to “Das Kapital” by Karl Marx, he may end up going down in history along with Marx as a proponent of the most destructive political system every created (38).  A system so oppressive that Leszek Kolakowski, one of the original leaders of the Communist movement, had to conclude “That Marxism has been the greatest fantasy of our century.” (Main Currents of Marxism, pg 1206)

Inequality  a gateway to inequality, what is it, why it exists and why it matters?

The Income Inequality Mirage  how the way income inequality is measured misleads people

The Trinity of Inequality  what if the forces that cause income inequality are a fundamental part of our humanness?