- Paperback: 286 pages
- Publisher: College Publications (November 24, 2014)
- Language: English
- ISBN-10: 1848901577
- ISBN-13: 978-1848901575
- Product Dimensions: 6.1 x 0.6 x 9.2 inches
- Shipping Weight: 14.9 ounces (View shipping rates and policies)
- Average Customer Review: 1 customer review
- Amazon Best Sellers Rank: #1,910,593 in Books (See Top 100 in Books)
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Piketty's Capital in the Twenty-First Century Paperback – November 24, 2014
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I felt that some reviews made very solid points but that others got sidetracked onto the author's favorite critiques of neo-classical economics, even if they were not that relevant to Piketty's broad-brush approach. I should also note that my copy of this book was not glued together very well - perhaps a third of the pages came loose.
A key reason cited for the Piketty phenomenon was his convincing case against the mainstream view that economic growth would naturally reduce inequality over time. Thus Piketty has brought the issues of income and wealth distribution back to center stage, using his solid income and wealth data over centuries and the semi-empirical r > g rule, or "fundamental force for divergence" (between low and high incomes). Here 'r' = the rate of return to capital and 'g' = the rate of economic growth = rate of growth of all forms of income, both from labor and capital. Public capital is not analyzed, though it may have large impacts on inequality. Piketty's rule says that when 'r' significantly exceeds 'g' over a period of time, then economic inequality will keep rising to a crisis level or other undesirable state unless there are extraordinary circumstances, such as the WW I - Great Depression - WW II era and the generation that followed.
The primary critique in this book is that the r > g rule is not well founded. For example, some authors say that it can be explained by policies and power structures that are open to challenge or by historical or other factors. In addition, to a mathematician such as myself, Piketty's presentation is more than confusing concerning his r > g rule and how it relates to his second law β= s/g, where 's' is the rate of savings and β is the ratio of national wealth to national income (β typically ranges from 2 to 7 and typical 20th century values for 'r' and 'g' are 5% and 2%). Thus in his review Yanis Varoufakis tries to explain the mathematics and the neoclassical axioms that are hidden in the background, except that the second law is an asymptotic result (limit over many years) for g >> 0 that I was able to easily derive using geometric series, whereas Varoufakis replaces it by an identity.
My critique of Piketty: A more fundamental issue involves the definitions of 'r' and 's' ('g' is well defined as the rate of growth of GDP). The rate of return to private capital 'r' is described by Piketty as consisting of corporate profits, capital gains, interest and dividends, and rents as a fraction of total capital (p. 25). Capital is the same as wealth = all assets that have a market value and may be traded (p.46). To this I would add some forms of social capital, especially education and organization, and note that rents must be after maintenance or depreciation. Yet when I tried to prove that β must increase when r > g, I realized that 'r' should be replaced by the rate of new investment iᵥ as a fraction of capital. It is only this investment that creates new capital. Substantial return on capital often goes instead to things like taxes, consumption, or charitable donations, so we designate i₁ as Piketty's 'r' value with these excluded. James Galbraith also noted this in his review.
In addition investment may come from retained earnings or corporate loans that are used for improvements (not maintenance or replacement), whose rate we designate i₂. Furthermore, ordinary investment and loans may come from a portion of savings on labor, not just from capital. However this contribution is different in that it would normally be expressed as a rate of return on income from labor, which must be rescaled as function of β to be a rate of return on capital. We designate this as i₃= i₃(β).
Thus I would replace r > g by iᵥ > g where iᵥ= i₁ + i₂ + i₃ = total rate investment in expansion and improvements to capital as a fraction of capital. From this it follows that if iᵥ > g then after one year β₁ = [(1+iᵥ K₀] / [(1+g)Y₀] > K₀ / Y₀ = β₀ where K denotes total capital and Y denotes total income.
Note that all factors, but especially Wall Street loans, could strongly increase β in a boom, hence also the measure of inequality α = r β (= the fraction of total income that comes from capital). However it would also rapidly decrease in a bust, when few new loans combine with loan payoffs to strongly reduce investment. In addition in a traditional agrarian patrimonial society there was little growth but also little investment, as most return to capital (after maintenance) was consumed by the aristocracy or paid for security or donated to the church. Note also that in today's world, investment from labor is substantial, including things like pension funds, stocks, real estate, businesses, etc.
Yet in an "ownership society", it would be just fine for capital to increase faster than economic growth, since everyone would own a decent piece of the capital. A major caveat would be when a society has reached its limits to growth, with increasing capital (and growth) having too strong an impact on resources and environment. To better analyze broad based ownership, when data is available I would use increasing values of iᵥ and 'g' as functions of income percentile, combined with capital and income distributions and with the Gini or Theil coefficients to measure inequality.
Back to this book: As an example of practical ways to overcome r > g, Dean Baker says that activists could make a big difference by campaigns to raise the minimum wage and by challenging tax evasion and monopolistic practices, even without the more progressive income and wealth taxes advocated by Piketty. Richard Koo says that the equality of the WWI - Great Depression - WW II era can be explained simply by the completion of urbanization (called a "Lewis Turning Point") and that the recent rise in inequality comes from developing countries in hot pursuit of the developed countries but who have not yet reached that point. Robert Wade says that we need to stop subsidizing the big banks, to establish a global wealth registry to combat tax evasion, and to restore the ability of governments to limit capital mobility and manage exchange rates. Michael Hudson says we need to get money out of politics and make the central banks serve the public instead of the 1%.
Yet I think Piketty's point, not acknowledged by these critics, is that such practical endeavors become very difficult to accomplish against the ever more concentrated power of wealth, until free market capitalism does itself in by provoking economic crashes that lead to depression, revolutionary movements, big wars, or the like. Or perhaps the middle class still has sufficient clout to effect change short of such catastrophic events. In any case, we shall soon see how this plays out in the United States, as the public is rising against plutocracy at the same time that right wing billionaires like the Koch brothers are going all out to capture even more of the government.
Among the more puzzling contributions was Fullbrook's mathematical analysis of market values. He claims that market values need to be represented by a "Boolean rather than Euclidean" structure, citing an analogy with probability theory. However probability uses the mathematics of measure theory, not the 0 / 1 mathematics of Boolean algebra. You could capture the changing market values of goods, services, and assets, with a time dependent measure (= way of assigning monetary values). Also Fullbrook finds trouble deriving market values from a barter system, but a liquid money system immediately clears up issues of consistency (consider the use of arbitrage to reconcile pairwise currency exchange rates). But I don't see that any of this says much about Piketty's big picture methodology. At most it seems to say that when the market values of assets go up dramatically, as in a financial bubble, then this "capital" part of the economy automatically becomes a bigger fraction of the total economy. True, but then asset deflation has the opposite effect and Piketty is concerned with long term averages.
The real interest lies in how financial bubbles redistribute wealth over a longer period of time: (1) through bailouts of speculators and (2) because insiders know better what is going on and are better able to offload, or short sell, overvalued assets before the bubble bursts. From an analytical point of view, the net result is that there should be different average rates of return to capital depending on the wealth of the capitalist, a fact which Piketty himself cites to partially explain the increasing value of 'r', using the Harvard endowment fund as an example. Thus r₀ could be the 'r' value for the bottom 90% of the population, r₁ for 90% - through 99%, r₂ for 99% through 99.9%, etc., or r(p) could even be a continuous increasing function of the percentile 'p'. Likewise, the savings rate varies with the percentile in a similar manner, so it would better to use such data when available.
Another fact is that rates of return vary with time and asset type, depending on the type of economy, speculation, tax policy, etc. When a small group controls valuable assets with relatively low prices, such as oil throughout much of its history, they can achieve high rates of return, hence rapidly concentrate wealth and power. Conversely the rates of return on overvalued assets, even good ones, can be negative, as so many find out after a bubble has burst. The reviews in this book do not delve much into this critique of Piketty, symbolized by his use of a single average rate of return `r' which masks these critical underlying dynamics.
A missing critique of Piketty is on the issue of zero or negative growth, which seems not far off due to natural resource and environmental limits-to-growth. In that case the formula β= s/g cannot be true, and in fact the asymptotic argument fails. Capital would certainly shrink. Consumption would likely be curtailed to keep at least some savings to invest, in addition to provide for maintenance. As productivity drops due to escalating costs, so will profits, and the rate of return 'r', and debt will be far harder to come by. In fact debt plays a huge role in economic growth, investment, speculation, etc., that Piketty fails to consider. Steve Keen's work on debt needs to be included.
As far as critiques of Piketty go, this book is a good starting point, but I expect that much more in depth responses will be forthcoming.