There is a lot of media praise for Thomas Piketty, a French economist and his new book, Capital in the Twenty-first Century. The basic theme of the book is that the rich get richer and everyone else gets poorer. Piketty’s solution is confiscatory taxes on wealth to reduce the amount of capital in the hands of “capitalists”. He believes this will force capital into the hands of more productive members of society such as entrepreneurs and then the benefits will be more widespread throughout society. It’s a mish-mash of failed ideas about capital, labor, inequality, entrepreneurs, free markets, and economic progress. It is “economics lite.”
From a column written May 1, 2014
There is a lot of media praise for Thomas Piketty, a French economist and his new book, Capital in the Twenty-first Century. He’s been all over TV, the NY Times, and his book tops the charts at Amazon. The reviews in the media have been effervescent.
The basic theme of the book is that capital is concentrated in the rich and such concentration causes returns on capital (i.e., the interest rate) to be greater than returns on output and labor (GDP growth rate), which means the rich get richer and everyone else gets poorer:
“… when the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based …”
This trend will
“eventually contribute to rebuild[ing] a class of rentiers in the U.S., whereby a small group of wealthy but untalented children controls vast segments of the U.S. economy and penniless, talented children simply can’t compete…
The only way to solve this problem of wealth inequality, according to Piketty, is to have an annual tax on wealth (80% tax on incomes above $500,000 plus confiscatory taxes on wealth) and thus reduce the amount of wealth in the hands of capitalists. He believes this will force capital into the hands of more productive members of society such as entrepreneurs. Thus capital will somehow then become more productive and the benefits will be more widespread throughout society.
If you are in favor of confiscating and destroying capital, you will love this book. His conclusions have been seized upon by Progressives who are desperate for some intellectual underpinnings for their wealth confiscation policies.
In the spirit of fairness and disclosure, I have not read Capital in the Twenty-first Century and will not. I have read Progressive economist Paul Krugman’s review of the book in the NY Review of Books (“Why We Are In A New Gilded Age”), a long review in the New Yorker by John Cassidy (“Forces of Divergence”), and multiple accounts and reviews in the NY Times, the Guardian, and the Financial Times. I also read a number of reviews of the book on Amazon. They all say the same things so I think I get the gist of it.
Here is my take on the book’s premise: it is a mish-mash of confused ideas about capital, labor, inequality, entrepreneurs, free markets, and economic progress. It is “economics lite.” As economist Ryan Decker put it:
“[H]e preaches to the converted and to those who are easily overwhelmed by a deluge of charts, knocking down straw men but avoiding the hard questions. The book is many things, including an excellent resource for stylized facts, but serious economic analysis it is not.”
The book has a vast collection of data and graphs that may be historically interesting but don’t really mean much when one tries to evaluate their significance. You can draw many conclusions from graphs especially when you do a kind of analysis where you look for data that justifies you hoped for conclusion, and you ignore other data or conclusions (“curve fitting”). It is a triumph of quantity over substance.
Let me give you an example. Let’s say you look at a simple object, say a clock, and you know what it is and its function as a little machine for telling time. Let’s say another person looks at the same little machine and doesn’t know what it is for. All he sees is numbers and hears a noise when a certain number is reached. He describes in great detail how the numbers seem to progress in numerical order but then stop at 12 and start over again at 1. What a stupid little machine.
Mr. Piketty is much like the latter observer except that the machine he watches is something called the “economy.” He sees numbers coming out of this machine and draws conclusions about those numbers without really understand how the machine works or its real purpose.
Here are the main flaws in his thesis:
- Wealth inequality has nothing to do with the causes of wealth or poverty.
The fact is that there will always be people who are richer than you. Is their greater wealth the cause of your lesser situation or poverty? No. Those who employ capital more successfully in a society will always benefit disproportionately. So what. Poverty is caused by the lack of capital, the lack of private property rights, social structures and government regulations that deter entrepreneurship, and the lack of the rule of law. If you want less poverty you need more capital, not less. (See my Sentinel article in Vol. 3, Issue 2.)
- Wealth never stays concentrated for long.
You know the old saying, rags to riches to rags in three generations. If you look at the long term effects of wealth, it doesn’t always last to any family or group. Economies change and with change comes “creative destruction, the competitive entrepreneurial force that wipes out unproductive capital investment and rewards new, efficient investments. And most “rentiers” if they invest well, have their capital employed in new, profitable ventures by venture capital advisers.
- Capital benefits all members of society.
Capital is not some amorphous, homogenous “thing”. It is rather many machines, factories, and other productive assets that are used in different ways by entrepreneurs and capitalists. All capital exists for one purpose only and that is ultimately for the production of consumer goods. The more capital we have, the more it will be used in production which creates jobs and more wealth. (See my Sentinel article in Vol. 2, Issue 41.)
- Government confiscation of wealth will only make us poorer.
Piketty’s idea is not new; it has been done by governments many times before. The countries most successful in modern times at reducing and even eliminating wealth inequality have been the Peoples Republic of China and the Union of Soviet Socialist Republics. Of course they wiped out capital making everyone poor, but hey, they got the job done. The point being is that once in the hands of government, capital is destroyed because it is spent, not invested. The less capital we have in private hands, there will be fewer new industries and businesses, fewer jobs, and less overall wealth. It will make us poorer. And, isn’t it pretty obvious that if you tax away wealth, entrepreneurs will have less incentive to create new wealth and jobs?
Mr. Piketty’s title (Capital in the Twenty-first Century) is actually a play on Karl Marx’s Capital (Das Kapital). Instead of looking at the tyranny of work and labor as the cause of society’s ills, Piketty looks at the tyranny of wealth “concentration” as the cause of society’s problems. This is a problem that is just made up by people like Piketty who don’t understand economics or the benefits of capital. Follow his advice if you will, but it’s the road to hell.
In response to this article I received a letter from a reader criticizing my article on French economist Thomas Piketty and his new book Capital in the Twenty-first Century. He accuses me of being close-minded, willfully ignorant, and failing to address Piketty’s central issue concerning wealth inequality.
Here is my response:
Thank you for your comment although it was highly critical of my commentary on economist Thomas Piketty.
But if you think Piketty has something new to offer you would be quite wrong. The conclusion of Mr. Piketty’s research is that he advocates confiscating much of the wealth from the very wealthy. This is not surprising since he comes from a long line of French Marxist-influenced economists who, like most of his fellow French socialists, hate wealth and rich people. I do not exaggerate here. France’s socialist president François Hollande and many French politicians and intellectuals have repeatedly and publicly expressed their hatred of the rich. Piketty’s entire premise is based on that intellectual foundation. The book’s data dump means nothing because his theoretical foundations are wrong, have been proven wrong over time, and always lead to disastrous economic results. Basically Piketty is guilty of curve-fitting his data to “prove” his thesis. He may be hailed by some neo-Keynesians as a genius but I see his epistemological foundations as intellectually weak. He really doesn’t understand how economies, especially capitalist market-based economies, work, and the voluminous data provided only serves to obscure that fact.
His basic premise is that wealth somehow automatically perpetuates itself and this gives rise to a permanent wealthy class who would control government for their own benefit and that endangers “democracy”. He concludes that capital automatically grows at 4% a year. How does he determine that? He pulls together copious amounts of data on capital growth and concludes that “capital” has grown by 4% over time but he never explains why that is so, other than making conclusory statements. This is ludicrous and demonstrates a facile grasp of the foundations of economics. He ignores almost all endogenous factors that go into the creation of wealth. Wealth grows because people do something productive to make it grow; it doesn’t just happen. Yet he believes that somehow it magically just grows.
It is easy to demonstrate his error. If you look at the Forbes list of the wealthiest Americans you would find that the list always changes and the very rich win and lose over time. Larry Summers (!) pointed out that by 2012 less than a tenth were still on the list of those who were there in 1982. Ditto the data from the IRS on the top taxpayers in the U.S. So where is this permanent wealthy elite that pulls our strings? There is none: there is a revolving door at the top. Yet despite the fact that wealth is created and lost by the actions of entrepreneurs over time and does not create some permanent dominant wealthy class, Piketty still believes that these permanent elites exist and somehow rule the world and endanger democracy.
There are definitely problems with democracy, but a permanent wealthy class that just sits on its ass and lets capital magically grow isn’t it. Perhaps instead it might be politicians who buy votes with reckless spending and create deficits resulting in generational-crushing debt.
With this in mind, his conclusion that wealth must be confiscated from this mythical permanent wealthy elite to prevent its dominance to “save democracy” is, to use a more polite word, poppycock. As I pointed out in my article, it would only destroy the economy, not save it. If that (wealth destruction) is any economist’s conclusion from his research and data, we need to look no further because it is wrong. It unmasks such a proponent as an intellectual fraud, ignorant of the reasons societies prosper or fail. So in that respect, if you think that I am being close-minded because I don’t consider his ramblings worthy of serious consideration, so be it. I don’t. Anyone who believes that Piketty is offering something new or intellectually daring would be wrong. Piketty is just another neo-Marxist economics poseur who appeals to those who don’t understand economics or how the world really works. He should be ignored.
The reader’s reply to the above:
I appreciate that you responded to my letter criticizing your commentary on Thomas Piketty’s book, Capital in the Twenty-First Century.
In your response you claim that Piketty is mistaken to be concerned that a permanent wealthy class could endanger our democracy. You say, “There is a revolving door at the top … [so there isn’t] a permanent, wealthy class that just sits on its ass and lets capital magically grow.”
Actually the facts show that among the top ten American billionaires, four are self-made billionaires: Bill Gates, Warren Buffet, Larry Ellison, and Michael Bloomberg, while six inherited their extreme wealth: Charles and David Koch, and Christy, Jim, Alice, and S. Robson Walton. Clearly the revolving door at the top is now more a myth than a reality.
You conclude with the following statement, “Anyone who believes that Piketty is offering something new or intellectually daring would be wrong. Piketty is just another neo-Marxist economics poseur who appeals to those who don’t understand economics or how the world really works.”
Apparently your strong beliefs about economics have led you to the conclusion that anyone who disagrees with you is automatically wrong. I urge you to set aside your ideological prejudices and recognize that extreme economic inequality is a threat to our democracy. For our country to have a prosperous future we must objectively address Piketty’s fundamental question – how can we promote a healthy, sustainable relationship between capitalism and democracy?
My response to the above:
It is clear that nothing I say will deter you from your chosen conclusions. So, with that in mind, I will try to talk over your head to those who may read these letters in the hope that facts, not conjecture, will shed light on this topic.
There is nothing in your response that in anyway reveals any fault in my assertion that wealth inequality (1) is a fake issue invented by those who wish to redistribute wealth or (2) that there is a revolving door at the top and thus there is no permanent wealthy elite.
For example, as proof that I am wrong on the revolving door, you refer to just 4 self-made individuals and one family (the Wal-Mart heirs) as proof that there is a permanent wealthy elite that are a threat to democracy. (As to the Kochs, they belong in the self-made category, having turned a small family enterprise into something quite large and prosperous praoviding more than hundred thousand jobs.) Yes, you are correct that the people mentioned are at the top of the wealth pyramid. So what? Are you saying that these folks run the country? I think not and I would guess you would agree with me. Piketty is not talking about a handful of folks, but rather a larger group of, say, One Percenters, who are statistically significant. My point was that the top tier changes, frequently, and I provided data to support my assertion. Gates, Buffet, and Ellison have pledged to give their fortunes away. So there you go. Where is this self-perpetuating elite?
This is the reason these discussions go nowhere: heartfelt assertions not supported by data or theory does not constitute an argument. Also calling me close-minded doesn’t help. I admit to having an ideological bent toward freedom and free markets. You have an ideological bent to Progressivism. So, all you have to do is challenge me on the theory and facts rather than ad hominem jabs if you wish to win the argument.
Getting to your and Piketty’s point about capitalism and democracy: it is an interesting one, but Piketty adds nothing new to the discussion.
First of all, the issue of prosperity has little to do with Piketty’s ideas. I have discussed the road to prosperity many times on the pages of this fine journal, but the confiscation of wealth from the rich, as Piketty proposes, is not one of them.
Second, just saying wealth inequality is a threat to democracy is an assertion which neither you nor Piketty support with facts. Where’s the beef? Piketty gives a ton of data about wealth, but his conclusions (wealth inequality threatens democracy) are mere unsupported conclusions as many of his critics have pointed out.
I say that our political environment is a threat to capitalism and democracy, but that capitalism, free market capitalism, is not a threat to democracy. What is a threat to democracy is the ascendancy of the Progressive ideas that you support which advocate the centralization of authority in the hands of a cadre of bureaucrats who usurp our rights to make our own economic decisions. They would substitute the use of government coercion for free and voluntary exchange. This increasing centralization of government economic power has proven fatal to freedom and democracy throughout history. And (need I even say it?) to prosperity as well.
The ideas Piketty promotes are fatal to democracy and freedom. They aren’t new. His and similar schemes have been tried and have failed many, many times over several millennia of human history. Freedom and free market capitalism work and history has proven me right.
If you wish to continue this discussion please do a little more reading and come up with facts, not heartfelt conclusions.