I am no economist, nor would even claim to be an expert on economic theory. I read a lot, and as such, did pick up Thomas Piketty’s “Capital in the 21st Century.” It is, after all, what ‘elites’ are talking about, and I like to be ‘in the know’. I am also a glutton for punishment; at almost 700 pages, and stuffed full of loads of economic data, it is not necessarily a leisurely read.
First of all, I think Piketty’s book is quite good. My conservative brethren may be surprised by that. However, if for nothing else, the book is worth reading for its extensive yet very approachable history of wealth inequality over the centuries.
For those that are unable or unwilling to read Piketty’s tome, I think this quote, which has been travelling the internet, summarizes his beliefs accurately:
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 ‘r>g’ equation is at the heart of Piketty’s thesis of the future of the world economy. I won’t go into depth on it here, but suffice it to say…it is overly simplistic and largely ignores major factors that effect the world economy.
Of course, Paul Krugman is leading the charge of the greatness of Piketty. That is no surprise; not because Krugman is an economic genius, but precisely because he is a political hyperpartisan. Krugman argues that there is no substantial retort to Piketty’s predicions in his most recent New York Times piece; of course as is generally the case, Krugman is wrong.
Tyler Cowen, James Pethokoukis, and a myriad of others have had thoughtful and productive responses to Piketty. Krugman largely dismisses them without actually, you know, providing a logic case against them.
Cowen extensively talks about the historical similarities of Piketty’s work to others, such as British economist David Ricardo. Note Krugman never counters Cowen’s concerns, such as this one:
Of course, since Ricardo’s time, the relative economic importance of land has plummeted, and his fear now seems misplaced. During the twentieth century, other 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.
For Krugman, these issues are ancillary to his central political faith, and thus, not worthy of retort. The ultimate issue with Piketty’s and Krugman’s thesis is this unanswerable question: is there an example a state with increasing wealth asymmetrically favoring the top 1% is more unstable or inherently non-viable as a free nation than one where the state imposes its moral will by using political force to reallocate that wealth in such a way to fit its world vision?
I do not think Krugman nor Piketty can actually answer that question. As is common with liberals, history and evidence is less relevant than intent; and their intent, like a religious crusade, cannot be countered with logic. Ultimately, their answer to this simple question is, “Does not matter; we will do it right this time.”
Sounds somewhat like faith in a spiritual power; that seems less than satisfying in our quest for knowledge.
Piketty’s central policy belief revolves around taxing people making over $500,000-$1 million at a 80% tax rate. Now, what was the logical reason for this? It is not to use that money to benefit the poor; in fact, Piketty acknowledges that because the rich will adapt to such a tax increase, that in the end such a policy will not raise much revenue. No, the reason is a moral, faith based one: he simply thinks it is immoral for people to be making so much money. No, he doesn’t state that in such clarity as I do here, but the meaning is still apparent to all who have read the book.
As Megan McCardle points out, none of these taxes on the rich ultimately change the reality that middle and lower classes around the world face. Their daily lives and struggles are about getting to a job that pays them enough to sustain and grow their family wealth. Taxing the rich, as history has shown, actually proves to be a detriment to these goals, because the rich will adapt to any such punitive tax structure by decreasing their productive value; and in turn, that means that they produce less innovation and technology, which is essential for the growth of the job sector that the middle class requires to thrive.
The core problem that Piketty’s thesis has is the same problem that Krugman and the central core of progressive thinkers on economic thought have today: they believe that government would be better at determining the ‘value’ of an individual than the marketplace.
As for the ‘Marxist’ label. Piketty never fully adopts Karl Marx’s vision. But he does, for the most part, lean far closer to Marx than Milton Friedman. Take this quote from the book:
“Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes, as Simon Kuznets thought in the twentieth century?”
Is there any question which economist is closer to Piketty’s thinking here? I think not. Progressives for obvious reasons do not like the comparison to Marx, but the comparison is nonetheless inescapable.
Piketty’s work is still well worth a read for any economist or layman who has delved into the fundamental philosophy of economics. This book expanded my base of knowledge and made me rethink many of my views of inequality and wealth, and for that I have to thank Piketty greatly; so few authors really provide a new way of viewing the reality of the world.
But ultimately, Piketty’s work is much like Thomas More’s Utopia; a thoughtful excercise, that philosophers can discuss in length, but ultimately does little to help anyone in the real world. Cowen summarizes the problems here:
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.
A more sensible and practicable policy agenda for reducing inequality would include calls for establishing more sovereign wealth funds, which Piketty discusses but does not embrace; for limiting the tax deductions that noncharitable nonprofits can claim; for deregulating urban development and loosening zoning laws, which would encourage more housing construction and make it easier and cheaper to live in cities such as San Francisco and, yes, Paris; for offering more opportunity grants for young people; and for improving education. Creating more value in an economy would do more than wealth redistribution to combat the harmful effects of inequality.
So although this is a thoughtful and valuable intellectual excercise, Piketty’s vision of the future, and his solutions to the problems that he sees ailing the world, seem to be nothing more than a retread of Marx, with a few slightly modernistic twists. And as such, the book is interesting as coffee table conversation, and will be the center of much discussion among the elite for good reason, but of minimal use for true economic and political policy in the world we live in today.