French economist Thomas Piketty is raising a ruckus

[BrainGlutton]

Not on purpose, not at all. But his new book, Capital in the Twenty-First Century (I haven’t read it, but I’ve read a lot about it online in the past few days), apparently concludes that there is no economic force that drives capitalist societies towards shared prosperity, and that ever-greater stratification is the normal thing to be expected absent governmental intervention. That alone is enough to get him called a Marxist, which he emphatically and dismissively is not, by American RW pundits. See recent editorials/reviews by Thomas Douthat and James Pethokoukis.

Questions for debate:

1. Is Piketty right?
2. Does what he writes make him effectively some sort of Marxist willy-nilly?
3. If so, does it matter?

[BrokenBriton]

The Guardian article on this from 10 days ago, with 480 comments below:

Occupy was right: capitalism has failed the world

[ISiddiqui]

Ross Douthat, and its a nice right-wing view at the book, IMO.

[Snowboarder_Bo]

I thought the Guardian article was very interesting. I’m curious now to hear what others think about this book.

[YogSothoth]

Without government to regulate the market, why would anybody think that people will equalize on their own? How much of their income do these right wingers give to charities, or the poor? How much time do they spend trying to dodge taxes, or make excuses for tax dodger, and demonize those who aren’t like them? I would think the logic is self-evident

[BrainGlutton]

@YogSosoth

Without government to regulate the market, why would anybody think that people will equalize on their own? How much of their income do these right wingers give to charities, or the poor? How much time do they spend trying to dodge taxes, or make excuses for tax dodger, and demonize those who aren’t like them? I would think the logic is self-evident

Nevertheless, it runs contrary to received economic wisdom of the past 60 years. See below.

Jeff Faux reviews Piketty’s book in The Nation.

The idea that capitalism naturally led to greater equality was codified in a 1955 landmark study by the American economist Simon Kuznets, whose data showed that after an initial period of rising inequality (e.g., our nineteenth-century gilded age) the wealth generated by market economies is distributed between labor and capital more evenly. When workers’ productivity rose, so do their wages. The “Kuznets Curve” quickly became conventional wisdom for both mainstream economists and the politicians they advised. As the nautical John F. Kennedy put it: “A rising tide lifts all boats.”

<snip>

Enter Thomas Piketty, whose impressively researched analysis (600 pages plus a detailed 165-page online technical appendix) concludes that Simon Kuznets was wrong. Not only does capitalist growth not reduce inequality; it increases it.

Using data and computer power unavailable to Kuznets, Piketty pored through 200–300 years of the economic history of the largest capitalist economies—principally the United States, Britain, France, Canada, Germany, Sweden and Japan. The numbers show that that since roughly 1700, with one exceptional period, the returns to capital (profits and interest) have exceeded the rate of overall economic growth. Since the rich own most of the re-investable capital, their wealth accumulates faster than the wealth of the vast majority of people whose income depends on wages and salaries.

The exceptions to the historical trend were the years 1914–75 in Europe and 1929–75 in the United States, in which inequality shrunk in almost all western nations. According to Piketty this era was unique: the consequences of two world wars, the Great Depression and the social democratic character of the postwar recovery in Europe, Japan and North America. Once those forces were spent, capitalism returned to its normal function as a machine for producing “inequalities that radically undermine the meritocratic values on which democratic societies are based.”

Moreover—and this is a key point—contrary to what we’re taught in Economics 101, markets appear to have no self-correcting mechanism that can halt the worsening misdistribution of wealth. If allowed to go unchecked, a tiny number of capitalists will own just about everything, with social consequences that Piketty sees as “potentially terrifying.”

Timothy Shenk incorporates it in his discussion of “Millennial Marxists.”

[adaher]

I’m not sure that government reduces inequality except at the margins. And mostly by making rich people poorer, not by making poor people richer. So that wealth from the rich is mostly transferred to the government itself, which creates a new class, and a pretty entitled one to boot, of bureaucrats.

Now maybe there’s this theoretical good government that can wisely make economic policy in a non-self-interested way to benefit the masses, but since this government is going to be run by people, it will never actually exist.

[MOIDALIZE]

The underlying idea of the book is that if the rate of return to capital exceeds economic growth, then inequality will tend to increase. Piketty calculates the average returns to capital as being around 4-5% historically, compared to the 2-3% annual growth we’ve seen in developed economies for the last 30 years or so. Aside from the post WWII period until about the 1970s, which looks increasingly like an anomalous period in economic history, this dynamic has largely been in effect. In other words, it’s easier to increase wealth when you already have wealth than it is when you have to work for a living. Compare the preferential tax treatment of capital gains to the tax treatment of income, as one of many examples.

I find it funny that economists consider Piketty’s conclusions so groundbreaking when any working stiff could have told them this. But then most economists have their heads up their asses.

[BrainGlutton]

@adaher

I’m not sure that government reduces inequality except at the margins. And mostly by making rich people poorer, not by making poor people richer.

Government makes poor people richer by building things everybody gets to use, which also sometimes serves as a jobs program.

@adaher

So that wealth from the rich is mostly transferred to the government itself, which creates a new class, and a pretty entitled one to boot, of bureaucrats.

:rolleyes: That shit again?! Look, no one goes into civil service for the money; and most money government at any level collects in taxes goes right out the door again immediately, stimulating the economy.

@adaher

Now maybe there’s this theoretical good government that can wisely make economic policy in a non-self-interested way to benefit the masses . . .

Yeah, ours, from the 1930s through the 1970s.

[BrainGlutton]

@MOIDALIZE

In other words, it’s easier to increase wealth when you already have wealth than it is when you have to work for a living.

See also the Vimes’ Boots Problem.

“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

This was the Captain Samuel Vimes ‘Boots’ theory of socioeconomic unfairness.”

[WillFarnaby]

Government intervention stifles competition. Regulatory burdens act as barriers of entry across the board. The elite know this. The elite control government as demonstrated by that empirical study cited in the Elections forum. If Piketty doesn’t account for this in his analysis, it’s worthless, even if his conclusion that capitalism leads to inequality is sound.

In a statist society, there will be income inequality, with those that manipulate government for their own ends rising to the top.

In a free-market society, there will be income inequality, with those that best satisfy the desires of consumers rising to the top.

[Batistuta]

@adaher

I’m not sure that government reduces inequality except at the margins. And mostly by making rich people poorer, not by making poor people richer. So that wealth from the rich is mostly transferred to the government itself, which creates a new class, and a pretty entitled one to boot, of bureaucrats.

Now maybe there’s this theoretical good government that can wisely make economic policy in a non-self-interested way to benefit the masses, but since this government is going to be run by people, it will never actually exist.

That’s simply not true. Particularly in the Nordic countries but also in many other places, government transfers have been proven to reduce inequality for decades now. Funny enough, Sweden’s small-government reforms of the 1990s and early 2000s have been followed by record-breaking increases in inequality. Coincidence? I don’t think so.

The whole ‘governments are run by people therefore dysfunctional’ argument is just wrong. Aren’t private businesses run by people too? Why do we trust them?

[BrainGlutton]

@WillFarnaby

Government intervention stifles competition. Regulatory burdens act as barriers of entry across the board. The elite know this. The elite control government as demonstrated by that empirical study cited in the Elections forum. If Piketty doesn’t account for this in his analysis, it’s worthless, even if his conclusion that capitalism leads to inequality is sound.

In a statist society, there will be income inequality, with those that manipulate government for their own ends rising to the top.

In a free-market society, there will be income inequality, with those that best satisfy the desires of consumers rising to the top.

Then what form of society will produce something near to income equality?

[BrainGlutton]

@Batistuta

The whole ‘governments are run by people therefore dysfunctional’ argument is just wrong. Aren’t private businesses run by people too? Why do we trust them?

We don’t. But we deal with them because they have what we need; we don’t have to trust them in order to work for them or buy from them. Caveat emptor.

[BrainGlutton]

@WillFarnaby

The elite control government as demonstrated by that empirical study cited in the Elections forum. If Piketty doesn’t account for this in his analysis, it’s worthless, even if his conclusion that capitalism leads to inequality is sound.

Well, apparently, whether he accounts for it or not is hard to know without reading the book. According to Jeff Faux (see link in post #6):

Piketty is not a Marxist. He sees no real alternative to global capitalism and has little interest in changing its inner workings through worker ownership, nationalization or the redevelopment or local or national markets. Like Keynes, his goal is to make markets a more efficient instruments for human progress. But although he supports the standard progressive agenda of financial regulation, public investment in education and infrastructure and aid to the poor, he thinks that in a globalized economy, capital is now beyond the control of any one country—even the United States. Efforts by individual nations to constrain capital will just chase away highly mobile private investment.

The ultimate solution, he writes, is a worldwide progressive tax on private capital. Piketty understands that this is now utopian. But he argues that the tax is technically feasible and could be gradually adopted region-by-region.

Here Piketty seems out of his political depth. In order to avoid Marx’s apocalyptic conclusion, he skips around a central implication of his own analysis: that the upward redistribution of wealth also generates an upward distribution of political power that perpetuates inequality. An enforceable global tax on capital ownership would require dramatic political shifts to the left within the major economies—at least the United States, Europe, China, Japan—and unprecedented cooperation among these economic rivals to face down transnational capital and force the rest of the world to accept it. Eyes will roll.

OTOH, Pethokoukis’ review (linked in the OP) says:

And it’s only going to get worse, Piketty concludes. Sure, the productive and innovative capacity of market capitalism will generate enough income growth for the masses to prevent revolution. He concedes Marx got that bit of apocalypticism wrong. But an “endless inegalitarian spiral” will create such wealth bifurcation that “the meritocratic values on which democratic societies are based” will be undermined. The political process will be hopelessly captured by a tiny elite of rent seekers and trust-fund kids. America (and then the other advanced economies) will become what Occupy Wall Street types and Elizabeth Warren think it already is.

[WillFarnaby]

@BrainGlutton

Then what form of society will produce something near to income equality?

Primitivism

[Budget_Player_Cadet]

@WillFarnaby

Government intervention stifles competition.

Wow, nice assertion. Care to back it up? Because if you want to claim this is universally or even largely true, then you’re going to need a cite. I think only a very few here take this claim as a given.

Regulatory burdens act as barriers of entry across the board.

Yes, it sure would be easier to start a pharmaceutical company if you didn’t have to go through that painfully expensive process of clinical trials for your treatments. And it sure would be easier to start a restaurant if you didn’t need any sort of certification to show that you actually know how to cook without poisoning people.

The elite know this. The elite control government as demonstrated by that empirical study cited in the Elections forum. If Piketty doesn’t account for this in his analysis, it’s worthless, even if his conclusion that capitalism leads to inequality is sound.

I know of the study you’re talking about, but here’s what I’m wondering… is that really what the elite are going for? Citation, please?

In a free-market society, there will be income inequality, with those that best satisfy the desires of consumers rising to the top.

Am I supposed to laugh now? Because that’s not very funny…

[BrainGlutton]

@WillFarnaby

Primitivism

Sounds sexy!

[marshmallow]

So his ground breaking thesis is that it’s easier to make money when you already have money, and those with money use it to drive out competition, protect their privilege, and maintain the status quo? Well, I guess it’s nice to get in down with charts and everything.

[Tom_Tildrum]

Tyler Cowen is not a fan, although that’s presumably not a surprise.