Capital Man: Thomas Piketty is economics’ biggest sensation and fiercest critic

http://chronicle.com/article/Capital-Man/146059

by dang • 12 years ago

157 193 12 years ago

selmnoo2• 12 years ago

I've been looking forward to a discussion on Thomas Piketty by the HN crowd for a long time, I was afraid it would never get here because it would have been be too 'political' - but I'm happy this has finally made the frontpage.

For those who are still unfamiliar with the name Piketty: He's a French economist (who briefly enjoyed a stint at MIT as professor before becoming disenchanted with the state of things here and returning to his home-country of France).

In his recent book "Capital in the 21st Century", he's done something very big. He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it. He's done this with an enormous amount of data.

His prescription for the cure is a little controversial though: progressive taxes (up to 80%) for the rich, and a "global wealth tax" that he wants America to orchestrate. For a good summary (that talks about this main discovery that "r > g" -- that return on capital is greater than the overall economic growth), watch this talk on Bill Moyers show with Krugman: https://www.youtube.com/watch?v=QzQYA9Qjsi0 - though this submission article seems to have a nice synopsis too.

As an article on NYT earlier this week said it, the book heralds a song of American socialism in the future. His findings are just too compelling to ignore, they're going to fundamentally change the tone and substance of debate we have about economic policies.

lobster_johnson2• 12 years ago

Paul Krugman also reviewed the book in the most recent New York Review of Books [1]. Good read for those interested.

[1] http://www.nybooks.com/articles/archives/2014/may/08/thomas-...

jmcmichael• 12 years ago

Bill Moyers and Krugman discussed Piketty's book on his latest show:

http://billmoyers.com/segment/preview-what-the-1-dont-want-y...

This link was posted to HN yesterday briefly but was then deleted.

csentropy• 12 years ago

That is one strike against the book. If PK likes it, it has to be crap.

justincormack2• 12 years ago

Would like to read the book but have not got a copy yet. All the physical shops I tried had sold out, seems to be selling well for an academic book.

RestlessMind7• 12 years ago

I bought a digital copy on google play. It might be available on kindle as well.

cylinder• 12 years ago

Kindle. Can read on the desktop reader or smart phone.

WildUtah• 12 years ago

I haven't gotten my hands on a copy yet.

But I'm reading that Piketty claims that the average return on capital over time in modern nations is 5%. This number is essential to his argument.

Meanwhile the US government is selling trillions in bonds at rates around -0.2%. [0] Yes, negative point two percent. I'd like to know where Piketty suggests for me to find risk adjusted 5% returns.

When someone makes a claim such as this which --if it were true -- would immediately make the claimant a billionaire or trillionaire in the markets with trivial trading, he loses all credibility. Well, loses all credibility unless he can show us the billions.

Right now governments and pension funds across the world are going broke hunting for 5% returns. Maybe Piketty can solve the growing pension crisis for us as a first step.

[0] http://www.treasury.gov/resource-center/data-chart-center/in...

jamesaguilar2• 12 years ago

If I were you, I would hesitate to assume a respected economist has no credibility, at least until I had read the paper. What is more likely: that he is trivially wrong, or that you have failed to understand some facet of his argument?

tinco• 12 years ago

If I understand it correctly (I'm not an economist) your argument is like the common global warming counter argument: It's so cold outside, global warming is a lie.

gte525u• 12 years ago

You've setup a helluva strawman. You're comparing returns of the entire capital stock for a chunk of the western world over the course of last century to the inflation adjusted yield curve of a specific government-bond calculated from last weeks prices.

beachstartup• 12 years ago

aggregate return on capital (i.e. the sum of profits of all firms i.e. all the money that rich people make) is completely different than the return of any one firm or market/investment strategy. you seem to be conflating the two deliberately to set up a straw man.

nmodu• 12 years ago

The conclusion that you have drawn is based on a misinterpretation of what constitutes as "capital". If "capital" meant "government debt", then the rate of return on capital would indeed equal the interest rate on government debt. However, when economists refer to capital, they are referring to the market value of the cumulative stock of a nation's capital.

What is "capital"? Piketty defines capital as:

"the sum total of nonfinancial assets (land, dwellings, commercial inventory, other buildings, machinery, infrastructure, patents and other directly-owned professional assets) and financial assets (bank accounts, mutual funds, bonds, stocks, financial investments of all kinds, insurance policies, pension funds, etc.) less the total amount of financial liabilities (debt)."

Furthermore, national capital can be broken down into public capital and private capital:

"[National capital is] the sum of public capital and private capital. Public capital is the difference between assets and liabilities of the state (including all public agencies), and private capital is of course the difference between the assets and liabilities of private individuals."

...and can be broken down into domestic capital and net foreign capital:

"Domestic capital is the value of the domestic capital stock (buildings, firms, etc.) located within the borders of the country in question. Net foreign capital...is the difference between assets owned by the country's citizens in the rest of the world and assets of the country owned by citizens of other countries."

The rate of return on capital:

"...measures the yield on capital over the course of the year regardless of it's legal forms (profits, rents, dividends, interest, royalties, capital gains, etc.), expressed as a percentage of the value of capital invested. It is therefore a broader notion than the 'rate of profit', and much broader than the 'rate of interest', while incorporating both."

jellicle• 12 years ago

Piketty claims that the average return on capital

So you've discovered that one data point in a set is not precisely equal to the average of the set.

And you think that means...."loses all credibility".

Oh boy.

rsync• 12 years ago

I wouldn't dismiss this critique too quickly...

It does indeed appear (I have not read the book, and I plan to) that the crux of his thesis is that capital can grow at 4-5% over the long run, whereas economic growth only grows at ~3%, and thus concentration of capital always runs away from normal economic growth.

... and this idea ... that you can regularly achieve even 4% annual return over the very long term ... has gotten a lot of people in trouble. Not just in the recent unpleasantness, but historically over many different economic cycles. Regardless of how receptive I may be to this book, or these ides, I am deeply skeptical of this assumption.

orasis• 12 years ago

Inequality is a fundamental to any network that features power-law like attachment of nodes - i.e. any sort of preferential attachment to nodes that are already well connected. Thus, in a way, inequality is "natural".

So the criticism of just capitalism is too narrow. I think this criticism would apply to any economic system that features small world network type topology.

wpietri• 12 years ago

So what if it's natural? Cancer's natural, and nobody says, "Hey, your criticism of cancer is too narrow."

That one could also critique multicellular organization in general is interesting, but irrelevant to anybody who actually has cancer.

Civilization is all about shifting our situation from natural outcomes to outcomes we like. So if ever-increasing inequality is an outcome we don't like, we can do something about that.

beaner• 12 years ago

What I am surprised about, as a Capitalist, is that anyone assumed "equality" was a natural result of capitalism.

ArkyBeagle• 12 years ago

Two things - capitalism replaces Mercantilism, and declining marginal value of money. So yeah - there are equalizing forces within capitalism relative to other systems.

steveplace• 12 years ago

He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it.

As I've not read his work nor critiques of his work, I'm curious to know if he puts any weight towards central bank policy and the widening inequality gap.

Because from my well-worn armchair, it seems that interest rates are not a free market and that policies such as quantitative easing serve to benefit higher classes much more than others.

dalek_cannes• 12 years ago

He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it.

One could argue, though, that the flaw is not in capitalist ideology per se, but that you can never fulfill its requirements perfectly:

1. Market information is never disseminated perfectly, i.e. to all parties, equally, at the same time with full accuracy.

2. Human beings are not rational.

3. Human rationality takes a nosedive if a person's wealth vs. time curve take a sudden upswing.

yourapostasy• 12 years ago

...quantitative easing serve to benefit higher classes much more than others.

While this is true, what it takes to route around this "power-law like attachment of nodes" that user orasis accurately described elsewhere in this thread has proven a maddeningly difficult problem to solve over the course of human history. The kind of top-down solution Piketty proposes ignores the kind of iterated game that plays out in the real world, and why the wealthy classes invest so heavily into political activity. It is not only relatively easy for the wealthy to eventually route around solutions like Piketty's, but even over the longer con subvert the original institutions into further means of command and control.

There are interesting developments afoot for this dynamic in our current era, and part of the reason why forums like HN are so fascinating.

stormbrew2• 12 years ago

In his recent book "Capital in the 21st Century", he's done something very big. He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it. He's done this with an enormous amount of data.

Am I missing something? Isn't this part of socialist analysis of capitalism from at least back to Marx?

mynameishere• 12 years ago

Well, it's a 700 page book that (I'm guessing) few of the reviewers have read, so it's entirely possible that you and many others are missing something.

That said, if the main point of a huge book, even among many other smaller points, is an observation so ho-hum that it would make a college freshman's eyes roll, something else is going on. Maybe he proved his obvious thesis in an unusually gripping way. Maybe he proved the obvious threat to democracy in an unusually gripping way. (But why would it matter? Does anyone still think this is a democracy?)

Or maybe all the lefty economists decided implicitly to push this particular warmed-over cliche as a great innovation. Who knows.

waterlesscloud2• 12 years ago

I suspect a great many supporters of capitalism accept inequality as a part of it as well. They may even argue it's a feature, not a bug.

leemcalilly• 12 years ago

The reason this book is important is that he's shown the r > g idea with data. As Picketty mentions in that article, it's a field of research that's an "academic no-man's land." It's traditionally too "economic" for history and too "historical" for economics.

Marx was espousing a theory. He wrote a manifesto. This is based on data that no one else has bothered to look into.

simonster• 12 years ago

I'm not trained in this field and I have not yet read Piketty's book, so take this all with a grain of salt, but my understanding from the discussion I have read is that Piketty's claim is that, if the rich can multiply their wealth faster than the middle class can become rich, then wealth becomes a hereditary entitlement rather than an incentive for hard work, and the meritocratic aspect of a capitalist system breaks down.

The Marxist thesis is essentially that the bourgeoisie (the rich) exploit the bourgeoisie because they generate more value from the proletariat's work than they pay in wages. Even if one accepts this line of reasoning, it is sort of orthogonal to Piketty's argument. One could imagine a society where the bourgeoisie exploit the proletariat, but, with intelligence, vision, hard work, whatever, the workers can still become members of the bourgeoisie, i.e., the "American dream." Piketty says that, under certain economic conditions, even this becomes impossible.

justincormack2• 12 years ago

I am presuming the title of the book is a reference to Marx, although I haven't read it yet...

aamar• 12 years ago

(I've only started the book.) Its claim is: under reasonable assumptions, inequality increases over time under capitalism.

Yes, Marx argued this; Piketty has an elegant new analysis supported by a lot of newly collected data. The book is in part a rebuttal to Simon Kuznets and others, who argue (plausibly) that capitalism tends to decrease inequality in the long run.

olefoo• 12 years ago

Piketty proves his point using data ( or should that be Data? ), so it's a bit harder to argue that it's just perception and that the losers in the game of life are merely angry that they were not born at the top of the meritocracy.

It's the difference between "it sure looks as though the lord of the manor is earning more than he deserves" and, "here are the books showing the lord of the manor took in 2 pounds of rent for every pound that was his by right.".

And Piketty is not even touching on the fact that we know that our financial elites basically rigged the game in 2008.

jaibot2• 12 years ago

that inequality is not an unintended result

I haven't seen him argue that rising inequality is "intentional" - no one sat down and said "Hey, let's build a system that widens inequality indefinitely". For most of the twentieth century, people thought that inequality was going to keep shrinking, and most everyone was fine with it.

The r>g problem looks like a real problem, but not an engineered one.

twoodfin• 12 years ago

Didn't inequality, globally, keep shrinking? I suspect it's still shrinking now, and perhaps at an increasing rate.

selmnoo2• 12 years ago

Perhaps I should have used a better word than "unintended". Sadly I'm out of the editing window for that post, so I can't really change it. Sorry about that.

WalterBright2• 12 years ago

He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it.

Of course it's an inherent feature of it. If, by some mechanism, every one was economically equal, what would be the point of anyone bothering to try to do anything?

vanderZwan3• 12 years ago

I know that this concept it pretty ingrained in American culture, but there's like... decades of psychological research on the topic of motivation debunking it - not even people who believe this principle act according to it.

I don't believe for one second that your prime motivation do make D was economical, for example.

belorn4• 12 years ago

Read simonster comment, posted 20m before yours.

If wealth becomes a hereditary entitlement rather than an incentive for hard work, then no matter how much you work you can never become economically equal.

If you can not earn wealth by working, what is then the point of work?

wyager• 12 years ago

Piketty's claim is that, in a capitalist system, wealth disparity increases over time (measured in currency).

I don't think he presented enough evidence to make that statement without a lot of qualifiers, but for now, let's just assume that it's correct.

What Piketty absolutely failed to account for is that capitalism's greatest strength (and even Marx thought this) is that it causes the marginal utility of currency to decrease over time.

That means that even if the dollar gap between rich and poor is bigger today than it was 200 years ago, the actual quality of life gap is just getting smaller and smaller.

A billionaire can afford caviar and ten lamborghinis.

A thousand-aire can afford hamburgers and a used civic.

The billionaire is not a million times better off, and every year, as brutal market forces push the development of better and cheaper technology in every field, the difference between the rich man and the poor man, measured in the quality of food, goods, and services they have access to, gets smaller and smaller. For the most part, billionaires can only buy more of the same thing that almost everyone has access to. The rich guy can buy a harvard education, and the poor guy can buy a cheap but effective online education. The rich guy can buy a gold-plated iPhone, and the poor guy can buy a cheap Android. It's all the same stuff, just with different levels of class.

Compare that to not so long ago when only the rich had cars, refrigeration, electricity, etc.

DerpDerpDerp• 12 years ago

Advanced medical treatments, robotics unavailable to the average person, space flight, the ability to avoid pervasive surveillance, a greatly disproportionate ability influence politics, etc.

There are lots of things you have access to by having a great deal of wealth that are simply unavailable in even a reduced form to the average person.

RestlessMind7• 12 years ago

I disagree with you.

"The rich guy can buy a harvard education, and the poor guy can buy a cheap but effective online education"

And what is the outcome of having Harvard education against having cheap online degree? I am sure Harvard graduates come way ahead of graduates of online universities, both in private job market as well as in influential government positions due to "cliques" and "networking".

But the problem is much deeper than whether you can afford high quality commodities or not. Those with excess capital can accumulate assets, and then rent out those assets to those without capital. If this sounds too abstract, consider a concrete example - bay area housing market. Only those with capital can afford houses. Those with excess capital can buy additional houses and rent them out to those who cannot afford housing. Net result? The ones who cannot afford houses now have to keep paying rent to those who could, thus making homeowners richer.

Piketty has elaborated this in detail. But the most salient question he raised was that inequality, per se, is neither bad or good, but whether it is justified? Today, Bill Gates or Mark Zuckerberg have billions more than I do. But I am OK with that because they took risks, invested their efforts (and yes, also got lucky). But I am don't think someone like Alice Walton or Paris Hilton deserve their billions - in their case, all they did was just to be born to rich parents. And they and their heirs are going to have a better life (education, nutrition, accommodation, entertainment, connections...) than almost everyone else. Why? Doesn't seem "justified" to me.

Edit: Why the downvote? And while I respect your freedom of speech (to downvote), I am sincerely interested in knowing your counterarguments.

andrewfong• 12 years ago

I think you're underestimating exactly what a billion dollars gets you over a thousand by several orders of magnitude. It's not about iPhone vs. Android. It's about having enough money to never need a phone vs. being unable to afford a data plan. It's not about caviar vs. hamburgers. It's about never having to cook vs. malnutrition from not having access to fresh produce. It's not about Lamborghinis vs. Civics. It's about having a ready replacement whenever you get into a wreck vs. losing your job because your car stalled on the freeway and you were late to work.

It's not the physical goods but intangibles that makes a billionaire a million times better off than the thousand-aire. Some particular intangibles:

Time. The billionaire never has to work again for the rest of his or her life and be assured that he or she has sufficient resources to not starve to death. Not so with the thousand-aire, who is likely living paycheck to paycheck.

Freedom. If the billionaire does want to work, he or she can work on whatever he or she wants. Paris Hilton can be a singer / actress / celebrity because she wants to be that. If Paris Hilton was not a wealthy heiress, I think it's safe to say her career choices would be significantly more constrained.

Influence. The political aspects of this are somewhat obvious, but it extends to practically everything else as well. The thousand-aire says, "It sure would be nice if my team won the championship this year." The billionaire can all but guarantee it.

turbojerry• 12 years ago

Gross inequality is not a feature of capitalism per se, it is the feature of our current implementation, specifically the current banking system. This is due to a number of factors, the main ones being bankers being the first in line to obtain newly created credit, central banks central planning of interest rates, bank fixing of market rates like LIBOR, massive fraud and government handouts to the banks. All of the above can be fixed without having to tax those that create real wealth in the economy, however that isn't going to happen as the banks have far too much influence in politics and even if they didn't changing the situation without collapsing the current system seems impossible at this stage.

zby• 12 years ago

If we had these progressive taxes and this global wealth tax - would we still have capitalism? And if yes - would that mean that 'r > g' is not inherent to capitalism but rather to some special kind of capitalism?

slashnull• 12 years ago

"The crux of his argument is a deceptively simple formula: r > g, where r stands for the average annual rate of return on capital (i.e. profits, dividends, interest, and rents) and g stands for the rate of economic growth. For much of modern history, he contends, the rate of return on capital has hovered between 4 and 5 percent, while the growth rate has been decisively lower, between 1 and 2 percent. (Piketty makes a compelling case that economic growth, which depends in good part on population growth, is unlikely to accelerate dramatically anywhere but in Africa, given current demographic trends.) Thus he adduces capitalism’s "principal destabilizing force": Whenever r > g, "capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based."

Now that was fascinating

msandford• 12 years ago

So the r>g makes a lot of sense, but it seems to assume that fortunes only grow. In real life they tend not to.

What I mean is that there are destabilizing/deconcentrating forces in an economy in addition to stabilizing/concentrating ones. Like companies going bankrupt or entire industries being displaced by new ones.

If you're worth $100mm it's not because you have a million hundred dollar bills in a vault, or hundreds of pounds of gold or a bank account with many zeros on it. You've got the money tied up in businesses that yield that r which is greater than g. And that SHOULD expose you to risks which could cause you to lose your money. In the last 20 or so years it seems like that exposure has been largely mitigated at least in the US which is quite unfortunate.

The other thing that strikes me is it kind of makes the assumption that only the rich (or capital) can participate in the r>g phenomena. With interest rates at less than 1% (and probably negative re:inflation) it doesn't make any sense for a normal person to save money. But what if inflation is 2% and real interest rates are 6%? Can the regular folk not participate in that as well?

intended2• 12 years ago

Compound interest alone will propel the rich further and further ahead.

But being rich also gets you access to shortcuts, investment opportunities and advisors no one else can call on. They insulate you from risk and target tax loopholes to help.

When that fails you have access to political insight and levers.

jgalt212• 12 years ago

Does anyone have a short and sweet one of Piketty's most profound findings:

the data reveals a deeper historical tendency for the rate of return on capital to outstrip the overall rate of economic growth, leading to greater and greater concentrations of wealth at the very top. quote from NY Times article: www.nytimes.com/2014/04/19/books/thomas-piketty-tours-us-for-his-new-book.html

Why does the rate of return on capital exceed the rate of economic growth? Isn't this just indicative of an asset bubble? And bubbles don't last forever. Or do they (if the Fed is always bailing the banks out)?

nagi2k4• 12 years ago

The Economist's review of his book gives a pretty good summary of his thesis. http://www.economist.com/blogs/freeexchange/2014/01/inequali...

stormbrew2• 12 years ago

From the linked article:

"But Marx's original critique of capitalism was not that it made for lousy growth rates. It was that a rising concentration of wealth couldn't be sustained politically."

I feel like this is one of the very most important things to consider in any discussion of wealth concentration. Economic growth does not necessarily correlate with a broadly pleasant experience for all participants in that economy. I think we came out of the 20th century with it being taken as axiomatic that some kind of tradeoff must be made to achieve both goals in concert somehow, but this understanding seems to be receding (really starting with the rise of austerity policy in the 80s, but coming very much to a head lately).

cadlin2• 12 years ago

The data is derived empirically; that r > g has been the historical norm since the industrial revolution, with the notable exception of the period ~1910-1970.

If that fact changes then the entire premise of the book is wrong. But the thesis of the book is grounded in historical evidence (this is how the world works), not any particular theory that answers "why."

pdonis2• 12 years ago

r > g has been the historical norm since the industrial revolution, with the notable exception of the period ~1910-1970

Actually, the data says quite a bit more than that. I'm looking at the chart shown in Krugman's review (Figure 1, a bit more than halfway down the page):

http://www.nybooks.com/articles/archives/2014/may/08/thomas-...

First, this chart says that r > g has been the historical norm since antiquity, not just since the industrial revolution. The first data point on the chart is for years "0 - 1000". I'm assuming that Piketty's book gives some explanation of how he figured out the rate of return on capital during the Dark Ages. :)

Second, the chart says that the difference between r and g decreased all through the period studied, up to the "1913 - 1950" data point, when r < g became true for the first time. Then, up through the "1950 - 2012" data point, r and g both rose sharply, but r < g was still true, and the difference between the two was more or less the same.

Third, the chart says that, for the rest of the 21st century, not only will r > g be true again, but r will continue to rise while g will fall sharply--which has never happened before in history. So I think it's wrong to claim that Piketty's prediction for the 21st century is just a prediction of things "returning to the historical norm". It's not--it's a prediction of a drastic change from the historical norm.

Tycho• 12 years ago

Taleb mentioned on Twitter (with a draft paper to back it up) that the observed (ie. by Picketty) inequality increase could just be a statistical illusion given the methods of measuring it.

cadlin2• 12 years ago

Maybe you could be bothered to link the paper? Otherwise this is no more than hearsay.

nhebb• 12 years ago

https://docs.google.com/file/d/0B8nhAlfIk3QIbzRrRkhhc1RNY0U/...

dang2• 12 years ago

Please be civil on Hacker News.

jberryman• 12 years ago

I guess this is it

https://mobile.twitter.com/nntaleb/status/456844260328083456

dpweb• 12 years ago

Any insights on getting this book on audio? Too new for Audible.. I find I can grasp the economic material easier listening to it.

stplsd• 12 years ago

Carlin said this better: https://www.youtube.com/watch?v=acLW1vFO-2Q

drcode• 12 years ago

BREAKING: Capitalism is worst system except for all the others.

News at 11.

ef4• 12 years ago

Its absolute wealth, not relative wealth, that determines whether your kids are likely to live to adulthood, how much leisure you're likely to have, what you'll eat, where you can live.

Capitalism has obviously excelled at raising absolute wealth across the board.

Relative wealth certainly matters when a society is foolish enough to vest massive power in a centralized political system, where it can easily be controlled by the wealthiest clade.

Which is the argument for more decentralized, limited government in a nutshell. That governments are run by the powerful is a tautology, and the iron law of oligarchy makes it clear that it isn't "the people" really running the show.

curveship• 12 years ago

Piketty's argument, as well as the findings of the IMF report, is that what you've called relative wealth and absolute wealth are linked: greater inequality leads to lower growth rates. The entire economy suffers for the benefit of a few. Eventually, inequality might choke growth out entirely, leading to crisis.

yummyfajitas2• 12 years ago

This seems to contradict r > g . Inequality results in investment, which shifts wealth from the g part of the economy to the r part, due to a lower propensity to consume among the wealthy.

Or are there second order effects that the reviews (I haven't read the book) don't discuss?

dllthomas3• 12 years ago

This relies on an assumption that 1) the only (or only important) places wealth can exert power is in government, or 2) that the likely harm of centralizing measures to address abuse of power in other spheres is greater than the likely benefits. 1 seems plainly false. 2 is much more plausible, but should still be stated explicitly and supported rather than implicitly assumed

patrickg_zill• 12 years ago

If he talks about capital and doesn't mention the Federal Reserve or the rise of fiat currency, he will have left out something quite important.

Slightly more than 100 years ago, all the major currencies of the world were backed by precious metals such as gold; now, none of them are.

zo15• 12 years ago

Of course Pickety doesn't mention it. That would ruin his narrative. And it wouldn't back his central thesis and proposal to tax the living excrement out of the rich. You know, to fix a problem none of us ever knew of until he "told us" about it in his giant weary book.

But I'll hold off on a proper rant about him and his book once I've read it.

md224• 12 years ago

For what it's worth, here's a somewhat negative review of Piketty's book from James K. Galbraith:

http://www.dissentmagazine.org/article/kapital-for-the-twent...

I don't have much background in economics so I don't know if Galbraith's criticisms are sound, but it's an interesting critique.

TL;DR: "In sum, Capital in the Twenty-First Century is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world’s wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin [with]—or at least include—a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest."

girvo• 12 years ago

I find it an interesting critique, too, though I do wonder whether it hits the mark. I'm no economist, but (assuming the fundamental work put into this book is as groundbreaking and unprecedented as said by those who are economists) does the book need to prescribe policy? Can't it stand on it's own, and perhaps aim to change the public policy discourse instead of coming down from on high with two stone tablets?

apsec112• 12 years ago

"... capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based."

Whatever else you might say about inequality, "unsustainable" is an obvious falsehood.

Roman civilization, for example, lasted two thousand years. Eight times as long as the United States. Think about that. One hundred generations of men lived and died as Romans. And the Roman Empire featured radical inequality, of the sort that we could never have in modern America, no matter what the Gini coefficient was.

On one side was the Emperor and his soldiers, who could have you and your entire family tortured to death, purely on a whim (see Caligula). On the other side were slaves, who had no human rights at all and were treated as property. And between them, countless peasants starved to death every time there was a bad harvest, while countless aristocrats taxed their lands to fund lavish banquets. (In the Roman tax system, tax collection was outsourced; the tax collector was responsible for finding a certain amount, and anything above that he could keep for himself.)

That's some serious fucking inequality right there. And I'm certainly not saying it's a good idea, or that we should try to emulate them. But it was, as a raw historical fact, extremely sustainable, lasting eight times as long as the US has so far.

teebs• 12 years ago

I think the difference between now and ancient Rome is that we're used to a higher standard of living, and technology and information are more accessible to all. I think by "unsustainable" he means that we would be likely to have a violent revolution. This is not unrealistic. Revolutions have happened because of inequality before. I'm no history expert, but I think you could argue that both the French and American revolutions were related to inequality of power and wealth.

judk4• 12 years ago

The American revolution was upper class vs upper upper class, quite different from the French or Russian revolutions.

The USA didn't change much due to the revolution. The US Civil War was a much greater inequality-related upheaval

jamesaguilar2• 12 years ago

According to Wikipedia, only twelve centuries, but your point is still well-taken.

infinity02• 12 years ago

Clearly, you have no idea about the difference between $5 billion and $0.01.

infinity02• 12 years ago

I challenge my down-voters to argue convincingly that Caligula held 10^12 times more power than the lowest slave.

msluyter• 12 years ago

I would agree with the gist of your comment, which is that autarchy can be a stable equilibrium.

However, I don't read Piketty as saying that inequality itself is unsustainable. Rather, inequality tends to undermine democracy. Thus, "unsustainable" here should be read to mean "unsustainable in conjunction with our commonly held egalitarian, democratic values."

steve_benjamins2• 12 years ago

Rome was not capitalist.

He is arguing that the inequality capitalism generates is unsustainable.

joeclark775• 12 years ago

"Capitalism" is just a made-up word meaning the natural state of human affairs, in which people own property, do work, buy, sell, and trade with one another. The word only became popular in the past couple centuries as socialists and fascists tried to present capitalism as "just another -ism", just another "option" that society might choose or not choose.

kaa21022• 12 years ago

Length of life and quality of life are very different things.

shoo• 12 years ago

Regarding sustainability, Charles Stross has a fun thought experiment over here: http://www.antipope.org/charlie/blog-static/2009/11/designin...

We humans are really bad at designing institutions that outlast the life expectancy of a single human being. The average democratically elected administration lasts 3-8 years; public corporations last 30 years; the Leninist project lasted 70 years (and went off the rails after a decade). The Catholic Church, the Japanese monarchy, and a few other institutions have lasted more than a millennium, but they're all almost unrecognizably different.
So. You, and a quarter of a million other folks, have embarked on a 1000-year voyage aboard a hollowed-out asteroid. What sort of governance and society do you think would be most comfortable, not to mention likely to survive the trip without civil war, famine, and reigns of terror?

nraynaud2• 12 years ago

the argument is that modern day USA actually has more inequality than old Rome.

There might be technicality on the economic points of view since slaves were not people but goods.

gregsq• 12 years ago

I think you'll need to adjust for speed of data transfer and population density when attempting such analogies. A peasant from Gaul for example could not travel to say Alexandria unless as a slave via Roman galley, and had no information of interest generally unless related to insurrection. Roman legions on roman roads operating from the hub of power, Rome, controlled information at a minuscule fraction of today's rate, but it served as a topological monopoly on transfers.

The Romans spent centuries withholding the northern tribes of Europe, like Picts and Teutonic peoples, the barbarians from the gate. But after adjustments to modern propagation speeds, the northern wars were much like a flash revolution in Egypt I would suggest.

GFK_of_xmaspast• 12 years ago

So I think it's probably worth pointing out that, depending on how you count, these numbers don't really work, and that's hurting your argument. There was about 700 years of the Roman monarchy (thru 509BCE) and Republic (thru +/- 44BCE), then another 500 or so of the Western Roman Empire (thru 476CE) and a thousand or so more years after that of the Eastern Roman Empire (thru 1453CE)

It's totally disingenuous to make claims as if there was some kind of "true" and eternal Rome.

StandardFuture2• 12 years ago

Rome's empire was based on their devotion to imperialism and not anything else. So having sustainability was militaristic more so than anything else.

The Roman Empire spent a heck of a lot of money and effort on their people though. Don't forget that in those times you could give a f*ck less about being royalty. If you were in the protected zones of the Romans you were already winning.

To Romans living inside the protected lands, the 'outside world' looked cold, harsh, and barbaric. So, you could put up with inequality as long as those aristocrats were making sure that there were roads, aquifers, and soldiers! :P

Also, slaves could eventually attain freedom and citizenship. So, while it was not a good life it still had potential to become a decent one.

Now, there were uprisings against the Romans by people who benefited from years of Roman protection and decided later on 'to plot their own course'. But that story is old/new. Happened to the Brits, Persians, Mongolians, etc.

nitam• 12 years ago

Similarly to the first world vs the third world countries today ?

yummyfajitas2• 12 years ago

This article, and most reviews of Piketty, have to be misrepresenting or misunderstanding something. The idea that r > g is simply mathematically impossible, and I don't think it's actually what Piketty is pushing.

That's because r is part of g. If the whole economy looks like E(t) = exp(rt)+rest, and exp(rt) grows faster than the rest, then eventually E(t) ~ exp(rt).

Since g = log(E(t))/t, g and r must eventually be equal.

The only way I can think of to resolve this is to assume a permanent redirection of wealth from investment to consumption. This could potentially result in investment returns being r, but the growth of invested capital being only g.

It's also worth noting that Piketty's numbers significantly underestimate income for the bottom 90%.

http://www.forbes.com/sites/scottwinship/2014/04/17/whither-...

See also Doug's comment on Robin Hanson's blog post: http://www.overcomingbias.com/2014/03/hidden-taxes-must-be-h...

Perhaps Piketty merely means that E[r] > E[g] (where r and g are both random variables). But that doesn't actually imply long term concentration of wealth at all, which seems to contradict the spirit of Piketty.

barrkel• 12 years ago

I glossed over the equation reading it as the rate of return on capital vs labour. That is, capital increasing faster than wages as a share of the economy, overall. I don't know if that helps or obscures.

etherael3• 12 years ago

Firstly, even if we assume that his conclusions are correct regarding the acceleration of inequality, his proposed solution is guaranteed not to work.

Charitably assuming omnipotence, handing more power to political authority over free markets necessarily increases the already enormous returns on lobbying activities and makes the ability to raise barriers to entry a more valuable commodity for political authority holders to trade in. Why compete on merit when you can buy competitive power straight from the political apparatus?

Meanwhile back in reality, omnipotence is not an assumption you can make. Cryptocurrencies stand a good chance of removing power over the free movement of capital from political authorities. Even forgetting technology advancements that may allow people to entirely circumvent capital controls, there is the tried and true method of employing hordes of lawyers and accountants to tailor schemes to achieve the same ends through political channels.

Putting all of this aside though, the fundamental r > g observation is conditional. If the return on capital is greater than overall economic growth, inequality increases. However, real growth is a function of the increase in the wealth of an economy, if capital cannot find opportunities to increase growth by investment then capital returns as well as growth will fall. Less growth, less return on capital.

Unless of course you can manage to subvert the entire monetary system through political channels and provide direct taps to the investment class so that even if they're not productively investing in anything and seeing real returns linked to growth they still see returns from quantitative easing and early access to new money. But who causes this effect? The same political authority the author proposes to fix the problem.

kaa21022• 12 years ago

Tonight's Cosmos featured the discovery that lead pollution from car emissions was poisoning the environment and humans. However, automobile and oil & gas companies had a vested interest in the status quo.

It took 25 years to remove lead from gasoline, e.g., unleaded gasoline. Unrestricted Free Market Capitalism has no environmental or health constraints or concerns. There must be a counterbalance or else our health, wellbeing, and the environment will suffer.

paul3• 12 years ago

If capital allocation is a skill/talent like most other things, then we should expect to see some people consistently outperforming the general population (just as we would expect a professional basketball player to consistently outperform an average player). If this group of skilled capitalists consistently gets higher average rates of return, it seems inevitable that over time they would end up with a larger fraction of the wealth -- that's just math. I'm surprised that this is a controversial observation.

nraynaud2• 12 years ago

what about his kids? what about retirement? The idea is that after having accumulated wealth, he doesn't need talent to continue accruing capital without talent. Because capital brings money faster than skill.

paul3• 12 years ago

I don't know what you are asking. The skill I'm referring to is capital allocation, and the capital that is growing is necessarily invested in something other than a savings account.

glesica• 12 years ago

I don't know that it is. What is controversial seems to be what comes next. Do those capitalists get to use those fortunes to wield massive political power? Do they get to make rules that benefits themselves even to the detriment of the larger society? Do they get to leave their fortunes (and corresponding political clout) to their children, who may be far less talented?

I haven't read this book, and maybe this isn't really the question you were asking, but it seems like there is some confusion about why people like myself have problems with capitalism. I have no particular problem with smart people being rewarded to some extent for finding new ways to make life better for others (Adam Smith's baker making bread for the town not to feed the town but to enrich himself).

But I do have a very, very big problem with the idea that just because someone "won" the economic contest he or she is somehow fit to make social and political decisions or somehow deserves greater consideration in the social and political spheres. I also have a huge problem with inheritance, though I don't really see a non-"radical" way to solve it.

baddox• 12 years ago

Do those capitalists get to use those fortunes to wield massive political power?

They do, which is why I laugh at the proposed solutions of higher taxes and even a global tax.

paul3• 12 years ago

The (current) top comment says: In his recent book "Capital in the 21st Century", he's done something very big. He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it.

So apparently the fact that capitalism naturally produces inequality _is_ controversial.

How to address that inequality is obviously a hard question. However, if you are thinking about it as "rewards", then you are guaranteed to arrive at the wrong answer.

lnanek2• 12 years ago

I read the whole article, but I don't understand why he is so offended by the wealthy being wealthy and getting wealthier. Does Bill Gates being rich hurt poor people? Not that I can see. In fact he puts a lot of money into curing diseases. Does Musk being rich hurt poor people? Not that I can see, he is saving the environment by making electric cars popular and bringing back the country's space capability. If this is what rich people do, by all means, lets have more and bigger rich people.

intended2• 12 years ago

In general the lending and charitable patterns of rich people is in favor of the occassional and ideologically. So if x person believed that global warming was a hoax, they would be funding or trying to shape the world as they see fit. There are a lot more rich people sitting on wealth than just Gates/musk.

tim3332• 12 years ago

I think he's more worried about inherited wealth. Gates to his credit is giving the bulk of his to charity.

twelvechairs2• 12 years ago

Piketty starts off by saying that inequality isn't necessarily bad by itself, but asks whether it is useful for society - which I think you'll agree is the right way to approach it.

The negatives are of course more associated with what happens to the poor than the rich. If you are born poor, CAN you rise to be a hedge fund manager (no matter how talented you are)? Will low-pay and long-hours spark political or social instability which is not worth the cost? What does society lose/gain from one level of inequality as opposed to a different level?

Its a complex issue though and you'd really have to read the book to understand how Piketty approaches this.

StandardFuture2• 12 years ago

I have not read Piketty's book. But can someone tell me how he showed that his discovered pattern of r>g is applicable to capitalist driven economies only and not ANY general economy?

The possibility of faster rate of return on investments (whatever resource you are investing) is supposed to exist in any gamed system. In an overall system where the available resources max at X, any individual's objective is too attain the largest portion of X as possible.

Whether that be through promoting capitalist ideologies, bureaucratic ideologies, or imperialistic ideologies, etc.

Generally speaking the ideologies you try to impress on others is spoken of in terms of being best for the 'g' value (overall economic growth), but we all know each person will just play the game of whatever system they are in to attain their own personal 'r' value.

Basically, what I am saying is: there have been very poor and very rich people in every single economic system throughout the span of human history. And ,at least some prevalent power distribution dynamics (game theory) can most likely be used to explain them all.

Th funny part is that r>g was the whole purpose of capitalism. If that were not true then you would not have the huge incentive for individuals hoping to build economic empires (or generally grow their fortunes decently).

r>g seems to be the promise that royalty/aristocrats must receive before making a political decision. Or the 'promise' Columbus looked forward too before he would 'discover' a new world for Spain. Or the promise any individual player must believe in if they are going to do something significant beyond themselves.

r>g was the even the general promise given to people during communist revolutions. Take money from the rich and give it to us, the poor.

There has to be incentive for individual players for them to want to pursue an ideology.

So, I am always surprised when people take ideologies so seriously, because in the end it's only a bit of game dynamics.

If someone wants government to put more focus on redistribution like Picketty, then so be it. All that means is that the place to have power will be via a position in government. I guess the people pushing for this enjoy the latest productivity of Congress. ;)

I, for one, do not care. Everyone will simply (as people have always done) 'play the game'. And then some time down the line the "winners" of whatever the game is will be yelled at and something will commence a 'restart'.

Welcome to humanity.

onnoonno7• 12 years ago

... and in the meantime, the systems of thought (as I tried to argue in my other posts) that are erected to hide these basics behaviors will become increasingly intricate and complex and hide this very fact that people are people in increasingly interesting ways.

I believe, as I mentioned above, the idea that 'humans are not rational' is one of the latest such constructs to hide basic reality.

In a way, it is an interesting evolution of delusion, to the point where it gets extremely hard to avoid being drawn into it.

Thinking this line further, maybe the next restart will be rather due to the fact that the complexity is so big that people just accept reality?

tim3332• 12 years ago

It's good Piketty is out there fighting for this stuff. As he mentions in his book none of the problems are particularly new. If you don't do much taxing or regulating, wealth will tend to get concentrated in the hands of a minority of investors with everyone else working for modest pay. If you bring in policies to counter that such as high inheritance taxes and subsided education then things get more equal. The UK went through some of that at the start of the century where the country used to be owned by lord whatever in his stately home and then 80-90% taxes caused then to lose that and the places are now mostly owned by the National Trust and open to the public as historical exhibits. I'm not sure how it's going to play out this time. The world economy is growing quite well. The political will to even things up only seems to get strong enough to make a big upheaval with things like World War 1 in the above case so I imagine not much will change in the short term.

tptacek17• 12 years ago

Milanovic's review of Piketty's book in The Journal of Economic Literature is Matt Yglesias's first recommendation for an in-depth treatment of Piketty's book:

http://mpra.ub.uni-muenchen.de/52384/1/MPRA_paper_52384.pdf

jeffdavis• 12 years ago

This doesn't strike me as surprising -- capitalism rewards capital, not labor. Ideally, each generation is able to use labor to acquire a bit of capital, and share it with their children until the family is financially secure.

Rather than inequality between brackets, or even people, I'd prefer to focus on whether the system of "save some each generation" is breaking, and if so, what can be done to fix it.

Capital Man: Thomas Piketty is economics’ biggest sensation and fiercest critic

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