The Concentration of Capital

I am no trained economist – not Austrian, not any other.  I have been able to grasp (I believe) the basics of Austrian economics because the foundations conform to how I understand the world to work: prices are the unifying common language – the single most important signal through which man can productively cooperate with his fellow man; profit and loss sends signals about efficient uses of resources, and further, determine the allocation of further resources to the most efficient; value is subjective, made manifest in an objective price; non-market interventions distort these signals and therefore can only lead to less-than-optimal results for the greater part of humanity.

Clean, simple, easy to understand – and perfectly descriptive of the world I see around me every day.

Economics – especially as it is practiced in the mainstream – causes my eyes to glaze over.  Formulas, econometric models, etc.:  I get it, sort of; if I really spend time I can follow it.  But I look at the world around me – none of the fancy modeling and formulas conforms to or can possibly capture the way people make decisions every day. 

Worse still, it is painfully obvious that the only benefit of such a voodoo science is for the purposes of making policy recommendations – in other words, modern macro-economics exists only to distort markets via government intervention.

This is my long-winded introduction to preface my comments regarding a book by Thomas Piketty, “Capital in the Twenty-First Century.”  I haven’t read the book, and I won’t read the book.  Too many formulas and models.  But, I will review the book!

At the Amazon link (above), I found a very thorough review.  So I will offer a few comments regarding the book based on the review.  Just a few.

First of all, a description of the book:

What are the grand dynamics that drive the accumulation and distribution of capital? Questions about the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth lie at the heart of political economy. But satisfactory answers have been hard to find for lack of adequate data and clear guiding theories. In Capital in the Twenty-First Century, Thomas Piketty analyzes a unique collection of data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings will transform debate and set the agenda for the next generation of thought about wealth and inequality.

Piketty shows that modern economic growth and the diffusion of knowledge have allowed us to avoid inequalities on the apocalyptic scale predicted by Karl Marx. But we have not modified the deep structures of capital and inequality as much as we thought in the optimistic decades following World War II. The main driver of inequality--the tendency of returns on capital to exceed the rate of economic growth--today threatens to generate extreme inequalities that stir discontent and undermine democratic values. But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, Piketty says, and may do so again.

A work of extraordinary ambition, originality, and rigor, Capital in the Twenty-First Century reorients our understanding of economic history and confronts us with sobering lessons for today.

To make a long story short, capital is concentrated to an extent greater that annual income; left to the market, this concentration will continue to increase.

Now to the comments from the review.  The reviewer is A. J. Sutter on March 17, 2014.  The comments really are quite thorough – and even this much is more than I care to read on this subject….

The book's main thesis is that economic growth alone isn't sufficient to overcome three "divergence mechanisms" or "forces" that are in many places returning inequality in income and/or capital to pre-World War I levels. The main mechanisms are:

(A)    the historical tendency of capital to earn returns at a higher rate ('r') than the growth rate of national income ('g'), which typically sets a constraint on how workers' salaries grow, symbolized by the mathematical expression, "r > g".

To the extent this is true (and, I am not going to get into the data), it can be so for two reasons that come to mind:

1)      If, over the long term – interest rates / discount rates have declined.  This seems plausible: as markets become more efficient and global, one would expect the price of capital (interest) to reflect this efficiency.

2)      Capital has become more valuable than labor.  This also seems not only plausible, but both true and valuable.  How much better off is the wage earner because capital is accumulated and deployed?  To ask the question is to answer it – go back to a subsistence economy and decide.

(B)    the relatively recent (post-1980) widening spread between salaries, not only between the wealthiest 10% or 1% and the mean, but even within the top 1%.

Nowhere in the review is there any mention of 1971 – the year when the reserve currency of the world became uncoupled, the year when no major international currency was tied to gold.  No mention of the unleashing of full fiat.  Perhaps this has something to do with the divergence – again, assuming that the divergence matters.

(C) an even newer inequality in financial returns, which correlates r with the initial size of an investment portfolio -- i.e., different r for different investors.

I have no comment – I am not sure what this means.

In Part IV of the book, TP considers policy approaches to deal with the three forces of divergence. In short, the answer for all three is a progressive, annual global tax on capital, to be set at an internationally agreed rate and its proceeds apportioned among countries according to a negotiated schedule.

No recommendation to reduce the interventions in the market; no mention of the distortions caused by the interventions.  Just a call for more intervention.

No mention of the value that accumulated capital has on the standard of living of ALL inhabitants of relatively developed economies.

Capital will be taxed annually.  This will be spent, resulting in a net reduction (relatively) of capital.  The re-allocation of the remaining capital will be in the hands of the politically connected, and not in the hands of the efficient market producer.

This will only lower the average standard of living.

Theft is never a solution for theft.  Additional intervention is not the solution for previous intervention.

Absent an acknowledgement of the distortions in the market caused by central banking, lack of free-market money, continuous and increasing regulation, it is difficult to take this work seriously.

That won’t stop many from doing so – such policy recommendations are music to the ears of the politicians and the oligarchs whom Piketty claims to want to attack.