Defenders of wealth push back against Piketty


Source: Thomas Piketty, Capital in the 21st Century

If things go on as they are now, there’s nothing to prevent wealth from becoming more and more concentrated and economic inequality returning to the levels of England and France 200 years ago, according to French economist Thomas Piketty in his new book, Capital in the Twenty-First Century.

But many economists say this is not a problem.  They say concentration of wealth is a good thing, not a bad thing, and benefits us all in the long run, not just a tiny elite.   In this post, I will consider this argument, and state it as fairly as I can, then explain what I think the argument leaves out.

Concentrations of wealth are necessary to a capitalist free-enterprise economy.  They provide the means to invest in machinery, technology, education and the other things that increase society’s total wealth.   Capitalism has generated more economic growth than any alternative system and, without capital, there is no capitalism.

The chart above is illlustrates Piketty’s conclusion, based on his research,  that, most of the time, r > g – that is, the rate of return on investment exceeds the rate of growth of the economy, which, as a matter of logic, means that the income of investors grows faster than the income of wage-earners.

Now the chart should be read with discretion.  The parts prior to 1820 are no more than an educated guess; the parts from 1820 to the present are blends of different national economies; the future projection is possibility, not a prediction.  That’s no criticism of Piketty.  He did the best he could with the data available, and what he shows is reasonable.

According to the chart, r > g by a great deal on average prior to 1913.   Nevertheless there was an increasing rate of economic growth.  Inequality was just as extreme in 1913 in France and Britain and more extreme in the USA compared to 1820 or 1700, but that doesn’t mean the average person got no benefit from that growth.  It just meant there was just as much of a gap between rich people and the rest of us.

Not all rich people did things that promote economic growth, but the famous economist Friedrich Hayek argued that an idle rich class is of benefit to society.  They are pioneers in consumption, he said.   Once automobiles were a luxury for the upper class, for example, but now almost every family in North America owns one.  If rich people hadn’t provided an initial market, automobiles would never have developed.   Medical treatments which once were affordable only to rich people are now available to the general public.

Rich philanthropists finance good works, including, as economist Tyler Cowen pointed out, Belknap Press of Harvard University, publisher of the English translation of Piketty’s book.

A final argument is that the problem of excessive returns on capital is self-correcting.  When you have too much capital, the rate of return on capital falls.  If too many houses are built, rent falls.  If capitalists invest too much in building railroads or making personal computers, railroad tickets or computers become a glut on the market, and profits fall.  The economist Joseph Schumpeter called this “creative destruction,” and he said this is how the capitalist system renews itself.

I don’t think these arguments are completely wrong, but they leave a lot out.   Let me explain.

The first thing to remember about Piketty is that when he uses the word “capital,” he is not just referring to venture capitalists financing a start-up company.  “Capital” for him is every form of property that can generate an income — land, buildings, machinery, corporate stocks, government bonds and much else.  It can be used for good purposes, bad purposes and neutral purposes.   It seems to me that these days capital is increasingly be used for bad purposes — to make a profit by getting people into debt and then squeezing them with unexpected frees, or figuring out how to make people work harder for less money, or offloading environmental risks onto the public.  Be that as it may, venture capital is only a small part of “capital” by Piketty’s definition.

I think it is possible to have a rising tide that lifts all the boats, even under conditions of high inequality, but this isn’t what has been happening in the United States during the past 30 or so years.  Instead things have been getting steadily worse not just for the poor, but for working people and the middle class.

I don’t need to study statistics from the Economic Policy Institute or the Center on Budget and Policy Priorities.  All I have to do is look around me and I can see how much harder it is for people in my social class to get an education, get a job or earn a decent living than it was for me.  And it is obvious that this is the result of national economic policies designed to free holders of financial assets from responsibility while protecting them from risk (the “too big to fail” banks are one example).

This isn’t just true of the USA.  It is true of any country forced into “austerity” policies by the World Trade Organization, International Monetary Fund, European Central Bank or other financial institutions, so that they sacrifice the well-being of their own people to the interests of holders of financial assets.

Piketty doesn’t advocate confiscating anybody’s wealth or preventing anybody from getting rich.  There were plenty of rich people during the 1945-1975 boom years.  He just says the rich shouldn’t get richer at a faster rate than the overall economy is expanding.   Like John Maynard Keynes in the previous century, his aim is not to abolish capitalism, but to save the system for the excesses of capitalists.

He agrees that at some point the rate of return on capital will level off.  But his research indicates that r > g can persist for a long time even when r is falling, and society can become extremely unequal in the meantime.

As for rich people being pioneers of consumption, I think there are limits.  I don’t think, for example, that middle-class couples getting married will benefit from the example of the $3 million wedding in 2010 between Chelsea Clinton and investment banker Marc Mezvinsky.  And this is far from the worst example of wretched excess.   It is just something that happens to stick in my mind.


These links are to what I think are the strongest arguments against Piketty.

Why a Global Tax on Wealth Won’t End Inequality by Tyler Cowen for Foriegn Affairs.

Why I am not persuaded by Piketty’s argument by Tyler Cowen as Marginal Revolution.

Wither the Bottom 90 Percent, Thomas Piketty? by Scott Winship for Forbes

The Capital Creators, Piketty and Growth Theory by Joshua Gans

The Most Important Book Ever Is All Wrong by Clive Crook for Bloomberg News

Living With Inequality by Garett Jones for Reason.

Capital in Partial Equilibrium by Ryan Decker on Update Priors.

The case for 80% tax rates on the rich by Scott Sumner on The Money Illusion.  He meant an 80% top tax rate on consumption, as a substitute for taxes on income.

Critical Remarks on Piketty’s ‘Capital in the Twenty-First Century’ by  Stefan Homburg of Leibniz University of Hannover, Germany

And in rebuttal.

What Piketty’s Conservative Critics Get Wrong by Kathleen Geier for The Baffler

The Conservative Case Against Piketty Is Surprisingly Weak by Brian Beutler for The New Republic

The right’s Piketty nightmare: Coming of age in the era of Post-Exceptionalism by Tim Donovan for Salon

Inequality & Capitalism in the Long-Run by Thomas Piketty

Capital in the Twenty-First Century: Introduction by Thomas Piketty

Why the rich will probably get richer, my synopsis of Piketty’s book.

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2 Responses to “Defenders of wealth push back against Piketty”

  1. Chico Says:

    and thanks for the references to the mostly less-than-mainstream media resources


  2. EthnicKonflict Says:

    Excellently written!


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