Piketty’s Capital


Top 1 Percent USA Income 1910 to 2010
Thomas Piketty is a relatively young economist who has spent most of his professional career teaching at the Paris School of Economics and the École des Hautes Études en Sciences Sociales after brief stints at MIT. He has collaborated with fellow École Normale Supérieure graduate Emmanuel Suez on comprehensive studies on income and wealth inequality. A chart of their data (similar to that shown above) is a frequently-used graphic (the one that looks like the Golden Gate Bridge) in Robert Reich’s current documentary film, Inequality for All. This figure shows the income of the top 1 percent of income earners as a ratio of the national income from the period from 1910 to 2010. It shows a dramatic peak just prior to the 1929 crash followed by a collapse in the years up to 1980 and then a dramatic rise back up to the same level of approximately 24 percent of national income that the one percent took home in the roaring twenties.

In March 2014 the English translation of Piketty’s latest book, Capital in the Twenty-first Century, hit the streets in the US. It contains over 600 pages (including notes) of remarkable data and graphics depicting the historic evolution of income and wealth in our world. It has been making quite a splash in the United States, it’s English translation coming as it has on the heels of Inequality for All. It has been enthusiastically reviewed by prominent Nobel Prize winning economist and New York Times columnist Paul Krugman in a recent issue of the New York Review of Books and by another Nobel-winning neoclassical economist, Robert Solow, in the New Republic. Scores of other reviews have come out since it’s publication by Harvard Press in March from both right and left. Martin Feldstein, the chairman of Ronald Reagan’s Council on Economic Advisers, felt it necessary to attempt to debunk Piketty from the right in a Wall Street Journal column recently. Michael Roberts has been regularly working at debunking Piketty in the pages of his blog from a Marxist perspective. Someone who has raised such praise and ire from both left (Roberts), middle (Krugman and Solow), and right (Feldstein) must be on to something.

Piketty’s book provides comprehensive documentation of the growing inequality that has the United States and Europe in its grip. But the forgotten element in this that Piketty brings to the discussion (if you have not read Ricardo and Marx) is that extreme inequality, in Europe at least, is not new. The inequality that has now established itself in both Europe and the United States is more like a return to the normal state of extreme concentration of wealth and income that ruled in the nineteenth century. It was only the great capital destruction of the inter-war years (and the threat posed by the success of socialist revolution in Russia – not so much emphasized by Piketty) that reduced inequality in the West in the twentieth century. Since then capital / GDP ratios have been steadily climbing back to the ratios that were common in the Gilded Age. Piketty calls this new reality “patrimonial capitalism” in that as economic growth chronically lags behind the rate of return that owners of capital can receive on their wealth, a tiny rentier class eventually emerges over generations that controls significant portions societal wealth and influence. This picture contradicts the story told by free market economists from Hayek to Kuznets to Milton Friedman and Paul Ryan that unregulated markets open doors to everyone to gain wealth. Instead, Piketty shows, the supposed triumph of capitalism in the wake of the fall of the Soviet empire, is more likely trending towards an entrenched structure of societal control by inherited wealth.

Piketty’s title seems to be modeled after that of the famous book by Karl Marx, but Piketty is no revolutionary, rather a socialist of the contemporary French type which much more resembles the Democratic Party of FDR than any nineteenth century socialist party. Not that he thinks that this enormous inequality is a good thing, far from it, but his solution is rather a (modest) tax on capital than overthrow of the capitalist system. In other writings in the recent past Piketty has also recommended a return to the high top tax rates used in the United States and Europe in the period from the Great Depression prior to the Reagan / Thatcher putsch.

Key concepts in the book:

1) Kuznets was wrong (Ricardo and Marx were right)

2) A return to simple models of the macro economy

3) The rise of patrimonial capitalism

Kuznets was Wrong (Ricardo and Marx were Right)

In his introduction, Piketty credits Simon Kuznets with the honor of pioneering the study of income and wealth disparities in his book from 1953, Shares of Upper Income Groups in Income and Savings. Kuznets was a native of Belarus who received the Nobel prize in 1971 for his work on national income accounting and economic growth. The Library of Economics and Liberty, an internet platform for the right-wing Liberty Fund, says of Kuznets the following:

“One of Kuznets’s more startling findings concerns the effect of economic growth on income distribution. In poor countries, he found, economic growth increased the income disparity between rich and poor people. In wealthier countries, economic growth narrowed the difference. In addition, Kuznets analyzed and quantified the cyclical nature of production and prices in spans of fifteen to twenty years. Such trade cycles, while disputed, are often referred to as ‘Kuznets cycles.'”

Piketty says, “According to Kuznets’s theory, income inequality would automatically decrease in advanced phases of capitalist development, regardless of economic policy choices or other differences between countries, until eventually it stabilized at an acceptable level. Proposed in 1955, this was really a theory of the magical postwar years referred to in France as the “Trente Glorieuse,” the thirty glorious years from 1945 to 1975.” The “regardless of policy choices” part to this quote brings to mind the fact that Kuznets was an admirer of Joseph Schumpeter, whose reluctant conclusion was that socialism was an inevitable development from capitalist society. Kuznets thought that this eventual Elysian condition of “acceptable” inequality would come to both sides of the Iron Curtain.

The remainder of Piketty’s book is a systematic demonstration that Kuznets was wrong and Ricardo and Marx had been right that “a small social group – landowners for Ricardo, industrial capitalists for Marx – would inevitably claim a steadily increasing share of output and income.” This had been true in the nineteenth century for Ricardo and Marx and Piketty predicts the trend that we have seen in the West since 1980 indicates that it will be true in the twenty first century. Kuznets was a pioneer to look at income share data, but he was looking at the wrong data set. He was looking at the period from 1913 to 1948, an anomalous period of revolution, war, and depression. When one “zooms out” to include the larger data set from 1700 to 2010, as does Piketty, the story looks more like the one that Ricardo and Marx had described and much less rosy that that depicted by Kuznets.

Return to Simple Models

Capital Share in the Rich Countries

Piketty presents simple models of the macroscopic economy, which he uses to illustrate theoretical concepts and manipulate his large database of income and wealth statistics. He uses these relationships as a guide to organizing his historical data, an example of which is shown above, representing the capital share in national income for a selection of rich countries during the the last quarter of the twentieth century. The graph illustrates a major theme of his book, the rising share of national income recovered by capital.

His data for this graph have been organized using his “first fundamental law of capitalism” (p. 52) as follows:

α = r X β


α = Share of income from capital in the national income

r = The rate of return on capital

β = The ratio of capital to national income

Piketty insists that this formula is “pure accounting identity” rather than a law which claims to identify causation, like Marx’s micro formula (See my post here):

The Fundamental Theorem

Michael Roberts, Marxist economist and blogger, quarrels with Piketty on these grounds:

” . . . Piketty says that the share going to profit as opposed to wages depends on the ratio of total capital to income times the net rate of return.  But Marx says that what matters is how you get the rate of profit.  That changes Piketty’s equation to the net rate of return (r), or the rate of profit, is equal to share going to profits over wages (the rate of exploitation) divided by total capital. Piketty’s version shows he is only interested in the share going to profit and assumes a rate of return to do it. He has no theoretical explanation of how this r is reached.  Piketty is interested in distribution of income or value in a capitalist economy not in its production.  So he ignores Marx’s law of value.”

Well,  to this reviewer it seems not so much that he ignores Marx’s (and also Smith and Ricardo’s) law of value, but that Piketty is trying to expose the documented history of distribution in capitalism and DOES take it as a given that capitalists will have some part in our societies in the future. Piketty’s work is not aimed at Marxists, however, but rather at the conventional economists who, following Kuznets, have systematically ignored, explained away, or celebrated the tendency of capitalism to evolve towards extreme inequality. Roberts complains in his blog piece that Piketty doesn’t seem to have read much Marx at all, although there are references to Marx throughout the text and Piketty indicates familiarity with Volume I of Capital in, for example, Chapter 6 (page 229).

The theoretical debate over who gets what in capitalism has been going on for a long time, at least since Marx’s time. It perhaps came to a head in the period of the 1950s and 1960s in the famous debates between the “two Cambridges.” This was the debate between the economists from Cambridge, England (chiefly Joan Robinson and Pierro Sraffa) and the Nobel-winning economists from Cambridge, Mass (Robert Solow and Paul Samuelson at MIT) and their followers. The English side argued that the “neo-neo-classical” theories (in Joan Robinson’s parlance, those American Economists who revised and extended the analysis by the original developers of marginal utility theory: Marshall, Walras, Wicksell, J. B. Clark, and Wicksteed) relied on a theory, the marginal theory of value and distribution, which shielded from view the exploitation of the working classes which lies at the heart of capitalism in Marx’s view. They “see capitalist institutions – private property, an entrepreneurial class, a wage-earning class – as giving rise to conflicts between the classes.” (G.C. Harcourt, Some Cambridge Controversies in the theory of capital, page 2.) In contrast, the neo-neo-classicals “regard the marginal principle as of overwhelming importance for the theory of value and distribution. They thus emphasize the role of the possibilities of technical substitution, both of ‘factors’ and of commodities, one for another. The principle of scarcity and the relevance of relative ‘factor’ supplies for ‘factor’ prices and ‘factor’ shares’ are the natural corollaries of their approach, as is the neglect of the institutional and sociological characteristics of societies.” (ibid.)

In his crucial Chapter six, Piketty presents the another significant “law” of capitalism:

β = s / g


s = The annual savings rate in percent

g = The annual economic growth rate in percent

This formulation was originally posed by Harrod and Domar in the form

g = s / β

Piketty tells us that it was Solow (the author of the review referenced above!) who years ago introduced the “production function with substitutable factors” which implied that Harrod and Domar’s original formulation could be inverted to imply that savings (by capitalists) was the cause of economic growth (and justifies their reward). Piketty mentions the “two Cambridges” debate and throws off that “Solow’s so-called neoclassical growth model definitely carried the day.” He seems to agree with Mark Blaug’s conclusion (in The Cambridge Revolution Success or Failure?) that “The Cambridge UK theories are certainly logically consistent, even if they do not always hang together in a logically-consistent total framework of theories. They are possibly more realistic in some of their basic assumptions, although that statement is itself highly ambiguous. But they are not simpler, they are not more elegant, they are totally incapable of producing testable predictions.” (Blaug, p. 85.)

But in contrast to the Solow view, Piketty says,

“To be sure, the law β = s / g describes a growth path in which all macroeconomic quantities – capital stock, income and output flows – progress at the same pace over the long run. Still . . . . such balanced growth does not guarantee a harmonious distribution of wealth and in no way implies the disappearance or even reduction in inequality in the ownership of capital. Furthermore . . . . the law β = s / g in no way precludes vary large variations in the capital / income ratio over time and between countries. Quite the contrary, in my view, the virulence – and at times sterility – of the Cambridge capital controversy was due in part to the fact that the participants on both sides lacked the historical data needed to clarify the terms of the debate.” (page 232).

Indeed, to provide an estimate of this historical data seems to have been the primary motivation for Piketty’s research.

The rise of Patrimonial Capitalism

After Tax 2000 Year Rate of Return

The third part of Piketty’s book presents his detailed development of the evolution of inequality in income and wealth in the world economy over the long term. The figure above is the one figure from Piketty’s book that apparently especially caught Paul Krugman’s eye, since it is the only figure accompanying Krugman’s New York Review summary. This figure provides the data for the key driver that Piketty sees as pushing our world into an increasingly unequal one. His mathematical expression for this is “r > g”. As long as the return on capital is greater than the growth rate of the economy, the owners of large quantities of capital will accrue rewards in excess of that required for their immediate needs and will continue to grow their wealth, relative to national income and relative to the mass of workers in the economy who have little savings or investment capital.

Roberts’s quarrel that Piketty provides no causative law for what exactly determines this “r” is true, as far as it goes. Piketty’s answer to this quarrel, I think, however, would be that it is really not important what causes “r”. He finds that, for whatever reason, it seems to be relatively stable over a very long time. We recall the money changers in the temple in the time of the New Testament and Shylock from The Merchant of Venice. The Marxist historian E.J. Hobsbawm reports in The Age of Revolution that “The French Assignats (1789) were at first simply French Treasury bonds (bons de tresor) with 5 percent interest, designated to anticipate the proceeds of the eventual sale of church lands.” This 5 percent rate happens to be very close to the one that Piketty assigns to the admittedly indefinite past and future in his Figure 10.10.

Joan Robinson complained bitterly (in Economic Philosophy and elsewhere) about Marshall’s explanation for the rate of interest as the “reward for waiting.” This seems to be on the same footing as the more sophisticated-sounding explanation of the “neo-neo-classicals” that it is the reward for the “marginal productivity of capital.” To a Marxist this is bunk, since capital is only stored labor. But whether this is a “reward for waiting” or surplus gleaned from prior labor or simply a reward for having money, the point is that  this reward has a long history, dating back at least as far as the money changers in the New Testament. Piketty is concerned not so much with how this rate is justified, but how it works in conjunction with other factors in the economy (namely “g”) to drive inequality.

What is wrong with Inequality?

Income of the top 10 percent

Feldstein, in his notice of Piketty’s book in the Wall Street Journal wonders what’s all this fuss about inequality, “The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck. The problem is the persistence of poverty. To reduce that persistent poverty we need stronger economic growth and a different approach to education and training, not the confiscatory taxes on income and wealth that Mr. Piketty recommends.” I have written about this before. The data that I showed there (and which are consistent with the data in Piketty’s new book) convince me that this Republican shibboleth (that lower tax rates produce more growth and jobs for all) is a colossal sham.

If for no other reason, Piketty’s book will be important in the future for its demonstrating the vacuity of these Reagan-era claims that a rising tide will lift all boats and that capitalism is not a rigged game. Productivity in the US economy has been rising alright in the last forty years, but it is only the fortunes of the owners of the yachts in the harbors at Monaco and Cannes that have been rising. The incomes of the majority in the US have been stagnant throughout this post-Reagan era. It is no longer credible to say that this has nothing to do with the nature of the capitalist system or even with rates of taxation. Can one really believe that the pay of corporate executives (the “supermanagers” in Piketty’s parlance) would be rising as fast as Piketty has demonstrated that they have been with a taxation rate at the top level of 77 percent as it was in 1977, compared to the 39% that we have today (after going as low as 28% during Mr. Feldstein’s tour of duty in the Reagan administration)?

Piketty surely doesn’t think so. In Chapter 9 he considers inequality of income and the rise of the “supermanager.” He seriously considers the possibility that the dramatically increased rewards that he demonstrates have accrued to these top executives during the post-Reagan years is due to their “marginal productivity”, to changes in “social norms”, and to “meritocratic extremism.” He rejects all of these convenient (for the supermanagers) explanations. He comes to the same conclusion that I did in my previous post: “Specifically, the very large decrease in the top marginal income tax rate in the English-speaking countries after 1980 (despite the fact that Britain and the United States had pioneered nearly confiscatory taxes on incomes in earlier decades) seems to have totally transformed the way top executive pay is set, since top executives now had much stronger incentives than in the past to seek large raises.”

Inheritance Tax Rates

His Figure 14.1 is identical to the top tax rate curve that I showed in my prior post, concave in the middle of the twentieth century, the opposite of growth rates and average income. His Figure 14.2 (above) likewise shows that the concave curve for inheritance taxes is the exact opposite of the convex one for the top wealth share. It’s the top tax rate, stupid!

But isn’t inequality required to provide incentives for effort in our merit-based economy? What is the problem with inequality? Don’t we need it? Isn’t this what made America “great”? There is a constant drone to this effect in the speeches of Republican congressmen (and women, unfortunately) in the US House of Representatives today. These questions and statements are a mixture of propositions that could conceivably be based in fact and those which are wholly “theoretical” in the worst (metaphysical) sense of the word. One could say that a doctor would be working the same way if he were compensated the same as a ditch digger assuming both received free public education for their skills and were provided with ample compensation to allow them both to enjoy the fruits of the productivity gains of the twenty-first century. Michael Roberts implies as much in a recent blog post. And one could also say that inequality, even the grotesque inequality that Piketty (and Ricardo and Marx before him) shows is the inevitable result of capitalism, is perfectly justified on moral grounds (on what moral grounds I couldn’t say, but don’t doubt that many would tell you this.) What is NOT possible to say, as Kuznets and many apologists for capitalism have said, is that capitalism and equality are partners and that capitalism does not lead to a society of a very small number of fabulously wealthy individuals buoyed up upon a sea of souls living in near or dire poverty. Not after the work that Piketty has done.

And it is also very clear that one cannot take refuge in the Declaration of Independence or any other document of the Enlightenment in justifying the extreme inequality that Piketty has revealed. Those words “All men are created equal . . .” cannot be written out of that document at this point. If one embraces inequality, one is really embracing the world that the American Revolutionaries fought against. It turns out that that fight is still very much on.


About Randal Samstag

Randal has an undergraduate degree in political philosophy, but has a graduate degree in engineering and has earned his bread for 30 years working on municipal and community water supply and wastewater collection and treatment systems in the US, Caribbean, Latin America, and Asia.
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5 Responses to Piketty’s Capital

  1. The British Newspaper, the Financial Times, has published a story that questions and even purports to invalidate Piketty’s wealth concentration data for Europe. The FT story by Chris Giles is here. Piketty’s letter to the FT in response is also posted online on the FT site. Michael Roberts gloats about this on HIS blog here. My reaction? Looks like a right-wing rear guard attack by Giles. Martin Wolf had earlier written a review in the FT full of praise for Piketty’s book. Roberts continues his attack on Piketty from the left. His criticism on the distinction between capital and wealth was also noted (and dismissed) by Solow in the New Republic article to which I linked above. I have written about the “law of the tendential fall in the rate of profit” that Roberts has insisted upon ad nauseum in his blog here. I am betting on Piketty to come out of this one unscathed.

  2. Pingback: Thoughts on the Labor Theory of Value | Notes from my library

  3. Pingback: Free Market Fool | Notes from my library

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