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News :: Labor
DAVE HARVEY Reviews Piketty's "Capitalism"
27 May 2014
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Afterthoughts on Piketty’s Capital
David Harvey

Thomas Piketty has written a book called Capital that has caused quite a stir. He advocates progressive taxation and a global wealth tax as the only way to counter the trend towards the creation of a “patrimonial” form of capitalism marked by what he dubs “terrifying” inequalities of wealth and income. He also documents in excruciating and hard to rebut detail how social inequality of both wealth and income has evolved over the last two centuries, with particular emphasis on the role of wealth. He demolishes the widely-held view that free market capitalism spreads the wealth around and that it is the great bulwark for the defense of individual liberties and freedoms. Free-market capitalism, in the absence of any major redistributive interventions on the part of the state, Piketty shows, produces anti-democratic oligarchies. This demonstration has given sustenance to liberal outrage as it drives the Wall Street Journal apoplectic.

The book has often been presented as a twenty-first century substitute for Karl Marx’s nineteenth century work of the same title. Piketty actually denies this was his intention, which is just as well since his is not a book about capital at all. It does not tell us why the crash of 2008 occurred and why it is taking so long for so many people to get out from under the dual burdens of prolonged unemployment and millions of houses lost to foreclosure. It does not help us understand why growth is currently so sluggish in the US as opposed to China and why Europe is locked down in a politics of austerity and an economy of stagnation. What Piketty does show statistically (and we should be indebted to him and his colleagues for this) is that capital has tended throughout its history to produce ever-greater levels of inequality. This is, for many of us, hardly news. It was, moreover, exactly Marx’s theoretical conclusion in Volume One of his version of Capital. Piketty fails to note this, which is not surprising since he has since claimed, in the face of accusations in the right wing press that he is a Marxist in disguise, not to have read Marx’s Capital.

Piketty assembles a lot of data to support his arguments. His account of the differences between income and wealth is persuasive and helpful. And he gives a thoughtful defense of inheritance taxes, progressive taxation and a global wealth tax as possible (though almost certainly not politically viable) antidotes to the further concentration of wealth and power.

But why does this trend towards greater inequality over time occur? From his data (spiced up with some neat literary allusions to Jane Austen and Balzac) he derives a mathematical law to explain what happens: the ever-increasing accumulation of wealth on the part of the famous one percent (a term popularized thanks of course to the “Occupy” movement) is due to the simple fact that the rate of return on capital (r) always exceeds the rate of growth of income (g). This, says Piketty, is and always has been “the central contradiction” of capital.

But a statistical regularity of this sort hardly constitutes an adequate explanation let alone a law. So what forces produce and sustain such a contradiction? Piketty does not say. The law is the law and that is that. Marx would obviously have attributed the existence of such a law to the imbalance of power between capital and labor. And that explanation still holds water. The steady decline in labor’s share of national income since the 1970s derived from the declining political and economic power of labor as capital mobilized technologies, unemployment, off-shoring and anti-labor politics (such as those of Margaret Thatcher and Ronald Reagan) to crush all opposition. As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.” The disparity in remuneration between average workers and CEO’s stood at around thirty to one in 1970. It now is well above three hundred to one and in the case of MacDonalds about 1200 to one.

But in Volume 2 of Marx’s Capital (which Piketty also has not read even as he cheerfully dismisses it) Marx pointed out that capital’s penchant for driving wages down would at some point restrict the capacity of the market to absorb capital’s product. Henry Ford recognized this dilemma long ago when he mandated the $5 eight-hour day for his workers in order, he said, to boost consumer demand. Many thought that lack of effective demand underpinned the Great Depression of the 1930s. This inspired Keynesian expansionary policies after World War Two and resulted in some reductions in inequalities of incomes (though not so much of wealth) in the midst of strong demand led growth. But this solution rested on the relative empowerment of labor and the construction of the “social state” (Piketty’s term) funded by progressive taxation. “All told,” he writes, “over the period 1932-1980, nearly half a century, the top federal income tax in the United States averaged 81 percent.” And this did not in any way dampen growth (another piece of Piketty’s evidence that rebuts right wing beliefs).

By the end of the 1960s it became clear to many capitalists that they needed to do something about the excessive power of labor. Hence the demotion of Keynes from the pantheon of respectable economists, the switch to the supply side thinking of Milton Friedman, the crusade to stabilize if not reduce taxation, to deconstruct the social state and to discipline the forces of labor. After 1980 top tax rates came down and capital gains – a major source of income for the ultra-wealthy – were taxed at a much lower rate in the US, hugely boosting the flow of wealth to the top one percent. But the impact on growth, Piketty shows, was negligible. So “trickle down” of benefits from the rich to the rest (another right wing favorite belief) does not work. None of this was dictated by any mathematical law. It was all about politics.

But then the wheel turned full circle and the more pressing question became: where is the demand? Piketty systematically ignores this question. The 1990s fudged the answer by a vast expansion of credit, including the extension of mortgage finance into sub-prime markets. But the resultant asset bubble was bound to go pop as it did in 2007-8 bringing down Lehman Brothers and the credit system with it. However, profit rates and the further concentration of private wealth recovered very quickly after 2009 while everything and everyone else did badly. Profit rates of businesses are now as high as they have ever been in the US. Businesses are sitting on oodles of cash and refuse to spend it because market conditions are not robust.

Piketty’s formulation of the mathematical law disguises more than it reveals about the class politics involved. As Warren Buffett has noted, “sure there is class war, and it is my class, the rich, who are making it and we are winning.” One key measure of their victory is the growing disparities in wealth and income of the top one percent relative to everyone else.

There is, however, a central difficulty with Piketty’s argument. It rests on a mistaken definition of capital. Capital is a process not a thing. It is a process of circulation in which money is used to make more money often, but not exclusively through the exploitation of labor power. Piketty defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not. This includes land, real estate and intellectual property rights as well as my art and jewelry collection. How to determine the value of all of these things is a difficult technical problem that has no agreed upon solution. In order to calculate a meaningful rate of return, r, we have to have some way of valuing the initial capital. Unfortunately there is no way to value it independently of the value of the goods and services it is used to produce or how much it can be sold for in the market. The whole of neo-classical economic thought (which is the basis of Piketty’s thinking) is founded on a tautology. The rate of return on capital depends crucially on the rate of growth because capital is valued by way of that which it produces and not by what went into its production. Its value is heavily influenced by speculative conditions and can be seriously warped by the famous “irrational exuberance” that Greenspan spotted as characteristic of stock and housing markets. If we subtract housing and real estate – to say nothing of the value of the art collections of the hedge funders – from the definition of capital (and the rationale for their inclusion is rather weak) then Piketty’s explanation for increasing disparities in wealth and income would fall flat on its face, though his descriptions of the state of past and present inequalities would still stand.

Money, land, real estate and plant and equipment that are not being used productively are not capital. If the rate of return on the capital that is being used is high then this is because a part of capital is withdrawn from circulation and in effect goes on strike. Restricting the supply of capital to new investment (a phenomena we are now witnessing) ensures a high rate of return on that capital which is in circulation. The creation of such artificial scarcity is not only what the oil companies do to ensure their high rate of return: it is what all capital does when given the chance. This is what underpins the tendency for the rate of return on capital (no matter how it is defined and measured) to always exceed the rate of growth of income. This is how capital ensures its own reproduction, no matter how uncomfortable the consequences are for the rest of us. And this is how the capitalist class lives.

There is much that is valuable in Piketty’s data sets. But his explanation as to why the inequalities and oligarchic tendencies arise is seriously flawed. His proposals as to the remedies for the inequalities are naïve if not utopian. And he has certainly not produced a working model for capital of the twenty-first century. For that we still need Marx or his modern-day equivalent.


David Harvey is a Distinguished Professor at the Graduate Center of the City University of New York. His most recent book is Seventeen Contradictions and the End of Capitalism, published by Profile Press in London and Oxford University Press in New York.
See also:
http://davidharvey.org/2014/05/afterthoughts-pikettys-capital/

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Re:
27 May 2014
The Financial Times’ attack on Thomas Piketty
27 May 2014

In a series of articles over the past several days, and in a major editorial published on Monday, the Financial Times has launched a scurrilous attack on Thomas Piketty and his book, Capital in the Twenty-First Century.

The newspaper claims to have discovered serious flaws in data that undermine one of the book’s central themes—that wealth concentration is growing throughout the world, and in the United States and Europe in particular. A front-page article published over the weekend, provocatively headlined, “Thomas Piketty’s exhaustive inequality data turn out to be flawed,” asserts that the authors have found “unexplained data entries and errors in the figures underlying some of the book’s key charts.”
Before taking into account Piketty’s reply to these criticisms, the newspaper concludes that they are “sufficiently serious to undermine Prof. Piketty’s claim that the share of wealth owned by the richest in society has been rising and [quoting Piketty] ‘the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945.’”
The World Socialist Web Site has basic theoretical and political differences with Professor Piketty, an opponent of Marxism who believes that social inequality can be addressed entirely through various reform measures. These criticisms will be treated in a separate review of his book and the response to it. However, the target of the FT’s attack is not these limitations, but the main strength of the book and Piketty’s work as a whole—the detailed examination of the growth of income and wealth inequality over the past fifty years.

The actual content of the allegations by the FT (focused on only one chapter in the book) bears no relationship to the sweeping conclusions that the newspaper attempts to draw from them. Among the flaws cited by the newspaper are apparent mistakes in data transcription and other minor issues that have no real significance. It also cites what it considers to be unexplained adjustments to data made as part of Piketty’s efforts to provide a unified portrait of wealth distribution over time. Such adjustments and assumptions are inevitable in assembling data from disparate sources, accumulated in different ways and in very different time periods—a fact that Piketty himself acknowledges.

Replying to the FT criticisms, Piketty noted that in the effort to be as transparent as possible, he made all his data available online and subject to public examination. Several assumptions that the professor made actually tend to underestimate, rather than overestimate, the level of wealth concentration. He notes, for example, that his estimates of wealth possessed by the rich do not “fully take into account offshore wealth, and are likely to err on the low side.”

The driving force behind the FT’s criticisms is transparently political in character. In its editorial on the subject, “Big questions hang over Piketty’s work,” the newspaper editors insist that the supposed problems in Piketty’s data “undermine his thesis that capitalism has a natural tendency for wealth to become ever more concentrated in the hands of the rich.” Incredibly, the newspaper asserts that because of the flaws in the data, there are “grounds to question the finding that the holding of wealth by the rich in Europe has increased since 1980. Without that result, there cannot be an iron law of capitalism that leads to ever rising inequality.”

Despite Piketty’s repeated assurances that he does not oppose the capitalist system (and does not, in fact, propose an “iron law” of inequality) the material he has gathered and presented in coherent form has clearly made the FT, and those for whom the newspaper speaks, very nervous. While they never mention the word, it is socialism that is on their minds.

In its attack on Piketty, the Financial Times is speaking for powerful sections of the financial aristocracy that sense the immense social tensions building up in Europe, the United States and internationally. They are well aware that they preside over an economic system that has lost credibility in the eyes of millions of people. Any acknowledgment of the illegitimacy of the vast wealth that has been accumulated by a tiny layer of the population is, from their standpoint, dangerous.
Inequality is not really a serious problem, they insist. To the extent that it exists, it is very likely justified. “There is a gulf of a difference between wealth derived from entrepreneurial skills and inheritance,” the editors write.

What “entrepreneurial skills” are responsible for the wealth of the modern-day aristocracy? For decades, the ruling class—led by the financial institutions in London and on Wall Street—have engaged in a massive orgy of speculation, ripping up entire industries to funnel money into the stock markets. Gigantic fortunes have been amassed through financial manipulation and semi-criminal or outright criminal activities. Since the 2008 crash, central banks have opened the taps to flood the financial system with cash at near-zero interest rates, re-inflating the speculative bubbles that produced the crisis.

The product of these policies is amply demonstrated—by Piketty and, as the author noted in his defense, many other sources as well. Most recently, the British Sunday Times published its annual rich list revealing that the richest 1,000 people in Britain have a combined wealth of £519 billion, an increase of 15.4 percent since last year and twice what it was in 2008. The wealth of these 1,000 individuals is now equivalent to a third of the entire country’s gross domestic product.

The 85 richest people in the world now control as much wealth as the bottom 50 percent. And the world’s 1,645 billionaires, according to Forbes, possess a combined net worth of $6.4 trillion, an increase of $1 trillion over 2013. In the United States, the richest 400 people increased their wealth in 2013 to $2 trillion, up 17 percent from the year before.

As for income inequality, the FT does not even address the exhaustive data accumulated by Piketty and his collaborators showing that an ever greater proportion of the world’s income is going to the top one and 0.1 percent, particularly in the United States and Europe. In the United States, the top one percent in 2012 monopolized 22.46 percent of all income, up from 19.65 percent a year before.

The FT attack on Piketty is an attempt to deal with the growth of class antagonisms by denying the significance of social inequality. Yet the facts remain—as do their explosive social and political consequences.


http://www.wsws.org/en/articles/2014/05/27/pers-m27.html
Re:
27 May 2014
A profoundly misguided and tedious bit of social misdirection was unleashed last Friday when FT (Financial Times) reporter Chris Giles published an ‘expose’ of alleged errors in Thomas Piketty’s research for his book Capital in the Twenty-First Century. Mr. Piketty made his research available to the public to be examined and there is no issue taken here with Mr. Giles or anyone else looking through it to any extent they care to and pointing out perceived errors. However, to the apparent legions of uninitiated, Thomas Piketty was decades late in reporting growing wealth concentration amongst the already wealthy. Regardless of whether there were errors in his research a copious amount of other research showing essentially the same tendencies he identified is available to anyone who cares to look. In fact, a lot of the griping from the economic left, such as it is, was that it took Mr. Piketty putting his research into the wholly improbable frame of mainstream economics before ‘income inequality’ went mainstream as a political issue.

Every three years since the 1980s the Federal Reserve has conducted its Survey of Consumer Finances (SCF) that reports household income, wealth and debt in various configurations across time. The data used in the graphs below is from the SCF and is freely available on the Federal Reserve website found here in Table 4. It is wholly unrelated to Mr. Piketty’s research and is compiled and produced by ahem, the Federal Reserve, not by Thomas Piketty. I give it no more or less credence than much of the other research coming out of the rapidly growing ‘income inequality’ industry. I personally wouldn’t have used (Emmanuel) Saez’s and (Thomas) Piketty’s income distribution data if I hadn’t gone through data and narrative accounts from other sources to come to my own conclusions. The only reasonable explanation for Mr. Giles’ piece getting any attention is that it provides tribal talking points in the banker and economist ghettoes that never see much sunshine anyway. That so much alternative evidence is available from sources deemed ‘credible’ by the mainstream economic press makes Mr. Giles as lazy as he is of limited capacity as a journalist for his “reporting” on this.



Graph (1) above: The Federal Reserve’s Survey of Consumer Finances data illustrates that median household wealth for the top ten percent of households started at a much higher level than everyone else and rose much faster. This data ends in 2010. Since 2010 the financial assets mostly owned by the very rich (per SCF) have dramatically increased in value. This has resulted in a rapid increase in the wealth of the very richest against house prices having risen but still being significantly below their levels in 2006. This is relevant because house values represent the preponderance of household wealth further down the wealth spectrum. Units are in thousands of dollars.



Graph (2) above: With apologies for being tedious here, mean (average) household wealth provides additional information. Mean household wealth for the top ten percent started from a much higher point than did median wealth and it rose much more dramatically until it declined in 2010. What this indicates is that within the top ten percent wealth is highly concentrated within the top five percent of households. (The difference between mean and median is the wealth ‘skew’). While this doesn’t prove that wealth is highly concentrated in the top one half of one percent because the data isn’t broken out in that much detail, it does illustrate that it is highly concentrated at the very top. Since 2010 the wealth of this group has been fully restored by the rise in financial asset prices. Units are in thousands of dollars.




Graph (3) above: A central point of the wealth concentration argument is that the very richest started from a higher starting point and have seen their wealth increase fastest. Illustrated here is that the top ten percent started from much higher levels of wealth and saw much larger wealth gains than the next ten percent below them. So the Federal Reserve data confirms that the top ten percent of households started from much higher levels of wealth than did everyone below them (Graphs (1) and (2) above) and saw much more dramatic increases in wealth. And within the top ten percent the very top began from the highest levels and saw the greatest increases. Units are in thousands of dollars.



Graph (4) above: Part of what is exasperating about the ‘income inequality’ story is the focus on the wealthy. Illustrated above is mean household wealth for the highest and lowest (poorest) deciles. The rise in household wealth of the poorest was largely reversed with the implosion of housing prices inflated by predatory sub-prime mortgages made by / for Wall Street. It is more than mere coincidence that the wealth of the very richest is tied to Wall Street while the wealth of the poorest households is tied to housing and was lost due to financial gamesmanship by Wall Street. The racist component, that blacks and browns were specifically targeted with predatory sub-prime loans, ties to over three hundred years of race-based economic exploitation. Units are in thousands of dollars.



Graph (5): The Western economic frame is that when ‘a society’ gets wealthier then that ‘society’ benefits. With the dramatic rise in extreme poverty and long-term / permanent unemployment for a substantial proportion of the population since 2006 what is evident is that there is no ‘society’ in the West. There are the rich and the rest of us. To be clear, this isn’t class warfare being launched from below, but from above. That many receiving food assistance (SNAP Supplemental Nutrition Assistance Program) exist below the level of economic resources needed to be eligible for the program suggests that SNAP participation is an optimistic view of the level of extreme poverty in the U.S. This is against a tiny fraction of the very richest who have seen their fortunes fully restored through Federal government and Federal Reserve policies.

To those as yet undamaged by an ‘education’ in economics, there are an infinite number of challenges to any configuration of economic data. Readers are welcomed to challenge this data and the way that I’ve arranged it. But before going public, pulling a ‘Chiles,’ look at the other evidence. The U.S., and the West more broadly, is in the midst of a class war launched from above and there is little time for gullibility being passed off as ‘reason.’ I couldn’t care less about Mr. Piketty and I would prefer that he, the Federal Reserve, the Census Bureau and the entire income ‘inequality’ industry were simply wrong about present circumstance and trajectory. But they aren’t. Someone else can do the work on ‘income inequality’ if they care to. To save readers the suspense, it looks pretty much like Messrs. Saez and Picketty say it does.

Rob Urie is an artist and political economist. His book Zen Economics is forthcoming.

http://www.counterpunch.org/2014/05/27/off-with-their-heads-thomas-picke/