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Notes On Piketty’s Book.

Important EDIT: Bob Murphy has written what might be the definitive refutation of Piketty’s book. Besides linking to various Austrian critiques, he quotes top two top of the line mainstream economists. One proves Piketty’s work is a hopeless mess theoretically, the other that Piketty’s data is all wrong.

Let me quote from the opening paragraphs:

Thomas Piketty’s Capital in the Twenty-First Century is a moving target. The book contains foundational theoretical problems, a misreading of the empirical literature that blows up his whole case, sloppy and absurd factual errors concerning tax rates and minimum wage hikes, and shocking quotations that reveal he has no desire to actually raise government revenue with his massive soak-the-super-rich schemes, but instead merely wants to prevent the formation of fortunes in the first place.

I am now beginning to suspect that this is the Frenchman’s rope-a-dope strategy. By this point, after I (and others) have been harping on one problem after another, the poor blogosphere reader is too fatigued to take it seriously when Chris Giles at the FT alleges that Piketty’s most important scholarship–the thing that supposedly warrants Piketty a Nobel Prize, according to Larry Summers–is not only wrong, but contains deliberately fudged data. Uh oh.

Here’s my two cents:

SD: Gotta give Piketty’s book credit for barking up the wrong tree right from the get-go. Here are the first lines from the intro:

The distribution of wealth is one of today’s most widely discussed and controversial issues. But what do we really know about its evolution over the long term? Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes, as Simon Kuznets thought in the twentieth century?

Let’s look at this more closely.

The distribution of wealth is one of today’s most widely discussed and controversial issues.

True as far it goes, that ignorant people talk about this a lot. But the intelligent can reach only one conclusion. Whoever works should be allowed to keep the profits of his work. [Even Marx agreed with this, merely arguing that the problem with capitalism is that someone is not being allowed to keep the fruits of his labors, a claim long exposed as false]. It makes no difference to A’s rights to keep what he produced whether B is rich or poor, equal or unequal, to A. If we see “inequality“, that does not mean something is necessarily wrong. In fact, inequality must exist in such a system, which the author agrees is the right way to go in his video. You’ll remember that he praises “meritocracy”, another word for what we are talking about.

For example, who reading this can write a book as popular as the Harry Potter series? I think we can agree that whoever can, will do it, Piketty and Karl Marx included, because the reward is so great. If you didn’t do it, it’s because you don’t have the talent. Now, nobody was exploited, nobody was robbed, nobody was placed in chains, by J. K. Rowling. She wrote books that people loved so much they happily gave her money in exchange for them. Meritocracy at its best. Is anybody going to claim that since she is now a billionaire and everyone else is the same old slob, that something is wrong with the world?

And yet, the Harry Potter books have increased inequality in way few things have. Miss Rowling used to be “equal’ to everyone. Now is she is supremely unequal. Is Piketty going to come out against the books, saying the world would be a better place if they were not written, that everyone would be happier that way? If he does, he’s a bigger fool than he already has shown himself to be.

Bottom line, “inequality” per se is not a problem, just a fact of life. But the author makes it sound like it’s the single greatest problem facing the world today. As other posters have pointed out, if people steal money to get rich, via the govt or in other ways, the problem is not inequality, but stealing.

The next sentences continue the theme, creating a false dichotomy. Either inequality will increase [=bad, he thinks] or will decrease or stay the same [=good, he thinks]. In light of the above, this is an incredibly foolish point of view. The book is about Capitalism, and he is going to be stupid enough to judge Capitalism based on the question, does it increase or decrease inequality?

The correct question, the correct criteria to judge Capitalism as opposed to other systems, is not to compare Miss Rowling to Joe Slob and see if they are both equal. It’s to compare Miss Rowling in a Capitalist system to Miss Rowling in an alternate system, and Joe Slob under Capitalism to Joe Slob under another system. Does Capitalism increase the standard of living of both Miss Rowling and Joe Slob? If so, it is the superior system, regardless of any “inequality” that exists.

Of course, this comparison is so clear cut that Marxists dare not talk about it. The poorest capitalist country has a much higher standard of living, for everyone, than the richest Marxist country, a fact no one denies.

So if you want to see someone say foolish things for a few hundred pages, read Piketty’s book. If you want to learn economics, read Austrian Economics.

Devil’s Advocate: Dave, that first paragraph jumped out at me too, but the claims he makes there are really more bold than the ones he makes in the rest of the book. I think he was being sloppy there, but that’s not necessarily what he meant. Also, he doesn’t talk about work, or people earning different incomes through work. His major focus, both implicitly and explicitly, is on what are essentially random endowments, like inheritance. We are endowed with certain resources through birth, and it’s like a lottery. The wealth we’re born into plays a very large role in determining the wealth we will have as adults.

SD: The key word there, the mistake he is making, is the word “random”. We are not born into wealth “randomly”, but rather as a result of the wealth of our parents. If Ms Rowling has a child, he will not be rich “randomly”, but because of the work his Mom did. Wealth doesn’t come into existence “randomly”. Somebody had to do some work somewhere for that wealth to be created. This is a key point that, when elaborated on, refutes all his arguments.

Now there are two angles from which to look at his thesis, the moral and the economic. Since the Austrian giants have written about this extensively, and since I’m tired, I’ll just give an outline:

Moral arguments:
1. Reductio ad absurdum. Accepting his logic for the sake of argument, the rich countries should give their wealth to the poor countries, until everyone is equally poor. But you don’t hear him advocating that.

2. Miss Rowling worked for her money, and even Marx agrees that therefore it’s hers. Has she the right to give it as a gift to anyone she wants? Of course, for otherwise it’s effectively not hers to with as she pleases. Therefore she has every right to give it to her son. Does she own it any less the day she is about to die? Of course not. So if she gives it as a gift to her son the day she is about to die, we are all OK with that, right? No questions about the son being “random”, right? And that’s what inheritance is, the recognition that the parents want to gift their kids with their money.

3. Another reductio. If it is our job, as he assumes, to right the wrongs the Universe has created, why stop at money? Why not right the wrongs caused by some people being more talented than other? Result: Harrison Bergeron.

Economic arguments:
1. Even Piketty understands that Capital Accumulation is what leads to greater wealth. AE has shown that not only does it lead to greater wealth for the owner of the capital, but for the whole economy. Thus, we should do all we can to increase capital accumulation, and get rid of every discouragement. Many people work to improve the lot in life of their children. And if we institute Piketty’s silly programs, we are destroying one of their important incentives to be productive.

Historically, this has always been the case. Soviet Russia was notorious for the amount of time wasting people did at work, preferring to gossip for hours than actually doing something productive. The reason? Russia had instituted Pikkety’s programs of reditribution.

Contrast this with the USA, which, until it started doing what Piketty wants, was the richest country in the world by far. Its workers got the highest wages in the world, its products were of the highest quality, and were sold cheaper than any others. And how did that happen? Austrian analysis says because the USA was the free-est country, economically, meaning those who made money were allowed to actually keep it, as opposed to having it taxed away at every opportunity.

2. Ability tends to be inherited, at least to some extent. Thus, we are giving the capital to the person most likely to use it best if we let it be handed on through inheritance. And if the inheritor is not competent, market forces will ensure they will go to someone who is. But redistribution guarantees that vast amounts of the money will go to incompetents and dead beats, who will just spend it on beer and cigarettes.

Bottom line, we have another instance of what Mises always pointed out was a basic flaw in all other schemes but the free market: the results are the opposite of what the proponents intended. And the reason is simple: The free market maximizes wealth for everyone. Everyone wants that. But their proposals are always to stifle the free market, meaning to reduce wealth.

Finally mosey on over to Mises.org and you’ll see plenty of articles showing that his numbers are all wrong as well.

DA: But Dave, Piketty claims there is a reason the rich get richer and the poor get poorer. The rich have more money. Money is like a fruit orchard or a herd of cattle or a fishery, where nature magically makes more and more fruit and cattle and fish bloom out of the previous supply of fruit and cattle and fish. Same thing with money.

So if we want to be ‘fair’ we should take away money from the rich and give it to the poor so that they, too, can own some of this magical paper money that reproduces itself by magic.

SD: It doesn’t work that way. Money doesn’t grow magically out of money. One cannot guarantee, or even feel confident, that Random Person A, given a wad of cash, will know how to get any return at all on that money. This attacks Piketty’s thesis by pointing out that first, in a free market, the rich earn the returns on their money by talent, not by virtue of merely having the stuff, and that second, the poor will fritter away the cash on pizza and cigarettes, because that’s how they roll. They have no clue of how to get money from money.

EDIT: George Reisman wrote an article exposing Piketty’s nonsense, too.  Here are some excerpts:

In his book, Piketty argues that saving and capital accumulation by wealthy capitalists serves to reduce wages. The capital accumulated does nothing to increase production, he claims. All that it accomplishes is allegedly to increase the share of national income going to profits while equivalently reducing the share going to wages. Because there is no additional production, the effect of the change in shares is a corresponding change in absolute terms, i.e., real profits up, and real wages down.

In order to avoid such endless destructive capital accumulation and its accompanying “inegalitarian spiral,” Piketty advocates a progressive income tax as high as 80 percent “on incomes over $500,000 or $1 million a year,” accompanied by a progressive tax directly on capital itself, as high as 10 percent per year….

Now Piketty’s claims about the wage and profit shares are refuted simply by imagining an increase in saving and investment by capitalists and then observing the consequences both for wage payments and for the amount of profit in the economic system. It will be found that wage payments necessarily rise and the amount of profit necessarily falls, results in diametric opposition to Piketty’s claims.

Thus, assume that initially the total amount of profit in the economic system is 200 units of money. (Each unit can be conceived as representing as many tens of billions of dollars as may be necessary for 200 units to equal the actual current amount of aggregate profit.)

Assume also that accumulated capital in the economic system is initially 2,000 units of money. Thus the initial average rate of profit is 10 percent.

And, finally, assume that the capitalists, who have up to now been consuming their 200 of profit, decide to save and invest half of it. They now make an additional expenditure for capital goods and labor in the amount of 100.

Whatever portion of this 100 is wage payments necessarily increases the total of wages paid in the economic system. At the same time, the spending of an additional 100 on capital goods and labor must sooner or later add 100 to the aggregate costs of production of business that are deducted from sales revenues, thereby equivalently reducing aggregate profits.

The rise in costs can take place immediately or over many years, depending on what the 100 is spent for. At one extreme, if it were spent entirely on items that were not capitalized, such as, typically, selling, general, and administrative expenses, it would show up immediately as equivalent additional costs. At the other extreme, if it were spent entirely on the construction of buildings with a forty-year depreciable life, it would take forty years for it to show up as equivalent additional costs of production. But one way or the other, it will show up as equivalent additional costs and thus equivalently reduce the amount of profit in the economic system.

Thus, Piketty’s “findings,” as they are called, are reversed. The capitalists’ saving and investment that increases the ratio of accumulated capital to income, increases the wage share of national income and decreases the profit share.

Moreover, the larger supply of capital goods that results from the transition to a higher capital/income ratio serves to raise the productivity of labor and increase the total of what can be produced, including a still larger supply of capital goods.

There’s more good stuff in Reisman’s article. To the link, comrades!



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