Piketty's Political Hunch

By George L. Priest 

In the many reviews of Thomas Piketty's 'Capitalism in the Twenty-First Century,' there has been no careful analysis of the author's conceptual structure.

Thomas Piketty’s Capitalism in the Twenty-First Century has reached the New York Times’ bestseller list for the past 10 weeks — it was first in nonfiction shortly ago and near the top for the last few weeks. For an academic book consisting mostly of statistics, this is remarkable, though, having read it, I think it is likely to chiefly end up sitting on many bookshelves perhaps briefly browsed but largely unread. Its market popularity undoubtedly derives from Piketty’s denunciation of what he claims to be the growing inequality in Western nations, especially in the United States. Piketty is an extreme anti-American.
Piketty’s statistics have been severely criticized: in the Wall Street Journal by my colleague on the AEI Council of Academic Advisers, Martin Feldstein; more recently in the Financial Times and the Economist.



These numbers will be worked out. In the many reviews of the book, however, there has been no careful analysis of Piketty’s conceptual structure, important for those attempting to understand the book.
Piketty is not quite a Marxist, though he fervently adopts, simplistically, Marx’s delineation between capital and labor. Marx, to his credit, had an economic theory. Piketty, in contrast, presents a political theory — or, more accurately, less a theory than a political hunch.

In a competitive economy, capital ownership is irrelevant.

Marx’s economic theory in Das Kapital (from which Piketty obviously took his title) was that capitalism would inevitably fail because of consumption crises (though Marx did not quite describe it this way). Marx’s analysis was that the owners of capital — as he saw it, chiefly manufacturers — would pay workers only subsistence wages, taking all the profits for themselves. But because these capitalists were limited in number, they could not consume enough to support continued production. This point was later elaborated by Veblen in The Theory of the Leisure Class, in which he described capitalists as attempting to address this problem through “conspicuous consumption” (today, if read as a satire, as opposed to Marxist ideology, Veblen remains hilarious). Thus, according to Marx, the capitalist society would implode from a succession of failures of consumption which he saw as having been the source of the various economic crises of the 19th century. Marx, of course, implored a worker revolution to accelerate the process.
Piketty doesn’t exactly endorse Marx’s analysis. He accepts the empirical fact that workers today aren’t paid subsistence wages and that there has been substantial economic growth over the centuries, especially in the years after Marx’s analysis. He criticizes Marx for not understanding the reality of economic growth.
Piketty is also aware that more recent analyses have shown that the various crises in the 19th century and since have resulted from financial — chiefly liquidity — problems. Indeed, the most recent collapse, in 2007-2008, is exactly the opposite of Marx’s theory: deriving not from underconsumption by the rich, but from overconsumption by the relatively low-income, who, encouraged by various government policies, consumed more housing than they could afford.
The heart of Piketty’s book, however, similar to Marx, is the claim that the owners of capital are gaining returns greater than workers, returns that will continue into the future, generating huge inequality. What is the consequence? The book is quite vague on this. It is not the Communist Manifesto. But laced throughout the book are references to the “powerful and destabilizing effects on the structure and dynamics of social inequality” and the like.
This is a political, not an economic, analysis. And it is not quite political science. Piketty shows that there have been periods of greater inequality of ownership than today or than he projects for the future that have not resulted in revolutions. Piketty’s predictions about the destabilizing effects of inequality in the future — revolution? — are a hunch.
Piketty attempts to distill his conclusion by claiming that over time, or at least for the future, the rate of return on capital will exceed the rate of a country’s economic growth. In his terms, the central point of the book is: “r (the rate of return on capital) is greater than g (the rate of economic growth).”

Piketty presents a political theory — or, more accurately, less a theory than a political hunch.

Although Piketty does not fully explain the point, this cannot be true in the long run unless, as Marx argued, though not Piketty, capitalists are stealing from workers. Again, Piketty does not make this point: he accepts that workers are receiving incomes equal to the marginal productivity of their labor. But, to put the point simplistically, in Marx’s and Piketty’s terms, if the economy is demarcated as between capital and labor, total economic growth will be determined by the sum of the increase of productivity due to capital plus the increase in productivity due to labor. If the increase in productivity due to capital is greater than the increase in total economic growth, then the owners of capital must be stealing from labor — which Piketty does not claim. Note that Piketty shifts his measure from increases to economic growth from productivity increases in capital to the rate of return on capital, which are not exactly comparable. The rate of return on capital may reflect expectations of future increases in demand, increases in capital productivity, etc. — different from the increase in real productivity of capital possibly in the short run, though not in the long run, but a subtle change of direction.
Piketty’s most important point, however, is his conclusion — assumption — that growing concentrations of wealth will somehow destroy the civic basis of society and lead to what: revolution by the working class? He doesn’t explain. This point is not extensively discussed and consists of continuous insinuation, rather than sustained analysis.
Piketty’s fervent commitment to Marx’s simplistic demarcation as between capital and labor fails here. Piketty, in defining capital, refuses to accept the concept of human capital (except for slaves). But if a person in the modern world develops marketable skills, why shouldn’t these skills be regarded as capital? They yield a return over a worklife, just as owning property yields a return over time. This is reflected in signing bonuses paid to many professionals as well as in compensation for moving costs and other perquisites, familiar in many industries. It is reflected in the obvious fact that most employees in signing for a new job are not offered only a subsistence wage. Of course, all salaried workers are enrolled in pension plans, making them idle capitalists as well. Are all workers, except those paid subsistence wages, now capitalists? By this definition, Marx’s and Piketty’s distinction between capital and labor collapses.
More importantly, Piketty does not explain, except for his subtle references to social discontent, why we should care about the growing — if it is — concentration of ownership of capital. In a competitive economy, why should we care about capital ownership?
In a competitive economy, capital ownership is irrelevant. If owners of capital aspire to maintain their rate of return, they have to provide products or services of value to the consuming population. Why should the consuming population care about inequality in ownership of the capital used to provide the product?

The most recent collapse, in 2007-2008, is exactly the opposite of Marx’s theory.

When a patient goes to a hospital, there is a huge inequality of capital ownership. The hospital’s possession of MRI and CT scanning machinery, not to mention the accumulation of machines checking vital signs, is vastly unequal to the capital possessed by the patient. Is this inequality a problem? No, in fact the patient would prefer more inequality of capital if that would enable the hospital to more successfully diagnose the health problem.

Similarly, when a consumer buys a car, does it matter whether the car manufacturer is owned or controlled by a dynastic family as opposed to a set of employee pension plans (again, most workers are idle capitalists by Piketty’s definition)? It doesn’t matter. What’s important is the quality of the car.
Maintaining a competitive economy trumps all of Piketty’s concerns about inequality of wealth.
Piketty’s and his colleagues’ compilation of these economic data is impressive. But Piketty should have used these data to evaluate the determinants of economic growth (equal to workers’ wages in Piketty’s terms), rather than inequality of ownership. The data might also demonstrate the extent to which competitive economies increase the incomes of all citizens.
The important determinant of economic welfare is competition in an economy, which leads firms, whatever their ownership, to provide products and services at low prices and increases jobs to the lower income — not inequality of ownership.

George L. Priest teaches courses on antitrust and capitalism at Yale Law School. He is the chair of AEI’s Council of Academic Advisers.