Five Myths of Piketty’s Capital in the 21st Century

Every intellectual has at least talked with a guy who knows a guy who read an article on Thomas Piketty’s book Capital_in_the_Twenty-First_Century_(front_cover)Capital in the Twenty-First Century, and this has qualified him to declare Piketty’s book to be a crushing critique of capitalism. Well, if that’s you or someone you know, this post is for you. I discuss five statements I see as common myths people have about Piketty’s book. (I cite the book parenthetically).

1. Piketty reveals a Marx-like economic contradiction in capitalism.

Marx argued that the fall of capitalism was inevitable, for the contradictions inherent in it are irremediable. His predictions proved false, of course (unless you believe the faithful Marxian ad hocsters), but it is important to remember that his predictions were not warnings for the capitalists and regulators to change policies. The predictions involved the coming, inevitable salvation of the proletariat. Piketty, however, explicitly denies that his critique is like this:

My conclusions are less apocalyptic than those implied by Marx’s principle of infinite accumulation and perpetual divergence (since Marx’s theory implicitly relies on a strict assumption of zero productivity growth over the long run). In the model I propose, divergence is not perpetual and it is only one of several possible future directions for the distribution of wealth. (27)

Indeed, Piketty’s book is meant to provide a blueprint for saving democracy and social justice by saving capitalism from itself by regulating it, not abolishing it. The book is not a radical critique of capitalism, but a call to regulate it. If anything, the book is a critique of the notion of a “self-regulating” market, which is a very common view anyway.

2. Piketty offers a radical critique of capitalism.

The leftist celebration of Piketty is rather odd, for nowhere does he advocate a dismantling of capitalism or the “market economy.”

Piketty’s argument is that there is a major “divergence” in capitalism (see 3) that is not simply a “market imperfection,” and it will lead to massive inequality between rich and non-rich. This, in itself, will not lead to economic collapse, but it will, he thinks, undermine democracy and social justice; and it will lead to oligarchy (i.e., rule by the wealthy) and possibly revolution. He writes,

The overall conclusion of this study is that a market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based. (571)

His main two policy prescriptions are an 80% tax on the super-rich and a very small global tax on capital, along with certain “utopian” measures of global governance.  Their purpose is to prevent the massive and disastrous inequalities he foresees. But notice that he is not offering anything radical in terms of a systematic change in economic structures. He is simply trying to fix capitalism with taxes, the assumption being that capitalism, when properly regulated, can coexist quite well with a healthy democracy and social justice. And if this divergence did not exist, all that remains relevant in the book is an interesting take on the history of economics, some lessons in economics (though Thomas Sowell’s book Basic Economics is a better pick) and an argument for the Unites States to have a more robust welfare system. There is not much here to excite leftists.

3. The actual wealth of the non-rich will decrease while the actual wealth of the rich increases.

This is perhaps the most common myth, and it is Piketty’s fault for being imprecise or deceptive.

Piketty argues that since the rate of return on capital will be larger than the rate of economic growth, the disparity of wealth will reach extreme levels by the end of the 21st century in the Western world. The “force of divergence” (25) is the higher rate of return on capital compared to the economic growth rate (or r>g). This means that “inherited wealth grows faster than output and income,” causing the concentration of capital, over time, to reach an “extremely high level” (26). Simply put, the families of the already-rich will indefinitely continue to acquire more and more of the percentage of national wealth. This disparity, according to Piketty, is “incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies” (26).

The rich get richer and the poor get…well, what do they get? He repeatedly frames the issue in terms of the “percentage” of national wealth. Piketty is misleading on this point. The super-rich will, over time, “devour” (378) only the percentage of national wealth, not actual national wealth. The percentage of national wealth is a zero-sum game; actual wealth is not. It is possible for one to increase in personal wealth and decrease in the percentage one owns of the national wealth. Indeed, this is what Piketty implies with r>g: the growth rate of output and income still increases, only its increase will be less than that of inherited wealth. The point is: output and income still increase. In other words, the non-rich will still see rising incomes and wealth, and therefore a rising standard of living. Their wealth will decrease only relative to the rich man’s. So their wealth decreases only on the basis of a relation, not the wealth in actuality.

We see nothing like this in Marx, who predicted falling wages and mass squalor. In Piketty, the non-rich’s standard of living continues to increase. The rich will not make their great wealth by taking the non-rich’s actual wealth. They will take only the percentage points of national wealth.

4. The proposed 80% tax on the rich is primarily for funding better welfare systems.

Actually, Piketty says rather plainly that a top tax-rate of 80%, the rate he claims is required to prevent the indefinite r>g as described above, would “not bring the government much in the way of revenue…[because] it would drastically reduce remuneration at this level” (513). The “supermanagers” would no longer seek such high incomes, leaving little to be taxed. To raise the “meager US social state,” taxes would have to be raised on “incomes lower in the distribution.” The middle class would have to be taxed to bring about the US social state. There is not enough money among the 1%, and high tax rates only reduce the super-richs’ gross income (that is, companies will not offer an income that enters the top bracket, so there is nothing to tax).

And the high tax has little to do with distributive justice. As he says, “the primary goal [of high taxation on the super-rich] is not to raise additional revenue….It is rather to put an end to such incomes…[considered] socially unacceptable” (505).

5. Piketty shows how his economic conclusions lead to social injustice, the failure of democracy, and human rights violations.

Piketty often makes statements referring to “social justice,” “democracy,” and “human rights,” but he never attempts to show how any of his economic conclusions will lead to the failure of democracy, social injustice, and human rights violations. Perhaps he leaves this for the political scientists, which is fine. But one cannot read Piketty’s book and understand just how such economic conditions will affect these things.

And, if I may give my own take on the book and possible political ramifications, it seems that much of his fear is rooted in assumptions of envy. Again, it is not the taking of actual wealth from the non-rich that makes the wealthy wealthier. The non-rich, even in Piketty’s account, will continue to see rising incomes, wealth, and standard of living, despite the fact that the wealthy are becoming enormously wealthy. Why would the non-rich care that others have such money? And, in particular, would Americans generally care? Perhaps the French would, but Americans probably wouldn’t. Furthermore, taxing the super-rich at a high rate does no common good other than whatever common good comes from the reduction of envy. For, as Piketty admits, a high tax on the super-rich does nothing for revenue. So, even if Piketty’s economics is right, it is not immediately clear why these economic problems are so politically alarming.

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