The mythology of Capital in the Twenty-First Century.

Author:Veetil, Vipin P.
Position:Book review
 
FREE EXCERPT
  1. Introduction

    Self-reflection is not a luxury warriors can afford. For much of the twentieth century, capitalism fought fascism, communism, and socialism of all hues. The great wars are over. Ours is the century in which capitalism goes to therapy. Capitalism will look into itself. And when it does, many problems will surface, one of them being inequality. In the United States, income inequality has increased considerably since the 1970s. What are the fundamental causes of inequality in capitalist societies? Will the trend of rising inequality continue? If so, for how long? Will inequalities rise to unsustainable levels? Will capitalism collapse from within? With Capital in the Twenty-First Century, Thomas Piketty takes a lead in answering the questions of our age.

    Piketty says that inequality in income derived from the ownership of capital is far greater than the inequality in income derived from labor. Therefore, if the share of income that accrues to capital increases, so will inequality. He finds that this share has increased since the Second World War. This empirical fact breaks the hegemony of neoclassical growth models that assume that the share of income that accrues to capital is a technological constant (Solow 1994).

    Why has there been an increase in the share of income that accrues to capital? According to Piketty, in the long run, the share depends on the relationship between the rate of return to capital and the rate of growth of output. The greater the rate of return to capital relative to the rate of growth of output, the higher the long-run share of income that accrues to capital. For some parameter values, the share is greater than one. This would make the dynamics of capitalism unsustainable, ultimately leading to its collapse. Piketty offers a bouquet of policy measures to avoid such a collapse.

    The problem is that Piketty views capital as a self-perpetuating homogeneous entity that begets itself. In the real world, there is no such thing as capital apart from its concrete and specific manifestations. There are tables, computers, pens, jet engines, and tractors. The web of relationships between the different kinds of capital goods embodies the web of relationships between the intertemporal production plans of different economic agents. The price system and other institutions of capitalist economies are means of coordinating their capital structures (Mises 1949). Piketty studies a world in which the problem of coordinating the structure of capital does not exist because capital is homogeneous. Insofar as Piketty's policy prescriptions intend to alter the institutions of capitalism, their effects and costs cannot be understood by studying a world in which these institutions have no role.

    Furthermore, Piketty does not provide a theory of inequality. He argues that inequality depends on the relationship between the rate of return to capital, the rate of saving, and the rate of economic growth. Variables like the rate of return to capital and inequality do not act on each other (Wagner 2010). Individuals make plans and engage in economic actions (Mises 1960). Aggregate variables like inequality are the emergent outcomes of the interactions between purposeful economic actors (Epstein 2006). Aggregate variables do not have a life of their own (Schumpeter 1939, pp. 43-44); they are not the primitives of economic analysis, they are the derivatives of individuals' choices. Piketty does not tell us how microeconomic interactions between economic actors generate macroeconomic inequality.

    The paper is organized as follows. Section 2 summarizes what Piketty calls the fundamental laws of capitalism. Section 3 defines the structure of capital. Section 4 explains how the structure of capital in an economy is an emergent outcome of the interactions between many human beings, each pursuing her own ends. Section 5 offers concluding remarks.

  2. The Fundamental Laws of Capitalism a la Piketty

    Neoclassical growth models presume that the question of how total income is divided between labor and capital is settled by a technological constant. Consider the Solow (1956) and Swan (1956) growth model with a Cobb-Douglas production function: Y = [K.sup.

    What explains the increase in the share of output accruing to capital? Piketty presents a mechanical explanation based on two factors. One, since the Second World War, there has been a steady increase in the quantity of capital. Two, the increase in the quantity of capital has led to a less than proportional fall in the price of capital. The two factors together have meant that the share of income accruing to capital has been on the rise.

    The share of output that accrues to capital is important because income from capital is more unequally distributed than income from labor. This is true for all countries for which data are available. While those in the bottom half of the wage distribution receive 25 percent to 33 percent of total labor income, those in bottom half of the wealth distribution receive less than 5 percent of total capital income (Piketty 2014, p. 244). This means that an increase in the share of output accruing to capital is associated with an increase in inequality--which is why Piketty's book is titled Capita/ in the Twenty-First Century (emphasis mine).

    In the neoclassical world, inequality is not a problem. Even if it were, human beings can do nothing about it. After all, the split between labor and capital is a technological parameter, not a political parameter. In Piketty's world, there is a problem: the share of income accruing to capital has been increasing, and so has inequality. Furthermore, the distribution of income can be modified through political means.

    Piketty claims that capitalism does not have a self-corrective mechanism to prevent the increase in the share of income that accrues to capital. In fact, there are reasons to believe that the rising inequality is a reflection of the internal contradictions of capitalism. According to Piketty, the long-run share of capital in income depends on the relationship between the rate of saving, the interest rate, and the growth rate. In particular, the long-run share of capital in income is given by the following equation:

    Piketty says that Marx was led to believe that capitalism will necessarily collapse because he assumed that the rate of growth of output will be near zero. In such a world, the share of income that accrues to capital will tend to a value greater than one for nearly any rate of saving and rate of return to capital. This mathematical impossibility is a reflection of the internal contradictions of capitalism. As labor's share of income declines, workers organize and revolt. Workers revolt not because of their concern for inequality or for Marx, but because the increase in

    According to Piketty (2014, p. 10), the rate of growth of output counterbalances the rise in inequality, which is a possibility that "Marx totally neglected." The question of whether capitalism will collapse if left to its own devices becomes an empirical question, which Piketty answers in the affirmative. Piketty (2014, p. 353) finds that for much of human history, the rate of return to capital has been 10 to 20 times greater than the rate of growth of output. This means that a rate of saving of greater than 10 percent would make the share of capital in output tend to greater than one: an impossibility. The fundamental cause of income inequality in capitalism has nothing to do with any market imperfection. Quite the contrary: "the more perfect the capital market (in the economists' sense), the more likely r [the rate of return to capital] is to be greater than g [the rate of growth of output]" (Piketty 2014, p. 27).

    Though Piketty is Marx in diagnosis (without the materialistic conception of history), he is Keynes in prescription. The collapse of capitalism is not a historical law but an empirical possibility--a possibility that can be altered with a bouquet of...

To continue reading

FREE SIGN UP