A Very Long Review of a Very Intellectually Deficient, but Very Big, Book by Thomas Piketty

Posted on June 9, 2014 by

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Before I begin this blog, I beg the reader’s indulgence for such a long book review.  However I considered this book worthy of such a detailed examination, due to its popularity and influence, barely three months after its appearance.  I do hope the length will be justified by the service it may provide.  I promise a shorter review in the near future.

I have just finished reading (slogging my way) through the new work by Thomas Piketty, Capital in the Twenty-First Century, published in 2014 by Belkap Press of Harvard University.  Piketty is a French economist at the Paris School of Economics, and is by all accounts a Social Democrat, the “kinder, gentler” form of Marxism.  The book is nearly 600 pages long and consists of basically two parts: (1) extensive, and contested, statistics on income and wealth (capital), both historical and current, and (2) Piketty’s proposals to minimize or at least ameliorate the inequality problem he sees inherent in income and capital returns.

The following is my attempt at a comprehensive review.  I am reviewing this book mainly because it has been so popular among Left-leaning thinkers.  In fact, it has been between number one and number 5 on the Amazon.com seller list for several weeks.  In addition, it has been at least partially reviewed by dozens of writers, some scholars and some journalists and some neither—and, yes, I question whether some “reviewers” have actually read it at all.  Among, those on the Left, this book may well be in their eyes the trump card needed to defeat capitalism generally, and growing economic inequality in particular.  It comes after all from a scholar, and an economist, who in Europe has gained some notoriety.  Moreover its theme, once one cuts through the maze of figures, charts and graphs, is about social justice and equality, the latter a topic peculiarly familiar to the French thinkers now and in the past since the French Revolution.

The first approximately 450 pages of the book present a picture of the historical development of income, return on capital in various Western nations from around 1700 to the present.  The narrative is accompanied by numerous charts and graphs addressing various values related to income and capital trends.  According to Piketty, “the fundamental inequality, which I will write as r>g (where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value, and g stands for the growth rate of the economy, that is, the annual increase in income or output), will play a crucial role in this book.” (p. 25)  Examining trends, Piketty will show thatr was far greater than g for the period 1870 to 1914, thereafter dropped precipitously between 1915 and 1950, and then has been steadily increasing since then to levels of around 500-600% of national income.  Piketty interprets this trend as a measure of inequality, and says that “when the rate of return on capital significantly exceeds the growth rate of the economy…, then it logically follows that inherited wealth grows faster than output and income.” (p. 26)  The result is that “levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies,” (Ibid.)  To put it more simply, those at the “top of the top” of capital-holders, who do nothing to earn their continuing and growing wealth, will grow ever richer because of those unearned returns, than those below them, resulting in growing inequality—not a static gap but a growing gap.  Piketty will find this untenable.  Between pages 27 and 470, Piketty narrates and illustrates his historical case for the assertion of growing inequality and also examines various types of income and wealth in the process.

Several reviewers have found flaws in Piketty’s numbers.  I have not had time (and it would require a great deal of time) to look personally into his statistics, but the reader should definitely consult the other reviews out there.  For my purposes, let us assume Piketty’s figures are correct.  But I was irritated that he used proportions and percentages in nearly every figure, instead of any absolute numbers.  I consider this to be a major flaw, since even if we assume inequality and growing inequality, we need also to know how all these incomes and returns on capital have grown or not grown over time.  It makes a huge difference whether incomes of those at the “bottom” have declined when adjusted for inflation or grown faster than inflation, even if incomes and capital returns have grown much faster.  To see that, we must see some real numbers, not ordinal measures.  But again, let us assume what Piketty does report is accurate—for now.  What does he do with those numbers and how should we evaluate his conclusions?

Throughout those first 470 pages, Piketty occasionally gives away his conclusions, asserting that the income or capital return gap is bad, or that the gap becomes oppressive.  He uses the phrase “extreme income inequality” from time to time.  And on page 264, Piketty says that this inequality must have resulted either because of some repressive regime or “apparatus of justification.”

Before moving to the heart of the book, it is worth adding that Piketty shows a particular interest in examining the income and wealth of the top decile and centile of those groups of earners and holders respectively.  He shows an even greater interest in the top centile (the top 1%) of those he labels CEOs, especially in  America and Great Britain, as well as France.  Pages 276 and forward begin with the heading “From a ‘Society of Rentiers’ to a ‘Society of Managers.” (p. 276)  The upshot is Piketty’s definition of the top centile of income earners and those deriving income from business capital (assets).  These, Piketty says, receive “an income several tens of times greater than average,” that is ten to fifty to one-hundred or more times greater—the “super rich.” (p, 280).  Labor compensation for these individuals (the top 1%) is very high, but the proportion of income from capital becomes even higher, Piketty asserts.Capital is mobile, is difficult to measure, and can be hidden, which Piketty says is a further problem with getting at it to tax it.  The trend is also seen in the United States after 1980.  Using Piketty’s measurements, the share of these top income earners, who are also major capital holders, has grown precipitously (in Piketty’s view) to 14% of all total income. Their capital share has grown even more. (see pages 300-301)  It is also important to note that for Piketty it is clear that the much higher and accelerating income levels for the top 1% are probably not due to greater marginal productivity (MP), but mere “luck” as he calls it.  While I tend to agree that MP is difficult to measure for some positions and at higher levels, it does not follow that their unequally greater incomes are somehow inherently unjust.

The truly interesting and rather breathtaking part of the book begins around page 470 (with some allusions at points before that).  Here Piketty reminds me of a cross between Thomas Hobbes and a mild Marxist.  He is Hobbes insofar as he sees no apparent problem with gathering and sharing of data between and among governments in order to obtain complete information about each individual’s income and wealth and, ideally, a supra-national tax collection agency if not a type of one-word government.  His “Leviathan” is an ominous one when compared with the puny ability of any government in Hobbes’ day actually to do all that much.  The purpose of course is simply to tax the overly wealthy (he doesn’t tell us how to determine this and who would do it) and redistribute for the “social good.”  Piketty is Marx insofar as he is obsessed with inequality and its alleviation.  He betrays also a Marxist predilection for labor income over capital income.  I suppose he is also like the dystopia of George Orwell and the utopia of H. G. Wells, whose works extrapolated into the hypothetical future to show (one as a warning, the other as a hope) what the state could do and the results.  Let’s explore this a bit more.

 Income and capital are both unequal in the developed world, according to Piketty.  Moreover, there is a growing gap between the lower earners and owners and the top centile.  Why care and what to do about it?  Part Four, entitled “A Social State for the Twenty-First Century” contains Piketty’s proposals.  Piketty opens the chapter with these words: “…the ideal policy for avoiding the endless inegalitarian spiral and regaining control over the dynamics of accumulations would be a progressive global tax on capital.” (p. 471) Piketty admits this is a utopian policy, but nevertheless the best one.  Secondary solutions would include regional or continental taxes.  It is here too that Piketty invokes democracy, arguing that his global tax “would expose wealth to democratic scrutiny.” (Ibid.)  Moreover it would “promote the general interest over private interests while preserving economic openness and the forces of competition.” (Ibid.)  Piketty’s ideal tax rate would be around 80% and its revenue would be used for “social purposes,” whether direct redistribution or the provision of various goods and services by government.  The taxes Piketty proposes also ought to be steeply progressive, hitting the very top centile of capitalists.  His propensity to egalitarianism is obvious at this point.  The taxes also would be applied not only to labor compensation but also to wealth, including inheritance (which he appears to wish to tax away completely at high amounts).  One of his primary fears is that growing inheritance among the top centile will lead to “patrimonial capital,” essentially creating an aristocracy.

All forms of wealth are suspect to Piketty.  On page 401ff he discusses the problematic nature of inheritance, adding to his discussions of the labor income of the top CEOs and their return on capital.  His proposals would apply to all forms of income and wealth beyond what would be democratically defined as “enough.”  Piketty’s philosophical justifications for his proposals are rather thin.  At one point he mentions the possible historical foundation of the French Declaration of the Rights of man and Citizen (1789).  He also briefly mentions John Rawls’ Theory of Justice (1971), writing that “…basic rights and material advantages must be extended insofar as possible to everyone, as long as it is in the interest of those who have the fewest rights and opportunities to do so.” (p. 480)

I am sorry to bore the reader, so I will try to finish this review quickly.  The first bottom line is that if one is politically and economically on the Left, Piketty’s proposals will resonate with them.  But from my perspective, Piketty is either very naïve or a true ideologue.  He seems completely unaware of unintended consequences some of his policy proposals.  He is completely comfortable with massive data gathering and sharing among governments to ascertain how much income and wealth are available.  He does at one point mention the objection that such data might be abused, but dismisses it.  He does admit how unrealistic a global tax is, but resorts to schemes that are equally confiscatory (calling them by that name without any hesitation) but more localized.  Most importantly, and likely for ideological reasons, Piketty refuses to consider the effects of steeply progressive taxes on economic behavior and their economic consequences.  What disincentives for work and investment would be created by his taxes?  Does Piketty believe that individuals and businesses won’t care about the amount of their taxes, that they will continue to work and invest at the same levels, only to have the fruit of their labor or entrepreneurship largely taxed away?  Does he think that returns on capital play no real role in creating more and better jobs for everyone?  What happens if that incentive is effectively eliminated?  Social justice simply outweighs any other consideration for him.

Piketty also believes that if a democratic majority imposes his tax schemes, they will somehow be more acceptable, in fact, per se acceptable, as he does not seem to recognize a problem of tyranny by a majority, for whatever reason.  Besides that, any majority may well be motivated by an opportunity to expropriate income and capital returns from others.  I frankly do not understand how he might neglect this potential, significant problem, except that he is definitely attracted to a particular kind of democracy as the primary political institution of decision-making.  His democracy has little to do with checks and balances or a skepticism of unfettered power, but rather exalts the single source—a parliament usually—as not only sufficient but necessary for good government.

But moreover, for all Piketty’s concern over inequality in income and capital returns, over 500 pages worth, is it inherently problematic?  Piketty’s use (or non-use) of numbers obscures this point.  Let us say a CEO makes 100 times his lowest paid employee (the way Piketty frames it) and his actual labor compensation is $1 billion (we will ignore other types of returns).  On the other hand, his lowest paid employees make on the average $50,000 per year.  Is that an unjust inequality?  It is an inequality to be sure.  Moreover, who decides what is an unjust level of income or wealth?  Piketty does not wrestle with these questions.  He assumes they have no relevance in his world of obvious and unacceptable inequality.  What he definitely fails to deal with is the concept of well-being, which is different from shear numbers.  If $50,000 per year enables an individual to purchase much of what he oir she desires to be satisfied, and if he or she has a fulfilling job (one that enables “earned success”), why is that by itself unjust, even though the CEO makes much more?  Finally, Piketty’s paternalism is obvious in his passing assumptions that we can collectively determines how much an individual needs.

At another level, Piketty does not even address the possibility that his confiscatory tax schemes might themselves be unethical.  The individual or CEO or businessman did not attain his wealth (we assume) by stealing it from others.  He added to what existed by his direct labor or entrepreneurship or investment.  To take his product from him simply to distribute it to others considered somehow more worthy seems unjust itself (see Robert Nozick, Anarchy, State and Utopia, 1974 and the Christian Scriptures).

All in all, I expected what I got, but was nevertheless disappointed.  I hope that others will examine Piketty’s numbers more carefully, as some have already done.  But I have focused here on the economic and ethical problems of the book, of which it contains many problems.  To sum up, this book is in essence quasi-socialist, but couched in modern European political terms that makes it all the more misleading.

 

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