Anti-Piketty, Capital for the 21st Century, edited by J-P Delsol, Nicolas Lecaussin and Emmanuel Martin, Cato Institute, 2017 ****
Every generation some neo-Marxist comes along to rehash Marx’s pseudoscientific theories and promptly becomes an intellectual celebrity. The latest fad is called Thomas Piketty, a French economist who repeats all the Marxist and Keynesian errors that have been exposed numerous times by Austrian and other economists. The authors of this book do a great job making mincemeat of Piketty.
Piketty’s grand idea is that r>g, in which r is the rate of return on capital and g the rate of economic growth. This is supposed to lead to ever greater inequality as the owners of capital get richer relative to the workers and others who have no capital.
As Tom Palmer writes in his foreword, Piketty’s explanation of inequality is at best one-dimensional. He ignores “the inequalities that matter, such as unequal access to the judicial system, unequal treatment by the state, and inequality of rights generally.”
Delsol and Martin similarly write that “History cannot be squeezed into just one formula or one idea … Similarly, economics cannot be entirely explained by algebra.” That’s the pseudo-scientific part of Piketty, similar to Marx with his simplistic-deterministic explanations.
Interesting: as “evidence” that inequality is growing, Piketty takes a Forbes ranking from 1987, compares that to one in 2010, and concludes that the wealth of the richest people grew 6.8% per year and the world economy 2.1%, thus “inequality is growing”. But he does not take into account the fact that there are different people on the list in 2010 compared to 1987!
Juan Ramón Rallo traced the fortunes of the top-10 in 1987 and discovered that their wealth grew at less than the world average. The one who did best of the top-10 grew his wealth at 2.9% per year, most of the others saw their wealth go down! None of them was still on the list.
The authors also come up with this deadly simple rebuttal to Piketty’s grand theory. Piketty advocates a wealth tax, but if he is right that r>g, then the best thing to do would be to privatize all public pensions and put all the money into stocks! In other words, the working classes should gather all their savings and turn it into capital!
When this idea was suggested to Piketty, he turned it down, because, he wrote, “one must bear in mind the return on capital is in practice extremely volatile. It would be quite risky to invest all retirement contributions in global financial markets. The fact that r>g on average does not mean that it is true for each individual investment.” But pensions are based on average returns of course, so that doesn’t make sense.
Besides, if a return on capital is really that risky, then it can’t be true, as he also writes, that “The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor.”
Piketty writes that “… beyond a certain threshold, capital tends to reproduce itself and accumulates exponentially”. As one of the authors in the book points out: “In his [Piketty’s] world, capitalism is a system of profits; in the real world, it’s a system of profit and loss.” Randall Holcombe notes: “Capital does not just exist and produce a rate of return. It has to be employed productively …”
Even if Piketty’s claim were true, that the rich are “inevitably” getting richer, without having to do anything to make that happen, the question still is whether the poor are becoming worse off. As Donald J. Boudreaux points out, “even the poorest people in market economies have seen their ability to consume skyrocket over time. … the accumulation of riches by the elite has not prevented the living standards of ordinary people from rising spectacularly. … Reckoned in standards of living – in ability to consume – capitalism is creating an ever-more-egalitarian society”.
Marx of course was also spectacularly wrong with his claim that “real wages are stagnant under capitalism”.
Holcombe has another interesting point to make. Piketty complains that heirs of great fortune have an unfair advantage. But an important reason why the lower class have lower savings is that the welfare state has taken the incentive to save away. The lower classes pay in taxes and premiums for all their welfare schemes – but these schemes end at death. They can’t be left to their children.
PS The real cause of today’s growing inequalities, which do exist, is state intervention. See my book Freedom of Government – the New Human Right, in particular chapter 3, How the state is making us poorer.
For another excellent critical analysis of Piketty and explanation of today’s economic problems, see George Reisman, “Piketty’s Capital: Wrong Theory/Destructive Program”, 28 July 2014