Piet Keizer on Thomas Piketty


This year Harvard University Press published the book by Thomas Piketty, titled “Capitalism in the Twenty-first Century. It appeared a hit. Many reactions, also from Paul Krugman, were very positive. Two important statements of the book are:

  1. The rate of return on capital is larger than the growth rate of output and income, which means the beginning of the end of capitalism.
  2. The introduction of a wealth tax, ideally on a global level, is a necessary step to save the system.

Today’s biggest problem is the significant increase of the wealth in the hands of the top 10%. Especially in the Anglo-Saxon world the increase has arisen sharply. Alas, Europe is going in the same direction. Piketty’s quantitative statements are based on an incredibly large database with respect to the distribution of income and wealth.  The data concern many countries and over very long periods; a true walhalla for econometricians.

His claim that inequality is the most important problem in the economy is not based on a careful analysis of the functioning of a capitalist economy; it is just based on a large series of ‘theory-free’ facts. This makes it necessary to critically assess the methodology behind Piketty’s claims.

Piketty, where is your theory?

It appears difficult to find a coherent structure, including an explicitly formulated paradigm, an analysis which is based on it, a series of definitions and empirical indicators of the concepts used in the analysis, and a series of theoretical statements, derived from the analysis. We are left with a number of ‘laws’ and a very large database, of which  the link with the knowledge structure is not explicitly formulated.

In this section we discuss the laws of capitalism as formulated by Piketty; in the next section we will discuss the empirical definitions of the essential concepts, such as capital, wealth and income.

Piketty considers Marx’ ideas about the accumulation and concentration of capital very important, but he warns for economic determinism. To him the historical evolution of capitalism is influenced by the ideas of people about the justice of particular distributions. Also the relative power of relevant groups affect the evolution significantly. However, the book does not contain any analysis, in which ideas ( which means culture) and power structure are playing a role. He restricts himself to the formulation of a few laws of capitalism.

  1. The first law says that the capital share is identical to the ratio of capital income and total income;
  2. The second law says that the capital/income ratio is equal to the savings rate divided by the growth rate of income;
  3. The third law says that small differences in savings rate imply large differences in wealth after not-too-long a period already.

The first law presents an accounting identity, and is true by definition. So, it is definitely not a law of capitalism; it is not a law at all. The second law expresses a goods market equilibrium. This condition will hold for whatever economic system; disequilibrium means that part of the production cannot be sold, or that part of the demand cannot be satisfied, because the goods are not produced. The third law says that if a particular subject saves part of his income over a long period, that his wealth is increasing exponentially. It implies that this law is just an arithmetical regularity and has nothing to do with human behaviour; again it holds for every system.

Piketty does not offer a historical analysis of the capitalist system. His statements are based on data about the rate of return on capital (r) and the growth rate of income (g). Over the period 1500 -1913 r and g develop in opposite directions. In the period 1913 – 1950 he observes quite stable values for both variables. Over the period 1950 – 2012 the variables move in opposite directions again, but the changes are small. The big change takes place in the future: 2012 – 2100: the positive difference between r and g grows dramatically. So, our future will show an ongoing increase in the capital/income ratio and continuing low income growth. The increase of inequality of income and wealth is interpreted as typical for capitalism, because the capitalist ideology says that inequality is good for all people; in practise it is bad for an increasing number, and good for a decreasing number of people. It means that pro-capitalist power and influence are strong, and resist against any increase in taxation and regulation.

Piketty advocates the introduction of a global wealth tax. Because he knows well that this is utopia, he suggests that countries such as China and the USA can make a start with it already.

The Construction of Telling Data

Of course Piketty has a story about capitalism; a story that differs from the neoclassical story, as told by Kutznets already. If we look through neoclassical glasses, we are neither surprised nor shocked by the data presented. If we look through social-economic or evolutionary or post-Keynesian glasses, however, we wonder why Piketty just counts private wealth, not public wealth and why he leaves human capital out of the equation. The only reason he mentions is that he just counts wealth components, which are tradable, and therefore have market value. Informal markets, second-hand markets and private wealth in terms of durable consumer goods are ignored. Only the black market might aggravate the inequality as measured by Piketty.

May be there are good reasons for his choice. If we want to assess the military power of a nation GDP and tradable wealth are good indicators. If particular pressure groups are in social conflict with each other, market values are relatively easy to calculate. What is missing in this book under review is the awareness of the theory-loadenness of statistical constructions. By just presenting statistics only members of the own school are convinced. By carefully analysing capitalist evolution and presenting data, also of psychological and sociological nature, the date are truly illustrating the story told by the author. Now we simply don’t know which mechanisms might help us to change that what we like to see changed.


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