
Capital Man: Thomas Piketty is economics’ biggest sensation and fiercest critic - dang
http://chronicle.com/article/Capital-Man/146059
======
selmnoo
I've been looking forward to a discussion on Thomas Piketty by the HN crowd
for a long time, I was afraid it would never get here because it would have
been be too 'political' \- but I'm happy this has finally made the frontpage.

For those who are still unfamiliar with the name Piketty: He's a French
economist (who briefly enjoyed a stint at MIT as professor before becoming
disenchanted with the state of things here and returning to his home-country
of France).

In his recent book "Capital in the 21st Century", he's done something very
big. He's pointed out that capitalism is flawed -- that inequality is not an
unintended result, but rather an inherent feature of it. He's done this with
an enormous amount of data.

His prescription for the cure is a little controversial though: progressive
taxes (up to 80%) for the rich, and a "global wealth tax" that he wants
America to orchestrate. For a good summary (that talks about this main
discovery that "r > g" \-- that return on capital is greater than the overall
economic growth), watch this talk on Bill Moyers show with Krugman:
[https://www.youtube.com/watch?v=QzQYA9Qjsi0](https://www.youtube.com/watch?v=QzQYA9Qjsi0)
\- though this submission article seems to have a nice synopsis too.

As an article on NYT earlier this week said it, the book heralds a song of
American socialism in the future. His findings are just too compelling to
ignore, they're going to fundamentally change the tone and substance of debate
we have about economic policies.

~~~
stormbrew
> In his recent book "Capital in the 21st Century", he's done something very
> big. He's pointed out that capitalism is flawed -- that inequality is not an
> unintended result, but rather an inherent feature of it. He's done this with
> an enormous amount of data.

Am I missing something? Isn't this part of socialist analysis of capitalism
from at least back to Marx?

~~~
waterlesscloud
I suspect a great many supporters of capitalism accept inequality as a part of
it as well. They may even argue it's a feature, not a bug.

~~~
logicallee
It is silly to talk about equality of capital. Imagine a world in which
everyone is equal.

And imagine a philosophical man or woman, gazing up at the clear blue sky and
being filled with wondrous thoughts that bring her or him great utility.
Thoughts that no amount of money can buy. A simpleton can see nothing there.
How can we call this equal? The very blue sky above us is unequal.

But that is the sky - the thoughts come from within. True, but what is a
javascript console, just some pale blue sky, to be filled with whatever you
want. The simpleton can not derive any utility. A programmer can create
anything. How can we call that equal?

But that is just some writing.

And if we let this person publish those thoughts, that script, that site? Then
the simpleton can have nothing - the programmer, anything. How can _that_ be
equal?

There is no such thing as equality. There is only equal opportunity. Today,
more than ever, nobody needs vast riches to achieve that. Perhaps everyone
should have the chance to be well-educated, to learn whatever is within their
capabilities, to choose to train for the best profession they can qualify for.
But that is not "equality", in the sense discussed here.

Mark my words: so long as man can gaze up at a clear blue sky, as long as
people are allowed to be friends and to talk, to think and to learn, to
create, to share, to communicate - actual equality is a silly, misguided
notion.

Look at opportunities - rather than capital results. Forget equality of
capital, and look at equality of opportunity.

~~~
belorn
Equality of opportunity was lost once pure ideas become patentable, and
competition became a race for the largest pool of obscured threats backed by
government force.

~~~
onnoonno
Nicely said. I don't know why you are downvoted :D

------
apsec112
"... capitalism automatically generates arbitrary and unsustainable
inequalities that radically undermine the meritocratic values on which
democratic societies are based."

Whatever else you might say about inequality, "unsustainable" is an obvious
falsehood.

Roman civilization, for example, lasted two thousand years. Eight times as
long as the United States. Think about that. One hundred generations of men
lived and died as Romans. And the Roman Empire featured _radical_ inequality,
of the sort that we could never have in modern America, no matter what the
Gini coefficient was.

On one side was the Emperor and his soldiers, who could have you and your
entire family tortured to death, purely on a whim (see Caligula). On the other
side were slaves, who had no human rights at all and were treated as property.
And between them, countless peasants starved to death every time there was a
bad harvest, while countless aristocrats taxed their lands to fund lavish
banquets. (In the Roman tax system, tax collection was _outsourced_ ; the tax
collector was responsible for finding a certain amount, and anything above
that he could _keep for himself_.)

That's some serious fucking inequality right there. And I'm certainly not
saying it's a good idea, or that we should try to emulate them. But it was, as
a raw historical fact, extremely sustainable, lasting eight times as long as
the US has so far.

~~~
StandardFuture
Rome's empire was based on their devotion to imperialism and not anything
else. So having sustainability was militaristic more so than anything else.

The Roman Empire spent a heck of a lot of money and effort on their people
though. Don't forget that in those times you could give a f*ck less about
being royalty. If you were in the protected zones of the Romans you were
already winning.

To Romans living inside the protected lands, the 'outside world' looked cold,
harsh, and barbaric. So, you could put up with inequality as long as those
aristocrats were making sure that there were roads, aquifers, and soldiers! :P

Also, slaves could eventually attain freedom and citizenship. So, while it was
not a good life it still had potential to become a decent one.

Now, there were uprisings against the Romans by people who benefited from
years of Roman protection and decided later on 'to plot their own course'. But
that story is old/new. Happened to the Brits, Persians, Mongolians, etc.

~~~
nitam
Similarly to the first world vs the third world countries today ?

------
ef4
Its _absolute_ wealth, not relative wealth, that determines whether your kids
are likely to live to adulthood, how much leisure you're likely to have, what
you'll eat, where you can live.

Capitalism has obviously excelled at raising absolute wealth across the board.

Relative wealth certainly matters when a society is foolish enough to vest
massive power in a centralized political system, where it can easily be
controlled by the wealthiest clade.

Which is the argument for more decentralized, limited government in a
nutshell. That governments are run by the powerful is a tautology, and the
iron law of oligarchy makes it clear that it isn't "the people" really running
the show.

~~~
curveship
Piketty's argument, as well as the findings of the IMF report, is that what
you've called relative wealth and absolute wealth are linked: greater
inequality leads to lower growth rates. The entire economy suffers for the
benefit of a few. Eventually, inequality might choke growth out entirely,
leading to crisis.

~~~
yummyfajitas
This seems to contradict r > g . Inequality results in investment, which
shifts wealth from the g part of the economy to the r part, due to a lower
propensity to consume among the wealthy.

Or are there second order effects that the reviews (I haven't read the book)
don't discuss?

------
md224
For what it's worth, here's a somewhat negative review of Piketty's book from
James K. Galbraith:

[http://www.dissentmagazine.org/article/kapital-for-the-
twent...](http://www.dissentmagazine.org/article/kapital-for-the-twenty-first-
century)

I don't have much background in economics so I don't know if Galbraith's
criticisms are sound, but it's an interesting critique.

TL;DR: "In sum, _Capital in the Twenty-First Century_ is a weighty book,
replete with good information on the flows of income, transfers of wealth, and
the distribution of financial resources in some of the world’s wealthiest
countries. Piketty rightly argues, from the beginning, that good economics
must begin [with]—or at least include—a meticulous examination of the facts.
Yet he does not provide a very sound guide to policy. And despite its great
ambitions, his book is not the accomplished work of high theory that its
title, length, and reception (so far) suggest."

~~~
girvo
I find it an interesting critique, too, though I do wonder whether it hits the
mark. I'm no economist, but (assuming the fundamental work put into this book
is as groundbreaking and unprecedented as said by those who _are_ economists)
does the book _need_ to prescribe policy? Can't it stand on it's own, and
perhaps aim to change the public policy discourse instead of coming down from
on high with two stone tablets?

------
etherael
Firstly, even if we assume that his conclusions are correct regarding the
acceleration of inequality, his proposed solution is guaranteed not to work.

Charitably assuming omnipotence, handing more power to political authority
over free markets necessarily increases the already enormous returns on
lobbying activities and makes the ability to raise barriers to entry a more
valuable commodity for political authority holders to trade in. Why compete on
merit when you can buy competitive power straight from the political
apparatus?

Meanwhile back in reality, omnipotence is not an assumption you can make.
Cryptocurrencies stand a good chance of removing power over the free movement
of capital from political authorities. Even forgetting technology advancements
that may allow people to entirely circumvent capital controls, there is the
tried and true method of employing hordes of lawyers and accountants to tailor
schemes to achieve the same ends through political channels.

Putting all of this aside though, the fundamental r > g observation is
conditional. _If_ the return on capital is greater than overall economic
growth, inequality increases. However, real growth is a function of the
increase in the wealth of an economy, if capital cannot find opportunities to
increase growth by investment then capital returns as well as growth will
fall. Less growth, less return on capital.

Unless of course you can manage to subvert the entire monetary system through
political channels and provide direct taps to the investment class so that
even if they're not productively investing in anything and seeing real returns
linked to growth they still see returns from quantitative easing and early
access to new money. But who causes this effect? The same political authority
the author proposes to fix the problem.

------
yummyfajitas
This article, and most reviews of Piketty, have to be misrepresenting or
misunderstanding something. The idea that r > g is simply mathematically
impossible, and I don't think it's actually what Piketty is pushing.

That's because r is part of g. If the whole economy looks like E(t) =
exp(rt)+rest, and exp(rt) grows faster than the rest, then eventually E(t) ~
exp(rt).

Since g = log(E(t))/t, g and r must eventually be equal.

The only way I can think of to resolve this is to assume a permanent
redirection of wealth from investment to consumption. This could potentially
result in investment returns being r, but the growth of invested capital being
only g.

It's also worth noting that Piketty's numbers significantly underestimate
income for the bottom 90%.

[http://www.forbes.com/sites/scottwinship/2014/04/17/whither-...](http://www.forbes.com/sites/scottwinship/2014/04/17/whither-
the-bottom-90-percent-thomas-piketty/)

See also Doug's comment on Robin Hanson's blog post:
[http://www.overcomingbias.com/2014/03/hidden-taxes-must-
be-h...](http://www.overcomingbias.com/2014/03/hidden-taxes-must-be-huge.html)

Perhaps Piketty merely means that E[r] > E[g] (where r and g are both random
variables). But that doesn't actually imply long term concentration of wealth
at all, which seems to contradict the spirit of Piketty.

~~~
barrkel
I glossed over the equation reading it as the rate of return on capital vs
labour. That is, capital increasing faster than wages as a share of the
economy, overall. I don't know if that helps or obscures.

------
paul
If capital allocation is a skill/talent like most other things, then we should
expect to see some people consistently outperforming the general population
(just as we would expect a professional basketball player to consistently
outperform an average player). If this group of skilled capitalists
consistently gets higher average rates of return, it seems inevitable that
over time they would end up with a larger fraction of the wealth -- that's
just math. I'm surprised that this is a controversial observation.

~~~
glesica
I don't know that it is. What is controversial seems to be what comes next. Do
those capitalists get to use those fortunes to wield massive political power?
Do they get to make rules that benefits themselves even to the detriment of
the larger society? Do they get to leave their fortunes (and corresponding
political clout) to their children, who may be far less talented?

I haven't read this book, and maybe this isn't really the question you were
asking, but it seems like there is some confusion about why people like myself
have problems with capitalism. I have no particular problem with smart people
being rewarded to some extent for finding new ways to make life better for
others (Adam Smith's baker making bread for the town not to feed the town but
to enrich himself).

But I do have a very, very big problem with the idea that just because someone
"won" the economic contest he or she is somehow fit to make social and
political decisions or somehow deserves greater consideration in the social
and political spheres. I also have a huge problem with inheritance, though I
don't really see a non-"radical" way to solve it.

~~~
paul
The (current) top comment says: In his recent book "Capital in the 21st
Century", he's done something very big. He's pointed out that capitalism is
flawed -- that inequality is not an unintended result, but rather an inherent
feature of it.

So apparently the fact that capitalism naturally produces inequality _is_
controversial.

How to address that inequality is obviously a hard question. However, if you
are thinking about it as "rewards", then you are guaranteed to arrive at the
wrong answer.

------
tptacek
Milanovic's review of Piketty's book in The Journal of Economic Literature is
Matt Yglesias's first recommendation for an in-depth treatment of Piketty's
book:

[http://mpra.ub.uni-
muenchen.de/52384/1/MPRA_paper_52384.pdf](http://mpra.ub.uni-
muenchen.de/52384/1/MPRA_paper_52384.pdf)

------
Tycho
Taleb mentioned on Twitter (with a draft paper to back it up) that the
observed (ie. by Picketty) inequality increase could just be a statistical
illusion given the methods of measuring it.

~~~
cadlin
Maybe you could be bothered to link the paper? Otherwise this is no more than
hearsay.

~~~
nhebb
[https://docs.google.com/file/d/0B8nhAlfIk3QIbzRrRkhhc1RNY0U/...](https://docs.google.com/file/d/0B8nhAlfIk3QIbzRrRkhhc1RNY0U/edit)

------
lnanek2
I read the whole article, but I don't understand why he is so offended by the
wealthy being wealthy and getting wealthier. Does Bill Gates being rich hurt
poor people? Not that I can see. In fact he puts a lot of money into curing
diseases. Does Musk being rich hurt poor people? Not that I can see, he is
saving the environment by making electric cars popular and bringing back the
country's space capability. If this is what rich people do, by all means, lets
have more and bigger rich people.

~~~
twelvechairs
Piketty starts off by saying that inequality isn't necessarily bad by itself,
but asks whether it is useful for society - which I think you'll agree is the
right way to approach it.

The negatives are of course more associated with what happens to the poor than
the rich. If you are born poor, CAN you rise to be a hedge fund manager (no
matter how talented you are)? Will low-pay and long-hours spark political or
social instability which is not worth the cost? What does society lose/gain
from one level of inequality as opposed to a different level?

Its a complex issue though and you'd really have to read the book to
understand how Piketty approaches this.

------
jgalt212
Does anyone have a short and sweet one of Piketty's most profound findings:

the data reveals a deeper historical tendency for the rate of return on
capital to outstrip the overall rate of economic growth, leading to greater
and greater concentrations of wealth at the very top. quote from NY Times
article: www.nytimes.com/2014/04/19/books/thomas-piketty-tours-us-for-his-new-
book.html

Why does the rate of return on capital exceed the rate of economic growth?
Isn't this just indicative of an asset bubble? And bubbles don't last forever.
Or do they (if the Fed is always bailing the banks out)?

~~~
nagi2k4
The Economist's review of his book gives a pretty good summary of his thesis.
[http://www.economist.com/blogs/freeexchange/2014/01/inequali...](http://www.economist.com/blogs/freeexchange/2014/01/inequality)

~~~
stormbrew
From the linked article:

> "But Marx's original critique of capitalism was not that it made for lousy
> growth rates. It was that a rising concentration of wealth couldn't be
> sustained politically."

I feel like this is one of the very most important things to consider in any
discussion of wealth concentration. Economic growth does not necessarily
correlate with a broadly pleasant experience for all participants in that
economy. I think we came out of the 20th century with it being taken as
axiomatic that _some_ kind of tradeoff must be made to achieve both goals in
concert somehow, but this understanding seems to be receding (really starting
with the rise of austerity policy in the 80s, but coming very much to a head
lately).

------
slashnull
"The crux of his argument is a deceptively simple formula: r > g, where r
stands for the average annual rate of return on capital (i.e. profits,
dividends, interest, and rents) and g stands for the rate of economic growth.
For much of modern history, he contends, the rate of return on capital has
hovered between 4 and 5 percent, while the growth rate has been decisively
lower, between 1 and 2 percent. (Piketty makes a compelling case that economic
growth, which depends in good part on population growth, is unlikely to
accelerate dramatically anywhere but in Africa, given current demographic
trends.) Thus he adduces capitalism’s "principal destabilizing force":
Whenever r > g, "capitalism automatically generates arbitrary and
unsustainable inequalities that radically undermine the meritocratic values on
which democratic societies are based."

Now that was fascinating

~~~
msandford
So the r>g makes a lot of sense, but it seems to assume that fortunes only
grow. In real life they tend not to.

What I mean is that there are destabilizing/deconcentrating forces in an
economy in addition to stabilizing/concentrating ones. Like companies going
bankrupt or entire industries being displaced by new ones.

If you're worth $100mm it's not because you have a million hundred dollar
bills in a vault, or hundreds of pounds of gold or a bank account with many
zeros on it. You've got the money tied up in businesses that yield that r
which is greater than g. And that SHOULD expose you to risks which could cause
you to lose your money. In the last 20 or so years it seems like that exposure
has been largely mitigated at least in the US which is quite unfortunate.

The other thing that strikes me is it kind of makes the assumption that only
the rich (or capital) can participate in the r>g phenomena. With interest
rates at less than 1% (and probably negative re:inflation) it doesn't make any
sense for a normal person to save money. But what if inflation is 2% and real
interest rates are 6%? Can the regular folk not participate in that as well?

~~~
intended
Compound interest alone will propel the rich further and further ahead.

But being rich also gets you access to shortcuts, investment opportunities and
advisors no one else can call on. They insulate you from risk and target tax
loopholes to help.

When that fails you have access to political insight and levers.

------
tim333
It's good Piketty is out there fighting for this stuff. As he mentions in his
book none of the problems are particularly new. If you don't do much taxing or
regulating, wealth will tend to get concentrated in the hands of a minority of
investors with everyone else working for modest pay. If you bring in policies
to counter that such as high inheritance taxes and subsided education then
things get more equal. The UK went through some of that at the start of the
century where the country used to be owned by lord whatever in his stately
home and then 80-90% taxes caused then to lose that and the places are now
mostly owned by the National Trust and open to the public as historical
exhibits. I'm not sure how it's going to play out this time. The world economy
is growing quite well. The political will to even things up only seems to get
strong enough to make a big upheaval with things like World War 1 in the above
case so I imagine not much will change in the short term.

------
jeffdavis
This doesn't strike me as surprising -- capitalism rewards capital, not labor.
Ideally, each generation is able to use labor to acquire a bit of capital, and
share it with their children until the family is financially secure.

Rather than inequality between brackets, or even people, I'd prefer to focus
on whether the system of "save some each generation" is breaking, and if so,
what can be done to fix it.

------
dpweb
Any insights on getting this book on audio? Too new for Audible.. I find I can
grasp the economic material easier listening to it.

------
kaa2102
Tonight's Cosmos featured the discovery that lead pollution from car emissions
was poisoning the environment and humans. However, automobile and oil & gas
companies had a vested interest in the status quo.

It took 25 years to remove lead from gasoline, e.g., unleaded gasoline.
Unrestricted Free Market Capitalism has no environmental or health constraints
or concerns. There must be a counterbalance or else our health, wellbeing, and
the environment will suffer.

------
StandardFuture
I have not read Piketty's book. But can someone tell me how he showed that his
discovered pattern of r>g is applicable to capitalist driven economies only
and not ANY general economy?

The possibility of faster rate of return on investments (whatever resource you
are investing) is supposed to exist in any gamed system. In an overall system
where the available resources max at X, any individual's objective is too
attain the largest portion of X as possible.

Whether that be through promoting capitalist ideologies, bureaucratic
ideologies, or imperialistic ideologies, etc.

Generally speaking the ideologies you try to impress on others is spoken of in
terms of being best for the 'g' value (overall economic growth), but we all
know each person will just play the game of whatever system they are in to
attain their own personal 'r' value.

Basically, what I am saying is: there have been very poor and very rich people
in every single economic system throughout the span of human history. And ,at
least some prevalent power distribution dynamics (game theory) can most likely
be used to explain them all.

Th funny part is that r>g was the whole purpose of capitalism. If that were
not true then you would not have the huge incentive for individuals hoping to
build economic empires (or generally grow their fortunes decently).

r>g seems to be the promise that royalty/aristocrats must receive before
making a political decision. Or the 'promise' Columbus looked forward too
before he would 'discover' a new world for Spain. Or the promise any
individual player must believe in if they are going to do something
significant beyond themselves.

r>g was the even the general promise given to people during communist
revolutions. Take money from the rich and give it to us, the poor.

There has to be incentive for individual players for them to want to pursue an
ideology.

So, I am always surprised when people take ideologies so seriously, because in
the end it's only a bit of game dynamics.

If someone wants government to put more focus on redistribution like Picketty,
then so be it. All that means is that the place to have power will be via a
position in government. I guess the people pushing for this enjoy the latest
productivity of Congress. ;)

I, for one, do not care. Everyone will simply (as people have always done)
'play the game'. And then some time down the line the "winners" of whatever
the game is will be yelled at and something will commence a 'restart'.

Welcome to humanity.

~~~
onnoonno
... and in the meantime, the systems of thought (as I tried to argue in my
other posts) that are erected to hide these basics behaviors will become
increasingly intricate and complex and hide this very fact that people are
people in increasingly interesting ways.

I believe, as I mentioned above, the idea that 'humans are not rational' is
one of the latest such constructs to hide basic reality.

In a way, it is an interesting evolution of delusion, to the point where it
gets extremely hard to avoid being drawn into it.

Thinking this line further, maybe the next restart will be rather due to the
fact that the complexity is so big that people just accept reality?

------
patrickg_zill
If he talks about capital and doesn't mention the Federal Reserve or the rise
of fiat currency, he will have left out something quite important.

Slightly more than 100 years ago, all the major currencies of the world were
backed by precious metals such as gold; now, none of them are.

~~~
zo1
Of course Pickety doesn't mention it. That would ruin his narrative. And it
wouldn't back his central thesis and proposal to tax the living excrement out
of the rich. You know, to fix a problem none of us ever knew of until he "told
us" about it in his giant weary book.

But I'll hold off on a proper rant about him and his book once I've read it.

------
drcode
BREAKING: Capitalism is worst system except for all the others.

News at 11.

------
stplsd
Carlin said this better:
[https://www.youtube.com/watch?v=acLW1vFO-2Q](https://www.youtube.com/watch?v=acLW1vFO-2Q)

