God is a Capitalist

Tuesday, May 20, 2014

Microwaved Marx - Piketty and his Capital

Thomas Picketty’s book Capital in the Twenty-First Century is on the best seller lists, so although it’s not about investing, it’s about economics, I felt I should add my comment to those of many others. 

1.       Piketty makes a grave statistical error: when comparing groups, those groups should be as homogeneous as possible in all areas except the one being investigated. In other words, don't compare apples and oranges. Piketty assumes that the economic regimes in place over the past three hundred years were all the same. They weren’t. The West veered sharply from laissez-faire policies in the late 18th and early 19th centuries to various flavors of socialism in the late 19th century. Germany implemented socialist policies in the 1870’s. The UK and US followed later, with the US having become almost pure democratic socialist under FDR with tax rates on the rich higher than Piketty recommends in his book as a cure for inequality. Piketty ignores those changes in regimes and classifies the entire period under his investigation as capitalist. In fact, the growing inequality since 1970 that he complains about has happened because of increased socialism.

2.       Piketty assumes that increasing inequality is a feature of capitalism, ignoring the fact that inequality was never higher than that which existed in the old USSR and communist Eastern Europe. His assumption is pure Marx with no supporting evidence. In fact, the Nobel-prize winning economist Robert Fogel in his Escape from Hunger and Premature Death demonstrated that laissez-faire regimes cut inequality in half in the UK and US by 1900. But Piketty doesn't like the Gini coefficient that Fogel and most economists use; it contradicts Piketty's thesis. So he invented his own metrics. 

3.       Piketty pimps for a tax of 80% on the wealthy. But as most bad economists and Marxists, he assumes that the wealth of the rich is idle, consisting of dusty old gold coins sitting in a warehouse. In reality, which completely escapes Piketty, all wealth held by the rich today is working hard at businesses to create jobs. The economist Thomas Stanley, famous for his The Millionaire Next Door demonstrated that 85% of the wealthy in the US earned their wealth by growing businesses. Only 3% inherited it.

So what happens when governments take 85% as Piketty demands? The money dedicated to investment gets turned into greater consumption when the government distributes it to the rest of the nation. Investment declines and consumption increases. Any freshman taking intro to economics knows that will cause the production possibility frontier to collapse, which means in laymen’s terms that we all get poorer together.

4. Piketty ignores the fact brought out by McCloskey in her Bourgeois Dignity that the wealth of even the poorest in the West is roughly 30 times, not 30%, but a factor of 30, greater today than in 1900. Inequality is rising, but from a point at which even the poor today are amazingly wealthier than a century ago. 

Piketty’s book appears to be microwaved Marx with a dump truck load of data designed to smother the reader and prevent him from thinking. Like a magician, Piketty uses data to distract the reader from what he is really doing. 

It doesn't help that many conservative economists defend the status quo. It's hard to deny that in at least some ways a lot of Americans are worse off. For example, Vern Gowdie, an Australian financial planner, wrote recently in "How the Fed Creatively Tortures the Data:
"Michael Greenstone and Adam Looney of the Hamilton Project went deeper into the median income numbers and discovered this rather depressing finding:
"[M]edian earnings for men in 2009 were lower than they were in the early 1970s. And it gets worse… Between 1960 and 2009, the share of men working full-time fell from 83% to 66%, and the share not making formal wages tripled from 6% to 18%. When you take all men, not just those working full-time, [you see] a plummet of 28% in median real wages from 1969 to 2009." 
Conservative economists need to quit defending the US as a capitalist economy. It hasn't been even close to capitalist since 1929.  We need to place the blame for rising inequality where it belongs - on socialist policies. These include the Fed's inflationary policies that benefit the rich at the expense of the poor and regulations that reduce competition and enrich established corporations.  

Some of the best reviews of the book I have read can be found at these links:

"The return of patrimonial capitalism":

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