Abstract
Comparing Piketty’s inequality generating mechanism (r>g) to Marx’s circuits of capital underscores a central difference: Marx wanted to replace capitalism while Piketty merely wants to fix it by taxing the rich. Piketty’s discussion of slavery reifies human chattel’s role in economic history. The failure to exclude the income of supermanagers as a return to labor may lead to an understatement of the inequality Piketty describes. Similarly, a brief mention of the environment without analysis of the wealth obtained from its abuse also understates the growth of inequality.
Thomas Piketty’s bestselling Capitalism in the Twenty-first Century is a masterful collection of income and wealth statistics about first world nations 1 covering a 300 year period. Piketty and his team show us convincingly what we already know: income and wealth are skewed toward the rich and in recent years is becoming even more skewed. To his credit Piketty’s work moved into the realm of economics, an already existing wide ranging conversation about inequality popularized in recent years by the Occupy Wall Street movement’s characterization of the 1 percent versus the 99 percent. However, questions continue to be raised about the accuracy of Piketty’s statistics and about the policy he recommends that addresses the real world situation of unequal, even unfair, wealth distribution.
Let us praise Piketty for his willingness to engage in a conversation that reaches beyond the standard narrow minded economic profession and his assertion that extreme capitalist inequality cannot be sustained: it must be corrected. His recommended solution is to tax wealth. He wants to examine the nature of capitalist institutions and to change those institutions, if, and as necessary, in order to reduce inequality. Piketty wants to let “democracy…regain control over capitalism and ensure that the general interest takes precedence over private interests”(1). His worldview is thus clear: extreme inequality can be mitigated within the capitalist context.
We cannot criticize Piketty for using his worldview to influence his data collection. That is what social scientists (certainly economists) do. His worldview “is what it is,” one reviewer of these notes has remarked. However, we must look closely at how that worldview shapes the data he collects and how it influences his conclusions. Much has been written about the technical aspects of the information he gathered. This is not a technical review of that information. It is, rather, an effort to show how Piketty’s worldview influences his interpretation of some of his data (and even the data he collects) and leads him to recommend that a fundamental flaw of capitalism can be fixed within it.
By choosing Capital as the title of the book, it seems that Piketty wants to succeed (maybe even replace) the work of Karl Marx. Marx’s magnum opus is also called Capital. It is a work in three volumes with three different subtitles: volume I - A Critique of Political Economy; volume II - The Process of Circulation of Capital; and volume III - The Process of Capitalist Production as a Whole. Central to this discussion of worldviews is that Marx and Piketty use the term “capital” in very different ways. For Marx the term requires at least three volumes of text to explain. It is about political and social relationships, the movement of money, of materials, and of people, and it is about the production and reproduction of the capitalist society. Piketty has a much more limited vision of the meaning of the term. He sees capital as specific physical things and as something distinct from labor: “capital has historically taken a variety of forms (land, oil, financial assets, business capital, real estate, etc.), but its underlying logic has not really changed [over time]…”(627, fn 46); or “The most fruitful way to understand … changes [in demographic and productivity growth] is to analyze the evolution of the capital/income ratio (that is, the ratio of the total stock of capital to the annual flow of income) rather than focus exclusively on the capital labor split (that is, the share of income going to capital and labor, respectively)”(42).
Thus, for Piketty, capital is distinct from labor. For Marx the owners of capital and labor are seen comprising the complex whole he works to analyze by examining the various elements that comprise that whole. Piketty sees capital as something that can be measured by money, implicitly accepting the underlying structure of prices in national and world markets. Marx sees prices of commodities as determined first by the amount of labor that goes into making things but as further reflecting the existing distribution of power and income/wealth. For him, the prices of commodities result from the social interactions he attempts to explain in the three volumes of Capital. Marx sees capital as a complex relationship primarily between the owners of the physical means of production and labor using those means to produce products and services among other social interactions. In Marx, labor is sometimes distinct from capital, but often labor is integrated into his understanding of capital. Piketty sees how capital is becoming owned by fewer wealthy people in proportion to the rest of the society. Marx sees capital as an all-encompassing system that exploits workers, enabling the wealthy to benefit from the work of others. They both agree change must occur, but Piketty sees change within the context of the capitalist system while Marx argues the system itself must change.
To better understand the difference in their worldviews, let us compare Marx’s circuits of capital with Piketty’s focus on the difference between the rate of return (r) and the rate of growth (g), an arithmetic relation behind much of Piketty’s analysis. In volume II of Capital, Marx developed one of the first national income/input-output models. He takes us through how precisely the outputs of the production process must match its inputs. He divides the outputs into two parts. One part is the production of producers’ goods. The second part is the production of consumer goods. The output of producers’ goods must include the machines that produce what consumers need and want. And it must include the machines that produce producers’ goods (i.e. machines that make machines). It is all very precise. This is one of the moments Marx’s clear understanding of how the capitalist market system works is prescient. What is produced must equal what is used both by producers and by consumers. If it does not, the system cannot work smoothly. And that is precisely Marx’s point. The system cannot work smoothly without corrections. Overproduction or underproduction of either producers’ or consumers’ goods may lead to crisis at any point in time (the most recent being 2008). Importantly, Marx spends a lot of time explaining how production and consumption, a historical process of human interaction, plays out through class struggle between producers and consumers (among others).
Piketty, on the other hand, does not see the important role class struggle plays over the division of output between owners and workers. According to Piketty, if the rate of return is greater than the rate of growth (r>g) some of the return goes into the building of physical stock that is used to produce things while the rest can be saved or consumed by the owners of capital. As the owners of capital save, their wealth increases. It is merely a relation between r and g: r>g seemingly devoid of human interaction. In addition, Piketty shows that the rate of return has been greater than the rate of growth for some time and he argues that it is likely to remain greater for the foreseeable future. Based on that projection into the future, Piketty argues inequality will continue to increase as the owners of capital capture more and more wealth as r>g plays out. The increasing inequality of wealth may lead to a future conflict, but not to the overthrow of capitalism.
As a result of the imperfect working of capitalism, Marx sees crisis leading to its overthrow in the future while Piketty sees the need for a policy change, namely a tax on wealth to prevent some future crisis; but even if that crisis occurs it would not lead to a fundamental change of the capitalist system itself.
These differences in worldview lead to three observations of Piketty’s work. As class struggle is not included in his worldview, though conflict is, much of his argument leaves out the primary dynamic that Marx focused on. But it is not that easy. Piketty says a lot of different things in his book. He would probably argue that he discusses each of the issues I raise. Maybe so, but in large part his emphasis is as I describe it. The example of social struggle is apt. Piketty tells us that his projections of the future rely on the assumption that no significant political reaction will alter the course of capitalism and financial globalization over the course of the next two centuries. Given the tumultuous history of the past century, this is a dubious and to my mind not very plausible hypothesis, precisely because its inegalitarian consequences would be considerable and would probably not be tolerated indefinitely. (358)
But in the very next sentence, as though he had not predicted future conflict between the wealthy and the rest of the population as a qualification, Piketty continues with: To sum up: the inequality r>g has clearly been true throughout most of human history, right up to the eve of World War I, and it will probably be true again in the twenty-first century. (358)
A good economist qualifies projections into the future (here, inequality will continue to increase) knowing there is an intellectual fallacy that assumes present trends will not change. But after offering those qualifications, the economist makes and reports those projections as though they have not been qualified. This is what Piketty does.
There are at least three areas, clearly influenced by Piketty’s worldview, that not only skew the collection of his data, but also affect the policy he chooses to recommend: slavery and land ownership, supermanagers, and the environment.
Observation 1. Slavery and Land Ownership
Shockingly, at the end of chapter 4, Piketty apologetically monetizes the value of U.S. slaves prior to their emancipation as part of the United States’s national wealth at that time. It is true that slave holders spent money to buy slaves and they considered slaves to be part of their wealth, but in the context of a retrospective evaluation of U.S. wealth, including human chattel is seriously misguided. It is Eurocentric. It is an “originalist” position similar to those that hold the U.S. Constitution written in the 1780s for the society of the 1780s should be applied unchanged 203 or so years later to today’s society. This position holds that as pre-1865 white men counted Africans as part of their wealth, we should too. Piketty’s book is not about the worldview of 19th century slave owners. It is about the 21st century. Our national income accounts do not include the so-called monetized value of people. Today we count and report the number of corporate employees, but do not monetize them as a corporate asset. He is confusing the control of Africans by Europeans with white monetary wealth. 2
By not re-evaluating the national accounting practice of pre-1865, Piketty falls into a racist trap. He should have excluded the so-called monetary worth of those enslaved human beings from national wealth. The result would have been a reduction of the pre-1865 national wealth and wealth inequality both as measured by money. Presumably the data sources corrected these errors after the 1865 emancipation. To repeat, it is merely an accounting change. However, national wealth should be measured from the perspective of the entire population, not just white men.
In addition, throughout chapter 4, Piketty says “anyone” could own land in the United States because land was so abundant. Even though there were policies making land available to poor people, it was not available to anyone and the land that was taken was not theirs to take as indigenous people had occupied that land long before the Europeans came to the Americas, a discussion Piketty does not begin. The worldview here is again focused on European white men. This narrow perspective goes against the premise of Capital in the Twenty-first Century that looks at the increase of global income and wealth disparity. National income cannot be evaluated by assigning some monetary value on human beings or by condoning the confiscation of other people’s land (assuming wealth increases by moving land from the care and control of one group of people to the ownership of another, establishing some money value for it – the land of indigenous peoples had no money value prior to its confiscation – and including that money value as part of the assets of the new “owners”). I doubt correcting these errors in Piketty’s data would change his overall conclusion – conclusions shaped by his preexisting worldview – that inequality as measured by money over long periods of time is increasing.
Observation 2. Supermanagers
I wonder how Piketty’s data would change if he did not include as a return to labor (the money people receive for the work they do) the extremely large sums of money taken by senior managers. Piketty acknowledges the role of supermanagers: The extremely generous rewards meted out the top managers can be a powerful force for divergence of wealth distribution: if the best paid individuals set their own salaries (at least to some extent), the result may be greater and greater inequality. (334)
Why include these huge sums in the returns to labor? Are not these supermanagers in a unique position? Long ago it was made clear that corporate control through stock ownership moved significantly towards corporate control through management (Berley and Means, The Modern Corporation and Private Property, among others). That should affect the way the data is collected and interpreted especially if the concern is to understand inequality. The large takings of supermanagers should not be interpreted as wages. At what point do the takings of senior managers stop being a return to their work and start becoming something akin to what rentiers get? Is it $200,000 annually? $500,000? Remember supermanagers take multiples of millions of dollars annually. The point is not to examine this complex question here, but merely to acknowledge that superwages should not be included in the return to labor. How would Piketty’s data change if these monies were interpreted as a return to capitalists? Would not that increase the degree of inequality Piketty is analyzing? Whether or not the data would change significantly, the analysis would be informative. Piketty’s worldview does not permit the takings of supermanagers to be seen as a return to capital (that is his definition of capital).
Observation 3. Environment
How can one write a 577 page book (not including footnotes and online appendixes) about the mal-distribution of national wealth and not refer to the environment until page 565? Piketty is clear about “the need for major investment in the search for new nonpolluting technologies and forms of renewable energy sufficiently abundant to enable the world to do without hydrocarbons” (568). But he has not attempted to evaluate how centuries of this misuse of the environment have diminished the national wealth benefiting the rich at the expense of the poor. This would not be a new exercise as writers like Herman Daly and John Cobb (For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future) have attempted to include elements that are not typically measured by the market in their estimation of national income. Again such an analysis would only strengthen Piketty’s conclusion that inequality is increasing as wealthy corporations are benefitting from the free use of the environment. That destruction is leading to greater wealth inequality. Here too, clear policy alternatives are needed. However, he makes no effort to include abuse of the environment in his otherwise expansive work.
Policy Conclusion
Piketty recommends taxing the rich to reduce income and wealth inequality. I agree this would help, but not permanently. Remember the Sherman Antitrust Act of 1890? That law and its successors led to the breakup of very large corporations. However, as the antitrust laws have been applied to large corporations, say the Standard Oil Trust, concentration and centralization of their spinoffs have led to the very largest global companies. How can one believe that the wealthy who would be taxed would not figure a way around the proposed taxes and continue to secure their positions in the top decile or even centile of wealth ownership? A wealth tax is neither socially transformative nor transitional to a better society. Yet Piketty’s worldview – fix capitalism – leads to this policy conclusion. A worldview more critical of the very system itself would look for much more fundamental change, a change away from capitalism itself. As Naomi Klein argues in This Changes Everything: Capitalism vs the Climate, slowing climate change will not happen as long as energy producers are permitted to pursue profits at the expense of the environment. Piketty’s worldview leads him to suggest policy directed at fixing what cannot be fixed. The alternative worldview looks to much more permanent and fundamental changes leading to a just society.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.
1
Piketty does not present data for third world countries, he says, because they are not yet available, thus in this respect making his work incomplete. My focus here, therefore, cannot be on the third world, but see David Barkin’s comments in “Looking Askance at Piketty: Inequality from the Third World” who addresses this very point by looking at Mexico’s struggle over the division of income and wealth.
2
It has become clear to me that I am taking a controversial position here. Several scholars (economist, historian, sociologist) have bluntly told me I am wrong. One asserted that by excluding slaves from pre-1865 financial assets for white men, I am making a moral argument. I have resisted that, but at base that is correct. We are all making moral arguments as the evaluation of what is and what is not included in “financial asset” is a moral judgment. Here worldview – from whose perspective is the judgment being made – becomes central.
My argument against the “originalist” position is that human beings are qualitatively different than any other financial asset. Their inclusion changes the underlying logic of financial assets. Clearly for slave owners they were a significant part of their wealth as David Olusoga shows us in his recent article about the long-term wealth of British slave owners (The Guardian, July 11, 
). Consistent accounting, however, would not permit us to agree that humans were part of the wealth of the slave era. Their inclusion changes the underlying logic of financial assets. Their exclusion from antebellum measures of wealth would require significant changes in the way the history is told. I argue that Piketty should exclude them from his accounting of the antebellum period and begin retelling that history.