I have been asked to comment on James Galbraith's review of Thomas Piketty's book, Capital in the twenty first century, because Galbraith is critical of both the ideas and policy recommendations made in the book unlike, for example, Paul Krugman, who is broadly in agreement with Piketty's thinking.
Now I should stress I have still not read all of Piketty, but I am accumulating a good collection of reviews. Others include Martin Wolf's review and Brad Delong's. There will, I have no doubt, be many more to come and I am not proposing to make this a review of reviews.
What it does appear to me that Piketty is supposedly guilty of is of proposing what Wolf calls 'a simple economic model'. That might appear odd in a work of 700 pages but as I mentioned in my own first blog on this issue, the essence of what Piketty is saying is that if the rate of return to capital is greater than the rate of growth in the economy then the result has to be increased inequality because that increased accumulation of capital has to arise as a result of a reduced return to labour. Piketty contends that this historically has been the case, and is again now after a period when this was not true.
The criticisms then appear to have four broad thrusts to them. Galbraith suggests that Piketty is using an inappropriate definition of capital. In Galbraith's view capital remains plant and machinery - the stuff with which the proverbial widget, much beloved of economic textbooks, are made. I have to say I think Galbraith is both naive in thinking that this is what capital is in an era when such assets make up a small proportion even of corporate balance sheets. Second, I think Galbraith is guilty of a standard macro-economist's failing: he simply has not comprehended the role or money and so of financial power within an economy. It is an astonishing fact that macroeconomics really does not have an adequate theory of money or of its impact in the real economy. As a consequence it has no way of managing the role of financial capital about which Piketty is rightly concerned because of its impact in the real world. Galbraith's economic criticisms largely fall apart at this point.
Delong's critique is potentially more interesting. He argues that Piketty has considered the wrong rate of interest. He says that of the four options for interest rates that could have been used Piketty considers what he calls r2' which is the real interest rate that is the actual average return on wealth in the society and economy when he should have considered r3' which Delong defines as the real interest rate that is the average risky net rate of accumulation--what capital receives, minus the risk of confiscation or destruction or taxation, plus appreciation in valuation multiples, minus what is spent in order to keep the world in the appropriate social position. I have not thought this through as yet, and need to, but suspect there is an issue here that does need to be explored if true, but which also might be capable of being dismissed entirely because I suspect that r2 and r3 tend to the same number in the long run which Piketty is considering.
Third, Wolf makes the criticism that Piketty asserts that inequality matters but does not say why. I reiterate, without having read it all I cannot say whether that is fair or not, but I also think it a red herring. Piketty does not, surely, need to cover ground already comprehensively covered by others and there is a growing literature on this issue that seems to me to more than comprehensively deal with this point.
Fourthly, the nature of Piketty's recommendations comes in for a lot of attention. You could say Piketty did not help himself here by saying that his propsoal for a worldwide wealth tax was unrealistic. I would disagree: in a platonic sense knowing the ideal form of a solution does not appear to me to be a bad thing even if that knowledge is then only of use in establishing a goal against which any pragmatic outcome can then be measured for effectiveness. As such I defend Piketty's idealism.
I also think Piketty is right to talk tax. He very clearly wrote this book to promote a paradigm shift in thinking, not least on this tax issue. For Galbraith to say that a tax solution is not possible because pre-paradigm shift thinking precludes it is to deny that this book is in itself a change agent. I confess I am surprised by this poverty of both aspiration and thinking on his part.
But that is not to say that Galbraith and Wolf, who also has concern regarding the recommendations, are wrong to say that more practical thinking may also be necessary. Some of that will be on how wealth taxes can be created. That is a task I certainly want to be involved in: I think that this book opens that opportunity just as it also creates an economic framework that justifies much of the work I and others have done on tax havens over the last decade or so. There is much to do here. Associated with other work with which Piketty has been involved in with regard to higher rate taxes, there is also work to do on that issue.
But I also accept that tax alone cannot deal with this issue or inequality and if that is the focus of most of Piketty's recommendations much as I welcome that pushing of an agenda with which I am involved I would also very clearly have to say that other regulation is essential. We do need living wages. We can cap higher pay. Land value taxation is clearly a way of addressing financialisation of capital, and resulting speculation. We need to redesign incentives in the tax system that reward capital growth such as low capital gains taxes and penalise labour, such as national insurance charges. We need to address issues that allow capital concentration, such as the free flow of capital. The fact that effective tax rates on investment income are so much lower than on wages is absurd. All these are issues to address, as are others.
Piketty is guilty of dreaming, but I do not criticise him for that. Dreamers change the world. But we should not necessarily expect him to deliver all the solutions. That would be unreasonable.
Piketty has provided a theoretical framework, which will no doubt develop, for considering this issue. That's an amazing achievement. Now it will need to be refined and, more pragmatically, thinkers with other experience will need to offer real world solutions for the issues he identifies. If his own solutions are but bench marks then they have use, as I have noted. But that use will be in assessing the relevance of offered solutions that can deliver real social change that permits the redistribution of wealth that I think Piketty is saying is now the condition for market economies and democracy surviving. Offering those solutions is now a task to be taken on. Galbraith has suggested some solutions, but i think there are more. The great merit of this work, if it proves to be enduring, is that it provides that opportunity for change. That, surely, is an enormous achievement? The rest may be nit-picking.
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James Galbraith is I think, one the Modern Monetary Theorists. I wonder if Galbaith’s views are in line with the MMT analysis or, as the theory is a huge body of work, they are more his views on this particular aspect. It is quite healthy to have debate within a framework as well as with those outside.
perhaps we need to revive the ‘euthanasia of the rentier’ which would result if banking were left to be genuine intermediaries in the economy rather than the hugger mugger relationship with the BoE indemnified by the Treasury. Government needs to be able to create debt free money spent into the real economy with banks is intermediaries that link to real economic activity rather than being in charge of the money creation itself (as the BoE now fully admits) – without this change, nothing changes.
The fact that it has taken over 35 years of market fundamentalism to realise that the trickle down isn’t happening, rather a ‘syphoning up’ is absolutely staggering.
I haven’t read Piketty’s book so can’t comment in any detail yet – it’s on my reading list for next week. However James Galbraith’s summary of the “Cambridge Capital Controversy” in his review looks correct. Essentially Joan Robinson and the other mid-20th century Cambridge economists were saying that the capital stock (plant and machinery) can’t be measured in any metric independent of the price system (because the only way of aggregating two or more completely disparate pieces of machinery, say, JCB diggers and computers – is to use their relative prices). But relative prices can change in response to technological shifts, changes in tastes, changes in the income distribution etc. Therefore, there is no unique measure of the capital stock which is independent of the price system. (I’d argue that this is in fact true for labour as well as capital – the only reliable way of aggregating worker outputs together is to use wages.) So I think Galbraith’s argument essentially turns on whether Piketty’s interpretation of movement in the real returns to capital over the 20th century makes sense. BUT this is as far as I’ve got with understanding Galbraith at present – I need to go back and read it again AFTER I’ve read Piketty. (Sorry – this has been a very wonkish comment post!)
Wonkishness allowed
I’m doing it a quite a bit right niow
Why is the word ‘wonkish’ being used so much? Is it another bit of memetic americana? I noticed that Randall-Wary in his MMT book uses it a lot so it’s clearly travelled across the Atlantic! Resist the meme!!
If taxes on ‘wealth’ are to be the aim of this work I would hope that taxes on land will be the chief beneficiary of any such shift in taxation. A shift away from highly regressive NI [a tax on labour] and somewhat less regressive VAT [a tax on production and services] for example would, if replaced with a well crafted Land Value Tax serve both as a measure of redistribution and a boon to production, jobs and ergo growth.
In a paper I have recently co-written we give a real-life worked example of a typical small south London house which shows that over a 40 year period banks could earn in interest payments over £200k just from the land value of this single house. If we had LVT banks would not be so profitable. Like Michael Hudson says, the main beneficiaries of house price inflation have been the banks. Landownership is not the only source of wealth but it really is the most invidious because it affects the price of a basic human necessity.
However, land is NOT capital, so I wonder if Piketty really ‘gets it’.
Financialised land is though….as far as I can see
Good point
Carol- is this paper available on the net -I’d be interested to read it.
Not yet, Simon. We intended to put it on our labourland.org site as a discussion document, but it’s not there yet and may at this stage only be available for comment on the members’ forum. We are in the process of updating our website.
It provides a way of implementing LVT gradually without scaring the horses. We also have a very simple and effective proposal for a ‘mansion tax’. It has been sent to a few people and I could send it to you if you email me. My address is on the website. I’m disappointed that this proposal for property taxation reform was rejected by CLASS. I’m waiting to hear from Fabians.
I have lived in five worlds They are the one I was born into, grew up in, worked in, retired into and the now. They were not the same sometimes morphing into a different one, sometimes lurching, sometimes pushed by war, sometimes by the rapidity of technological change. Necessarily what capital is, labour is and a lot of things have also changed. Piketty is right to say that where capital is now is not as it was and where it is going could be different and given its critical role and changing form the consequences may not be what we want or like. He is on the right track and very likely going in the right direction. But whether he is on the express, the stopping, the parcels or the freight train is the question.
“But I also accept that tax alone cannot deal with this issue or inequality”
Which is pretty much what Galbraith was saying in his review, think you have been a bit unfair on Galbraith here.
From his review
“Adam Smith wrote the definitive one-sentence treatment: “Wealth, as Mr. Hobbes says, is power.” Private financial valuation measures power, including political power, even if the holder plays no active economic role”
So pretty sure he does understand role of money and financial power.
Pikkety’s idea is very simple, and if he can write 600 pages on it, I suspect you could amass 6,000 pages challenging some of his assumptions quite easily. My immediate reaction is that drawing conclusions at such a macro level in the way suggested (I too haven’t read the book) is fraught with methodological problems. There are just so many objections that could be raised. As has been pointed out, simply aggregating everything using a price system which is based on marginal prices can be contested as meaningless. Also, although at an individual level money is treated as capital, as soon as you look at it from a societal point of view the concept of money as capital becomes meaningless. At that level then factories and supply chains etc really are what is capital only. Then there is the debate about what is interest, what is profit etc. If you see interest as being derived from time preference then what does that mean in terms of returns and how do you compare it to labour’s return (return on what?)? Then you could question how much is being reinvested in capital, how much in maintaining it etc. And is it possible to neatly separate capital from Labour into different groups?
Thank you so much … I hadn’t expected such a fulsome response… real food for thought.
To be honest I woke up at 5 feeling pretty darned uncomfortable and read your comment and it gave me something to think and write about until pain killers kicked in (well, for a while afterwards in the end). So thank you too: it made me pull some ideas together
‘Wonkish’; ‘darned’ -Americanisms abound-what drugs have they been giving you!(Smiley thing!).
About 30 painkillers a day!
Plus the odd PPI
Hope things ease for you soon -it’s a testimony to your spirit that you can keep blogging with such vitality through all of this.
So sorry to hear about the pain! Glad it helped to distract you. Take care.
Not totally connected with this thread but i thought it was worth sharing this statement from the president of Iceland on how they have fared better-by letting the banks fail! http://www.upworthy.com/when-people-say-if-you-dont-like-it-here-go-to-another-country-id-love-offer-this-one?c=ufb1
The proposition that if the rate of return on capital is greater than the growth in the economy then inequality of wealth will increase seems to assume that those with income or capital gains derived from capital will not spend any of the income they derive therefrom i.e. they will live within their earned income.
However, in the real world, widows live off their late husband’s savings (and I condemn any academic economist who decries this practice) and most of those who do not need to work find better uses for their time: even when living within their income they are consuming most of the return on capital.
Currently the real return on risk-free capital in the UK is less than zero, even before tax (source FT 19/4/2014), and was , after tax, for much of the New Labour era, while under Thatcher it was positive (having been massively negative under Labour from 1974-9. So the major increase in wealth inequality under New Labour following its decrease under Mrs Thatcher (and every previous Conservative government in my lifetime) contradicts Picketty’s headline claim. The philosophical argument is of interest but reality demonstrates that his conclusion is just WRONG.
This is just so small minded
The assumption that capital is merely the mechanism for the provision of widow’s pensions is just so trite it is enough to show that all your comments are absurd and your use of statistics too manipulative to trust
Please don’t call again