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Wednesday, November 18, 2015

Piketty, Capital versus unearned Wealth

All Wealth is not Actual Capital And that Matters.

When I wrote "Disambiguating Capital from Simple Wealth" I looked at the confusing definitions of capital and realized I would have to use the term "actual capital" when talking about the sort of Capital that is valuable and to distinguish it from simple wealth. I realized that I was dealing with various newspeak definitions resting on sometimes deceptive moral arguments. When "productive capital" is extolled as the engine of "job creation", it is to defend an order of "capital" that is simply ownership of natural resources, raw materials, land properties and simple wealth. I realized soon on that this "deliberate confusion matters" because "capitalist" polemicists use the productive definition of capital to sell the notion of "capital" while in practice simply trying to justify a rentier economy where ownership of wealth guarantees rents from loaning money, property, business empires and monopolies.

Capital as Guaranteed Rent

Re-reading "Capital" I realized this confusion is deliberate. The nice thing about Piketty's book is that he dispenses with the gobbledy-gook and defines Capital as pretty much synonymous with non-labor compensation. He dispenses with the moral arguments and uses the definition of capital favored most by capitalists anyway. Piketty explains, explicitly, on page 49:

"To be clear, although my concept of capital excludes human capital (which cannot be exchanged in any market in nonslave societies), it is not limited to 'physical' capital (land, buildings, infrastructure, and other material goods). I include 'immaterial' capital such as patents and other intellectual assets ... capitalization"... "as priced in common stock and other corporate financial assets." [Page 48]

Yet as I noted in my "Disambiguating Capital from Simple Wealth" post, Actual Capital is only that part of wealth that is actually in use to fuel more production. Piketty is right to exclude "human capital" from that definition but, if he didn't, then there would be no national income belonging to labor as he:

By this definition, he has to admit that:

"To simplify... I use the words 'capital' and 'wealth' interchangeably, as if they were perfectly synonymous." [Page 47]

He admits that it would be better to "exclude land and natural resources." The problem he notes is that "it is not always easy to distinguish the value of buildings from the value of the land on which they are built." He also excludes the "actual capitalism" of wealth employed in the process of creating more wealth from his definition. It seems like he's abandoning all the moral definitions of Capital;

such as the Georgist argument as "[that] part of wealth—that [is] devoted to aid production" ... Capital is "wealth in the course of exchange." [Actual Capital]

So much for Georgism. But Piketty isn't talking about actual capital or any advertised meaning of capital anyway. He's talking about the power of wealth versus the power of labor. And this definition allows him to analyze what is actually happening with Capital. He admits he's talking about what the wealthy are talking about when they call themselves capitalists. He admits that it would be better to "exclude land and natural resources." The problem he notes is that "it is not always easy to distinguish the value of buildings from the value of the land on which they are built." And this is how modern "capitalists" describe their own wealth.

This allows him to lay out the math, intranational and international:

"National Income = Capital Income + Labor Income" [page 45 of Piketty's book "Capital"]

Which tells us that we can measure both capital income, Labor income, production and also measure inequality by measuring the disparity between wealth going to "capitalists" and other powerful rentiers who earn "capital" and the trickle reaching everyone else.

Capital as Wealth

For Piketty, the result is that he lumps together all kinds of wealth, only making a distinction between "national capital" versus "net foreign capital:"

"National Wealth = national capital = domestic capital + net foreign capital"

For Piketty's analysis capital is simply the "total wealth owned at a given time." This lets him reduce it to a formula, where the capital ratio is called "beta" [β] which is the ratio of Capital / Income:

"β = Capital / Income"

Income is a stream of production and products. A country with a high ratio such as "beta" [β] = 5, would be a country where the Capital Wealth of the country is 5 times the annual production. It can also be seen as a country with high savings of wealth.

Return on Capital

He then calls National Income "alpha" [α];, and gives it this formula, where r is the rate of return on capital:

"β = r x α"

Measuring Inequality

His analysis then ensues, and he masterfully shows the link between modern capitalism and feudalism as he talks about "return on capital" throughout History. From Ancient times to Modern Times and from the Third World to the United States. He captures inequality in chart after chart that graphically describes the disparities between growth of economies and the rate of return of capital. And how that "r" dominates both labor and arrogates growth (g).

For example he shows how the "r" in economies has always commanded more than labor. For example he notes how in the times of Balzac or Jane Austen the rate of return on land capital was about 5%. To get a rent of 50,000 Francs a person had to invest a million franks. [page 53] If the return on capital doesn't generate inequality, than even the capitalists also have to labor. Since inequality is as much a matter of social hierarchy, class and status -- inequality is necessary to the socially dominant in order to maintain their power. Later in the book he demonstrates that a person had to make 20-30 times the average wage income, which was 400-500 francs during that period -- in order to not live in misery [page 106]. To live in minimal comfort a person had to have an income of at least 15,000 francs. And to get that income they had to have "capital" (mostly in the form of rentable property or business property) in excess of about 450,000 francs. People assumed that most folks would live in misery. His charts show how rapidly we are returning to those times. They also show how national and international policy is driving "r" and that in turn is creating increasing inequality in most of the world, not just the United States.

Absurdities of Rent Seeking and Usury

Piketty goes on to describe in graph after graph the role of "return on capital" and policies favoring capital over labor in inequality around the world. Piketty talks about how wealth gets concentrated, and describes that concentration in chart after chart after chart.

Henry George and Marx were using "moral" analysis of labor and capital. By stripping off all the academic definitions Piketty used the definition of capital most comfortable to the capitalists. In the process, he shows that "r" or "return on capital" is mostly economic rent; interest, rents, even production - wage compensation; all are means to earn rents. Which means that "r" is really mostly unearned income derived from the power and privilege of wealth and it's monopolies and control of properties. So his material can feed back into Marxian, Georgist or any Post Keynesian moral argument.

I'd suggest that folks read Piketty's Book Capital in the Twenty-First Century"" if they are interested in understanding capitalism in some depth. But for an idea of what to do about it, even more important is to acquire a copy of "Rewriting the Rules of the American Economy" by Joseph Stiglitz. That book refers to some of the charts in Piketty's book.

From "Rewriting the Rules"

"Skyrocketing incomes for the 1 percent and stagnating wages for everyone else are not independent phenomena, but rather two symptoms of an impaired economy that rewards *gaming the system* more than it does hard work and investment."

I've got a lot more to quote from and say from Piketty's "capital", but I think this summarizes what we have so far.

--Joseph E. Stiglitz, 2016. "Rewriting the Rules of the American Economy," p. 2.
Piketty's Book Capital
Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity
Lincoln the Marxist!!!
Disambiguating Capital from Simple Wealth
Taxing the Right People for the Right Reasons
Progress and Poverty:

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