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July 5, 2014

When I was 22, after a few years spent in defending democracy from fascism in WW II, I was an undergraduate in college seeking an economics degree preparatory to going to law school. I had had a brief flirtation with the idea of pursuing a PhD in economics and joining academia as a career but did not; I instead became a lawyer. When Thomas Piketty was 22, he not only already had a PhD but also had a professorship at Harvard University (where he spent three years before returning to his native France). He was and is brilliant, and history may accord him a place in economics similar to the place we accord to Newton and Einstein in physics – rare company indeed!
The point of this introductory paragraph is this: that I know my place in the pecking order and will not challenge genius, relegating my commentary to suggestion and embellishment of his ground-breaking findings and conclusions backed by massive research, research classical economists such as Adam Smith and David Ricardo did not have to undergird Smith’s “invisible hand” and Ricardo’s scarcity theories, both of which have either been rendered obsolete or corrected by the influence of time and experience.
When my economics hero for hard times, John Maynard Keynes, wrote The General Theory of Employment, Interest and Money, it was in reaction to the “classical economists” (Smith, Ricardo, Malthus et al.). When Marx wrote Das Kapital it was in reaction to the “bourgeois economists,” and when Thomas Piketty wrote Capital in the Twenty-First Century, it was in reaction to the “U.S. economists,” all as noted by Heather Boushey in the March-April edition of The American prospect. Piketty moved back from Harvard to Paris after only three years because, he said, “I did not find the work of U.S. economists very convincing.”
That’s a bit of a reproach to two of my favorite American economists, Krugman and Stiglitz, both brilliant and award-winners themselves, but whatever his personal motives for returning to France, his Capital in the Twenty-First Century amounts to a great leap forward in the field. Just as I have debunked the idea that “the company did this or the company did that;” but rather that “the companies” do nothing and only humans in charge of such “companies” act out in the real world – so does Piketty debunk the phony distinction between “earned” and “unearned” income under the misleading terminology of “human capital,” “economic agents,” and “factors of production.” This misleading terminology assigned to labor and capital income – to those as real people who have to work for a living and those who do not, are both correctly identified by Piketty as people, and not just “factors of production.” It is refreshing to read that people who work for a living and people who don’t are not just ciphers in glossed-over language designed to cover the harsh reality of those who sweat for their bread and those who do not.
Before becoming overly-specific on our future if the grounds for Piketty’s historic and prophetic formula of r > g persist, let’s set the stage. His key conclusion (supported by mountains of evidence) is that under capitalism, if the rate of return on private wealth (including land, housing, physical and financial capital) exceeds the rate of growth of the economy, then the share of capital income in the net product will increase. In other words, as the old saw goes, “Them what’s got, gets.” That’s simple enough, and one wonders why that measurement has not been emphasized before.
Piketty goes on to write that if most of that increase is reinvested (rather than consumed by the superrich who own it), the capital-to-income ratio will rise (r > g gets worse). That also makes sense, since such reinvestment will increase the marginal productivity of the capital so deployed as well as increase the marginal productivity of their workers ( all leading to a result in which capital’s owners will doubly profit these days since they are not only enriched by the increase in their capital’s marginal productivity increases but are also gobbling up such marginal productivity increases by their workers rather than sharing them as they formerly did between WW II and 1974 – which my followers know is one of my largest current complaints against the many corporate malpractices in fattening their bottom lines at the expense of their workers).
Piketty explains this sudden end of sharing and has alluded to how to reinstate sharing of a sort – through taxation and sterner regulation of corporations since they won’t increase wages – in an interesting suggestion in how to get the greedy owners of capital to help share the load of domestic needs such as education, infrastructure, health care etc., which I will visit in subsequent parts of this essay. Suffice it to say here that if capital continues to refuse to do anything about wage inequality and thus deprive income from their workers (who as a result – given also inflation – have less and less money for taxes with which to fund desperately needed projects such as education, infrastructure and healthcare), then unless we want to descend into Third World status, we must tax and otherwise more strongly regulate their activities in order to be able to fund such needed projects. I don’t see that we have any other rational choice in the absence of capital’s continuing failure to substantially correct current and rampant wage inequality, and, as we shall see, neither does Piketty.
Wall Street and the corporate culture do not own our economy – so far. It’s our economy and they are mere participants – so it is time for us to take charge of our own property. I am not into placating and encouraging greed (on this day following Independence Day or any other day) in how we structure and operate our economy in favor of arbitrageurs, rentiers, hedge fund operators and any other such paper shufflers, especially when to do so threatens our very existence as a First World country.
We have a choice on this day after we made a fateful choice for democracy 238 years ago. We can decide to reinvigorate our democracy and share the bounty we all helped produce, or we can hand over both the bounty and our democracy to a narrow slice of the greedy and sink into Third World status. I have made my choice; what’s yours this “day after?” Perhaps we can find some clues on choices we can and must make from a further parsing of the observations and conclusions of Piketty, a parsing I propose to undertake in subsequent parts of this essay. Stay tuned for Part III. GERALD E


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