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July 6, 2014

What to do about r > g, that is, the accelerating rate of capital return on private wealth relative to national income in developed countries, which threatens to go back to pre-World War I levels in a return to our near-Gilded Age epoch? Piketty writes that one way to slow this dangerously escalating ratio (short of taxation of capital) is to have rapid economic growth. That is sensible. With rapid economic growth we also get full employment, aggregate demand out the roof and greatly enhanced revenues to government to fund important projects, like education, infrastructure, research and development etc.
However, he laments, rapid economic growth is unlikely now due (among other things) to lack of population growth in developed states which he says mean (and his data show) that returns from investment will continue to grow faster than output. Further, it seems to me that even if the general economy is humming with the increase in growth and output (g), then the private rate of return (g) is increasing in tandem and thus there is little or no change in the ratio favoring accumulation by the one tenth of one percent among us, and since Piketty claims (with some nicks and scratches due to war, revolution and depression) that this has been going on since 1700, there must be some problem within the system itself. There is such a problem, and it’s a big one (Piketty calls it “enormous”). It is so big that the system is unsustainable (at least in democratic societies) in the long run if left on its own.
Piketty further concludes that this lopsided and historically systemized favor of the rich over the rest of us will cause inheritances and income inequalities to keep rising, possibly to levels never before seen and, if unattended, could theoretically mean that capital has all the wealth there is to have at some future date. That is hardly a sustainable model for those of us not within the one tenth of one percent at the very top of the superrich; the better model for our purposes would be to have a system where the private rate of return on capital (r) is evenly or near evenly matched with the rate of growth and output (g). Per Piketty, that (with some temporary exceptions) hasn’t happened since 1700 and probably did not happen before that. It is, as he puts it, “the central contradiction of capitalism.” Simply stated, the system itself favors accumulation of wealth over output and wages, and Piketty’s massive research proves it. This in my view means that at some point in time we must either amend our current system to fit the wants and needs of all of us or adopt a new system that does. I prefer amendment, but failing that, I am open to a new system of perhaps a blend of “isms” to better serve the governed. We do not exist to serve any ism; isms exist to serve us, and all have their shortcomings. I think we the people, if it comes down to it, should make such choices apolitically and pragmatically. It’s our economy to remake.
It seems to me Piketty is saying his data show that the capital-labor share of an economy’s net product is also rigged in favor of capital whether or not it rests in Swiss banks or is applied to domestic economies; that it is rigged because it is a natural outcome of the system of capitalism itself. I am always suspicious of anything in economics which bears a description of “natural” (see Adam Smith’s “invisible hand” in re self-correcting markets) because economics is totally man-made and has no independent existence either as an “invisible hand” or some spiritual force in the stratosphere, just sitting there until economic man has made a mess of things and then swooping in to correct the markets for a fresh start in a “forgiven sinner” fantasy of sorts. That’s not the way things work whether the system is one of communism, capitalism or some blend of capitalism and socialism. More Piketty in Part IV. GERALD    E


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