Philip Pilkington: Misdirection – Galbraith on Thomas Piketty’s New Book on Capital

Yves here. The best review so far on Thomas Piketty’s new book Capital in the Twentieth Century is by Jamie Galbraith, and we’ve featured it in Links. But the article itself is long and a bit wonky, so Pilkington’s recap is a useful distillation of Galbraith’s piece.

By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil. Originally published at Fixing the Economists

I’ve been waiting for this for some time but now Jamie Galbraith has come out and provided an extensive discussion of Thomas Piketty’s new book Capital in the Twentieth Century. While I haven’t yet read Piketty’s book its difficult not to have heard about it given how much of a response it is getting among economics types.

The moment the hype started I thought that something was amiss. In 2012 Galbraith and his team published an extensive empirical investigation of income distribution using new datasets that they constructed. Beyond the interview I did with Galbraith and a few other articles and the like the release of the study didn’t get much play among economist types. The reason should be obvious: whereas Galbraith arrived at heterodox conclusions, Piketty’s are mostly orthodox.

As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance.

It is new types of income that are tied to asset price valuations that are important to explain rising inequalities. Galbraith makes this clear when he writes that what is really at issue today is a rise in rents. Piketty remains blind to this because he has a fairly woolly notion of what exactly constitutes ‘capital’ (the start of Galbraith’s piece discusses the implications of some aspects of the Capital Controversies).

If Piketty had distinguished between earned and unearned income — between income generated as a result of productive physical plant and income generated from financial assets — he would have been able to discuss his findings much more consistently. But unfortunately he does not and this, to Galbraith, renders his analysis confused.

Galbraith also makes clear that Piketty’s policy proposals — mostly dealing with higher taxes on the rich — are probably not fit for purpose in a globalised, financialised economy. Rather Galbraith asks us to consider alternative approaches.

If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.

I think that Galbraith is on the right track here. More importantly from my perspective, however, is that Galbraith’s analysis provides us with a much more immediate way of focusing the discussion. In order to get people to understand what is going on in the economy these days we need to point the finger time and again at the financial sector. The general public already sense that the main purpose of Big Finance is to redistribute income and this needs to be supported by the opinions of those who claim to be experts.

Ultimately, Piketty’s work will not refocus the opinions of the experts in this regard. And that is unfortunate. Rather it will speak to a worn-out left that is unable to properly articulate itself. While its base intuitively sense that something is up with Big Finance, policymakers and experts continue to talk in outmoded tones.

From what I have seen so far the logical outcome of Piketty’s book is the government of Francois Hollande — with its insistence on high marginal tax rates for the sake of high marginal tax rates; an economic policy based on envy with no real productive aspect. And the logical outcome of the government of Francois Hollande will be, if the Socialist Party in France is unable to reformulate itself, the rise of the Front National.

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  1. Paul Tioxon

    It would seem seem that a war on poverty would mean giving more money, not more work, to the people who do the work, hence raise the minimum wage. This also reveals the causal relationship of labor to value, hence, Marx’s labor theory of value can be empirically verified with examination of wages, minimum wages and increases in wages. Since taxation does not seem to stop returns on investment all by themselves, the variable which boosts these returns, the wages and other monies distributed in the form of benefits, such as job related health insurance, pensions, disability payments, seems to be the critical path to take for political action. Mr Galbraith’s work seems to confirm that income inequality, and the general inequality that it leads to, poor health, poor life expectancy, poor social relations i.e. divorce, single parent households, falling household formation. All this leads back to wages, and the labor theory of value. Shockingly enough, our good friends at the left of the spectrum concur.

    An excerpt from the above book review of Capital 21, the reviewer’s contraction for Piketty’s book.

    “Piketty advocates policies that he thinks can rescue capitalism from its rentier, oligarchic tendency. “To regulate the globalized patrimonial capitalism of the twenty-first century . . . [t]he ideal tool would be a progressive global tax on capital. . . . It is perfectly possible to move toward this ideal solution step by step. . . . The largest fortunes are to be taxed more heavily” (pp. 515-517).

    Secondarily, Piketty advocates restoring a very high marginal tax on the highest incomes, aimed mainly at the exorbitant pay of top corporate executives (p. 512). The purpose of the tax rate is not to generate revenue but to make such pay futile.

    Although Piketty comments on a wide variety of governmental economic policies, his practical emphasis is on the progressive capital tax, not on programs that its estimated yield of around two percent of gross domestic product could finance. He takes the social state (his term for the package of programs enacted during the New Deal, for example) as a good thing, but his tax on big wealth is unlikely to rally mass support by itself.

    Reforms like a big increase of the minimum wage, tough laws against employers firing workers who exercise free speech in favor of a trade union, the extension of Medicare by reducing the age requirement until everyone is covered — reforms like these mean something to people. However, when the main content of a policy downplays definite benefits to specific groups of people, when a policy aims “higher” to make capitalism fair and democratic, people have healthy skepticism.

    A tax on capital, calibrated so that it limits rentier wealth but does not suffocate entrepreneurs — this is Piketty’s finale to a historical survey of steep inequality that prevailed for centuries with one amazing exception of 37 years. Perhaps communists make a strategic political mistake. They frankly tell people that the capitalist mode of production must be overthrown. Yes, this will be a world-historic feat, and contradictions in capitalism have developed to the point that such a change is both necessary and achievable.”

  2. Foppe

    I quite liked Galbraith’s review as well, and I agree that the mere fact of the widespread and mainstream interest in Piketty’s book is a pretty damning indication of its provinciality.
    I was wondering, though, what you mean when you say that the Hollande govt’s “insistence on high marginal tax rates for the sake of high marginal tax rates” will lead to the rise of the FN. Considering that the rates on the first 5 brackets are all quite reasonable, with the top tax rate (excluding the temporary >€1m tax bracket) is 10% lower than the current Dutch top tax rate is, I don’t really understand why the French tax system would meet much popular resistance. Do you mean that the Hollande govt is trouble because it’s otherwise only concerned with austerity, thus being unable to tout any “policy wins” other than “huzzah! the deficit is <3%" and "look! we're socialist because we have high taxes. never mind this austerity thing, the top tax rate proves that we care", while letting the economy languish?

  3. 4D

    I haven’t read the book but what immediately struck me when looking at the two century long graph of inequality was that the divergence returned at a time that coincided with a drop off the gold standard and money creation was privatized.

    Galbraith was the first review I saw that makes any mention of the financialization aspect but not the ultimate source in my view.

    1. Ben Wolf

      The Gold Standard was dropped in 1933. Inequality just as severe as what we experience today happened during the late-nineteenth through the early twentieth centuries while we were on the gold standard. Financialization is not dependent on monetary systems.

      1. 4D

        Ok, “partial gold standard” then.

        Under Bretton Woods US dollar creation was still anchored to gold until 1971.

        The point is that after that banks had free rein to create money and those with capital have the collateral to borrow more from the private sector money printers.

        Why do “the rich get richer”? Simple, because they have had the capital to gear up in the four decade long global ponzi.

        1. James Levy

          The problem as I see it is neither gold nor no gold, but fractional reserves and leverage allowances. I can have a gold standard and if I allow rentiers to leverage their holdings or banks or the Fed or the Treasury to demand only fractional reserves and set the rules so that stocks and bonds can be “marked” to whatever price I wish to assign them then used as collateral, the problems persist. Gold may or may not be part of the answer (my instinct is that their is too little gold for a 7 billion person, 28 trillion dollar global product world) but by itself, given the rules and standards of today, a gold standard would mean little.

      2. JuneTown

        “”Financialization is not dependent on monetary systems.””
        Perhaps you’re confusing a conversion basis with a monetary system.
        While convention-speak around here defines our system as ‘endogenous’, the reality is that is a ‘debt-based’ system of money, where authorities strive towards workability through capital markets (OMO).
        And the truth is that modern ‘financialization’ can only come about through such a system.
        Have a read of Alexander Del Mar’s “”History of Monetary Systems””.
        If our system was not based on debt-issuance, the move to make new non-money-monies that profit always the fewer would not be possible.
        Financialization is completely dependent on a debt-based monetary system.

        1. Ben Johannson

          There is no such thing as money not based on debt. It is not possible, money is always an IOU within a society. If I give it to you in a transaction, you then owe me the good or service I’m purchasing. You owe some of it in debt to the government for taxes. The government owes you an end to your tax liability when you give your money to it. Debt is ubiquitous regardless of monetary system or banking structure.

  4. John Merryman

    I still think that at its core, the conceptual fallacy is that capitalism treats money as a commodity, rather than a contract. We can manufacture promises to infinity, especially when the debt backing them is insecure, but eventually they come to naught. If we were to treat money as the contractual obligation it so evidently is, then we could do a much better job of keeping its function in the broader economy to a stable and effective level. For instance, if people generally accept that it is a form of public medium, like a road system, they will be far more careful what value they take from other resources, such as social relations and ecological resources, to convert to money. This would serve to make society and the environment the stores of value that we have to treat them as, for a healthy planet and civilization. As it is, finance is that big, blood sucking leech and as much value as it drains from the economy, people will be forced to turn around and pull from something else.
    There was a time when the executive function of government was in private hands, until the monarchists lost all perspective of their role in the larger system and cooked their own golden goose. The bankers are now doing the same thing with the economic circulation system and will eventually find it has to become a form of public trust as well.

    1. susan the other

      John Merryman, I’m not smart enough to answer you but this is what I have been thinking: I think you are right that the problem is that capitalism treats money as a commodity. But if you take that further you must see that it is a selective distinction – capitalism does not treat all its obligations as commodities. If it did it could easily configure retirement, social security, and single payer as an expense based not on retail prices, not even on wholesale prices, but all the way down to commodity prices. Why not? Labor has also already been commoditized, right? After all, our puppeteers have tweaked the skim to go to the top, but if we created a coherent system of competition (just that stuff at say the top 20% of the economy), then competition would not exist in a legal vacuum and it would actually have to compete!

      1. John Merryman

        The system does a pretty good job of commodifying everything from birth to death and using the financial process tying all these disparate parts of life together to asset strip anything and everything possible.
        I think a larger issue is that we have a fuzzy and fragmented understanding of what all life is about and often those who take most advantage of us, do so by using our hopes and dreams and finding ways to harness those broader desires to their own ends. I think if we had a more clear eyed view of nature, we would be happier with our lives and invest in the reality, rather than the dream.
        Here is an essay I wrote for a contest entitled, ‘How Should Humanity Steer the Future.’ Usually this contest asks more science oriented questions, but this I had some fun with.

        1. susan the other

          JM, you surprised me when you ended with a proposal for local banking. I agree local/state banks are a very good idea because they keep money and resources at the grassroots level. But I loved your premise about dichotomies. Reality is a complex of dichotomies. And we aren’t evolved to sort them all out, but only to follow our self interest. It is like what we 7 billion people have created as our reality is a projection of our inability to just cut through the crap. Frustrating. Local banking would cut through the financial mess quite effectively. Good place to start.

          1. John Merryman

            I’ve actually had an email exchange with Ellen Brown, about two years ago, on the subject and suggested she further explore raising the issue of the nature of money. The only current alternative seems to be MMt, which largely seems to be about the government spending money directly into existence, but it is still an obligation and unless it creates a positive return, is still a bubble. Allowing politicians to spend money into existence is an idea which should be considered with the greatest of caution. Banking should be public, but should still be a separate function from government. Much as the central nervous system and the circulation system are separate organic functions.

            1. Calgacus

              John Merryman:MMT which largely seems to be about the government spending money directly into existence, MMT notices that the government spends money into existence right now. That’s how it works and always worked.

              but it is still an obligation and unless it creates a positive return, is still a bubble. Of course it is an obligation, a contract in your terms, a debt, a promise, a liability etc. Many words meaning the same thing. The important thing to understand that money is a relationship, not a thing, not a commodity. (Money is a relationship, a debt, that is treated as a commodity.) Money being what it must be – an obligation – has nothing to do with positive returns or bubbles – which aren’t even definable without money/obligation.

              Allowing politicians to spend money into existence is an idea which should be considered with the greatest of caution. Again, that is how it works right now. And this is something which is perfectly obvious to everyone – everyone believes and knows this in practice. But everyone has been perfectly brainwashed into holding an incredible, preposterous opposing theoretical, “church” belief – that politicians don’t spend money into existence.

              1. Lambert Strether

                I guess some would prefer that oligarchs spend money into existence, for their own benefit, rather than democratic institutions do so, for public purpose. It’s a funny old world, as Maggie Thatcher was wont to say.

  5. Dan Kervick

    Ah the heterodox chip never falls far from the shoulder.

    I tend to take more interest in book reviews written by people who have actually read the book under review. Similarly, secondary reviews of other people’s book reviews are generally more worthwhile when written by secondary reviewers who have read the book the book reviewer read.

    Piketty focuses on two fundamental “forces of divergence” leading to increasing levels of inequality, neither of which is related to the education and skills gap. The first falls on the “return to labor” side of the income equation, and lies behind the explosion of incomes for the top managers in firms. He cites as the most probable cause of this phenomenon not a divergence in skills and education but rather the fact that “these top managers by and large have the ability to set their own remuneration.” He also suspects that there are different cultural norms at work since the phenomenon is much more pronounced in the United States and the UK than in other wealthy countries.

    The second force is a high ratio in the rate of return on capital to income. Piketty provides evidence that this ratio tends to grow under conditions of slow growth, and that under such conditions the importance of inherited and accumulated wealth in driving income flows increases.

    I will write more about the book when I have completed it.

    1. financial matters

      I’ll be looking forward to your review. Sounds like an interesting book to dissect well. From the heterodox standpoint they make the point that taxes don’t fund anything but give a currency value and are used to tame inflation if necessary. From this standpoint tax havens don’t keep money from us that we need to spend but would tend to devalue the currency.

      A point that I think is made better by Michael Hudson than most post Keynesians is the function of the tax system to encourage the FIRE sector and bad corporate governance. Here we need high tax rates in specific areas to discourage various types of rentier activities and corporate looting. As in where it is more profitable to loot a company and destroy it rather than invest in it in a productive manner.

    2. Yves Smith Post author


      Pilkington is NOT reviewing Piketty’s book. He is summarizing and commenting on Galbraith’s article, a distinction that seems to elude you. And I put this up to make Galbraith’s review more accessible.

    3. craazyman

      It’s even better to take an interest in reality instead of books! :)

      If people sit around reading books too much they forget to walk around down the street and down the avenue and into places where normal people congregate — like a Burger King in Queens, New York– they risk a psychotic break from reality that can result in total insanity, wandering lost in abstractions in their heads.

      A declne in the Job Offering Rate is the primary cause of inequality. This is the rate at which jobs are offered, as a function of accumulation of capital and revenue. The capital accumulates and the gravitational force builds and any job-rays are bent back into the capital pool. Eventually it goes dark and disappears. You only know it’s there because there’s no jobs anywhere near it and there’s a dude sitting on top of it by himself drooling.

      1. Dan Kervick

        Full employment can help to alleviate inequality. But inequality surged forward under Clinton, even when we had much higher employment rates and labor force participation.

        1. Paul Tioxon

          Clinton would famously promote the 22 Million+ jobs created during his 2 terms. So would the news outlets. The public responded, yeah, 22 million new jobs created, and my wife and myself have 3 of them. We got more work, more jobs, just to get the SAME amount of money we needed to maintain a middle class lifestyle that one adult in the family working 1 job used bring home in a weekly paycheck. Who misses the 50’s 60’s and 70’s now?

  6. Phil Ebersole

    For what it’s worth, Piketty does not attribute excessive executive compensation to the race between technology and education. He considers that hypothesis only to reject it. Instead he attributes it to the power of CEOs to control their own pay, and the lack of social norms in the USA, the UK and others that inhibit them from taking advantage of their power.

  7. Charles

    Mr Kervick has obviously read a good part of the book, and Mr. Pilkington, should have, as with Ms. Smith should have before referencing Galbraith’s review.

    1. Yves Smith Post author

      Please see our comments earlier in this thread. Pilkington was not reviewing the book. You are imposing an inappropriate frame on his post. He is summarizing and reacting to Galbraith’s essay. This is a meta conversation.

  8. Larry Headlund

    If Piketty had distinguished between earned and unearned income — between income generated as a result of productive physical plant and income generated from financial assets

    That is a pretty nonstandard definition of earned and unearned income, at least for a lay audience. It is liable to cause confusion unless you repeat it often.

    Gailbraith, in his review, uses ‘physical capital equipment’ and ‘other forms of money valued wealth’ for the same dictonomy.

    1. Yves Smith Post author

      Fair point. He might be picking up on nomenclature from classical economists, who objected to rentiers strenuously, but in their day, the big rentiers were landowners, not financiers.

      1. Larry Headlund

        While I am as fond of thesis and antithesis as the next guy, I think we need at least four divisions:
        A. Physical capital equipment
        B. Physical income producing wealth not in A (classic rent producing like land)
        C. Wealth which is not income producing.
        D. Financial instruments

        The dictotomies are that ABC are constrained by physical limits while as the 2008 crisis demonstrated, D is not , ABD versus C (paging Veblen)., A versus D (Pilkington), and A versus BCD (Gailbraith). When studying the historical data the records usually don’t break things up this way. Additionally for any individual actor the four forms are fungible.

      2. Larry Headlund

        I just remembered that there are existing good terms for A versus BD: physical capital and fictitious capital.

  9. Benign Brodwicz

    Galbraith’s review obfuscates rather than enlightens.

    Economists are ever provincial. As an apostate one, I am adequately convinced by the epidemiological evidence assembled by Wilkinson et al. (see his TED talk on inequality) that there are degrees of inequality that are maladaptive and destructive to health and welfare. I could make up an argument appealing our “evolutionary adaptive environment” to sound cool, but I won’t. If your heart doesn’t tell you this, you’re “one of them” (i.e., there’s also adequate research on the empathy-destroying effects of being in the “1 percent.”

    Galbraith is the old lefty here, not Piketty, appealing to the quaint notion that labor can exert cost-push in the globalized environment. Corporations beat up on national labor markets in sequence to keep labor costs down.

    In other words, to paraphrase Kenneth Boulding, economics studies money and commodities, not people, all too often. Getting involved in a “capital controversy” is so useless (Piketty may have avoided sounding too much like a Marxist to be politik.) Piketty attacks the main problem head on, which is INEQUALITY, Galbraith provides a work-around and an infeasible one at that. Why the hell can’t we raise taxes on rich people, James? WTF? Afraid of alienating your donors? Sorry, that may seem like a low blow, but the research tells us our politics are SO correlated with our income levels and socioeconomic status.

    The pusillanimousness of economists never ceases to amaze me. They are simply prisoners of the status quo (the ones who get to be heard in polite society) to an extent that I don’t think they can realize. Look at the support of the left for QE, when we were all taught for 40 years that pushing on a string doesn’t work! Then why? To support deficit spending for its own sake! Can monetary policy OR deficit spending work in an economy when the first several rounds of stimulus went ~93 percent to the 1 percent? NO! The distribution is broken! But can economists see past their own noses to admit it? NO! The status quo and a bankrupt “standard model” rule.

    It took economists about 40 years to let psychology into their midst, and they only did it in the most imperialistic of ways, denying that psychology itself had much to offer unless done by economists. Perhaps it will be the same for epidemiology. But perhaps it could happen quicker? In an “evidence-based” way, instead of by fiddling with mythical economic constructs that no one can agree on anyway? Until the rich, currently on a neurohormonal power trip perhaps unprecedented in world history, are brought down to Earth by reducing their relative incomes and wealth, they will continue to run the planet like the psychopaths they are. Power corrupts, and absolute power corrupts absolutely.

    So, economists, until you can look the problem in the face (as I see it, of course)–shut up, please!

    1. Yves Smith Post author

      I suggest you bone up on the costs components of producing goods. For manufactured products, direct factory labor is typically 10-15% of total product costs. That’s the case in cars, for instance. The offsets to any reduction in factory labor via offshoring are increases in the costs of much more highly paid managers, shipping and finance costs, and much greater risks related to supply chain length (for instance, being stuck with inventory with a product that isn’t selling as well as you thought).

      I have had numerous executives tell me that the case for offshoring in their company was weak, but they did it anyhow to please Wall Street.

      That means in many cases, offshoring was not about a necessity to compete in a global market, which is the unending refrain to justify this practice. It is better understood as a transfer from factory labor to a small number of senior executives.

      1. Peter Pan

        I agree with your comment Yves but I also wonder why raising taxes is off the table. JKG’s solutions seem every bit as difficult as raising taxes.

        The GWB administration reduced taxes on dividends and capital gains. This put newly found capital into the hands of the wealthy. The idea was that it would be invested in the USA to create new jobs through investment in capital equipment, research & development and productive real property. Unfortunately this newly found capital, courtesy of the tax cuts, took flight out of the USA and into the hot money flows of markets outside the USA. So instead of primarily creating new jobs in the USA, it destroyed jobs in the USA by creating new jobs outside of the USA (capital equipment, research & development, productive real property and speculation on trading exchanges).

        I don’t think the idea of raising taxes on the wealthy should be excluded, especially since the tax cuts were ultimately destructive to the middle and lower classes and advanced income inequality.

        1. Ben Johannson

          You’re not arguing with Galbraith, as he never said taxes were off the table. He said it was an ineffective method of combating inequality, which it is.

          1. Lambert Strether

            Exactly. Taxes are there to prevent dynasties, as Galbraith says explicitly (and not, of course, to raise revenue, which we learn from MMT).

        2. foppe

          Not sure. I think Philip was just trying to be contrarian when he wrote that, and meant it purely as “taxing without doing anything else [in fact, coupled with austerity] won’t get you votes, and [more importantly] won’t improve the economy”. That said, I don’t find it very helpful to go along with the millionaire’s perspective, and to call a 75% effective tax rate on income >€1m “inspired by envy”. It needn’t be at all; it could just as easily be inspired by a legitimate fear of the political influence enjoyed by people who can boast multimillion € personal fortunes. The French “Socialist” party’s failings have little to do with its ideas about taxation, and everything with its refusal to do anything but tax the rich a little bit.

          1. Peter Pan

            Well, I think Philip’s comment threw me off a bit, which upon rereading I realize is this reader’s comprehension problem:

            “Galbraith also makes clear that Piketty’s policy proposals — mostly dealing with higher taxes on the rich — are probably not fit for purpose in a globalised, financialised economy. Rather Galbraith asks us to consider alternative approaches.”

            So then I read the first few items Galbraith mentions and I suddenly have my eyes glaze over. Had I ignored Philip’s remarks I’d have read Galbraith recommending, “Tax corporate profits and personal capital gains, including dividends!”

            Duh !!

      2. Gabriel


        You wrote that numerous execs offshored just to stay on the good side of Wall Street.

        This is truly depressing and disheartening – if this reflects trends in other industries besides auto. We are doomed. Such Wall Street pressure to offshore reflects a nasty and extremely short-sighted self-interest.

        Why unnecessarily deprive many of jobs in the US, especially lower level workers? How does killing jobs in the US serve Wall Street or the economy? How does offshoring help alleviate income and wealth inequity?

        Or maybe I’m missing the bigger picture – maybe Wall Street’s push to offshore reflects its desire to reorient the US economy toward high tech and services? Maybe Wall Street knows what’s better for the US economy?

        At any rate, if generally true, very depressing.

      3. Benign Brodwicz

        Of course I agree the screwing of labor is pathological behavior. That’s why I think Piketty’s blunt instrument approach to reducing inequality is correct–tax it down, bring these jacked-up mofos down to earth. Saez has a thoughtful interview somewhere in which he discusses whether this will “hurt growth” in which he says maybe. But I say so what. And also: our growth rates were highest when we had the highest marginal rates. The missing variable in my view is a viable social contract (disclosure: adherent to Fourth Turning analysis), and the old time religion states that it takes a severe depression and/or war to re-instill it once it’s been lost. Do we need to do that again?

        Economists remain totally ignorant of the epidemiological research (Wilkinson’s TED talk, Equality Trust web site in UK for starters). To be expected. But of course utility theory (welfare theory) has ALWAYS said redistribution would increase social welfare, but you won’t find an economist saying that, it’s so passe–so much better to argue about which flavor of worthless fiat money you prefer. I’m waiting for the Fed to convert Treasuries into zero coupon perpetuities….

        I believe we Americans *all* would be so much happier *and healthier* with 1970 per capita GDP and a Gini coefficient half of what it is today. This is what the the epidemiological research suggests.


    2. Benedict@Large

      Which left were you talking about that supported QE? The Obama Left? Because MMTers, who are more often than not political leftists, called QE to be useless (merely an accounting entry, to be specific) right at the onset.

      Careful tossing around labels there. You may be telling more about yourself than about those you are trying to talk about.

  10. Andrew Edwards

    First Yves then Pilkington, first on Lewis, now on Piketty. Is Naked Capitalism becoming a site where bloggers post reviews on books they haven’t read?
    Yves would have learned just from the Times excerpt that Lewis, while hardly blameless – he has lamented in the past how “Liar’s Poker” was read more as a how-to manual than a cultural critique – is in favor of destroying the HFT world, root and branch. Certainly this not the sweeping change to society we might be looking for, but it is not small ball. At least, not in New Jersey.
    And Pilkington’s sense of the intelligencia review is embarrassing. The logic of Piketty’s argument (which, to be sure is about wealth inequality and little else, but again, not small ball), there are only two solutions. Reduce the rate of return on capital (as Galbraith argues), increase real income growth (Galbraith again), or tax financial property just as, say, we tax physical property in the United States, thus reducing the actual wealth of the very rich.
    While this three-part solution may be a bit simplistic, as Galbraith’s critique makes plain, it radically redefines policy approaches to inequality. Either cut ‘r’, raise ‘g’, or tax ‘w.’ Anything else keeps us on the road to Versailles. Hardly “high marginal tax rates for the sake of high marginal tax rates; an economic policy based on envy with no real productive aspect.” Give me a break – or simply read the books first.

    1. Philip Pilkington

      I see all of one tangible criticism in all of this fulminating, which I will address shortly. But I must point out that Galbraith’s complaint — which I echoed — was that Piketty defines ‘capital’ too narrowly and thus cannot pinpoint the fact that it is financial capital (i.e. rentier capital) that is the leading cause of inequality. From what I have read and from what others have told me Piketty doesn’t really have a theory of what causes the inequality but Galbraith does. The main purpose of my post was to highlight that Galbraith’s work — which is a year old — was ignored by the mainstream while Piketty’s is posted everywhere. And yet given that Galbraith provides a causal argument and Piketty provides none, surely Galbraith’s is more important!

      As to your lone issue: Higher marginal tax rates will just hurt economic growth at this stage. That is what Hollande has tried in France. It’s a disaster. It’s like saying that higher marginal tax rates by the Weimar government during their austerity programs post-1929 would have stymied Hitler’s rise. Nonsense.

      1. Lambert Strether

        To my simple mind, the difference is that Piketty can be framed in term of “inequality,” of which it is permissible to speak, but Galbraith must be framed in terms of “class,” of which it is never permitted to speak.

      2. Andrew Edwards

        That is why Piketty argues for a tax on wealth, not income. This confusion between a wealth tax and an income tax is the root problem of your meta-review.
        To wit:
        1. “…whereas Galbraith arrived at heterodox conclusions, Piketty’s are mostly orthodox.”
        In what sense is a Piketty’s primary policy prescription: a progressive tax on financial wealth ‘orthodox’? I wish!
        2. “As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education.”
        Piketty argues that differentiations between nations (not people) can be explained, somewhat, in terms of education and technology. But the book isn’t about income inequality; it is about wealth inequality, and specifically inequality in the distribution of income producing financial assets. So Piketty, like Galbraith, blames ‘finance.’
        3. “It is new types of income that are tied to asset price valuations that are important to explain rising inequalities.”
        This is precisely Piketty’s point. To be fair, you wouldn’t know that from Galbraith’s review.
        4. “Galbraith also makes clear that Piketty’s policy proposals — mostly dealing with higher taxes on the rich — are probably not fit for purpose in a globalised, financialised economy.”
        A wealth tax is indeed a tax on the ‘rich,’ but it is not, as you suggest, a higher marginal income tax rate. It is a tax on financial property. This, as Piketty and Galbraith note, is utopian, but it is not the policy of Hollande’s France.
        5. “From what I have seen so far the logical outcome of Piketty’s book is the government of Francois Hollande — with its insistence on high marginal tax rates for the sake of high marginal tax rates; an economic policy based on envy with no real productive aspect.”
        Again, we’re not talking about marginal tax rates here. That is a misreading of Galbraith’s review (not to mention the actual book). And the claim that a global financial asset tax is ‘an economic policy based on envy,’ belongs on Fox News not Naked Capitalism. As noted, it may be utopian, but it is worthy a deeper analysis than: “Class Warfare!”

        And Lambreth, I agree. The book (assuming anyone actually reads it) is potentially subversive precisely because we’re allowed to talk about inequality now.

        1. Philip Pilkington

          1. He is an orthodox economic theorist.

          2. Can you provide clear quotes that Piketty makes the case that income inequality is driven by financialisation?


          1. Andrew Edwards

            1. If you say so! I’m extremely heartened to hear that the ‘orthodox’ view is that “the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.” (Piketty 2014, 32). Finally! (irony)

            2. “Broadly speaking, the 1970s and 1980s witnessed an extensive ‘financialization’ of the global economy, which altered the structure of wealth in the sense that the total amount of financial assets and liabilities held by various sectors (households, corporations, government agencies) increased more rapidly than net wealth.” (Picket 2014, 193-194). As a result “total financial assets and liabilities” reached “ten to fifteen years of national income” in the United States by 2010 (Picketty 2013, 194), the point being more income producing financial assets (held by the rich) = more income inequality. But, again, you might have to read the book to see the argument.

            3. Hope that helps!
            PS: Here’s a more helpful review of Piketty:
            Milanovic’s description of Piketty’s argument is far better than Galbraith’s, if rather uncritical. Meta-review!

  11. John Merryman

    In the long run, probably the next generation, we will have to be more concerned with how financialization siphons value out of society, the economy and the environment, rather than simply whether this firehose of extracted wealth is evenly redistributed amongst the various classes of people, because, like fossil fuels, clean water, etc, it will not prove to be a bottomless supply, before the blowback becomes overwhelming.

  12. AdamK

    Has anyone read Martin Ford’s book “The lights in the tunnel”??
    I was wondering what are your thoughts regarding his suggestions, considering
    that he as Picketty sees technology the major culprit here.

    1. Dan Kervick

      Picketty does not see technology as the major culprit. See how quickly false rumors spread from slapdash stuff?

  13. Peter L.

    I’m reading Piketty’s book now. I think he is a careful scholar, and rather modest in the way he states his conclusions. In the introduction he states very clearly that politics play a major role in how inequality develops, or does not. He emphasizes the role of the two World Wars in reduces inequality, for example.

    However, I think it is noteworthy that he is very clear that he does not see inequality as something bad in itself, instead he says, we have to ask how the inequality happens. Further he takes what I think is a rather extreme position that democratic society is based on meritocratic values. That’s right on the first page of the introduction.

    One might think democratic society is based on sister- & brotherhood, liberty and, equality. I think inequality is more like a crime. Perhaps it can be justified in special cases, but we ought to start from the position that it is unacceptable in a decent society.

    Perhaps this is one factor making Piketty’s work more accessible to certain economists.

    1. James Levy

      The problem with his formulation is that we don’t live in a culture in which there are any rewards like honors or reverence or respect, so merit can only earn you money. That’s assuming, of course, that we live in a meritocracy (we don’t). It also assumes that merit can be judged objectively and we all agree what meritorious actions are and how they should be compensated: with a crown of laurel leaves? a medal? a magistracy? a knighthood? a million bucks? For a scholar with such a reputation, he wasn’t thinking this issue through clearly at all. He was just going with the cultural flow.

  14. Pelham

    Galbraith’s and Pilikington’s comments are outstanding. I would only add this:

    While Piketty fails to make the crucial distinction between earned and unearned income, maybe the rest of us fail to fully appreciate the distinction between what is to be done and the means to do it. Right now we have no means, no tools at hand to bring about any real change. The entire political system is completely locked up in any number of ways by those who wish to keep things as they are — with unrestricted campaign financing the least of these ways.

    And that’s why Pilkington’s final comment re Hollande’s France is apt. The mainstream alternatives are hopeless as well. Where France differs is that there is a viable, albeit frightening, alternative — the Front National.

  15. john kissinger

    1 Raising the minimum wage is great… but if this is done, there is no need to support unions… and much easier to get a bill through congress raising the minimum wage than something that boosts unions. Point out over and over that the minimum should have been indexed to inflation long ago, and what it would be today if it had. Be practical regarding what arguments will resonate with the center, and what will not.

    2 Taxing unearned income is ok in principal, but this is a non-starter in today’s congress. Cut taxes an equal amount for everybody instead, say 100/month credit against taxes for every taxpayer when unemployment is over 5.5%, with withholding rates immediately modified; this cut targets the middle class and boosts the automatic stabilizers while providing a sunset provision, meaning no obvious total cost. Of course republicans much prefer a cut that is focused on the rich, but their base is not rich… how many republicans could vote against such a proposal? And with the deficit around 3% the time to pass it is now.

    1. Larry Headlund

      Some sticky points with your tax proposal:

      Define taxpayer. Around 43% of Americans pay no income tax (but 2/3 of those pay payroll taxes). So who gets the tax credit? The 57%? The 86%? Everybody?

      How many republicans could vote against such a proposal? Let history be your guide: When the Bush Era Tax Cuts were and issue in 2010 and 2012 Republicans were willing to not vote for extending the tax cuts to most Americans unless their demands were met for tax cut extenions to the upper brackets and estate tax modification. So the answer seems to be that Republicans will vote against a tax cut which is insufficiently generous to their patrons.

  16. Richard

    Galbraith’s review is simply incorrect. Piketty doesn’t pretend to be measuring physical capital since his definition of capital is any asset which provides a flow of income and that can be sold. That includes intellectual property as well for example. You could however argue that he shouldn’t have given his book this title since his definition is very much at odds with what we usually think of as “capital”.
    And Piketty acknoweldges at length that the low capital/income ratio of the “trente glorieuses” was due in large part to pro-workers policies that kept the price of capital low, and that’s also why the ratio is lower in Germany, because of Rhine Capitalism.

    1. Dan Kervick

      Yes, on pages 47 and 48 Piketty explains that he is using “capital” in a broader and more inclusive sense synonymous with “wealth.” So his book could just as well have been called “Wealth in the 21st Century” without any change in his arguments. “Capital” is not a univocal term in economics.

  17. Hugh

    We live in a kleptocracy. Wealth inequality is the defining characteristic of kleptocracy. It is the object, end, purpose, and point. It results from theft and looting by the rich and elites, and it is maintained and justified by the class war they wage against us.

    Kleptocracy is an all in proposition. There is no possibility of reforming or modifying it. There is no chance of its economic overthrow until its political overthrow is accomplished. Even if this is done, we are still left to ask, What then? What kind of a society do you want to live in? How this question is answered should provide the context against which all economic, political, and social ideas should be measured.

    We don’t need to talk about minimum wages if everyone has access to a living wage or a guaranteed income. If everyone has the right to decent food, shelter, environment, healthcare, education, and retirement, how much more than this do any of us need, how much more than this can any of us justify?

    What is capital except money stripped of its social connotations, purposes, and responsibilities? Work is one of the most misunderstood ideas I know of. What is work? Define it for me. For me, someone who picks up a single aluminum can at the side of the road and recycles it has done more good and less harm than Jamie Dimon with all his millions will in his entire life. So who has worked, and who should be compensated? How can great personal fortunes be justified that sequestrate and misdirect society’s resources to purely personal and socially destructive ends?

    I see nothing new here, no recognition of kleptocracy or its fundamentally criminal nature, just a few competing suggestions which, given kleptocracy, will never come to pass.

    1. Banger

      Great comment! We must, if we want to provide a new vision that people can begin to rally around, ask just the sort of fundamental questions you are asking which are, essentially about values. We can find no solution to the political/economic dead end we find ourselves in without exploring the assumptions that most of us, despite the evidence, seem to hang around our necks dragging us further into some variant of despair.

      1. MikeNY

        Yes to you and Hugh.

        The massive transfer of income and wealth has been from workers to corporations and the 1% who own 40% of US publicly traded equities (let alone private equity, which is almost by definition the demesne of the plutocrats). So: tax corporations, or tax dividends and prohibit stock buybacks, and use the revenue to implement a national living wage. $25 / hour average would be reasonable.

        Impossible? Sure — until the people start to question to political stability of the United States of America. And that’s where we’re headed.

    2. John Merryman

      What is money, other than an accounting entry? One person’s asset is another’s debt. As with much in life, there is a wave function here, where the initial usefulness turns to mindless momentum and the efficient allocation of resources, which made capitalism a viable economic system, has been turned into the production of capital as an end in itself, as this wave peaks. Such that the flood of notational value has turned into a tumor on the very system it created. The snake is eating its tail.
      The real question is not how to save the system, but what principles will replace it, after the crash. Just as government is the executive function of society, finance is its economic circulatory system and just as humanity eventually outgrew government as a private function, it is now outgrowing finance as a primarily private function. The money coursing through the economy is like blood coursing through the body. No one part, even the heart, owns the blood it contains. It is like a highway system. We own our houses, cars, businesses, but not the roads connecting them and no one cries socialism about that. Eventually we will have to come to see money as just such a public utility.
      Like layers of government, we would have local public banks supporting the communities using them and they would be the foundation for regional banks, for broader functions and those would be the pillars on which a national bank would rest. The structure can only be as big as the foundation on which it rests can support.

    3. Dan Kervick

      I think its also important to recognize that wealth inequality can grow as a natural result of people doing their normal everyday things in the everyday economy, even in the absence of stealing or other predatory activity. There is no force of natural economic harmony that keeps everything in a lovely balance so long as people are nice and honest. Equality is something of important social value that we have to work hard to build and then preserve. It is not natural.

      1. Hugh

        Government can redress any wealth inequality through its powers of legislation, regulation, spending, and taxation. In terms of taxation, wealth inequality can be limited by high marginal income taxes, estate taxes, and asset taxes. This is not about numeric equality or any particular kind of regimentation. The point is that we pull together and undertake to provide to each other the wherewithal for a good and decent life. We do not say that every life must be exactly like every other. It is more like, here are the tools for a good life and godspeed. We can tolerate some inequalities to reward those who make special contributions to our society. We should never allow such inequalities to become hereditary or so large as to distort and deform our society as a whole.

        I have in the past put forth a tax plan that would effectively cap income at $130,000. This figure could be slid up or down. How much disposable income does someone need in a year, for example, if their needs for a good life are guaranteed them? It would also cap overall wealth (through an asset tax) at $20 million. This is much smaller than most of today’s great fortunes, but it can be equally argued that it is much more than anyone really needs in a society which provides for all their reasonable needs.

        1. Peter L.

          “We do not say that every life must be exactly like every other.”

          Right. I think equality of wealth, income and material things ought to be a goal in itself. My gut feeling is that pursuing this goal would provide a basis, or at least go hand in hand, with bringing out true diversity among people. That is, people are not “equal” in their talents, interests, abilities and so forth. This is a good thing, and I believe these good “inequalities” would be better expressed as inequality of material things decreases.

    4. Peter L.

      Hugh asked,

      “What is work? Define it for me.”

      I very much like the opening line from Studs Terkel’s Working. Here it is:

      “This book, being about work, is, by its very nature, about violence—to the spirit as well as to the body. It is about ulcers as well as accidents, about shouting matches as well as fistfights, about nervous breakdowns as well as kicking the dog around. It is, above all (or beneath all), about daily humiliations. To survive the day is a triumph enough for the walking wounded among the great many of us.”

  18. Jim in SC

    I would just like to say that being a rentier is a lot tougher than it sounds. There can be lots of serious work involved. People do not always behave in a rational fashion. And they sometimes tear things up. It is, in general, difficult to squeeze a return out of capital, when there is a lot of capital out there competing for that return.

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