Garett Jones Critiques Piketty

See Living with Inequality: Has Thomas Piketty really found "the central contradiction of capitalism"? Garett Jones is an associate professor of economics and BB&T professor for the study of capitalism at George Mason University. The book he reviews is Capital in the Twenty-First Century, by Thomas Piketty. Excerpts from the review:

"Piketty claims to have uncovered "the central contradiction of capitalism.""

"at some times and at some places, the interest rate is greater than the economy's growth rate."

"capitalists will take over more and more of the economy until something genuinely awful happens, Piketty says. He is vague about what this awfulness might consist of,"

"elites can buy massive political influence, pushing the government to favor well-connected insiders and in the process slowing down the economy."

"So is the central contradiction a [bad] thing? Barely. Even capitalists consume, and they can consume quite a lot."

"Saving is mostly just delayed consumption, as generations of economists have taught, and the only way for capital to grow exactly at the interest rate is for nobody to consume it. Every bit of consumption pushes down the growth rate of capital."

"But between the possibility of spendthrift descendants who fritter away her fortune and the possibility of multiple descendants who divide it into tiny slices, there's good reason to expect the long-run trend will be for the capital of billionaires to grow at about the same rate as the overall economy. Since capital helps the average worker do her job, we should hope that the world's billionaires will be frugal rather than reckless,"

"There's an extra reason to think that capital isn't going to permanently grow at a faster rate than the overall economy: Piketty says it won't. He places great weight on the mainstream economic idea that in the long run the natural tendency of market economies is for capital and the economy to both grow at the same rate,"

"there's no inherent tendency for capital to outpace the economy forever, even when Piketty's "central contradiction" of high interest rates holds. The reason is simple. If the first machine is more productive than the second (i.e., diminishing returns), and if machines wear out and fall apart at a fairly predictable rate—a depreciation rate, in accounting-speak—then it's a safe bet that in the long run capital and the economy will grow at about the same rate."

"if interest rates are high, business owners look for alternatives to capital (such as workers); private demand for capital thus shrinks."

"But while Piketty's contradiction is less an iron law and more a chalkboard speculation, there's still plenty of room for class warfare in our future. A final way to see if capitalists are going to exercise unprecedented influence in the economy is to see whether their share of the economy is at unprecedented levels. Here, Piketty's arduous historical research pays off. For the two countries for which he has data going back more than a century—Britain and France—the answer is clear: Capitalists are claiming a substantially smaller share of the economic pie today than they did in the mid-19th century. Back then capital income was a bit more than 40 percent of total national income. Now it's a bit under 30 percent. So if capitalists—savers, landowners, entrepreneurs, and all the rest—are going to become a bigger deal in the future, they've got a long way to go before they're at 19th-century levels."

"Market-oriented economies that learn to live with inequality will reap the rewards: More domestic capital for workers to use on their jobs, more foreign capital flowing in to a country perceived as a safe investment, and a political and cultural system that can spend its time on topics other than the 1 percent. Market-oriented economies that instead follow Piketty's preferred path—taxing capital heavily, preferably through international consortiums so the taxes are harder to evade—will end up with less domestic and foreign capital, fewer lenders willing to fund new housing projects, fewer new office buildings, and a cultural system focused on who has more and who has less."

"Any tax on capital is a bad idea in the long run, and that the overwhelming effect of a capital tax is to lower wages. A capital tax is such a bad idea that even if workers and capitalists really were two entirely separate groups of people—if workers could only eat their wages and capitalists just lived off of their interest like a bunch of trust-funders—it would still be impossible to permanently tax capitalists, hand the tax revenues to workers, and make the workers better off.

Why? Because the tax on capital would shrink the supply of machines, which workers use to become more productive and earn more."

"a bountiful supply of capital tends to push interest rates in a direction that diminishes whatever is left of Piketty's central contradiction. The "global savings glut" that Ben Bernanke wrote about a decade ago may last quite a while, and that's good for global productivity."