Wednesday, July 30, 2014

Das Kapital in the Twenty-First Century

I finally finished Thomas Piketty’s envy economics bestseller Capital in the Twenty-First Century, which according to those fine people at Amazon, is actually an accomplishment in itself. I was debating for sometime whether to buy the thing, the irony of shelling out nearly $30 for a mass produced book to someone who already makes more than me decrying income inequality was certainly a factor, but was curious as to what all the fuss was about and don’t like criticizing something I haven’t read based purely on other people’s opinions.

The short story, it’s not too terrible, actually fairly readable for a voluminous book on an arcane subject. Did I find it world changing? No. Were there plenty of parts that left me shaking my head? More than a few.

First of all, the books has received a fair amount of criticism for playing fast and loose with the facts. Most famously from the Financial Times. In the scope of things, that probably isn’t the worst of his sins. The most egregious is where he completely reverses the history of minimum wage hikes in the United States. This is bad since it could not have happened as the result of a typo or misplaced cell on a spreadsheet. The only reasonable explanation is that Piketty either falsified the facts intentionally, or just neglected them in an attempt to fit his political biases. He also does a similar thing when he falsely claims that the top marginal tax rate under Herbert Hoover was 25%.

In the end, this is really what the book is about. While it makes some interesting points on investments, his research into investment returns in university endowments actually interested me enough to research further, the book is basically a political tract to rally against income inequality. Marxist references aside, the book really shouldn’t be named Capital, as capital is only incidental to the real theme of the book, income inequality. Piketty makes no analysis of capital whatsoever, aside from how he thinks it contributes to income inequality. To him it is just one amorphous blob completely devoid of distinction, which grows ad infinitum until it consumes the entire universe, leaving impoverished widows and orphans in its metaphorical wake.

This is perhaps the greatest weakness of the book. Despite its nearly 700 pages it is quite weak in the details and makes an incredible amount of logical leaps without even a theoretical support. For example he bases his predictions of the future of capital growth on the assumption that all capital gains taxes will go to zero.

Wha…? Now I know many countries are reducing capital gains rates to spur investment, and some libertarian economists have proposed reducing rates to zero, but I know of nobody who actually thinks it will be, much less that will be the global standard for the next century. It seems nothing more than a convenient way for him to apply his argument than any rational expectation.

Also in this line of thought Piketty just starts with the presumption that income inequality is not only bad, but that it is the economic measure that all others revolve around. In the introduction, he mentions that mankind has greatly improved it average economic well-being over the last 200 years, but then the subject is promptly dropped. The entire rest of the book rests with the sole concern of economic inequality, with no thought whatsoever to changes in overall well -being. Without even the slightest analysis all reduction of inequality is presumed to be good, all increases bad.

Piketty also gives no thought whatsoever to investment decisions or the behavior of the “capital class”.  Ironically, he even repeatedly refers to Bill Gates amassing great wealth as a classic example of the reason steps need to be taken to eliminate the wealthy, with only a passing parenthetical reference to the fact that Gates is giving his money away voluntarily and doing an incredible amount of good with it . In Piketty’s mind all wealth is equal. It almost reaches cartoonish levels, where he almost seems to imagine wealthy people piling their ill gotten gains in a giant vault and diving into it Scrooge McDuck style, cackling evilly. One example of this is his repeated references to the movie Titanic as an example of class distinctions in early 20th century America. Seriously? I was half expecting him to use Unobtanium as an example of resource consumption and the exploitation of native cultures.

This brings me to yet another issue with his analysis, his conflation of capital, wealth, and consumption. Piketty, like many left wing economists employs a static zero sum analysis where any wealth, especially in the form of capital, is seen as being stolen from the poor, in fact he even says at one point that wealth is partially based in theft. Piketty calls for a series of taxes; on both income and wealth so that society may take back this stolen loot. Ironically, he fails to even make a moral argument for why society is justified in confiscating property. It is just accepted as good. He doesn’t even limit this to the rich, although he argues for the elimination of their wealth, but he also calls for massive tax raises on the middle class in the United States, even though that has actually nothing to do with the subject of the book as far as capital or income inequality go. He just throws that in there because he thinks government should confiscate wealth.

His biggest fallacy though is that invested capital does not detract from society, it provides the investments needed for society to improve itself. In Piketty’s superficial view it is bad though. His logic essentially argues that a billionaire who blows through his money wastefully consuming large amounts of resources, wrecking sports cars, buying off abused girlfriends and running yachts ashore in the Mediterranean is benefiting society by reducing his capital. Meanwhile that same billionaire who lives frugally in a three bedroom  house in Omaha and builds a successful and profitable business, is detrimental to society and must be punished.

So is the book worth reading. Yeah, if you have the time and interest. Is this next word in economics? Unfortunately no, it actually takes us back a couple of generations, to a superficial understanding of the way the world works.

No comments: