“Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine democratic societies.” — Thomas Piketty, “Capital in the 21st Century” (2014)
The Economist magazine rightly called French professor Thomas Piketty the new Marx, although a watered down Marx. His bestseller (rated #1 on Amazon and the New York Times) is a thick volume with the same title as K
arl Marx’s 1867 magnum opus, “Kapital.” The publisher, Harvard University Press, appropriately designed the book cover in red, the color of the socialist workers’ party.
Piketty cites Karl Marx more than any other economist, even more than Keynes. He barely mentions Adam Smith. Instead of the modern scientific name “economics,” he prefers the old term “political economy,” a favorite of radical professors.
Most importantly, his focus is on the distribution of income and capital, not the creation of wealth. He’s not so much concerned with the size of the economic pie, but with how it’s cut up.
The book is ostensibly a study of inequality of wealth and income over time. His main thesis is that inequality grows under capitalism, that unfettered free markets make the rich richer and the poor poorer, a standard Marxist position, and that the only solution is to tax the dirty, filthy, stinkin’ rich with highly progressive taxes on their income and wealth.
I don’t want to be picky, but Piketty often ignores data that contradicts his theory of growing inequality. For instance, he selectively chooses a few members of the Forbes billionaires list to show that wealth somehow grows automatically faster than the average income earner. He repeatedly refers to the growing fortunes of Bill Gates in the United States and Liliane Bettencourt, heiress of L’Oreal, the cosmetics firm. “Once a fortune is established,” he claims, “the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.”
Come again?
I guess he hasn’t heard of the dozens of millionaires and billionaires who lost their fortunes, like the Vanderbilts or the Hunts, or to use a recent example, Eike Batista, the Brazilian businessman who just two years ago was the seventh-wealthiest man in the world, worth $30 billion, and now is almost bankrupt.
He conveniently ignores the fact that most high-performing mutual funds eventually stop beating the market and even underperform. Take a look at the Forbes “Honor Roll” of outstanding mutual funds. Today’s list is almost entirely different from the list of 15 or 20 years ago. In our business, we call it “reversion to the mean,” and it happens all the time.
Professor Piketty seems to have forgotten a major theme of Marx, and, later, of Joseph Schumpeter, that capitalism is a dynamic model of creative destruction. Today’s winners are not necessarily next year’s winners. IBM used to dominate the computer business; now Apple does. Citibank used to be the country’s largest bank. Now it’s Chase. Sears Roebuck used to be the largest retail store. Now it’s Wal-Mart. GM used to be the biggest car manufacturer. Now it’s Toyota. And the Rockefellers used to be the wealthiest family. Now it’s the Waltons, who a generation ago were dirt poor.
Piketty is no communist and is certainly not as radical as Marx in his predictions or policy recommendations. Many call him “Marx Lite.” He doesn’t advocate abolishing money and the traditional family, confiscating all private property or nationalizing all the industries. But he’s plenty radical in his soak-the-rich schemes, demanding a punitive 80% tax on incomes above $500,000 or so and a progressive global tax on capital with an annual levy between 0.1% and 10% on the greatest fortunes.
The great Scottish economist Adam Smith once said, “Little else is required to carry a state from the lowest barbarism to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice.” Moreover, his system of easy taxes and natural liberty would reduce inequality and result in “universal opulence which extends itself to the lowest ranks of the people.”
Hopefully Mr. Piketty will see the error of his ways and write a sequel called “The Wealth of Nations for the 21st Century,” in which he will quote Adam Smith instead of Karl Marx. Perhaps he will quote this passage: “To prohibit a great people….from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.”
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I find it the ‘somehow’ in ‘wealth somehow grows automatically faster than the average income earner’ puzzling. Why would it be surprising that the wealth of someone with a high income would grow faster than someone with an average income?
You focus here on the times when the rich don’t get richer, or even stay rich, but to take the example of mutual funds, surely it’s not so much about whether high-performing mutual funds are liable to stop performing so well, but about how much you can afford to invest in mutual funds to begin with?
The thought experiment I posit is this: In what ways would Adam Smith s views alter if he were alive today, was in his or, and had studied not only economics, but history and neuroscience? I imagine he would refine and alter nearly all of his views and contend with many of the comments posted here. It would be great to see the changes in his thinking after enjoying over 200 years of knowledge his own enlightenment contributions helped produce. He might contradict himself on more than a few points.