The heart of the theoretical view of Thomas Piketty, the new darling of the left, is this equation:
r > l
What this means is that the return earned on capital is higher than the return earned on labor. According to Piketty, that relationship means that the owners of capital (the investors/owners) will always do better than the workers. The result will be an inexorable movement towards greater inequality unless something is done to take away the advantage that the owners of capital have over those who provide labor.
From a historical perspective, there is a marked problem with Piketty's theory. During the last century, it has not been true. Inequality has been reduced, not increased. Of course, Piketty has an answer to this problem: the great distruction of capital caused by World War I and World War II leveled the playing field and prevented the increase in inequality.
Piketty's excuse is faulty. World War II, Piketty's great destroyer of capital, ended almost 70 years ago. For the next fifty years, there was a move away from inequality that was clear and undeniable. If the return on capital is really greater than the return on labor as a rule, then inequality should have started to appear again by ten years after WW II at the latest. It did not.
Piketty's basic theory is also flawed. The group which has seen its income grow by the most in recent years is not the one that holds capital. No, the outsized gainers of the last 15 years have been the corporate managements, the folks who provide extremely specialized labor. When the CEO of a company makes 200 times what the entry level workers make, it has nothing to do with returns on capital. Oh, the CEO usually is a part owner of the company, but that is because his labor is rewarded with stock options. In other words, his capital ownership is a direct result of his labor.
Another flaw in the Piketty analysis is that he ignores the ups and downs (including the crashes) in the capital markets and in individual companies. Think about all those folks (including a lot of really rich people) who owned stock in Lehman Brothers, General Motors, or one of the other companies that failed six years ago. Not only did their "returns" on capital disappear; their capital itself disappeared. Remember, those who lost their jobs at Lehman Brothers still had their skills and were able after a time to get another job. It may not have been as good as their last one, but the returns on labor were nevertheless coming in again. The investor who lost five million dollars when his Lehman Brothers stock became worthless couldn't put his capital elsewhere and get lower returns; that capital was gone. Piketty ignores this dynamic.
Piketty also ignores intellectual capital. When Bill Gates and his friends design DOS and managed to sell it to IBM for their PC, his success had nothing to do with traditional capital. Microsoft used an idea, "intellectual capital" if you will, to make billions of dollars. Intellectual capital has nothing to do with the return on traditional capital or the return on labor. Nevertheless, in contemporary America, it is intellectual capital which determines to a great extent who becomes wealthy.
The truth is that Piketty's views are a modernization, but a rehash of those of Karl Marx. Those views have proven to be wrong over and over again through the last 150 years. Repackaging them today will not make them any more successful.
r > l
What this means is that the return earned on capital is higher than the return earned on labor. According to Piketty, that relationship means that the owners of capital (the investors/owners) will always do better than the workers. The result will be an inexorable movement towards greater inequality unless something is done to take away the advantage that the owners of capital have over those who provide labor.
From a historical perspective, there is a marked problem with Piketty's theory. During the last century, it has not been true. Inequality has been reduced, not increased. Of course, Piketty has an answer to this problem: the great distruction of capital caused by World War I and World War II leveled the playing field and prevented the increase in inequality.
Piketty's excuse is faulty. World War II, Piketty's great destroyer of capital, ended almost 70 years ago. For the next fifty years, there was a move away from inequality that was clear and undeniable. If the return on capital is really greater than the return on labor as a rule, then inequality should have started to appear again by ten years after WW II at the latest. It did not.
Piketty's basic theory is also flawed. The group which has seen its income grow by the most in recent years is not the one that holds capital. No, the outsized gainers of the last 15 years have been the corporate managements, the folks who provide extremely specialized labor. When the CEO of a company makes 200 times what the entry level workers make, it has nothing to do with returns on capital. Oh, the CEO usually is a part owner of the company, but that is because his labor is rewarded with stock options. In other words, his capital ownership is a direct result of his labor.
Another flaw in the Piketty analysis is that he ignores the ups and downs (including the crashes) in the capital markets and in individual companies. Think about all those folks (including a lot of really rich people) who owned stock in Lehman Brothers, General Motors, or one of the other companies that failed six years ago. Not only did their "returns" on capital disappear; their capital itself disappeared. Remember, those who lost their jobs at Lehman Brothers still had their skills and were able after a time to get another job. It may not have been as good as their last one, but the returns on labor were nevertheless coming in again. The investor who lost five million dollars when his Lehman Brothers stock became worthless couldn't put his capital elsewhere and get lower returns; that capital was gone. Piketty ignores this dynamic.
Piketty also ignores intellectual capital. When Bill Gates and his friends design DOS and managed to sell it to IBM for their PC, his success had nothing to do with traditional capital. Microsoft used an idea, "intellectual capital" if you will, to make billions of dollars. Intellectual capital has nothing to do with the return on traditional capital or the return on labor. Nevertheless, in contemporary America, it is intellectual capital which determines to a great extent who becomes wealthy.
The truth is that Piketty's views are a modernization, but a rehash of those of Karl Marx. Those views have proven to be wrong over and over again through the last 150 years. Repackaging them today will not make them any more successful.
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