I've been looking forward to a discussion on Thomas Piketty by the HN crowd for a long time, I was afraid it would never get here because it would have been be too 'political' - but I'm happy this has finally made the frontpage.
For those who are still unfamiliar with the name Piketty: He's a French economist (who briefly enjoyed a stint at MIT as professor before becoming disenchanted with the state of things here and returning to his home-country of France).
In his recent book "Capital in the 21st Century", he's done something very big. He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it. He's done this with an enormous amount of data.
His prescription for the cure is a little controversial though: progressive taxes (up to 80%) for the rich, and a "global wealth tax" that he wants America to orchestrate. For a good summary (that talks about this main discovery that "r > g" -- that return on capital is greater than the overall economic growth), watch this talk on Bill Moyers show with Krugman: https://www.youtube.com/watch?v=QzQYA9Qjsi0 - though this submission article seems to have a nice synopsis too.
As an article on NYT earlier this week said it, the book heralds a song of American socialism in the future. His findings are just too compelling to ignore, they're going to fundamentally change the tone and substance of debate we have about economic policies.
Piketty's claim is that, in a capitalist system, wealth disparity increases over time (measured in currency).
I don't think he presented enough evidence to make that statement without a lot of qualifiers, but for now, let's just assume that it's correct.
What Piketty absolutely failed to account for is that capitalism's greatest strength (and even Marx thought this) is that it causes the marginal utility of currency to decrease over time.
That means that even if the dollar gap between rich and poor is bigger today than it was 200 years ago, the actual quality of life gap is just getting smaller and smaller.
A billionaire can afford caviar and ten lamborghinis.
A thousand-aire can afford hamburgers and a used civic.
The billionaire is not a million times better off, and every year, as brutal market forces push the development of better and cheaper technology in every field, the difference between the rich man and the poor man, measured in the quality of food, goods, and services they have access to, gets smaller and smaller. For the most part, billionaires can only buy more of the same thing that almost everyone has access to. The rich guy can buy a harvard education, and the poor guy can buy a cheap but effective online education. The rich guy can buy a gold-plated iPhone, and the poor guy can buy a cheap Android. It's all the same stuff, just with different levels of class.
Compare that to not so long ago when only the rich had cars, refrigeration, electricity, etc.
"The rich guy can buy a harvard education, and the poor guy can buy a cheap but effective online education"
And what is the outcome of having Harvard education against having cheap online degree? I am sure Harvard graduates come way ahead of graduates of online universities, both in private job market as well as in influential government positions due to "cliques" and "networking".
But the problem is much deeper than whether you can afford high quality commodities or not. Those with excess capital can accumulate assets, and then rent out those assets to those without capital. If this sounds too abstract, consider a concrete example - bay area housing market. Only those with capital can afford houses. Those with excess capital can buy additional houses and rent them out to those who cannot afford housing. Net result? The ones who cannot afford houses now have to keep paying rent to those who could, thus making homeowners richer.
Piketty has elaborated this in detail. But the most salient question he raised was that inequality, per se, is neither bad or good, but whether it is justified? Today, Bill Gates or Mark Zuckerberg have billions more than I do. But I am OK with that because they took risks, invested their efforts (and yes, also got lucky). But I am don't think someone like Alice Walton or Paris Hilton deserve their billions - in their case, all they did was just to be born to rich parents. And they and their heirs are going to have a better life (education, nutrition, accommodation, entertainment, connections...) than almost everyone else. Why? Doesn't seem "justified" to me.
Edit: Why the downvote? And while I respect your freedom of speech (to downvote), I am sincerely interested in knowing your counterarguments.
You're missing his point a little bit. He acknowledges that the rich will keep getting richer, and places like Harvard will continue to act as gatekeepers. But the intrinsic value of education will largely be available both to the rich and the non-rich. The credential and social signal of Harvard won't be, but the actual learning of things will.
That's all well and good. Learnings don't matter one bit when it comes to what an HR department or venture capitalist will look for on a resume or pedigree in a slide deck respectively, or the social network of having been present at said institution. Pedigree might be for suckers as PG put it, but it's still a signal of being selected and completing an expensive hazing ritual. So it will continue to function for people that value expense and exclusivity.
Tautology. You can't say that a benefit of being rich is being rich, or having ways to be rich. What are the intrinsic benefits of education? Do the poor in capitalist societies have more access to those intrinsic benefits, or less?
(For what it's worth, I dropped out of college after a single semester).
If someone is a child of a farmer and hangs out in a tiny farm town without internet access, doesn't complete high-school, their odds of creating great wealth are zilch. They may start a hardware store but don't get your hopes up that they'll be the next Sam Walton. Whatever they hope do, it will be much harder. Some of the doors are closed, some doors don't matter.
If someone where a Ruby developer and wanted to work for a startup, a degree probably wouldn't matter as much as say MegaCorp.
But if someone goes to an exclusive university, graduates and then lives in a large city and has lots of friends, their odds of wealth dramatically improve versus the former... if they were ambitious, many more doors would be open to them (vendors, partners, investors, customers, etc.). Being close to the action with the right contacts is a world of difference from being a random person without successful, helpful friends and pedigree.
Furthermore, it is valid to be self-reinforcing because it is. Without wealth, it's impossible to capitalize on opportunities to make smart investments which one would otherwise have to pass on while others with more wealth may have the chance to make more money on them. Also, people with wealth have plenty of pseudo-"friends" pitching them opportunities to make wealth, whereas someone without wealth is unlikely to have a full calendar of people trying to get investment from them. Think of how many deals Mark Cuban can pass on just because he doesn't like the terms, and how good he's gotten good at negotiating favorable equity terms and knowing which deals are good/bad. Someone that's totally new is likely to be totally inept at some part of the business dance and will likely get rooked. Someone with the right friends is far more likely to get good advice from them about what to do or not do in a business setting to make fewer mistakes.
It's harder to get from zero to having VC's for friends that send you sweetheart deals to invest in, but that usually requires proving oneself (rich) first.
In conclusion, rich does not assure itself but it tends to be self-reinforcing.
(I took the ten-year plan and barely finished because I subconsciously resisted due to the conscious futility of it. Box checked, not about to start Dr. ... PhD)
Yes. We all agree about that. The question is: how much does that matter? Maybe it matters a whole lot. I won't be surprised if it does, because that's what I intuitively believe too. But if it's so obviously true, we should be able to marshal evidence to support the idea the idea that distribution of wealth matters to the welfare of the whole population.
So far, arguments against the comment upthread boil down to two things:
* Arguments that appear factually incorrect, like, "the wealth gap means the rich have good nutrition but the poor don't".
* Arguments that wealth inequality means that the poor can't become wealthy, which is like saying "the problem with wealth inequality is wealth inequality".
"the problem with wealth inequality is wealth inequality"
Just one nit - the problem with wealth inequality is that it perpetuates wealth inequality (and Piketty has detailed evidence for that).
We have had a lot of back and forth in multiple threads for this post. It is helping me clarify my thoughts, which for now can be summarized as:
1. Today, rich people have much better life than poor people.
2. Rich have higher chance of being rich tomorrow than poor folks. So that means they and their heirs have a higher chance of having a better life perpetually than ordinary folks and their heirs.
3. I don't begrudge better lifestyle for those who earned it (Gates, Zuck, Buffet...), but I do think its grossly unfair to enjoy better lifestyle just because you were born to rich parents (Walton heirs, Koch heirs, Paris Hilton...).
4. If you think capitalism has improved things so much that differences in wealth hardly matter (or such will be the case in future), kindly provide me evidence. I don't see it anywhere in my observations - eg. first class vs economy class experience in air travel, public schools vs private schools in the USA, job prospects for ivy league vs third tier univs, or even longevity[1] - rich people's life is better in almost all aspects (some of those aspects might frivolous but some are very meaningful).
This is obvious from any comparison between the United States and any genuinely poor or developing country.
In the United States, the "poor" own cars and televisions (with cable!), enjoy smartphone service, live in air-conditioned houses, and eat lavish meals. The standard of living they enjoy is fantastically better than the poor or even middle class in any developing nation. Not only that, but their standard of living is far superior to the standard of living of the "poor" in this country 10, 20, or 50 years ago. Economic growth has lifted all boats. What's more, no one in this nation has a valid justification for envy.
If your neighbors are eating well while your children are starving, okay, be envious. It might be justified. That's not the case here. As Maggie Thatcher once responded to an accuser, "you would prefer that the poor be poorer, in order that the rich would be less rich". Greed and envy are not to be confused with justice, and should be rejected.
Perhaps if the wealthiest among us suffered more equally the pain of fighting wars and of medical care insecurity, they would invest more heavily in world peace and healthcare, and less on Angry Birds and luxury taxi services. This is why equality of quality of life matters -- to keep us focused on each others' wellbeing.
We do have virtually equal quality of life in the US. A rich person can have ten cars, but he can't drive ten at the same time. It is a left-wing cliche that the burden of fighting wars falls upon the poor. In the real world we live in, the military is all volunteers and mostly middle-class, not from the poorest demographics. And pretty much everyone in the USA has access to state of the art care. You cannot buy your way to the top of an organ donor list or something. Certainly there is a difference between rich and poor, but you have not shown that it is an unjust difference or that it is harmful to the poor person.
Those sort of arguments are broad generalizations.
It's impossible to say anything's impossible given determination, but the level of difficulty varies and it's context-dependent.
It's harder to become wealthy if your car is a POS and you miss a crucial client meeting, or live in a rough neighborhood and have your laptop & cell stolen because your apartment was robbed. None of those sort of things individually are fatal, but the likelihood of i) not being taken seriously (lacking friends, intros, pedigree, previous exits, paying customers per my previous comment) or ii) more set-backs as mentioned here make it HARDER to "get ahead." When someone is really broke, doesn't have a car and is living on the street, it's much hard for them to claw their way back to "normal..." it's an uphill battle that only slightly flattens out into more "normal" everyday challenges. (Life's challenges never go away, no matter which end of the spectrum, the challenges just become different.)
Unless someone has been homeless, their ability to appreciate and empathize with the set of challenges they face would be a stretch.
(I've done client-facing AWS technical consulting in the mobile industry while living out of the back of my car, and bested the competition and expanded the "beach-head" as it were. So I've little patience for laziness or people that can't hustle to bring home the bacon.)
How do we make them not broad generalizations? How do we get the "is" right, before debating the "ought"? What's an axis along which the rich have a zero-sum quality of life versus the poor?
By the way, how apropos: Pandora just played George Thorogood's "Get a haircut."
This reminds me of my father yelling at me when I was 16: "If you don't do good in school, you won't get into a good college, and you won't get a good job and you'll be working at McDonald's." This same dogmatic formula plays out in hundreds of millions of families. It's only partially true, for some kinds of jobs. But if one is absolutely set on startups or some technical jobs, then it's not absolutely essential. In fact, it's best to know what job/field one would be aiming for and work backwards from that... may save a lot of effort, time and cost.
(I did the least amount of work possible in high school and didn't study for the SATs.)
A every increasing wealth inequality destroys incentives to work hard. The song sixteen tons encapsulate the feeling workers get when they just get "another day older and deeper in debt".
With wealth being hereditary entitlement to one group that increasingly get more wealthy, we end up with everyone else being in more debt to them each passing day. The debt bondage model simply moves from being about a mine, and becomes the model of the country.
I feel like this conversation is sidestepping the fact that "cheap online education" is synonymous with "we'll take a bunch of your money under unique loan conditions and operate as a paper mill".
Not to say anything else about the political economy, I'm a believer in capitalism as the 'least bad system', but in the education sector, those 'cheap online schools' are actually a point in favor of the exploitation narrative.
The "paper mill" refers to credentials, which refers to the wealth-enhancing effect of education. But this subthread stipulates that the rich will keep getting richer.
Are the non-rich getting drastically worse access to teaching and learning resources? If you had to plot a line representing this (admittedly abstract) concept starting in 1950 and running to 2020, what would that line look like? It needs to capture the Internet, Wikipedia, the digitization of books, citeseer and scholar.google.com, open source software, Khan Academy, MIT OpenCourseware, and Coursera.
> Are the non-rich getting drastically worse access to teaching and learning resources?
Yeah, that's what I'm arguing if you're going to point to online certificate programs that get advertised on the subway as evidence for equal opportunity. You could make a better case for online self-directed research, probably, but I don't think there's a substitute for 19yos being exposed to great minds with tough expectations -- that only happens at good/decent universities [1]. And that's without even getting into the whole 'learning starts really young' thing with good school districts compared to lousy ones, etc.
[1] If you want to take that point and argue for investment in good state universities, I'm entirely with you, but the current power structures seem to disagree[2] as evidenced by funding decisions.
[2] I realize it's silly to term an emergent outcome as 'disagreement'
I don't know. My 19 year old self went to a decent state research university. The lectures I sat through were much less effective than watching Gilbert Strang on Youtube at 3x speed with arrow keys to get him to repeat himself when I miss something and a pause button so I can work out problems after he writes them on the board but before he explains them. There was 1-on-1 time at "real" school, but it was with TAs and a room full of 19 year olds. I feel like the Internet addresses that use case better as well.
(Fair warning: I've been pretty successful in my career, but I dropped out of school after a single semester).
However you also have the luck of having a computer, being interested in computers, and being able to further than interest. Do you think you would've fared nearly as well, if your interest instead was in cars? Clothing design? Social work?
Us tech workers are fairly lucky that in all honesty, the things we tend to like seem to be problems that can be solved with one another.
I'd also argue, that while the billionaire's life is not a million times better than the thousandaire, that this never was the case, and that is thinking of the best of times.
However, look at the worst of times. You get a serious illness- say, a cancer. For one, as a wealthy person you likely could have it detected much earlier from regular doctor visits and various signs. The poor never get this opportunity. When time comes for treatment, the best medicine, procedures, and rehabilitative therapy are available- and for the poor, they might be able to get the procedures, but the medicine will often be second-rate and there likely will be very little, or perhaps even no rehabilitation.
Similar states repeat for smaller life disasters. You get in a car wreck; The rich man likely has a newer car, and can much easier afford to use the insurance to get a worthwhile vehicle again without being out very much. The poor was probably driving a car worth less than $1500, with numerous problems already, but at least it was paid off. The wreck might leave them with only enough money to get another car, but now they must make payments and still only get another 2-3 years out of it, if they're able to at all thanks to an insurance plan with less coverage.
There is a huge quality of life gap here. Being poor today isn't at its worst when everything is going well- overall, things are pretty great there, and are a good reason why even lower middle class people rarely fall into absolute poverty. But the inability to pull oneself out of a hole is a much, much more pervasive problem.
First, most poor people also have access to computers --- as in, have them in their homes.
Second, stipulate an aristocracy of permanently wealthy people and a majority underclass of people living at a technical poverty level. Assume that price competition is going to continue to improve the standard of living of that underclass.
Exactly what will prevent those people from designing and selling clothes, fixing and modifying cars, or doing social work?
> First, most poor people also have access to computers --- as in, have them in their homes.
It depends what you mean by "most". If you mean "more than 50%", that is technically, barely true. 57% of households making less than $25,000 have a computer; the $25,000-$50,000 bracket reaches 76%. For "internet access anywhere", the numbers are 50% and 64%.
And 5-10 years from now, because of price competition, those numbers will approach the numbers for telephones. What percentage of people living at the poverty line in the US have telephones?
Well, you're an outlier. Deleted the rest of my post since I'm on my way to bed and didn't want to steal the last word. You can probably guess most of it.
Not necessarily an outlier. I was dumber than him and sat out the whole four years. I spent a year doing something I hated because that's what my degree got me.
I now have a job I love that has literally zero to do with what I studied. If I had focused on the acquisition of knowledge when I realized I wanted to program for a living I could have saved a lot of time, money, and opportunity cost. I know more than a handful like me.
Actual learning is only one of the multiple aims of college degree. One aim is also to improve career prospects in terms of better job opportunities and networking. And for that, Harvard has vast advantage over cheap online education.
It seems tautological to say that one of the benefits exclusively allocated to the rich is an ability to be rich. Stipulate that the rich are going to stay rich, or even get richer. How are you rebutting the comment upthread, which argues that regardless of income gaps, the quality of life gap is narrowing? Isn't the quality of life gap the more meaningful of the two gaps?
Rather than income gap or quality of life gap, I personally find "opportunity gap" to be more important. And I believe that gap is proportional to wealth disparity, i.e. rich people have a lot more opportunities than poor people.
Basic safety net in the rich societies may ensure a decent quality of life even for the poor folks. But does that mean they have opportunities to escape poverty, and have means to pursue whatever they are interested in pursuing?
Since you asked for concrete evidence in one of the other comments, here is one example showcasing opportunity gap - a child in Atlanta raised in the bottom fifth of the quintile has only 4% chance to rose to the top fifth.
EDIT: tptacek, seems I cannot reply to you here as well. But you are right - the biggest advantages of being rich today is that you have better life today and you have better chances to be rich tomorrow, which means you (and your heirs) will keep having better life than others.
I responded to your appeal to opportunity downthread. It seems tautological. The benefit you're reduced to allocating exclusively to the rich is "becoming rich".
Paris Hilton earned her money as an entertainer. You may not like her, but she didn't flop into a career. She took some seed money (just like Bill Gates) and used it to build her bizarre but profitable little industry.
I think you're underestimating exactly what a billion dollars gets you over a thousand by several orders of magnitude. It's not about iPhone vs. Android. It's about having enough money to never need a phone vs. being unable to afford a data plan. It's not about caviar vs. hamburgers. It's about never having to cook vs. malnutrition from not having access to fresh produce. It's not about Lamborghinis vs. Civics. It's about having a ready replacement whenever you get into a wreck vs. losing your job because your car stalled on the freeway and you were late to work.
It's not the physical goods but intangibles that makes a billionaire a million times better off than the thousand-aire. Some particular intangibles:
Time. The billionaire never has to work again for the rest of his or her life and be assured that he or she has sufficient resources to not starve to death. Not so with the thousand-aire, who is likely living paycheck to paycheck.
Freedom. If the billionaire does want to work, he or she can work on whatever he or she wants. Paris Hilton can be a singer / actress / celebrity because she wants to be that. If Paris Hilton was not a wealthy heiress, I think it's safe to say her career choices would be significantly more constrained.
Influence. The political aspects of this are somewhat obvious, but it extends to practically everything else as well. The thousand-aire says, "It sure would be nice if my team won the championship this year." The billionaire can all but guarantee it.
Advanced medical treatments, robotics unavailable to the average person, space flight, the ability to avoid pervasive surveillance, a greatly disproportionate ability influence politics, etc.
There are lots of things you have access to by having a great deal of wealth that are simply unavailable in even a reduced form to the average person.
A homeless person in the US today does not have access to better health care than the president did in 1960. Is a homeless person likely to have up-to-date health insurance information (I'd imagine its pretty tricky to get your health insurance card when you don't have an address). Are they likely to have enough cash on hand for a copay? What about for prescriptions? Are they going to have reliable transportation to a medical office? Are they going to have a reliable phone number where they can get messages from the doctor?
For all of these practical reasons, I would imagine that many homeless people would probably forgo all but the most essential medical care, which they would receive at an ER. They're probably going to be waiting hours to see someone at the ER and when they do it will be an overworked resident. The president in 1960 would be able to see any doctor he wanted at the time of his choice.
Also, a lot of homeless people probably wouldn't be homeless in the first place if they were able to access mental health care.
What does it matter if they have insurance, or cash for a copay? Public hospitals are required to treat them, with an extremely high standard of care, regardless of their ability to pay. Not only do they not need to pay to get care, but they don't even wait longer in the ER; ER triage (at least, where I've asked, but I assume this is true everywhere) is need-blind.
Those same hospitals are also incentivized to rush an uninsured patient out the door as soon as possible. Serious, painful, but not immediately life-threatening problem: give a random diagnosis and tell them to follow up with their nonexistent primary care doctor as soon as possible, and escort them out.
In many states in the US, Medicaid or other insurance is not available to the homeless or indigent, not unless you have a disability diagnosis from the doctor you can't pay to see, and can get the necessary help to have that diagnosis recognized legally by the government. Otherwise cursory, rushed visits to the free clinic and ER are all that's available.
Hospitals may be as minimally need-blind as required by law (if that, its not like the homeless can sue), but they only offer just that. The number of options and quality of medical treatment is vastly greater for those who can pay than for those who can't.
I doubt very much that the president would receive the same level of attention and prioritization at an ER as a homeless person, but even if you substitute a wealthy person in 1960 for the president you're still wrong.
Let's say that the homeless person develops a form of cancer that was incurable in 1960 but can now be treated with a very low rate of recurrence with chemotherapy. Your point, I assume, is that because this new treatment exists, this homeless person will receive better healthcare than anyone in 1960. But that presupposes that this homeless person has access to that treatment, which means that they need reliable transportation to a medical office on a regular basis for an extended period of time, they need someone to take care of them when they're really sick, they need some ability to get their medication and to take it regularly.
I can't give a precise date, but you might compare what a homeless person would get for a heart attack in 2014 with what Eisenhower got for his heart attack in 1955.
I think that a lot of the advances in treating heart disease have to do with preventing a heart attack in the first place by recognizing what risk factors a person has and having them change their lifestyle and take medications such as statins. Improvements in the area of prevention are going to be difficult for a homeless person to access since they require the ability to visit a primary care doctor, get medication and make lifestyle changes. It's pretty hard to eat healthy if you're on a very tight budget for food and don't have access to a kitchen.
The treatment that a homeless person gets when they actually have a heart attack may be better since they would presumably have access to a defibrillator in an ER.
Disregard the homeless for a second. The life expectancy for white Americans without high-school educations has dropped since 1990. -5 years for women, and -3 for men. The life expectancy for white women without high school educations in 2008 was the same as all women in 1960.
Uninsured ER treatment is great when you want to get your gangrened limbs amputated. Not so much when you want insulin to control your diabetes. But yes, I'm sure that a homeless gunshot victim taken to a trauma center today is given better treatment then Reagan in 1981.
How about having all of the following, only because you were lucky enough to be born to rich parents and no other reason:
- better parenting
- better education
- better nutrition
- better accommodation
- better connections
and countless other advantages over 99% of other people? Kids of billionaires having all that, and kids of poor people having nothing of that, seems to me the biggest injustice and the strongest argument against capitalism.
Why must an income gap mean that only the rich have good parenting, education, nutrition, and housing? Which of those benefits can you allocate exclusively to the wealthy in an argument backed by evidence? Poor school districts spend enormous amounts of money on students. In the span of half a century, we've moved from a society where the poor lacked electricity to one in which families below the poverty line have air conditioning, a car, and Internet access. His argument is that this is a result of price pressure caused by increasing competition driven by a need to keep capital invested in order to achieve the 'r' that Piketty talks about.
I admire accomplishments of capitalism - like material progress enhancing lifestyles of everyone, or lifting millions out of poverty.
But that was not the main thrust of my comment, which talked mainly about "injustices" caused by unchecked inheritance. If you want an example of the benefits allocated to wealthy, here is one - opportunities. I believe billionaire kids have a lot more opportunities in life compared to middle class kids, let alone poor ones.
Edit: tptacek, since I cannot reply to you, I will reply here - one example of what poor people won't have access to "tomorrow" compared to rich people : ability to be rich. And I already explained the advantages of being rich over being poor are already (food/health/shelter/education/...). And yes, your questions certainly helped clarify my thoughts, so thanks :)
First, you just moved the goalposts. Education, parenting, nutrition, housing: you said the rich have all of that, and the poor none. Did I misread you? Did I effectively rebut you and change your mind, simply by asking questions? That seems unlikely.
Second, in this new argument, you refer to "opportunity". Opportunity for what? Wealth? If capitalism is generating competition which in turn generates innovation which in turn drives down prices which in turn raises everyone's quality of life, how much does the opportunity for wealth matter? What is the thing rich people have "today" that poor people won't eventually have comparable access to "tomorrow" as a side effect of capitalism? I'm sure there's something; what is it?
Incidentally: I sound like I'm an advocate for wealth inequality, but I'm not, nor am I a concern troll. I believe the argument were having here is positive, not normative; we don't even agree on the facts. We should get the "is" down before the "ought".
> Poor school districts spend enormous amounts of money on students.
By what measure? Throughout most of the US public schools are funded through local taxes. The poorer the district, the less resources are available to educate children, which means understaffing, buildings which are falling apart, lack of classroom materials.
And is your comparison on funding per student meant to be against upper class families, who most likely send their children to pricey private schools? I just don't see how your statement is justified.
Sure, but that's a syllogistic non-sequitur. Norway drives innovation, the US drives innovation; either way, poor people get sharply increasing access to medical technology and services, not worse access (as an intuition of income inequality might suggest).
Yes, even in non-equal societies people benefit greatly from innovation.But if innovation is not dependent on extreme capitalism , why attribute it to capitalism in this discussion ?
It's because the engine of all wealth in capitalism is investment. Currency gets less valuable over time. Like sharks, concentrators of wealth need to keep moving. One of the most effective ways to do that is to invest in enterprise, which is competitive, and thus generates innovation.
It's a decent argument, and the arguments about lower taxes and increased innovation sound sensible. But as I said, some high taxes countries are quite innovative.
And in the end, the role of innovation should be to help people and equality, safety net and the like have great value for many. On the whole it's hard to argue social Democratic countries offer a worst deal for people than capitalism.
> He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it.
As I've not read his work nor critiques of his work, I'm curious to know if he puts any weight towards central bank policy and the widening inequality gap.
Because from my well-worn armchair, it seems that interest rates are not a free market and that policies such as quantitative easing serve to benefit higher classes much more than others.
Agreed. This has historically always been the case. There is a reason that early cities formed around navigable waterways, trade-routes, or near specific wealth-making resources. One need only look to the middle east that was almost entirely desert and small-towns a short while ago (relatively speaking) to get a more recent and visible example of this.
Equality is the exception, not the rule throughout history, including the recent "enlightened" one.
I think I now heard this meme/statement/mantra/whatever way too often. Sorry.
First of all, I fundamentally do agree that this is the case. Deep down, I cannot fully figure out my emotions, that what drives me, in a completely rational sense. I like certain things, and I dislike others.
BUT I would still argue that using the idea 'human beings are not rational' in the generic form I see it being used and for any form of policy is very dangerous. Although I believe we cannot completely figure out who we are and what we want, we CAN certainly reflect on our thoughts and actions rationally.
Using this statement is very often basically saying: Humans believe 1+1=3, therefore we have to make policy x/y/z.
Agreeing to this statement in this blanket form often thus means:
a) Humans are not rational
b) Therefore anyone discussing this statement is not rational
c) Any rational argument about policy is essentially lost in this weird post-modernist black hole, by jumping back to a)
Addendum: Or, said in a more concise way: We finally figured out that we are simply stupid primates (as if that is news at all). Because we are stupid primates, we cannot think. Because we cannot think, we have to base our policies on that.
Isn't it surreal that one can appear to use deductive reasoning in this kind of 'argument'?
This isn't exactly what the statement means. I highly recommend you read Thinking Fast and Slow, it gives an excellent analysis on this topic.
The statement "human beings aren't rational" doesn't mean "human beings are stupid", but rather we're really terrible at statistical analysis, and are very susceptible to manipulation.
The science leading up to the statement "human beings are not rational" was actually used to explain why classical economic theory didn't accurately predict human behavior in (close to) free markets.
Although some people may use this deduction to make laws about protecting people from their stupid selves, really this conclusion leads to protecting people against dishonest behavior, or subtle manipulation. Humans can only make rational decisions when the information is comprehensive, and presented in an non-influential form.
I've seen this argument over and over again, and it's ridiculous. Saying "humans are not rational" is not the same as "humans are never rational"
The statement is made about perfect rationality. No, humans are not perfectly rational, but it does not follow that humans are never rational or unable to be rational.
Is it a good idea to assume non-rationality in policy, though?
As I also wrote in my other post, I think one can easily argue that 'more informed policy' that 'accounts for human's partial rationality' actually creates complexity which makes it even harder for humans to act rational.
I think you have missed what people are getting at with "humans are not rational". The argument behind Capitalism is that people will do what is in their self-interest, and more generally will be rational actors, and as such the outcome of the market will reflect what people want.
However, people often act against their self-interest either naturally or because of manipulation, and short term self-interest can conflict with long term self-interest.
A good example of this is "austerity" in hard economic times. When times are bad the reaction of many people is to "tighten their belts" and decrease spending, and in the short term that provides some protection against things like being laid off. However, if large numbers of people start doing this then the amount of economic activity is significantly reduced and those people who reduced their spending now risk being laid off.
That might all be true. However, the question is not discussed in a vacuum. It is discussed in the context of policy, seemingly often used as a core premise.
Thus the question remains: What kind of policy one exactly wants to base on 'human's irrationality'. And whether it is good to base policy on irrational behavior.
It is also important to consider that there will always be people who are more rational in their profit/money/power-maximizing than others.
A policy based upon irrational behavior might create an inefficiency that will be exploited by those with more rational behavior.
That's why I am wary about lines of reasoning along 'people are just irrational'.
I believe it creates system(s) of thought where somehow, we account for people's irrationality and thus make it more just/less cyclic/less prone to capital accumulation.
Yet, those who simply, coolly maximize their own gains, those who sort ideas like 'complex, advanced policy informed by the irrational behavior of humans' into the religion bin etc. will still come out ahead.
In other words: We generate complex systems of thoughts, especially in fields like economic policy. Rational actors will play with those systems, circumvent them, be creative, etc.
To turn the argument around: Given that human's rational behavior is limited, is it a good idea to create complex policy that makes it even less likely for humans to understand it and act rational?
>Thus the question remains: What kind of policy one exactly wants to base on 'human's irrationality'. And whether it is good to base policy on irrational behavior.
That isn't what people are saying. What people are saying is that Capitalism is predicated upon the notion that people are at least mostly rational actors who act in self-interest, and so a free market will give people what they want. The criticism of Capitalism is that humans are not mostly rational, and regularly don't act in self-interest, and this leads to large amounts of human suffering.
People like Piketty aren't looking to eliminate the disparity between "irrational actors" and "rational actors"^, or to increase the amount of "rational" behaviour, but to eliminate the human suffering that Capitalism is supposed to eliminate if it worked as claimed.
^ Which is not a synonym for "wealthy". What Piketty is talking about is wealth accumulating to the point where the skilled and hard working don't have upward mobility. The hereditarily wealthy don't need to be particularly "rational actors", they just need to not spend their wealth faster than it accumulates.
P.S. Even "rational actors" suffer losses caused by the irrationality of the market.
But is the wealth they inherited the problem - or rather the abuse of power that comes with it?
If you agree that it is the abuse of power: Does this need additional complexity to address - or is it simply something to be addressed with (tax) laws?
Also, I think that the idea of 'eliminating human suffering' is a sure sign of an ideology. Human suffering can be reduced, certainly, but 'elimination' is utopian, an unreachable extreme.
For example, I would argue that a large property and luxury tax could alleviate most the problems that unwise wealth causes.
Further down in this thread, the user 'StandardFuture' more eloquently says what I think am trying to say - people are people and they just game whatever system is in place.
I think that in some sense, the idea of 'fixing the damn system' can actually be a trap. It may make one busy trying to think outside the box, to be busy inventing very advanced ideas for solving a problem that in the end boils down to 'people are people'.
Would "Humans are not always perfectly rational." be preferable?
(meaningin this case that in a large enough group, it is very likely that a portion of the group will make sub-optimal decisions)
Whereas some economic models would model every person as always making the optimal choice.
So expressing the idea of this assumption being false might be useful, and ideally if one is talking about it often, it would probably be good to be able to refer to the concept in a concise way.
Hence, as a shorthand, saying "humans are not perfectly rational."
> ...quantitative easing serve to benefit higher classes much more than others.
While this is true, what it takes to route around this "power-law like attachment of nodes" that user orasis accurately described elsewhere in this thread has proven a maddeningly difficult problem to solve over the course of human history. The kind of top-down solution Piketty proposes ignores the kind of iterated game that plays out in the real world, and why the wealthy classes invest so heavily into political activity. It is not only relatively easy for the wealthy to eventually route around solutions like Piketty's, but even over the longer con subvert the original institutions into further means of command and control.
There are interesting developments afoot for this dynamic in our current era, and part of the reason why forums like HN are so fascinating.
Inequality is a fundamental to any network that features power-law like attachment of nodes - i.e. any sort of preferential attachment to nodes that are already well connected. Thus, in a way, inequality is "natural".
So the criticism of just capitalism is too narrow. I think this criticism would apply to any economic system that features small world network type topology.
So what if it's natural? Cancer's natural, and nobody says, "Hey, your criticism of cancer is too narrow."
That one could also critique multicellular organization in general is interesting, but irrelevant to anybody who actually has cancer.
Civilization is all about shifting our situation from natural outcomes to outcomes we like. So if ever-increasing inequality is an outcome we don't like, we can do something about that.
Well, but I think we have to figure out what and whether we can do something about it (inequality), how much, and for what cost (cost in the non-economic sense).
I think the observation that power accumulates in one way or the other, capitalism or not, seems to hold in any society.
Being naive and not an economist, I would still believe that money is a form of distributed trust and thus power. Lots of money means lots of power, in the sense of causing a lot of change (negative as well as positive).
And I do not think that there is necessarily something wrong with that. We all seem to praise the billionaire Elon Musk here on HN for making space flight more efficient. And I think he is a very capable individual who amassed a lot of power/money and is thus able to effect a lot of change. Why should I complain about this?
I would argue that the only things that hurt a society when it comes to accumulation of wealth/power is actually _using it in a detrimental_ sense.
Things such as:
- luxuries
- buying laws in your (corporations) favor
- using a lot of resources (ore, land) inefficiently
The more I think about it, and having recently read another person here on HN mention it, the more I think something that broadly falls under the idea of 'Geolibertarianism' would bring us closer to a more just society. And, no I am not talking about 'solving our problems' here, because I think having problems is inherent to being a human.
Actually taxing the bad effects of money instead of owning/moving/etc. money itself would also solve e.G. the problem on how to deal with the existence crypto-currencies without resorting to draconian measures.
Finally, I think that we as humans tend to shy away from even just criticizing the actual bad effects of power. I think this is as much a problem as the people with power misbehaving in the first place. Most of us, myself included, simply seem to have a very strong 'follow the leader' emotion, and we rather argue about secondary issues than the real problems. Or we invent powerless utopias and start to believe in them (Marxism, Feminism, ...), actually becoming controllable by the malevolent powers.
> Well, but I think we have to figure out what and whether we can do something about it (inequality), how much, and for what cost (cost in the non-economic sense).
Agreed.
> I think the observation that power accumulates in one way or the other, capitalism or not, seems to hold in any society.
Sure. And disease also spreads. Just because we haven't figured out how to inoculate ourselves against power accumulation as a society doesn't mean it's impossible or wrong.
I haven't read Foucault, but I'm pretty sure he answers a lot of your questions.
> I would argue that the only things that hurt a society when it comes to accumulation of wealth/power is actually _using it in a detrimental_ sense.
Detrimental according to who? Everyone, everyone agrees that accumulation of wealth/power hurts society when it is used in a detrimental sense. That's the definition of the word "detrimental". Classical liberalism was founded on understanding that this statement means nothing.
Why are luxuries detrimental? Why is crony capitalism detrimental? Why is inefficiency detrimental? These are questions that you haven't answered, because your proposal is arbitrary. Liberalism, classical or not, holds up universalism as an ideal because arbitrary measures are problematic, not least because they remain unreasoned from agreed principles but more importantly because they're ultimately elitist. Don't get me wrong: I'm not disagreeing that they're detrimental; I'm saying that you're identifying symptoms.
And I suspect the reason is this:
You see societal solutions in economic, not political, terms. And that's a problem, because people are not defined in economic terms. It's not a surprise in a place like HN; most of us are engineers and we like quantifiable problems and answers. A politician is scary, because a politician plays with forces we don't have the same grasp on.
My advice? If you want to understand power, stop learning about money. Yes, they're strongly correlated, but you're never going to get a racist to stop beating up differently colored people by offering them a million dollars.
> In his recent book "Capital in the 21st Century", he's done something very big. He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it. He's done this with an enormous amount of data.
Am I missing something? Isn't this part of socialist analysis of capitalism from at least back to Marx?
I'm not trained in this field and I have not yet read Piketty's book, so take this all with a grain of salt, but my understanding from the discussion I have read is that Piketty's claim is that, if the rich can multiply their wealth faster than the middle class can become rich, then wealth becomes a hereditary entitlement rather than an incentive for hard work, and the meritocratic aspect of a capitalist system breaks down.
The Marxist thesis is essentially that the bourgeoisie (the rich) exploit the bourgeoisie because they generate more value from the proletariat's work than they pay in wages. Even if one accepts this line of reasoning, it is sort of orthogonal to Piketty's argument. One could imagine a society where the bourgeoisie exploit the proletariat, but, with intelligence, vision, hard work, whatever, the workers can still become members of the bourgeoisie, i.e., the "American dream." Piketty says that, under certain economic conditions, even this becomes impossible.
The reason this book is important is that he's shown the r > g idea with data. As Picketty mentions in that article, it's a field of research that's an "academic no-man's land." It's traditionally too "economic" for history and too "historical" for economics.
Marx was espousing a theory. He wrote a manifesto. This is based on data that no one else has bothered to look into.
(I've only started the book.) Its claim is: under reasonable assumptions, inequality increases over time under capitalism.
Yes, Marx argued this; Piketty has an elegant new analysis supported by a lot of newly collected data. The book is in part a rebuttal to Simon Kuznets and others, who argue (plausibly) that capitalism tends to decrease inequality in the long run.
It is silly to talk about equality of capital. Imagine a world in which everyone is equal.
And imagine a philosophical man or woman, gazing up at the clear blue sky and being filled with wondrous thoughts that bring her or him great utility. Thoughts that no amount of money can buy. A simpleton can see nothing there. How can we call this equal? The very blue sky above us is unequal.
But that is the sky - the thoughts come from within. True, but what is a javascript console, just some pale blue sky, to be filled with whatever you want. The simpleton can not derive any utility. A programmer can create anything. How can we call that equal?
But that is just some writing.
And if we let this person publish those thoughts, that script, that site? Then the simpleton can have nothing - the programmer, anything. How can that be equal?
There is no such thing as equality. There is only equal opportunity. Today, more than ever, nobody needs vast riches to achieve that. Perhaps everyone should have the chance to be well-educated, to learn whatever is within their capabilities, to choose to train for the best profession they can qualify for. But that is not "equality", in the sense discussed here.
Mark my words: so long as man can gaze up at a clear blue sky, as long as people are allowed to be friends and to talk, to think and to learn, to create, to share, to communicate - actual equality is a silly, misguided notion.
Look at opportunities - rather than capital results. Forget equality of capital, and look at equality of opportunity.
I'm only part way through the book, but to give a counterpoint from it, one of Piketty's examples is from a Balzac story, which describes a situation where basically those in the top 1% of jobs earn nothing compared to those with the top 1% of accumulated capital.
So imagine if you can't even earn money through a good invention because the money would go to the project's financiers instead of you. This is the sort of world Piketty is worried will return and stifle invention.
What kinds of opportunities? Who gets to decide? Should everyone be given some prime investment opportunities and the ability to make a lifechanging investment? That way, your entire decision and the outcome is based on you (including realizing that the market may or may not be rigged), but there's absolutely no risk to your current life if you make a bad investment choice. That's not an opportunity many people have.
You're still drawing lines in the sand whether you're talking about capital or opportunity equality. 'How much inequality is tolerable to the economy?' and other such questions. I haven't studied American capitalism much, but any system becomes weird when you can use/abuse the rules of the system to change the rules of the system. Eventually you start calling it something else.
One of the major points in the interview/book is the amount of inherited wealth, so to turn your example around, the programmer gets decent pay after building something of value while the simpleton who has contributed nothing has a mansion, several vacation homes and a fleet of vehicles. There can be some natural resentment when hearing that story and it's going to be a focus of the inequality debate.
Equality of opportunity was lost once pure ideas become patentable, and competition became a race for the largest pool of obscured threats backed by government force.
Well, it's a 700 page book that (I'm guessing) few of the reviewers have read, so it's entirely possible that you and many others are missing something.
That said, if the main point of a huge book, even among many other smaller points, is an observation so ho-hum that it would make a college freshman's eyes roll, something else is going on. Maybe he proved his obvious thesis in an unusually gripping way. Maybe he proved the obvious threat to democracy in an unusually gripping way. (But why would it matter? Does anyone still think this is a democracy?)
Or maybe all the lefty economists decided implicitly to push this particular warmed-over cliche as a great innovation. Who knows.
I'm still looking for a proof that income inequality is a "threat" to "democracy"... Or as he put it, the "meritocratic values of democracy". As if we have anything remotely resembling a "meritocratic" society, even if it was a democratic one.
The threat is of wealth becoming political power and the government becoming an oligarchy... which has happened in the US, as shown by the recent study Northwestern and Princeton. When the few have the majority of the influence, that is no longer democracy, and there is no reason to believe that the control exerted by the wealthiest players is made for the benefit of those at the bottom. This a flaw of government more than of capitalism itself, but it's a flaw nonetheless, seeing as the two — capitalism and government — are intertwined.
I agree with you, of course. Though I'd say it's not just wealth, but political clout and "connectedness" as well. There are quite a few influential community/union leaders that aren't all that wealthy, but command a great deal of political power. Both by virtue of the people who they "lead" and the contacts they have in various levels of government.
What I'm trying to point out with the above is that: We are already assuming that the wealthy have a selfish or non-altruistic motive behind their actions, simply by virtue of them having wealth. If we go down that route, then we essentially need to admit that the problem isn't that the wealthy are selfish, but that their wealth enables them to exert that selfishness much more.
You are most certainly right that this is a flaw of government, or democracy in general. However, it is not a flaw of capitalism. It is, in fact, a virtue of capitalism: that money represents our "vote". But that vote doesn't magically stay with us, it get's transferred every time we "vote", or buy things.
They don't have to be intertwined, Anarchocapitalism seeks to do away with the institution of political authority entirely to deal with this problem, for example. This absolutely terrifies the kinds of people who don't understand that the state is the cause of the problems with capitalism because they always attempt to address the problems by handing more political authority to the state, which sells it off in a process of regulatory capture.
You assume that these people are trying to address problems with capitalism and not, you know, quality of life. That's exactly like saying that an atheist is simply angry at God when the majority of atheists don't even think God exists.
These people invariably see "hand more power to the state and petition for more aggressive control of the free market" as the solution to increasing their quality of life, or whatever else they're trying to accomplish.
What difference do their goals make if their suggestions are always the same and guaranteed to turn out badly?
> As if we have anything remotely resembling a "meritocratic" society, even if it was a democratic one.
It's not a threat in that sense. Income inequality has existed since the concept of income was relevant. Democracy, as viewed through economics, is part of the long march towards removing that inequality. It's less accurate to say that democracy is threatened by income inequality as it is to say that income inequality is threatened by a well-implemented democracy.
A well-implemented democracy--and I use this qualifier emphatically because I hardly consider America to be one; I barely consider Scandinavian countries well-implemented--depends on equal voice. Equal voice depends on two things: minimum thresholds of education and the strong dissemination and accessibility of information. Or shorter, understanding proposed policy and being able to talk about it.
These dependencies do not function cooperatively with income inequality. Look for people who argue that laws are overly arcane and complex precisely in order to keep lawyers in business. They have a point. Notice that tax code reform is opposed by companies making software to simplify it. Notice the sheer quantity of disillusionment among the population for the ability to do anything. Look at that iconic Tea Party sign demanding that the government leave a government program alone. Keeping income inequality in place is an important profit driver; it is rational to become a monopoly, to have full control over supply of a product, to gouge prices. The paradox of the price mechanism is that, when you subvert it, it reinforces that subversion. It only becomes rational to encourage competition when you look outside of your own self-interest.
The practice of maintaining any income inequality is, at the end of the day, kicking the feet out from underneath democracy. It's by no means a direct attack; it's just intelligent self-defense.
Piketty proves his point using data ( or should that be Data? ), so it's a bit harder to argue that it's just perception and that the losers in the game of life are merely angry that they were not born at the top of the meritocracy.
It's the difference between "it sure looks as though the lord of the manor is earning more than he deserves" and, "here are the books showing the lord of the manor took in 2 pounds of rent for every pound that was his by right.".
And Piketty is not even touching on the fact that we know that our financial elites basically rigged the game in 2008.
Two things - capitalism replaces Mercantilism, and declining marginal value of money. So yeah - there are equalizing forces within capitalism relative to other systems.
> He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it.
Of course it's an inherent feature of it. If, by some mechanism, every one was economically equal, what would be the point of anyone bothering to try to do anything?
If wealth becomes a hereditary entitlement rather than an incentive for hard work, then no matter how much you work you can never become economically equal.
If you can not earn wealth by working, what is then the point of work?
Why do you have to "become economically equal" in order for wealth to be an incentive for work? Can no one "earn wealth by working" except in reference to Bill Gates or Paris Hilton or someone? Is wealth defined only in terms of "who I'm ahead of"? If I go from rags to riches, is it meaningless because in the same time Bill Gates went from one mansion to another mansion?
It all depend. Slaves sometimes competed with each other in order to get favors from the slave owner. In reference to the slave owner, they could never earn enough to be free but if they might work hard enough to get food for the day, so was it meaningless to work hard?
Ever heard the song sixteen ton? How meaningful is the work in such situation?
I know that this concept it pretty ingrained in American culture, but there's like... decades of psychological research on the topic of motivation debunking it - not even people who believe this principle act according to it.
I don't believe for one second that your prime motivation do make D was economical, for example.
Most people don't particularly like their jobs. Do you think people like cleaning carpets for a living, for example? How about the guy spending time away from his family, driving a truck?
(just to be absolutely clear here: I'm not saying everyone should be economically perfectly equal)
By that logic, cleaning carpets and truck driving should be among the highest paying jobs in the US, but I doubt that one would get a straight line if one were to plot "how much people hate their job" vs income.
Also, it's probably a good rule of thumb to ask yourself with any economic theory of the last century that is of Western origin: "how much did the political pressure to prove the Soviets wrong at all costs influence this line of thinking, or the adoption of it?" I think it applies here.
I am not saying carrots and sticks have no influence whatsoever, just that thinking it explains everything is extremely simplistic. Even if they did work universally, there are more types of carrots and sticks than just economical ones, and they are often conflicting. Then there are types of motivation that are different altogether. For example: there is clear evidence that rewards can be counterproductive to motivation in certain situations because they undermine intrinsic motivation (which works differently). Just look up the psychological research cited by critics of gamification, for example.
Anyway, this topic is way to big for a HN comment, but what I'm trying to say is that there's much more to motivation. By and large, the evidence suggests that once a lack of money as an impediment to "personal freedom" (I'm oversimplifying here) is off the table, people are motivated by different reasons. Social reasons, moral reasons, hedonistic reasons, you name it.
Gross inequality is not a feature of capitalism per se, it is the feature of our current implementation, specifically the current banking system. This is due to a number of factors, the main ones being bankers being the first in line to obtain newly created credit, central banks central planning of interest rates, bank fixing of market rates like LIBOR, massive fraud and government handouts to the banks. All of the above can be fixed without having to tax those that create real wealth in the economy, however that isn't going to happen as the banks have far too much influence in politics and even if they didn't changing the situation without collapsing the current system seems impossible at this stage.
I haven't seen him argue that rising inequality is "intentional" - no one sat down and said "Hey, let's build a system that widens inequality indefinitely". For most of the twentieth century, people thought that inequality was going to keep shrinking, and most everyone was fine with it.
The r>g problem looks like a real problem, but not an engineered one.
Perhaps I should have used a better word than "unintended". Sadly I'm out of the editing window for that post, so I can't really change it. Sorry about that.
This is a good point (does anyone have a good source on global GINI?). But I suspect that what we're currently experiencing in the very-developed world is what's expected globally long-term. If global inequality is shrinking, it's probably down to deploying existing technologies and catch-up growth. When all that's over - when there's no such thing as the "developing" world anymore - at the End of History, r>g.
But I'm reading that Piketty claims that the average return on capital over time in modern nations is 5%. This number is essential to his argument.
Meanwhile the US government is selling trillions in bonds at rates around -0.2%. [0] Yes, negative point two percent. I'd like to know where Piketty suggests for me to find risk adjusted 5% returns.
When someone makes a claim such as this which --if it were true -- would immediately make the claimant a billionaire or trillionaire in the markets with trivial trading, he loses all credibility. Well, loses all credibility unless he can show us the billions.
Right now governments and pension funds across the world are going broke hunting for 5% returns. Maybe Piketty can solve the growing pension crisis for us as a first step.
If I were you, I would hesitate to assume a respected economist has no credibility, at least until I had read the paper. What is more likely: that he is trivially wrong, or that you have failed to understand some facet of his argument?
You've setup a helluva strawman. You're comparing returns of the entire capital stock for a chunk of the western world over the course of last century to the inflation adjusted yield curve of a specific government-bond calculated from last weeks prices.
The conclusion that you have drawn is based on a misinterpretation of what constitutes as "capital". If "capital" meant "government debt", then the rate of return on capital would indeed equal the interest rate on government debt. However, when economists refer to capital, they are referring to the market value of the cumulative stock of a nation's capital.
What is "capital"? Piketty defines capital as:
"the sum total of nonfinancial assets (land, dwellings, commercial inventory, other buildings, machinery, infrastructure, patents and other directly-owned professional assets) and financial assets (bank accounts, mutual funds, bonds, stocks, financial investments of all kinds, insurance policies, pension funds, etc.) less the total amount of financial liabilities (debt)."
Furthermore, national capital can be broken down into public capital and private capital:
"[National capital is] the sum of public capital and private capital. Public capital is the difference between assets and liabilities of the state (including all public agencies), and private capital is of course the difference between the assets and liabilities of private individuals."
...and can be broken down into domestic capital and net foreign capital:
"Domestic capital is the value of the domestic capital stock (buildings, firms, etc.) located within the borders of the country in question. Net foreign capital...is the difference between assets owned by the country's citizens in the rest of the world and assets of the country owned by citizens of other countries."
The rate of return on capital:
"...measures the yield on capital over the course of the year regardless of it's legal forms (profits, rents, dividends, interest, royalties, capital gains, etc.), expressed as a percentage of the value of capital invested. It is therefore a broader notion than the 'rate of profit', and much broader than the 'rate of interest', while incorporating both."
If I understand it correctly (I'm not an economist) your argument is like the common global warming counter argument: It's so cold outside, global warming is a lie.
It does indeed appear (I have not read the book, and I plan to) that the crux of his thesis is that capital can grow at 4-5% over the long run, whereas economic growth only grows at ~3%, and thus concentration of capital always runs away from normal economic growth.
... and this idea ... that you can regularly achieve even 4% annual return over the very long term ... has gotten a lot of people in trouble. Not just in the recent unpleasantness, but historically over many different economic cycles. Regardless of how receptive I may be to this book, or these ides, I am deeply skeptical of this assumption.
aggregate return on capital (i.e. the sum of profits of all firms i.e. all the money that rich people make) is completely different than the return of any one firm or market/investment strategy. you seem to be conflating the two deliberately to set up a straw man.
I agree with your response to your parent post, but I have one clarification to add:
aggregate return on capital (i.e. the sum of profits of all firms i.e. all the money that rich people make)
Actually, as I understand it, the term "capital" as standardly used by economists is broader than this. To see the difference, consider: if you are doing work that requires skills (as I'm sure most HN readers are, since computer programming is such work), those skills are capital that you possess, and your pay, according to standard economic usage, is partly return on that capital, not compensation for labor. (Basically, the difference between your pay and the pay of an unskilled person, like the burger flipper at McDonald's, is return on capital--it's actually not quite that simple because variations in productivity at similar skill levels, due to automation, also come into play, but that's the gist of it.)
I have not read Piketty's book, so I can't say for sure how he is using the term "return on capital", but it seems to me that in order to properly interpret the data he appears to be using, one has to pay very careful attention to the distinction I made above. Otherwise one might be incorrectly estimating return on capital.
Please don't post comments like this to HN. WildUtah's comment may (or may not) have been overstated, but yours is mean.
Seeking to cast another person in the stupidest possible light is a form of incivility. The precedent it sets for others gets worse the more right you are.
If we had these progressive taxes and this global wealth tax - would we still have capitalism? And if yes - would that mean that 'r > g' is not inherent to capitalism but rather to some special kind of capitalism?
"... capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based."
Whatever else you might say about inequality, "unsustainable" is an obvious falsehood.
Roman civilization, for example, lasted two thousand years. Eight times as long as the United States. Think about that. One hundred generations of men lived and died as Romans. And the Roman Empire featured radical inequality, of the sort that we could never have in modern America, no matter what the Gini coefficient was.
On one side was the Emperor and his soldiers, who could have you and your entire family tortured to death, purely on a whim (see Caligula). On the other side were slaves, who had no human rights at all and were treated as property. And between them, countless peasants starved to death every time there was a bad harvest, while countless aristocrats taxed their lands to fund lavish banquets. (In the Roman tax system, tax collection was outsourced; the tax collector was responsible for finding a certain amount, and anything above that he could keep for himself.)
That's some serious fucking inequality right there. And I'm certainly not saying it's a good idea, or that we should try to emulate them. But it was, as a raw historical fact, extremely sustainable, lasting eight times as long as the US has so far.
I would agree with the gist of your comment, which is that autarchy can be a stable equilibrium.
However, I don't read Piketty as saying that inequality itself is unsustainable. Rather, inequality tends to undermine democracy. Thus, "unsustainable" here should be read to mean "unsustainable in conjunction with our commonly held egalitarian, democratic values."
> We humans are really bad at designing institutions that outlast the life expectancy of a single human being. The average democratically elected administration lasts 3-8 years; public corporations last 30 years; the Leninist project lasted 70 years (and went off the rails after a decade). The Catholic Church, the Japanese monarchy, and a few other institutions have lasted more than a millennium, but they're all almost unrecognizably different.
> So. You, and a quarter of a million other folks, have embarked on a 1000-year voyage aboard a hollowed-out asteroid. What sort of governance and society do you think would be most comfortable, not to mention likely to survive the trip without civil war, famine, and reigns of terror?
So I think it's probably worth pointing out that, depending on how you count, these numbers don't really work, and that's hurting your argument. There was about 700 years of the Roman monarchy (thru 509BCE) and Republic (thru +/- 44BCE), then another 500 or so of the Western Roman Empire (thru 476CE) and a thousand or so more years after that of the Eastern Roman Empire (thru 1453CE)
It's totally disingenuous to make claims as if there was some kind of "true" and eternal Rome.
Rome's empire was based on their devotion to imperialism and not anything else. So having sustainability was militaristic more so than anything else.
The Roman Empire spent a heck of a lot of money and effort on their people though. Don't forget that in those times you could give a f*ck less about being royalty. If you were in the protected zones of the Romans you were already winning.
To Romans living inside the protected lands, the 'outside world' looked cold, harsh, and barbaric. So, you could put up with inequality as long as those aristocrats were making sure that there were roads, aquifers, and soldiers! :P
Also, slaves could eventually attain freedom and citizenship. So, while it was not a good life it still had potential to become a decent one.
Now, there were uprisings against the Romans by people who benefited from years of Roman protection and decided later on 'to plot their own course'. But that story is old/new. Happened to the Brits, Persians, Mongolians, etc.
I think you'll need to adjust for speed of data transfer and population density when attempting such analogies. A peasant from Gaul for example could not travel to say Alexandria unless as a slave via Roman galley, and had no information of interest generally unless related to insurrection. Roman legions on roman roads operating from the hub of power, Rome, controlled information at a minuscule fraction of today's rate, but it served as a topological monopoly on transfers.
The Romans spent centuries withholding the northern tribes of Europe, like Picts and Teutonic peoples, the barbarians from the gate. But after adjustments to modern propagation speeds, the northern wars were much like a flash revolution in Egypt I would suggest.
I think the difference between now and ancient Rome is that we're used to a higher standard of living, and technology and information are more accessible to all. I think by "unsustainable" he means that we would be likely to have a violent revolution. This is not unrealistic. Revolutions have happened because of inequality before. I'm no history expert, but I think you could argue that both the French and American revolutions were related to inequality of power and wealth.
"Capitalism" is just a made-up word meaning the natural state of human affairs, in which people own property, do work, buy, sell, and trade with one another. The word only became popular in the past couple centuries as socialists and fascists tried to present capitalism as "just another -ism", just another "option" that society might choose or not choose.
The falsehood in the claim that capitalism is an "ism" can be demonstrated by the fact that no nation or culture has ever "imposed" capitalism upon its people. All forms of socialism, fascism, redistributism, Keynsianism, etc, are imposed by government taking deliberate action against the natural economic choices of their people. What you call "capitalism" is just the absence of such interventions. Capitalism is just a word to describe the natural economic life of man.
Its absolute wealth, not relative wealth, that determines whether your kids are likely to live to adulthood, how much leisure you're likely to have, what you'll eat, where you can live.
Capitalism has obviously excelled at raising absolute wealth across the board.
Relative wealth certainly matters when a society is foolish enough to vest massive power in a centralized political system, where it can easily be controlled by the wealthiest clade.
Which is the argument for more decentralized, limited government in a nutshell. That governments are run by the powerful is a tautology, and the iron law of oligarchy makes it clear that it isn't "the people" really running the show.
Piketty's argument, as well as the findings of the IMF report, is that what you've called relative wealth and absolute wealth are linked: greater inequality leads to lower growth rates. The entire economy suffers for the benefit of a few. Eventually, inequality might choke growth out entirely, leading to crisis.
This seems to contradict r > g . Inequality results in investment, which shifts wealth from the g part of the economy to the r part, due to a lower propensity to consume among the wealthy.
Or are there second order effects that the reviews (I haven't read the book) don't discuss?
This relies on an assumption that 1) the only (or only important) places wealth can exert power is in government, or 2) that the likely harm of centralizing measures to address abuse of power in other spheres is greater than the likely benefits. 1 seems plainly false. 2 is much more plausible, but should still be stated explicitly and supported rather than implicitly assumed
I don't have much background in economics so I don't know if Galbraith's criticisms are sound, but it's an interesting critique.
TL;DR: "In sum, Capital in the Twenty-First Century is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world’s wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin [with]—or at least include—a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest."
I find it an interesting critique, too, though I do wonder whether it hits the mark. I'm no economist, but (assuming the fundamental work put into this book is as groundbreaking and unprecedented as said by those who are economists) does the book need to prescribe policy? Can't it stand on it's own, and perhaps aim to change the public policy discourse instead of coming down from on high with two stone tablets?
Firstly, even if we assume that his conclusions are correct regarding the acceleration of inequality, his proposed solution is guaranteed not to work.
Charitably assuming omnipotence, handing more power to political authority over free markets necessarily increases the already enormous returns on lobbying activities and makes the ability to raise barriers to entry a more valuable commodity for political authority holders to trade in. Why compete on merit when you can buy competitive power straight from the political apparatus?
Meanwhile back in reality, omnipotence is not an assumption you can make. Cryptocurrencies stand a good chance of removing power over the free movement of capital from political authorities. Even forgetting technology advancements that may allow people to entirely circumvent capital controls, there is the tried and true method of employing hordes of lawyers and accountants to tailor schemes to achieve the same ends through political channels.
Putting all of this aside though, the fundamental r > g observation is conditional. If the return on capital is greater than overall economic growth, inequality increases. However, real growth is a function of the increase in the wealth of an economy, if capital cannot find opportunities to increase growth by investment then capital returns as well as growth will fall. Less growth, less return on capital.
Unless of course you can manage to subvert the entire monetary system through political channels and provide direct taps to the investment class so that even if they're not productively investing in anything and seeing real returns linked to growth they still see returns from quantitative easing and early access to new money. But who causes this effect? The same political authority the author proposes to fix the problem.
This article, and most reviews of Piketty, have to be misrepresenting or misunderstanding something. The idea that r > g is simply mathematically impossible, and I don't think it's actually what Piketty is pushing.
That's because r is part of g. If the whole economy looks like E(t) = exp(rt)+rest, and exp(rt) grows faster than the rest, then eventually E(t) ~ exp(rt).
Since g = log(E(t))/t, g and r must eventually be equal.
The only way I can think of to resolve this is to assume a permanent redirection of wealth from investment to consumption. This could potentially result in investment returns being r, but the growth of invested capital being only g.
It's also worth noting that Piketty's numbers significantly underestimate income for the bottom 90%.
Perhaps Piketty merely means that E[r] > E[g] (where r and g are both random variables). But that doesn't actually imply long term concentration of wealth at all, which seems to contradict the spirit of Piketty.
I glossed over the equation reading it as the rate of return on capital vs labour. That is, capital increasing faster than wages as a share of the economy, overall. I don't know if that helps or obscures.
If capital allocation is a skill/talent like most other things, then we should expect to see some people consistently outperforming the general population (just as we would expect a professional basketball player to consistently outperform an average player). If this group of skilled capitalists consistently gets higher average rates of return, it seems inevitable that over time they would end up with a larger fraction of the wealth -- that's just math. I'm surprised that this is a controversial observation.
I don't know that it is. What is controversial seems to be what comes next. Do those capitalists get to use those fortunes to wield massive political power? Do they get to make rules that benefits themselves even to the detriment of the larger society? Do they get to leave their fortunes (and corresponding political clout) to their children, who may be far less talented?
I haven't read this book, and maybe this isn't really the question you were asking, but it seems like there is some confusion about why people like myself have problems with capitalism. I have no particular problem with smart people being rewarded to some extent for finding new ways to make life better for others (Adam Smith's baker making bread for the town not to feed the town but to enrich himself).
But I do have a very, very big problem with the idea that just because someone "won" the economic contest he or she is somehow fit to make social and political decisions or somehow deserves greater consideration in the social and political spheres. I also have a huge problem with inheritance, though I don't really see a non-"radical" way to solve it.
The (current) top comment says: In his recent book "Capital in the 21st Century", he's done something very big. He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it.
So apparently the fact that capitalism naturally produces inequality _is_ controversial.
How to address that inequality is obviously a hard question. However, if you are thinking about it as "rewards", then you are guaranteed to arrive at the wrong answer.
what about his kids? what about retirement? The idea is that after having accumulated wealth, he doesn't need talent to continue accruing capital without talent. Because capital brings money faster than skill.
I don't know what you are asking. The skill I'm referring to is capital allocation, and the capital that is growing is necessarily invested in something other than a savings account.
Milanovic's review of Piketty's book in The Journal of Economic Literature is Matt Yglesias's first recommendation for an in-depth treatment of Piketty's book:
Taleb mentioned on Twitter (with a draft paper to back it up) that the observed (ie. by Picketty) inequality increase could just be a statistical illusion given the methods of measuring it.
I read the whole article, but I don't understand why he is so offended by the wealthy being wealthy and getting wealthier. Does Bill Gates being rich hurt poor people? Not that I can see. In fact he puts a lot of money into curing diseases. Does Musk being rich hurt poor people? Not that I can see, he is saving the environment by making electric cars popular and bringing back the country's space capability. If this is what rich people do, by all means, lets have more and bigger rich people.
Piketty starts off by saying that inequality isn't necessarily bad by itself, but asks whether it is useful for society - which I think you'll agree is the right way to approach it.
The negatives are of course more associated with what happens to the poor than the rich. If you are born poor, CAN you rise to be a hedge fund manager (no matter how talented you are)? Will low-pay and long-hours spark political or social instability which is not worth the cost? What does society lose/gain from one level of inequality as opposed to a different level?
Its a complex issue though and you'd really have to read the book to understand how Piketty approaches this.
In general the lending and charitable patterns of rich people is in favor of the occassional and ideologically. So if x person believed that global warming was a hoax, they would be funding or trying to shape the world as they see fit. There are a lot more rich people sitting on wealth than just Gates/musk.
Does anyone have a short and sweet one of Piketty's most profound findings:
the data reveals a deeper historical tendency for the rate of return on capital to outstrip the overall rate of economic growth, leading to greater and greater concentrations of wealth at the very top.
quote from NY Times article:
www.nytimes.com/2014/04/19/books/thomas-piketty-tours-us-for-his-new-book.html
Why does the rate of return on capital exceed the rate of economic growth? Isn't this just indicative of an asset bubble? And bubbles don't last forever. Or do they (if the Fed is always bailing the banks out)?
> "But Marx's original critique of capitalism was not that it made for lousy growth rates. It was that a rising concentration of wealth couldn't be sustained politically."
I feel like this is one of the very most important things to consider in any discussion of wealth concentration. Economic growth does not necessarily correlate with a broadly pleasant experience for all participants in that economy. I think we came out of the 20th century with it being taken as axiomatic that some kind of tradeoff must be made to achieve both goals in concert somehow, but this understanding seems to be receding (really starting with the rise of austerity policy in the 80s, but coming very much to a head lately).
The data is derived empirically; that r > g has been the historical norm since the industrial revolution, with the notable exception of the period ~1910-1970.
If that fact changes then the entire premise of the book is wrong. But the thesis of the book is grounded in historical evidence (this is how the world works), not any particular theory that answers "why."
r > g has been the historical norm since the industrial revolution, with the notable exception of the period ~1910-1970
Actually, the data says quite a bit more than that. I'm looking at the chart shown in Krugman's review (Figure 1, a bit more than halfway down the page):
First, this chart says that r > g has been the historical norm since antiquity, not just since the industrial revolution. The first data point on the chart is for years "0 - 1000". I'm assuming that Piketty's book gives some explanation of how he figured out the rate of return on capital during the Dark Ages. :)
Second, the chart says that the difference between r and g decreased all through the period studied, up to the "1913 - 1950" data point, when r < g became true for the first time. Then, up through the "1950 - 2012" data point, r and g both rose sharply, but r < g was still true, and the difference between the two was more or less the same.
Third, the chart says that, for the rest of the 21st century, not only will r > g be true again, but r will continue to rise while g will fall sharply--which has never happened before in history. So I think it's wrong to claim that Piketty's prediction for the 21st century is just a prediction of things "returning to the historical norm". It's not--it's a prediction of a drastic change from the historical norm.
"The crux of his argument is a deceptively simple formula: r > g, where r stands for the average annual rate of return on capital (i.e. profits, dividends, interest, and rents) and g stands for the rate of economic growth. For much of modern history, he contends, the rate of return on capital has hovered between 4 and 5 percent, while the growth rate has been decisively lower, between 1 and 2 percent. (Piketty makes a compelling case that economic growth, which depends in good part on population growth, is unlikely to accelerate dramatically anywhere but in Africa, given current demographic trends.) Thus he adduces capitalism’s "principal destabilizing force": Whenever r > g, "capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based."
So the r>g makes a lot of sense, but it seems to assume that fortunes only grow. In real life they tend not to.
What I mean is that there are destabilizing/deconcentrating forces in an economy in addition to stabilizing/concentrating ones. Like companies going bankrupt or entire industries being displaced by new ones.
If you're worth $100mm it's not because you have a million hundred dollar bills in a vault, or hundreds of pounds of gold or a bank account with many zeros on it. You've got the money tied up in businesses that yield that r which is greater than g. And that SHOULD expose you to risks which could cause you to lose your money. In the last 20 or so years it seems like that exposure has been largely mitigated at least in the US which is quite unfortunate.
The other thing that strikes me is it kind of makes the assumption that only the rich (or capital) can participate in the r>g phenomena. With interest rates at less than 1% (and probably negative re:inflation) it doesn't make any sense for a normal person to save money. But what if inflation is 2% and real interest rates are 6%? Can the regular folk not participate in that as well?
Compound interest alone will propel the rich further and further ahead.
But being rich also gets you access to shortcuts, investment opportunities and advisors no one else can call on. They insulate you from risk and target tax loopholes to help.
When that fails you have access to political insight and levers.
It's good Piketty is out there fighting for this stuff. As he mentions in his book none of the problems are particularly new. If you don't do much taxing or regulating, wealth will tend to get concentrated in the hands of a minority of investors with everyone else working for modest pay. If you bring in policies to counter that such as high inheritance taxes and subsided education then things get more equal. The UK went through some of that at the start of the century where the country used to be owned by lord whatever in his stately home and then 80-90% taxes caused then to lose that and the places are now mostly owned by the National Trust and open to the public as historical exhibits. I'm not sure how it's going to play out this time. The world economy is growing quite well. The political will to even things up only seems to get strong enough to make a big upheaval with things like World War 1 in the above case so I imagine not much will change in the short term.
This doesn't strike me as surprising -- capitalism rewards capital, not labor. Ideally, each generation is able to use labor to acquire a bit of capital, and share it with their children until the family is financially secure.
Rather than inequality between brackets, or even people, I'd prefer to focus on whether the system of "save some each generation" is breaking, and if so, what can be done to fix it.
Tonight's Cosmos featured the discovery that lead pollution from car emissions was poisoning the environment and humans. However, automobile and oil & gas companies had a vested interest in the status quo.
It took 25 years to remove lead from gasoline, e.g., unleaded gasoline. Unrestricted Free Market Capitalism has no environmental or health constraints or concerns. There must be a counterbalance or else our health, wellbeing, and the environment will suffer.
I have not read Piketty's book. But can someone tell me how he showed that his discovered pattern of r>g is applicable to capitalist driven economies only and not ANY general economy?
The possibility of faster rate of return on investments (whatever resource you are investing) is supposed to exist in any gamed system. In an overall system where the available resources max at X, any individual's objective is too attain the largest portion of X as possible.
Whether that be through promoting capitalist ideologies, bureaucratic ideologies, or imperialistic ideologies, etc.
Generally speaking the ideologies you try to impress on others is spoken of in terms of being best for the 'g' value (overall economic growth), but we all know each person will just play the game of whatever system they are in to attain their own personal 'r' value.
Basically, what I am saying is: there have been very poor and very rich people in every single economic system throughout the span of human history. And ,at least some prevalent power distribution dynamics (game theory) can most likely be used to explain them all.
Th funny part is that r>g was the whole purpose of capitalism. If that were not true then you would not have the huge incentive for individuals hoping to build economic empires (or generally grow their fortunes decently).
r>g seems to be the promise that royalty/aristocrats must receive before making a political decision. Or the 'promise' Columbus looked forward too before he would 'discover' a new world for Spain. Or the promise any individual player must believe in if they are going to do something significant beyond themselves.
r>g was the even the general promise given to people during communist revolutions. Take money from the rich and give it to us, the poor.
There has to be incentive for individual players for them to want to pursue an ideology.
So, I am always surprised when people take ideologies so seriously, because in the end it's only a bit of game dynamics.
If someone wants government to put more focus on redistribution like Picketty, then so be it. All that means is that the place to have power will be via a position in government. I guess the people pushing for this enjoy the latest productivity of Congress. ;)
I, for one, do not care. Everyone will simply (as people have always done) 'play the game'. And then some time down the line the "winners" of whatever the game is will be yelled at and something will commence a 'restart'.
... and in the meantime, the systems of thought (as I tried to argue in my other posts) that are erected to hide these basics behaviors will become increasingly intricate and complex and hide this very fact that people are people in increasingly interesting ways.
I believe, as I mentioned above, the idea that 'humans are not rational' is one of the latest such constructs to hide basic reality.
In a way, it is an interesting evolution of delusion, to the point where it gets extremely hard to avoid being drawn into it.
Thinking this line further, maybe the next restart will be rather due to the fact that the complexity is so big that people just accept reality?
Of course Pickety doesn't mention it. That would ruin his narrative. And it wouldn't back his central thesis and proposal to tax the living excrement out of the rich. You know, to fix a problem none of us ever knew of until he "told us" about it in his giant weary book.
But I'll hold off on a proper rant about him and his book once I've read it.
For those who are still unfamiliar with the name Piketty: He's a French economist (who briefly enjoyed a stint at MIT as professor before becoming disenchanted with the state of things here and returning to his home-country of France).
In his recent book "Capital in the 21st Century", he's done something very big. He's pointed out that capitalism is flawed -- that inequality is not an unintended result, but rather an inherent feature of it. He's done this with an enormous amount of data.
His prescription for the cure is a little controversial though: progressive taxes (up to 80%) for the rich, and a "global wealth tax" that he wants America to orchestrate. For a good summary (that talks about this main discovery that "r > g" -- that return on capital is greater than the overall economic growth), watch this talk on Bill Moyers show with Krugman: https://www.youtube.com/watch?v=QzQYA9Qjsi0 - though this submission article seems to have a nice synopsis too.
As an article on NYT earlier this week said it, the book heralds a song of American socialism in the future. His findings are just too compelling to ignore, they're going to fundamentally change the tone and substance of debate we have about economic policies.