Piketty or Marx? Capital in the Twenty-first Century: a fundamental criticism
Part 3 Transition to capitalist production
Piketty or Marx?
Capital in the Twenty-first Century: a fundamental criticism
Part 3
Transition to capitalist production
For his part, Piketty doesn’t mention the transition from feudalism to capitalism, which was a very slow process until the late 18th century, impeded by the persistent strength of medieval traditions, protected by the monarchy and the aristocracy. He does, however, provide statistical evidence of a passage from a more-or-less economically stagnant world to a world of accelerated national growth, although he doesn’t recognize capitalism as fundamentally different from feudalism. Nor does he consider “capital” something uniquely associated with capitalism. Marx and Engels, on the other hand, did explain the historical transition to capitalism.
The underlying assumption in Piketty’s analysis is that “capital” has existed since ancient times; indeed he has a chart showing the ratio of the rate of return on capital to the growth rate of the economy starting at the year zero. He explains in Chapter 10 (p. 446): “In order to illustrate this point as clearly as possible, I have shown in Figure 10.9 the evolution of the global rate of return on capital and the growth rate from antiquity to the twenty-first century.” But this ignores the basic facts of the evolution of social systems since the birth of civilization. In previous forms of society (barbarism, slavery, feudalism) capital either did not exist, or existed only in primitive forms (merchant’s and usurer’s capital). In these earlier stages of social development, the basic needs of the population were met by traditional practices of production and distribution that did not involve money. In slave societies production was carried out by slaves, and a portion of the product was given to them as survival rations. In feudal society, the work was done by serfs who provided labor services or a share of the product to the aristocratic landowners.
In order for capital to play a role in the production and distribution of the most basic products of labor, the necessities of life, there was a need for the growth of exchanges among villages, regions, and nations. Along with this kind of progress, the use of money as measure of exchange and means of payment had to increase. The growth of these historical economic processes is described by Marx and Engels (and many other historians as well), as the emergence of capital, which develops as a result of the evolution of the use of money for commodity exchange. But in the ancient world, some forms of capital developed in limited spheres. Marx, explained it this way: “In ancient Rome, beginning with the last years of the Republic, when manufacturing stood far below its average level of development in the ancient world, merchant's capital, money-dealing capital, and usurer's capital developed to their highest point within the ancient form.” (Capital, Vol. III, Chap. 36) In pre-capitalist societies, in which merchants’ and usurers’ capital maintain only a marginal presence, the foundation of social stability and economic progress lies with the dominant modes of production, slavery and feudalism.
Piketty’s chart shows a slow growth rate for capital from year 0 to 1700, an uptick from 1700 to 1913, and even more accelerated growth rate from 1913 to 1950, and a decline after that. This is a graphical illustration of the kind of growth many economists have talked about, many of them attributing the historical upturn in 1700 to the growth of capitalism emerging within its pre-capitalist environment. But as we see, Piketty makes no distinction between capitalism and feudalism. Capitalism is a system in which capital, moneyed wealth invested in production, transport, finance and commerce, plays the central organizing role for economic activity. In the previous forms of society, the basic economic forms were based on production and distribution without the need for commodity exchange, and production for exchange was a subordinate feature.
Capital and wealth
Later, in Chapter 1, Piketty sums up his conception of capital.
“To summarize, I define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market. It consists of 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).”
Since he uses the term “residence,” the total national wealth (the national capital) includes all the wealth of families of all classes, including workers, farmers and the middle classes. He adds up existing categories that are considered to be wealth, and makes no distinction between real wealth (commodities) and wealth that could be wholly, or in part, fictitious (bank accounts, stocks, bonds, derivatives contracts, etc.). (On fictitious capital, see below.) But Marx understood that wealth is the marriage of labor and nature. In Capital, Vol. 1, Marx states:
“The use values, coat, linen, &c., i.e., the bodies of commodities, are combinations of two elements—matter and labour. If we take away the useful labour expended upon them, a material substratum is always left, which is furnished by Nature without the help of man. The latter can work only as Nature does, that is by changing the form of matter. Nay more, in this work of changing the form he is constantly helped by natural forces. We see, then, that labour is not the only source of material wealth, of use values produced by labour. As William Petty puts it, labour is its father and the earth its mother.” (Capital, Vol. 1, Chap. 1)
Here Marx analyzes “use values,” which are the material products of labor, made to fulfill some human need, regardless of whether or not they are sold to others. If they are produced for sale to others on a continuous basis, then they are commodities. But as for capital, Marx argues that wealth becomes capital only in societies in which the capitalist mode of production prevails. As he put it:
“The wealth of those societies in which the capitalist mode of production prevails, presents itself as ‘an immense accumulation of commodities,’ its unit being a single commodity.” (Capital, Vol. 1, Chap. 1)
Further:
“The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit.” (Capital, Vol. 3, Chap. 15)
Here we see that pre-capitalist societies do have wealth, because they have products of labor, but the mass of the wealth that they possess does not take the form of commodities. In subsistence-based societies, products that are produced and consumed within local communities (barbarian tribes, feudal estates, slave latifundia) are not commodities, they are “use values,” i.e., they are objects people need, and are produced and consumed in accordance with the prevailing traditions that form the material foundation for their life and work. These products are made to satisfy the needs of the members of the community, as well as provide for the privileged social elements who feed off the surplus produced by the laboring peasants.
In these societies, various forms of exchange of products outside the bounds of the local community play only a subordinate role; but they evolve over time, and systems of production for exchange emerge and grow, and the volume of use values that can be exchanged embraces wider categories of products and more frequent exchanges. A product that is considered a commodity is one that is regularly produced for exchange. In slave or feudal societies, there is a greater surplus of products above and beyond the needs of the laboring people, and this goes to the ruling classes and their personal retinues. In the late middle ages advances in farming methods and artisan productive techniques created the basis for larger surpluses, and there was a growth in exchanges of products between regions and nations. The role of merchant’s capital expanded in the 16th and 17th centuries after the discovery of the new world and the growth of the slave trade. This enabled merchants to invest in production and gradually take over the production of the necessities of life, one sector after another.
In Capital, Vol. III, Chap. 20, Marx pointed out
“Since merchant's capital is penned in the sphere of circulation, and since its function consists exclusively of promoting the exchange of commodities, it requires no other conditions for its existence—aside from the undeveloped forms arising from direct barter—outside those necessary for the simple circulation of commodities and money. Or rather, the latter is the condition of its existence. No matter what the basis on which products are produced, which are thrown into circulation as commodities—whether the basis of the primitive community, of slave production, of small peasant and petty bourgeois, or the capitalist basis, the character of products as commodities is not altered, and as commodities they must pass through the process of exchange and its attendant changes of form.”
Merchant's capital flourished in the middle ages and into the early modern period in Europe, providing one of the points of origin for capitalist production. It originated in the ancient Mediterranean, even earlier than the epoch in which the Phoenicians plied their vessels loaded with ivory, silk, ceramics, spices, etc. The objects traded were generally commodities, i.e., they were produced to be exchanged for money. The profits gained by the Phoenicians, and other traders of the ancient world, came from the difference between prices paid to the sellers (producers or their agents) and prices paid by the buyers of the goods. These price differentials were sufficient to cover the expenses and losses of the merchant, plus enough to allow some accumulation of wealth in the form of goods and money. This accumulation of wealth extracted from trading excursions is merchant's capital. At a later stage of historical development, with a higher evolution of the productive arts in Europe, as well as a further development of world trade, it became possible for merchant's capital to penetrate ever more deeply into the spheres of artisan and agricultural production, gradually taking control of all fields of agricultural and artisan production, converting the productive materials and equipment into their private property, and remaking the artisan laborers into wage-earning proletarians. As Marx put it:
“Within the capitalist mode of production — i.e., as soon as capital has established its sway over production and imparted to it a wholly changed and specific form — merchant's capital appears merely as a capital with a specific function. In all previous modes of production, and all the more, wherever production ministers to the immediate wants of the producer, merchant's capital appears to perform the function par excellence of capital.” (Ibid.)
What is striking about Marx, in contrast to Piketty, is that he recognizes capital as a historical and social category that developed through various stages, along with the changing forms of social production. Piketty simply gives an abstract definition, which omits mention of how things came to be.
But capital did not take shape as the dominant force in production in social production until the transition to capitalism which began in the 16th to 17th century with the great expansion of world trade, and until its economic power was fully expressed in the period of the late 18th century industrial revolution.
Capital is self-expanding value. But Piketty has not addressed the problem of profit, or of how and why it expands, or of the relation between value and price. Piketty does not really attempt to define “value” either, but instead recommends the marginal utility theory, which a way of calculating ideal market prices based on supply and demand of goods and services that are subject to market competition. This theory leaves out of account the nature of “value” and treats price as the essential object of economic analysis. Price therefore no longer has any connection to the determining forces that give rise to prices, and the economists are left with just prices. Not having an understanding of value robs you of the possibility of understanding the foundation of prices, and the nature of capital as well.
Piketty explains one reason why he doesn't draw a distinction between wealth and capital, saying,
“Some definitions of “capital” hold that the term should apply only to those components of wealth directly employed in the production process. For instance, gold might be counted as part of wealth but not of capital, because gold is said to be useful only as a store of value. Once again, this limitation strikes me as neither desirable nor practical (because gold can be a factor of production, not only in the manufacture of jewelry but also in electronics and nanotechnology). Capital in all its forms has always played a dual role, as both a store of value and a factor of production. I therefore decided that it was simpler not to impose a rigid distinction between wealth and capital.”
Growth of credit and fictitious capital
As Piketty examines the capitalist economy in the present era of capitalist decline, he leaves out the overexpansion of credit in the capitalist economy and the growing accumulation of debts, whether household, governmental or corporate. This debt explosion can be seen in figures that track the growth of financial obligations as a percentage of total wealth, and the growth of the financial sector as a percentage of nominal GDP. The proliferation of forms of credit and their massive increase has greatly accelerated the growth of fictitious capital, both in public and private spheres. As the total of all debts grows, the divergence between real wealth and fictitious wealth grows. This means that statistics on assets of banks and corporations do not take into account the difference between real wealth and paper wealth. This is something that observant people were supposed to have learned in the aftermath of the 2008 financial crash (or perhaps before). But there is a growing mass of paper tokens of wealth which, in reality, represent very little wealth.
Source: BMG Group Inc. http://bmg-group.com/us-federal-debt-divided-by-us-gdp/
Source: St. Louis Federal Reserve Bank, https://fred.stlouisfed.org/series/GFDEGDQ188S
It should be understood that bank money is created out of nothing. Sums that are lent at interest, although they are regarded as assets for the bank and show up on the asset side of the ledger, do not represent money, but instead are potential future income streams for the bank as loans are paid back. The borrower accepts the money and spends it, and (ideally) keeps up with the monthly payments representing principal and interest. Frances Coppola, writing in Forbes Magazine in 2014 reads:
“Is there a magic money tree? All money comes from a magic tree, in the sense that money is spirited from thin air. There is no gold standard. Banks do not work to a money-multiplier model, where they extend loans as a multiple of the deposits they already hold. Money is created on faith alone, whether that is faith in ever-increasing housing prices or any other given investment. This does not mean that creation is risk-free: any government could create too much and spawn hyper-inflation. Any commercial bank could create too much and generate over-indebtedness in the private economy, which is what has happened. But it does mean that money has no innate value, it is simply a marker of trust between a lender and a borrower. So it is the ultimate democratic resource. The argument marshalled against social investment such as education, welfare and public services, that it is unaffordable because there is no magic money tree, is nonsensical. It all comes from the tree; the real question is, who is in charge of the tree?”
Furthermore, in order to increase the easy availability of credit in the wake of the 2008 crash, the Federal Reserve Bank has eliminated the reserve requirement for member banks (commercial and investment banks). Previously there had been a reserve requirement for banks so as keep assets ready in case of a crisis that drove depositors to withdraw their funds. As a December 2021 article by Kimberly in The Balance explains:
“The reserve requirement is the total amount of funds a bank must have on hand each night. It is a percentage of the bank's deposits. A nation's central bank sets the percentage rate.
“… On March 15, 2020, the Fed announced it had reduced the reserve requirement ratio to zero effective March 26, 2020. It did so to encourage banks to lend all of their funds during the COVID-19 coronavirus pandemic. As of January 2022, this reserve requirement was still in effect.”
(See: https://www.thebalancemoney.com/reserve-requirement-3305883)
But apart from the bank assets in commercial and investment bank (account records specifying quantities of money owed by borrowers) the total wealth of any nation in the modern era is composed of tokens of credit representing a variety of assets—interest, royalties, capital gains, dividends, bonds mortgages, etc. Their value is calculated on the basis of a nominal underlying value of a share of stock, or bond, or other security, that itself represents fictitious wealth. These are numbers in accounts—in most cases there is no method of ascertaining how much real value they represent.
The payment checks being issued to the creditors or title-holders are as valid as any other check (leaving aside cases of fraud and larceny), which means that as long as the institution of issue is not legally bankrupt or in immediate danger of insolvency, the check will be honored by any acceptor. What is supposed to be considered an economic phenomenon, money, becomes transmuted into a legal phenomenon based on credit. In the final analysis, what is called “wealth” is determined not by bankers or economists, but by courts, lawyers and the police.
The ease with which money changes hands convinces nearly everyone that there is solvency on all sides. It is only in a crisis that potential bankruptcy is converted into real bankruptcy and paper values suddenly vanish. At a time of cascading insolvencies, the government intervenes in the financial system to decide which banks and corporations were undercapitalized, which were light in their reserves, which must be liquidated, and which must be bailed out. At least that’s one of the takeaways of the 2008 crash. A different scenario could emerge in a future crash. In the long run, as fictitious assets accumulate, every bailout becomes an infusion of fictitious capital of a legally authorized variety in order to replace fictitious capital that has evaporated in a crash.
As is commonly known, publicly-traded companies issue shares of stock in various trading venues (NYSE, NASDAQ, S&P500, etc.). The forces of supply and demand determine the stock prices, which are untethered from the underlying values of the companies’ hard assets. A method of calculating the underlying values of shares of stock in companies based in the U.S. becomes increasingly urgent for investors, who see share prices driven higher and higher by growing demand. They recognize that the “market value” (total price of all outstanding shares of stock) of a company is much higher than its “actual value” based on the underlying value of the company’s assets, referred to as the “book value.” A useful definition of book value is provided by
https://corporatefinanceinstitute.com
: “The book value is the amount that would be left if the company liquidated all of its assets and repaid all of its liabilities. The book value equals the net assets of the company and comes from the balance sheet.”
As stock traders have shifted their portfolios towards companies that seem to have the brightest prospects for future growth in recent years, a number of media, communications and commercial companies (Facebook, Amazon, Apple, Netflix, and Google) have gained greater market share than old established companies in manufacturing , transportation and construction. Amazon, for example has reached a price to book ratio of 15.25 as of December 2019, according to https://www.surveydone.info: “Price to book ratio in most recent quarter was 15.25 while trailing twelve months period, to sales ratio of the stock was 3.28.”
On a grand scale this reveals a large sum of money (much of it borrowed) invested in ownership of a relatively small underlying sum of value. In a bull market shares represent growing quantities of fictitious wealth. Amazon, for example has reached a market capitalization of 1.06 trillion. This valuation is largely fictitious since the share price reached that level only because investors were impressed by the company’s rapid growth and commercial success. Meanwhile its intrinsic value grew at a much slower pace. We should keep in mind that the underlying value of the company, the “book value,” itself contains a significant fictitious component, due to the overvalued prices of the bonds and other financial securities which are counted as assets on the company’s books. We should also keep in mind that in the context of a generalized financial downturn, both market value and book value will be substantially written down. Long ago Marx explained the reason for the overexpansion of the quoted values of the stocks:
“Titles of ownership to public works, railways, mines, etc., are indeed, as we have also seen, titles to real capital. ... To the extent that the accumulation of this paper expresses the accumulation of railways, mines, steamships, etc., to that extent does it express the extension of the actual reproduction process—just as the extension of, for example, a tax list on movable property indicates the expansion of this property. But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory [emphasis added], and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles. Their value, that is, their quotation on the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest—in so far as this fall, independent of the characteristic movements of money-capital, is due merely to the tendency for the rate of profit to fall; therefore, this imaginary wealth expands, if for this reason alone, in the course of capitalist production in accordance with the expressed value for each of its aliquot parts of specific original nominal value.” (Capital, Vol. 3, Chap. 30)
The explosion of credit in the capitalist economies, coming on the heels of the downturns in the 1970s and early 1980s, then accelerating after the dot-com bust of 2000, injected fictitious capital on an unprecedented scale into the balance sheets of all major banks, corporations and governments—not to mention the households of overextended consumers—all money-dependent entities that had access to the credit system. Financial companies developed new mechanisms (mortgage-backed securities and other derivatives) to produce titular assets with real values much higher than their book values (if, indeed, there were such book values). The 2008 crash let a lot of air out of the balloon, bringing valuations closer to reality. But we should recall that the only way the financial system could be rescued was by the injection of more credit into the banking system through the operations of the Federal Reserve Bank (not just TARP, but also quantitative easing, which extended over many years after the crash). In order to restore the levels of business activity that existed before 2007, it was necessary to recreate the levels of debt which had precipitated the 2008 crash.
As for the outstanding treasury bonds of the U. S. government ($22 trillion as of February 2019), this mass of nominal dollars represents fictitious capital in the sense that any government bond only represents a debt of the government to the creditor, who can only recover the money paid for the bond by selling the bond to another purchaser. In some theoretical sense, the real assets held by the government might be regarded as “collateral” for the outstanding government debt, but if the U.S. government goes into Chapter 11 bankruptcy, how many creditors would be satisfied with a cruise missile or an acre of land in the Arizona desert? In the real world these bonds are not wealth at all, only IOUs. In this connection Marx says,
“The state has to annually pay its creditors a certain amount of interest for the capital borrowed from them. In this case, the creditor cannot recall his investment from his debtor, but can only sell his claim, or his title of ownership. The capital itself has been consumed, i.e., expended by the state. It no longer exists. ... the capital of the state debt remains purely fictitious, and, as soon as the promissory notes become unsalable, the illusion of this capital disappears. As for the interest on bonds, this must be paid according to the terms of the obligation at the time of purchase.” (Capital, Vol. III, Chap. 29)
As of 2018 U. S. governments (federal, state and local) are paying an estimated $523 billion annually in interest on their debts, see: https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm.
Bondholders receiving this interest count it as income (or at least that’s what the IRS says they must do), and it is so entered in the national accounts as private income. Piketty regards the outstanding government debt as an asset for private capital and a liability for public capital. Thus, for the total national capital it cancels out. Thus for Piketty the effective debt of the U.S. government is not $22 trillion, but $0, because for every dollar owed by the government there is another dollar asset in the hands of a bond holder. (A bond is as good as gold.) So, for Piketty, there are no factors that would undermine the credibility and convertibility of these federal debts. If the government wanted to issue an additional $20 trillion, or $200 trillion, in bonds—why not? The effective debt would still be zero.
But many observers see the debts inexorably mounting in a climate of the government's incapacity to significantly accelerate economic activity. The borrowing by federal, state and local governments helps these entities meet their budgetary targets without raising taxes, but the debt keeps growing. From 2008 to 2018 the debt to GDP ratio in the U.S. has grown from 67.7 % to 105 %.
“The United States recorded a government debt equivalent to 105.40 percent of the country's Gross Domestic Product in 2017. Government Debt to GDP in the United States averaged 61.70 percent from 1940 until 2017, reaching an all time high of 118.90 percent in 1946 and a record low of 31.70 percent in 1981.” https://tradingeconomics.com/united-states/government-debt-to-gdp
Many observers foresee the coming crash. The Sept. 14, 2018, issue of Market Watch features these comments from experienced market analysts:
“Gary Shilling is particularly worried about the $8 trillion in dollar-denominated emerging-market corporate and sovereign debt, especially as the U.S. dollar rises along with interest rates. “The problem is as the dollar increases,” he said, “it gets tougher and tougher for them to service [that debt] because it takes more and more of their local currency to do so.” Of that, $249 billion must be repaid or refinanced through next year, Bloomberg reported.
“Jim Stack indicates that housing-related stocks “saw a parabolic run-up” in 2016-17, but in January his index “peaked and now it’s coming down hard.” That suggests “bad news on the housing market looking 12 months down the road,” he said. But the biggest danger, Stack told me, is from low-quality corporate debt. Issuance of corporate bonds has “gone from around $700 billion in 2008 to about two and a half times that [today].”
“Raghuram Rajan, the chief economist of the IMF, believes ‘there has been a shift of risk from the formal banking system to the shadow financial system.’ He also told me the post-crisis reforms did not address central banks’ role in creating asset bubbles through accommodative monetary policy, which he sees as the financial markets’ biggest long-term challenge. ‘You get hooked on leverage,’ he said. ‘It’s cheap, it’s easy to refinance, so why not take more of it? You get lulled into taking more leverage than perhaps you can handle.’ Rajan also sees potential problems in U.S. corporate debt, particularly as rates rise, and in emerging markets, though he thinks the current problems in Turkey and Argentina are ‘not full-blown contagion.’ ‘But are there accidents waiting to happen? Yes, there are.’”
The balance sheets of corporations, banks and wealthy families contain trillions of dollars in public and private bonds reflecting the debt of the U.S. and other sovereign borrowers, as well as state and municipal bonds, and bonds issued by banks and corporations. These assets are the basis for interest income of the bondholders. Corporate bonds might have a better claim to represent real wealth than government bonds, but in a stock-market crash they tend to fall farther in price than do government bonds. (http://www.investopedia.com/university/credit-crisis/credit-crisis7.asp)
The assets columns of banks are growing as the total outstanding indebtedness increases. The more reserve assets claimed by a bank, the more money it can loan out. The main sources of private, non-commercial, non-financial indebtedness are grouped under “household debt.” Household debt consists of home mortgages, commercial building loans, student loans, credit card debt, auto and appliance debt, and other. The New York Federal Reserve Bank reports (at the end of the second quarter of 2019) a total U.S. household debt of $13.86 trillion, and explains:
“The CMD’s latest Quarterly Report on Household Debt and Credit reveals that total household debt increased by $192 billion (1.4 percent) to $13.86 trillion in the second quarter of 2019. It was the twentieth consecutive quarter with an increase, and the total is now $1.2 trillion higher, in nominal terms, than the previous peak of $12.68 trillion in the third quarter of 2008.”
(https://www.newyorkfed.org/microeconomics/hhdc.html)
Politicians and economists assume that the government will use its executive power to defend its own solvency, and prop up the market for its sovereign bonds. Also, the U.S. banks that are deemed “too big to fail” can expect a good price for their assets and capital holdings from the federal government, on the belief that in a crash the government will step in and rescue them, as in 2008. On this basis, they continue to build up their fictitious assets.
The New York Times of Sept. 12, 2018, carried a debt survey report as part of its “Crisis and Consequences” series. They pointed to the alarming rise of corporate, student, mortgage and financial sector debt, as well as pointing to the global character of the current debt expansion. The authors of the article, Matt Phillips and Karl Russell, point out:
“Another pocket of concern is the fast-growing market for so-called leveraged loans. Banks make these loans to companies, and then sell off slices that are packaged up and resold to investors, like hedge funds, mutual funds and pensions. The market is much larger than it had ever been, with more than $1 trillion of the loans currently outstanding.
“Investors are so eager to get their hands on these loans — because they have adjustable interest rates, they perform well when the Fed is hiking rates — that they’re accepting lower-quality deals. Some 80 percent of today’s institutional leveraged loans are known as ‘covenant lite’ deals because they offer weaker protections for investors.”
Piketty returns again to the divergence theme, claiming that, “high capital/income ratios in the past few decades” can be explained in part by the “return to a regime of relatively slow growth (p. 33)”. Piketty has a point here. In slowly growing economies “past wealth naturally takes on disproportionate importance, because it takes only a small flow of new net savings to increase the stock of wealth. ...” If the “rate of return on capital remains significantly above the growth rate for an extended period of time ... then the risk of divergence in the distribution of wealth is very high.” This is, at best, a truism, which adds nothing to an understanding of the crisis of the 21st century.
So to get the bottom of the slowing growth rate of capital, we need to recognize that there is a tendency of the rate of profit to fall (see below), which operates over the long process of maturation and senescence of the capitalist mode of production. Falling profit rates produce a slowdown in production and trade which strangle the motive forces of productive growth, reducing return on investment for the owners of capital. This increases the motivation of the ruling rich to cut the costs of production (wage cuts, reduction of workers’ benefits, tax cuts, cutting of costly regulations, offshoring of bank accounts, growth of the shadow banking system, etc.).
Piketty argues that “people with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels.” Granted, the new generation of the elite will take their inheritance and try to build on it. Workers, on the other hand, inherit very little, and if they save, they don't save much. But what does Piketty mean that “inherited wealth will dominate wealth amassed from a lifetime's labor”? In practice there is no “wealth amassed from a lifetime’s labor.” Paychecks are spent on the necessities of life and there is little or nothing left to “amass.” Apparently, he means that the capitalists will increase their wealth, while the workers will not, which is true. So, the gap between the rich and poor will grow. And, indeed, statistics continue to show this is happening. http://www.wsj.com/articles/fed-gap-between-rich-poor-americans-widened-during-recovery-1409853628
Capital and labor
The first chapter in Piketty’s book, “Income and Output,” opens with a discussion of the distribution of wealth between capital and labor. Piketty begins by recalling the massacre of thirty-four platinum miners in Marikana, S. Africa, in August 2012, in the midst of a strike. The question involved in this incident is wages. “How should the income from production be divided between labor and capital?” Piketty asks, as if it were a question to be settled by economists or governments. He continues, “... hopes for a more equitable distribution of income and a more democratic social order were dashed.”
The Marikana miners pointed to the excessive profits of the mining company, Lonmin, and of the high compensation awarded to the mining company's top executives. In order to explain the sharpness of the battle at Marikana, Piketty says, “If the capital-labor split gives rise to so many conflicts, it is due first and foremost to the extreme concentration of the ownership of capital.” He gives the impression that in workplaces of a lower capital concentration one would expect more generous wage policies. But the fight over wages has broken out time and again in workplaces both large and small throughout the history of capital. Many small shops live on the edge of commercial viability, and pinch every penny. They avoid unionization like the plague—as do the large corporations. Piketty seems to be promoting the notion that when capital becomes “extremely concentrated” bad things can happen. “Smaller is better,” then. Is it that Piketty is proposing a less concentrated, perhaps more egalitarian, distribution of capital ownership? Not really, although he is inspired to imagine such possibilities.
He argues, “Indeed, if capital ownership were equally distributed and each worker received an equal share of profits in addition to his or her wages, virtually no one would be interested in the division of earnings between profits and wages.” His imagination runs away with him. Is he actually advocating a system of “equal distribution of capital”? Or is he fantasizing about the paradise of the equality between labor and capital? He seems to be hypothesizing that “equality” among the property owners would foster a more egalitarian society. He says, “Inequality of wealth—and of the consequent income from capital—is in fact always much greater than inequality of income from labor.” But again, he avoids explaining why this inequality has arisen. But he does have a remedy —a progressive income tax. He discusses this later in the book.
In Chapter 7, Piketty returns to the theme of inequality between capital and labor, saying, “by definition, in all societies, income inequality is the result of adding up these two components: inequality of income from labor and inequality of income from capital. The more unequally distributed each of these two components is, the greater the total inequality.” Inequality of income distribution is always higher for capital that than income inequality for labor, Piketty says. However, “this regularity is by no means foreordained, and its existence tells us something important about the nature of the economic and social processes that shape the dynamics of capital accumulation and the distribution of wealth.” But the arguments Piketty makes in this section really have nothing to do with how it is that the society has come to be divided between the owners of wealth and those who must work for a living. This remains unexplained.
We should recall how Piketty defined “capital,” (see above) “To summarize, I define ‘national wealth’ or ‘national capital’ as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market.” Piketty is not talking about sectors of production, but the property owned by families. He is referring to the inequality of income from capital (stocks, bonds, real estate, etc.) among all those families who receive income from capital. So, when Piketty says, “… whereas the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth (and in some societies as much as 90 percent)” he is talking about the concentration of wealth in the society as a whole, with the richest families owning the biggest share. Marx, on the other hand, focused on the production of commodities and the distribution of profit among the owners of the means of production.
But, as Piketty says,
“The third decisive factor is the relation between these two dimensions of inequality: to what extent do individuals with high income from labor also enjoy high income from capital? Technically speaking, this relation is a statistical correlation, and the greater the correlation, the greater the total inequality, all other things being equal.”
So now we have better-off individuals within the working class; those who earn income from property as well as from labor. Perhaps these individuals should be categorized as the working wealthy (which is how many of the ultra-rich see themselves.) As he reviews the statistics, his preliminary conclusion is that:
“the first regularity we observe when we try to measure income inequality in practice is that inequality with respect to capital is always greater than inequality with respect to labor. The distribution of capital ownership (and of income from capital) is always more concentrated than the distribution of income from labor.”
In other words, if you look at the income tax returns you find a wide range of income variation among that class of taxpayers whose principal sources of income are rent, interest, dividends, capital gains and royalties. Some of them are quite rich, but many are very middle-income people. On the other hand, looking at those taxpayers whose main income sources are wages, salaries, tips, social security and retirement pensions, there is considerably less wealth variation among them. Nearly all of them are low on the income scale. It seems to me that Piketty is laboring mightily to tell us something that we already know: among those whose income is derived from ownership of property, there is an ascending scale of wealth, with the highest incomes recorded among very small elite of the ultra-rich. He then introduces the charts (Tables 7.1, 7.2, &7.3) which demonstrate these points. This is very interesting but is far removed from a discussion of how the population came to be divided among those whose income derives from wages and those whose income derives from ownership of value-producing property. On the question of whether modern society is a class-divided society (as Marx claimed) or whether it’s a classless society, as the IRS seems to think, Piketty has nothing to say.
Students of history recognize that long before capital had become “concentrated” into large corporations, bitter struggles were fought, oftentimes with the workers on one side and employers’ associations on the other. This happened in many industries: textiles, mining, construction, transportation, etc. Up until the middle of the 19th century capitalist production was dominated by relatively small producers, which more and more began to buy each other out, or merge into large companies. But the turn of the 20th century monopolistic trusts and combines were forming, leading to large aggregations of capital. Still the concentration of capital had a long road ahead of it. Smaller businesses were often absorbed by the big companies, but in many cases, they were preserved as subordinate elements within a capitalist property hierarchy. Lenin explains this evolution in his book, Imperialism, the Highest Stage of Capitalism.