Piketty or Marx?Capital in the Twenty-first century: a fundamental criticism

Part 4 of 5

Piketty or Marx?
Capital in the Twenty-first century: a fundamental criticism

Part 4

Wages

Marx explained that the source of bourgeois wealth was the ability of capital to capture and retain a portion of the value created by workers in the production process. This portion is called surplus value (which can be broken down principally into profits, interest and rent). The workers subsist on a limited wage, usually sufficient to maintain their living conditions and raise children. The value of the products pouring out of the process of production, on average, exceeds the value that the capitalist has advanced for their production. When the products are sold in the market, the part in excess of the capitalists’ expenses of production is pocketed by the owner of the means of production as surplus value (a portion of which might be paid to the banker as interest, and to the landlord as rent). The surplus value is the portion of value that the capitalist collects without having had to pay any equivalent.

Speaking of wages, Piketty observes, “The average wage increased enormously over the course of the twentieth century, but the gap between the best and worst paid deciles remained the same. Why was this the case, despite the massive democratization of the educational system during the same period? The most natural explanation is that all skill levels progressed at roughly the same pace, so that the inequalities in the wage scale were simply translated upward” (p. 384). Piketty links wage income with education, and education with productivity. He states: “Wage increases cannot exceed productivity increases indefinitely, but it is just as unhealthy to restrain (most) wage increases to below the rate of productivity increase.” Piketty does not mention the workers’ unionization movement as a force for the improvement of the conditions of the workers. It is as if, in Piketty’s view, working people are not a factor in economic change. It’s as if they, as exploited producers, have no opinions about their wages and conditions of labor. Perhaps it never occurred to them to form unions? Whatever the case, Piketty wants himself to be seen as recommending policies for the management of labor relations that are humane, sensible and beneficial to growth.

Piketty announces: “to sum up what has been said thus far: the process by which wealth is accumulated and distributed contains powerful forces pushing toward divergence, or at any rate toward an extremely high level of inequality.” He says,

“More generally, insofar as employers have more bargaining power than workers and the conditions of “pure and perfect” competition that one finds in the simplest economic models fail to be satisfied, it may be reasonable to limit the power of employers by imposing strict rules on wages.”

Here Piketty expresses the feeling that in general wages are lower than what they would be the conditions of “perfect competition” were met. After all, employers have more bargaining power (given their control of the state and its judicial institutions, as well as the police power and military power). Such issues are outside the scope of Piketty’s fantasy-vision of capitalism. He has nothing to say of capitalists using paid goons, armed police, or the national guard to suppress workers strikes. But in the model of perfect competition (which economists analyze as somehow representing the real world) there are no outside “powers” intervening to distort the market. It’s all a matter of “marginal utility” or “elasticity of substitution” forming the basis for supply and demand. There are no cops, courts, or jails—and no unions either.

But his “reasonable” recommendation, to limit the power of the employers, assumes that the government is, or should be, the entity that “reasonably” regulates the level of wages and the relations between the classes in general. This is how governments generally portray themselves: impartial observers of the struggle over wages and profits. They only intervene when necessary, and only to bring the two sides together to find a compromise acceptable to all. The social and political domination of society by the propertied class is the fundamental condition that overshadows all labor relations within capitalist society, but improvements in wages and working conditions have been achieved as a result of the battles waged the trade unions built by working people, relying on solidarity among themselves and often with the aid of family farmers and other laboring people. Marx has an advantage over Piketty in explaining the relationship of class forces brought about by trade-union and political struggles between the classes.

Piketty believes that a worker's wage should reflect the marginal productivity of the labor contributed by that worker. What portion of “output” does each worker contribute to the product? Once that is determined, then you could calculate what the wage and benefit package should be. As he says,

“In an organization employing dozens or even thousands of workers, it is no simple task to judge each individual worker’s contribution to overall output. To be sure, one can estimate marginal productivity, at least for jobs that can be replicated, that is, performed in the same way by any number of employees. For an assembly-line worker or McDonald’s server, management can calculate how much additional revenue an additional worker or server would generate. Such an estimate would be approximate, however, yielding a range of productivities rather than an absolute number. In view of this uncertainty, how should the wage be set?” (Chapter 8)

But the marginal utility theory was dreamed up as an attempt to explain bourgeois economics without offending the capitalists, and in the process, it tries to invalidate Marx’s labor theory of value. But the marginal theory has no relevance outside of “Econ 101.” In reality, the wages are set by prevailing norms of workers’ living standards, and how much they need to get by and raise their families. Wages are higher for more skilled work, due to the costs of training. But wages are modified—either up or down—by the relationship of forces in the class struggle, which usually entails unions and strikes, but often is a measure of the threat of unions and strikes. Over the course of history, wages fluctuate in accord with the ups and downs of labor struggles. In its most basic expression, the wage is the equivalent of the value of labor power, beginning with simple, or unskilled, labor power. As Marx explained,

“The value of labour-power is determined, as in the case of every other commodity, by the labour-time necessary for the production, and consequently also the reproduction, of this special article. So far as it has value, it represents no more than a definite quantity of the average labour of society incorporated in it. Labour-power exists only as a capacity, or power of the living individual. Its production consequently pre-supposes his existence. Given the individual, the production of labour-power consists in his reproduction of himself or his maintenance. For his maintenance he requires a given quantity of the means of subsistence. Therefore, the labour-time requisite for the production of labour-power reduces itself to that necessary for the production of those means of subsistence; in other words, the value of labour-power is the value of the means of subsistence necessary for the maintenance of the labourer.”

However, Piketty would like to suggest a way in which wages might be raised generally, assuming that wages are set according to guidelines recommended by economists, promoted by government agencies, and implemented by managers.

“In the long run, the best way to reduce inequalities with respect to labor as well as to increase the average productivity of the labor force and the overall growth of the economy is surely to invest in education. If the purchasing power of wages increased fivefold in a century, it was because the improved skills of the workforce, coupled with technological progress, increased output per head fivefold. Over the long run, education and technology are the decisive determinants of wage levels.” (ibid.)

It is true that in the course of a century, not just any century, but the century from 1870 to 1970, there was a significant rise in the standard of living. This was a century of a massive cheapening of all commodities and massive improvements in health and welfare of the mass of the working people. It was also a century of the unprecedented growth of workers’ power to determine the level of wages and benefits. Never before or since has there been such a century. See: The Rise and Fall of American Growth, by Robert Gordon. https://press.princeton.edu/titles/10544.html

But for a two or three centuries now higher levels of skill and education are not useful or necessary for most factory, mining and service jobs. Automation has made these jobs simpler and easier to learn. Most entry-level jobs in manufacturing, mining, agriculture, commerce and transportation require very little education beyond the normal life skills obtained from growing up in an industrialized society. This is one of the byproducts of the continuing replacement of labor by machines and the loss of outmoded technical mastery and artistry on the part of artisan-workers. The history of capitalist development is a history of the simplification of labor, progressively reducing the necessary training for each job. Nowadays much so-called technical training is little more than an initial familiarization with the equipment, where to go for tools or supplies, etc.

On the other hand, new branches of production have evolved that require new skills, new occupations and new training processes. Engineers, technologists, designers, architects, planners, etc. have increased their presence in the workforce along with the growth in the complexity and of technology and the multiplicity of automated processes introduced into machine production. But as these sectors grow and develop, factory labor tasks are simplified or eliminated and the simplification of the labor process as a whole advances.

The mass of the workers in production, mining, transport and most service jobs far outnumber the professional skilled layers that continue to redesign and upgrade production technology. On the one hand, automation causes a growth in output per hour, and this tends to reduce the number of production workers in relation to the mass of machinery employed. But as the scale of production rises, the mass of workers in production grows in proportion to the total output.

Piketty then moves on to Chapter 8, entitled “Two Worlds.” The two worlds described are the top 1 % of wealth ownership vs. the 9% immediately below the top 1%. One thing that Piketty observes is that within the top 1% the bulk of the income is from property ownership: rent, interest, capital gains, dividends, royalties, etc., while within the 9% just below the main category of income is salaries, fees, bonuses, honoraria and wages (i.e. work-related income categories), with property income playing a subordinate role. This is what one would expect: within the top 10% of income there are many positions that allow salaried persons to obtain portions of the total social surplus value (managers, doctors, lawyers, accountants, entertainers, etc.). We should be aware that the classification of income sources can easily be distorted by social or legal customs under a system in which the surplus value produced by the workers is distributed in many ways among families within the upper layers of society.

For the upper middle class, certain income categories which appear to be remuneration for the services rendered or work performed in reality are a conventional form of cashing in on the values created by working people in production, i.e., these middle-class earners are taking a share of the profits. For example, a doctor who earns $500,000 annual income, much of it might be from honoraria accepted from surgical implements manufacturers or pharmaceutical companies, and there is a lot more to it than just that. Likewise, major carrier airline pilots, who do provide a highly skilled service for the flying public, might earn more than $150,000 per year. Instead of being a correct reflection of the value of the pilot's labor power, it is a conventional mechanism that allows pilots to have a good wage, plus a share of the profits produced by the working people. Lawyers, for the most part, are participants in the sharing out of the social surplus value, as are salesmen and administrators, even though a certain portion of their income might be compensation for useful work done. Their honoraria and feels are a transfer of surplus value from one account to another.

National income

Piketty then directs his attention to the division of the national income between capital and labor. Notwithstanding that workers are often paid scarcely enough to live on—or even less than that—Piketty takes into account that “if all the company's earnings from its output went to paying wages and nothing to profits, it would probably be difficult to attract the capital needed to finance new investments” (!)—not to mention the fact that the owners of such a company would be judiciously committed to a psychiatric institution. This reductio ad absurdum approach manages to leave out of sight the mechanisms and forces lying behind the division of the product value into wages and profits.

“National income,” says Piketty, is the “sum of all income available to the residents of a given country in a given year. This is closely related to GDP, but GDP measures “the total of goods and services produced in a given year within the borders of a given country.”

He continues, “in order to calculate national income, one must first subtract from GDP the depreciation of the capital that made this production possible; in other words, one must deduct wear and tear on buildings, infrastructure, machinery, vehicles, computers, and other items during the year in question.” This means that GDP calculation tries to avoid “double counting” of a given product that becomes is incorporated into the value of another product further down the production pipeline.

“GDP is a measure of ‘value added’ rather than sales; it adds each firm's value added (the value of its output minus the value of goods that are used up in producing it). For example, a firm buys steel and adds value to it by producing a car; double counting would occur if GDP added together the value of the steel and the value of the car. Because it is based on value added, GDP also increases when an enterprise reduces its use of materials or other resources ('intermediate consumption') to produce the same output.”
http://en.wikipedia.org/wiki/Gross_domestic_product

This article says:

“1. Estimate the gross value of domestic output out of the many various economic activities.

2. Determine the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services.

3. Deduct intermediate consumption from gross value to obtain the gross value added.

“When considering the production process for the entire economy, intermediate products—that is, goods and services that are used as inputs in the production process (and will not contribute to future production)—are excluded, so that the measure of output is an unduplicated total.” From U.S. Bureau of Economic Analysis.”

On this basis, all the money that is incorporated into the value of the final product could then be divided into three portions: the part that goes to purchase raw materials and semi-finished goods and replace and repair productive equipment (amortization of fixed capital) is one part, defined as “immediate consumption” above. Then the second part is that which accrues to the capitalist (principally the shareholders and bondholders of the company) some of which goes to payment of rent, taxes, fees and interest. The third part is that which goes to the expenses of labor, including compensation paid to all employees. Note that this analysis does not include the sales the intangible products of banks, insurance companies and other financial institutions. Financial operations do not add to GDP because there is nothing produced. Financial activities do, however, add to the calculated value of assets and incomes from property (dividends, interest, royalties, capital gains).

Piketty identifies domestic output as “net domestic product” or “domestic production,” which is derived by subtracting depreciation of capital from GDP (which corresponds to the definition of GDP). International trade involves calculating the gain or loss in the international trade balance. If profits generated domestically are repatriated to foreign owners, then this must be subtracted from GDP. Conversely profits repatriated from productive installations abroad are added to GDP.

Gold and money

What of gold (not only used as a store of value, but also in jewelry and industrial compounds)? Gold is a mineral, like iron or lead. It is also a repository of value, since labor was required in the digging, smelting, refining and stamping. This value can be expressed in exchange by how much of other commodities (linen, iron, etc.) can be exchanged for one ounce of gold. The products of nature, including gold, are taken up and used in society in accordance with the economic relations that govern production and exchange. In the pre-capitalist Aztec society gold was used as a decorative material, but not as a means of exchange or store of value, because the Aztecs had not developed relations based on commodity exchange. Precious metals were developed as means of exchange and measure of value in ancient European society in the course of the development of production for exchange and merchant's capital. In Grundrisse, the “Chapter on Money,” Marx explained the history of how gold came to be recognized as the universal equivalent in exchange, as measure of value, means of circulation and store of value. He explained the history of all the precious metals and how their peculiar physical and chemical attributes facilitated their use in exchange, and how the exchange ratios among them evolved. He tracks the historical value relation between copper, brass, silver and gold and their uses in early and developed trade:

“Money—the common form, into which all commodities as exchange values are transformed, i.e. the universal commodity—must itself exist as a particular commodity alongside the others, since what is required is not only that they can be measured against it in the head, but that they can be changed and exchanged for it in the actual exchange process. ... The first form of money corresponds to a low stage of exchange and of barter, in which money still appears more in its quality of measure rather than as a real instrument of exchange. At this stage, the measure can still be purely imaginary (although the bar in use among Negroes includes iron) (sea shells etc., however, correspond more to the series of which gold and silver form the culmination). ... Money appears as measure (in Homer, e.g. oxen) earlier than as medium of exchange because in barter each commodity is still its own medium of exchange. But it cannot be its own measure or its own standard of comparison. ... We see that it is in the nature of money to solve the contradictions of direct barter as well as of exchange value only by positing them as general contradictions. Whether or not a particular medium of exchange was exchanged for another particular was a matter of coincidence; now, however, the commodity must be exchanged for the general medium of exchange, against which its particularity stands in a still greater contradiction.” Grundrisse, Chapter on Money, Part II

Regarding the nature of gold, Piketty says that since gold can either be a store of value or an industrial metal in jewelry and other commodities, he decides it is “simpler not to impose a rigid distinction between wealth and capital.” Simpler, maybe, but not all simplifications are scientifically valid. In addition to being a material used in production, functioning as the object of labor, gold also functions in the social exchange process as the “universal equivalent.” As Marx explained in Capital, Vol. 1, Chap. 3:

“The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.”

Money appears in the historical evolution of barter between communities when multiple articles are being regularly exchanged. Eventually the need is recognized for an equivalent that goes beyond merely representing the value equivalent of one product in the body of another. People involved in systematized exchange relations begin to choose a single product that can stand as the representation of the value of a variety of other objects that exchange for it in ratios that become standardized over time. The one object that becomes the objective form in which other products express their value is the universal equivalent. In Grundrisse, Marx discussed the evolution of regularized exchange, and the various objects that served either as medium of exchange or measure of value: shells, bone implements, copper, brass, silver, etc. Marx put it this way in Capital, Vol. 1:

“Commodities with definite prices present themselves under the form; a commodity A = x gold; b commodity B = z gold; c commodity C = y gold, &c., whereas, b, c, represent definite quantities of the commodities A, B, C and x, z, y, definite quantities of gold. The values of these commodities are, therefore, changed in imagination into so many different quantities of gold. Hence, in spite of the confusing variety of the commodities themselves, their values become magnitudes of the same denomination, gold-magnitudes. They are now capable of being compared with each other and measured, and the want becomes technically felt of comparing them with some fixed quantity of gold as a unit measure. This unit, by subsequent division into aliquot parts, becomes itself the standard or scale. Before they become money, gold, silver, and copper already possess such standard measures in their standards of weight, so that, for example, a pound weight, while serving as the unit, is, on the one hand, divisible into ounces, and, on the other, may be combined to make up hundredweights. It is owing to this that, in all metallic currencies, the names given to the standards of money or of price were originally taken from the pre-existing names of the standards of weight.”

Paper wealth

Piketty begins the third chapter on a hopeful note:

“In this part I am going to concentrate on the evolution of the capital stock, looking at both its overall size, as measured by the capital/income ratio, and its breakdown into different types of assets, whose nature has changed radically since the eighteenth century. I will consider various forms of wealth (land, buildings, machinery, firms, stocks, bonds, patents, livestock, gold, natural resources, etc.) and examine their development over time .... “

A “government bond,” says Piketty, “is nothing but a claim of one portion of the population (those who receive interest) on another (those who paid taxes): it should therefore be excluded from national wealth and included solely in private wealth.” But now that Piketty has told us that a bond is nothing but a promise to pay, how can it be wealth—whether public or private? As we have seen (above) bonds are assets for their purchasers and liabilities for their issuers. Such “wealth” can easily be created out of nothing, by issuing a certificate to the purchaser of the bond, unlike real wealth which requires the operation of a productive process. And yet we live in a world dominated by the confusion between bits of paper and real wealth.

Marx explained:

“Even when the promissory note — the security — does not represent a purely fictitious capital, as it does in the case of state debts, the capital-value of such paper is nevertheless wholly illusory.”

And further on:

“The independent movement of the value of these titles of ownership, not only of government bonds but also of stocks, adds weight to the illusion that they constitute real capital alongside of the capital or claim to which they may have title. For they become commodities, whose price has its own characteristic movements and is established in its own way” (Capital, vol. 3, Chapter 29).

The dollars in your pocket, the deposits in your bank — are they real wealth? For all practical purposes they function as such, and we understand that a promise to pay works as well as gold and silver coins (except in monetary crises), provided it has the stamp of a trusted issuer. In the bond market these IOUs are as good as real money, and are considered stable investments because the prices fluctuate very little from day to day and they are completely liquid (at least if they are U.S. dollar-denominated bonds). But the same is true of any Ponzi scheme. The investor keeps receiving good returns, and all seems normal, until the inflow of funds into the investment vehicle is insufficient to cover the payouts. Then something different begins to happen . . . (Bernie Madoff could explain it to you, except that he died in prison in 2021.)

Not only was it evident that something unusual was occurring on Wall Street in the early years of the 21^st century, but a growing number of analysts pointed to the massive growth of mortgages issued to persons who were evidently unable to make the monthly payments (sub-prime mortgages). And this circumstance was seen as linked to the practices of mortgage originators to rid themselves of the mortgages by selling them to the Wall Street investment banks for further processing into collateralized debt obligations, or similar “assets.” Awareness of a coming crash grew. In 2007 the Federal Reserve Bank ignored warnings of an imminent collapse of financial assets. The New York Times reported in September 2007 that,

Edward M. Gramlich, a Federal Reserve governor who died in September 2007, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford. But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman. ... Mr. Greenspan, in an interview, vigorously defended his actions, saying “the Fed was poorly equipped to investigate deceptive lending and that it was not to blame for the housing bubble and bust.”

http://www.nytimes.com/2007/12/18/business/18subprime.html?pagewanted=all&_r=0

Brooksley Born, chair of the Commodities Futures Trading Commission, sounded the alarm about the impending crash until she was removed from her position in 1999. “In 2009 Born, along with Sheila Bair of the FDIC, was awarded the John F. Kennedy Profiles in Courage Award in recognition of the ‘political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis’”. According to Caroline Kennedy, “...Brooksley Born recognized that the financial security of all Americans was being put at risk by the greed, negligence and opposition of powerful and well-connected interests... The catastrophic financial events of recent months have proved them [Born and Sheila Bair] right.” http://en.wikipedia.org/wiki/Brooksley_Born

During that period the Clinton administration officials Robert Rubin, Larry Summers, Alan Greenspan, James Johnson and others collaborated to promote the massive housing scheme. The objective was to accelerate the growth of banking profits. When put on the spot, Greenspan was inclined to express himself in evasive terms, not with outright denials of financial risk. He was familiar with the warnings of the critics but was under a lot of pressure from Wall Street and the White House. It's not as if the government was capable of working out a rational response to the accumulation of danger signs. Danger signs, in and of themselves, carry little political weight. The main determinant of government regulatory policy is the combined pressure of the sentiments and demands of the most powerful owners of capital. In the 20 years leading up to the 2008 crash, the emergence of the new money-making mechanisms — the shadow banking system, the unregulated derivatives — gave rise to unprecedented exuberance, and the participants in the financial explosion were buoyed by waves of optimism. House prices would go up forever; they could never fall, it was said. Everything seemed new and different, unlike previous booms that ended in a bust.

Behind it all, and critical to the social support for markets, there is a strong belief in “wealth” as promissory notes. This is reflexively supported by Piketty, showing his deep immersion in the illusions generated by the day-to-day functioning of capitalist social relations. Pieces of paper not backed by real wealth are fictitious capital — they are nothing but promissory notes. As for the bonds issued by the federal government, there is no collateral for these, so the bondholder has no legal claim on government property. These tokens are bought and sold in the belief that the federal government “backs them.”

As more and more fiat currency has been issued, the ratio between the mass of tokens of value (currency without any precious metals backing) grows in relation to the underlying values measured as representations of quantities of human labor

In 2008, suddenly a lot of people began to recognize the difference between real wealth and tokens of wealth. The difference between reality and fiction was present before the 2008 collapse. It became evident in the aftermath. You didn't need Marx to tell you that. There were not a few economists who issued warnings about the mushrooming of worthless assets in the course of the run-up to the crash.

It is relatively easy to see the difference between money (precious metals) and currency (tokens of value). One of many market analysts who understands this is Adam Baratta. In his book, The Great Devaluation (2020), he explains:

“Ninety years ago, a one-ounce gold coin bought you one $20 bill; 20 years ago, a one-ounce gold coin bought you twenty-three $20 bills, and today a one-ounce gold coin buys seventy-eight $20 bills. This is a staggering devaluation. Ninety years from now, if things keep going at this same rate, a one-ounce gold coin will buy six-thousand and eighty-four $20 bills. Which means that in 90 years a one-ounce gold coin will be worth $121,680. The Great Devaluation is a one-way street that has actually been paved ahead since the beginning of our fiat currency system.”

The “founding fathers” of the United States understood this as well, as is indicated in the U.S. Constitution, Article 1, Section 10:

“No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any Title of Nobility.”

What the Constitution called “bills of credit,” eventually became the U.S. paper dollar backed by gold, and ultimately, when the backing was removed in 1971, just fiat currency. The experience of paper money inflation has influenced many people to recognize the difference between something that is a store of value (gold, silver, etc.) and tokens that are created in order to be used as representations of value (dollars, euros, yen, etc.). The number of tokens can expand indefinitely, since the banks or governments can create them willy-nilly.

In the aftermath of the 2008 crash the U.S. federal reserve, in collaboration with the Treasury Dept. cut insterest rates to make fiat currency easier to acquire and use for investments, thus creating the ballooning growth of stock prices, house prices, etc. But as for the role of the Federal Reserve in the wake of the 2008 crisis, Piketty says,

“The pragmatic response to the crisis also reminded the world that central banks do not exist just to twiddle their thumbs and keep down inflation. In situations of total financial panic, they play an indispensable role as lender of last resort—indeed, they are the only public institution capable of averting a total collapse of the economy and society in an emergency.”

The downward slide in U.S. GDP bottomed out in August 2009. The U.S. Federal Reserve Bank, acting in concert with the officials of the Bush and Obama administrations, had been able to respond in such a way as to severely limit the extent of and depth of the financial crisis but only in such a way as to build the conditions for a deeper plunge in the years ahead. Then Piketty continues:

“That said, central banks are not designed to solve all the world’s problems. The pragmatic policies adopted after the crisis of 2008 no doubt avoided the worst, but they did not really provide a durable response to the structural problems that made the crisis possible, including the crying lack of financial transparency and the rise of inequality. The crisis of 2008 was the first crisis of the globalized patrimonial capitalism of the twenty-first century. It is unlikely to be the last.”

Piketty puts his finger on the “lack of financial transparency” as part of the problem. But this was not a cause of the crash of 2008, although it was a preexisting condition characteristic of normal capitalist functioning. What is implicit in Piketty’s statement regarding “financial transparency” is that if the government knew what was going on, they would have put a stop to it. But, as is widely known, there were many government officials and corporate officers with extensive knowledge of the risks that were accumulating in the early 21^st century, and the fact that they knew it made no difference. The government itself was systematically building the conditions for a big crash. The ratings agencies, Standard and Poor’s, Moody’s and Fitch found ways of putting their fraudulent stamp of approval on patently malignant securities so as to the grease the wheels of the Wall Street profit machine. The government agencies looked the other way. So, Piketty is dead wrong on the first part of his explanation of the problem.

The other cause of the crisis, Piketty claims is “the rise of inequality.” But the rise of inequality of income, or of wealth, has been continuous, as his charts demonstrate, (except for the depression and the two world wars, which destroyed a large fraction of the world's capital). The rise of inequality is an inescapable condition of the existence of the capitalist mode of production. It is a process that underlies the whole course of evolution, the booms as well as the busts. In the growth phase of the business cycle all the firms involved in production race to take advantage of the sales. Rolling in cash, they introduce new methods of production to economize further on production costs. As the downward curve of the cycle catches them, they struggle to stay afloat. The weaker companies are bought out by the stronger firms. There is a shakeout among the smaller capitals, bankrupting some and forcing others into a subordinate status. There is consolidation of capital and the further concentration of wealth into fewer hands. Rising inequality is the result, as the percentage of the national wealth is concentrated in a smaller fraction of the population. So, Piketty evades any explanation of the 2008 financial crisis, although certainly many others have explained it. See, for example, Gretchen Morgenson’s Reckless Endangerment (2012).

But how is it that the government acted so rashly in the period 1992–2008 to build up the conditions of a collapse of financial assets? And then, to turn on a dime and restore the functionality of the capitalist system? Engels explained that while the capitalist state acts to perpetuate the conditions that sustain capitalist production, it does so with its own methods, which develop historically along an independent trajectory of the formation of the bourgeois state. The state is not a simple tool of the ruling capitalist class but an aggregation of institutions that develop on the foundations of capitalist growth. As Engels explained in a letter to Conrad Schmidt, October 27, 1890,

“The reaction of the state power upon economic development can be one of three kinds: it can run in the same direction, and then development is more rapid; it can oppose the line of development, in which case nowadays state power in every great nation will go to pieces in the long run; or it can cut off the economic development from certain paths, and impose on it certain others. This case ultimately reduces itself to one of the two previous ones. But it is obvious that in cases two and three the political power can do great damage to the economic development and result in the squandering of great masses of energy and material.”

Thus we see that in the period of the formation of the crisis of 2008, the capitalist regime in Washington, D.C., accelerated a process that was already underway, a process of using instruments of credit to ameliorate the declining conditions of production and trade. As Jack Barnes explained in “Capitalism’s Long Hot Winter,” New International #12, (Pathfinder, 2005),

“All the newly packaged and ever more leveraged forms of debt have made credit relations today even more explosive. New forms of insurance (that’s what derivatives were supposed to be when they were ‘invented’) are turned into new forms of gambling. The underlying relationship between the credit system and capitalist production explained by Marx in Capital has not changed. While credit greases the wheels during prosperity, Marx wrote, in a ‘period of overproduction and swindle, it strains the productive forces to the utmost, even beyond the capitalistic limits of the production process. . . . In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur—a tremendous rush for means of payment—when credit suddenly ceases and only cash payments’—that is, payments redeemable in gold— ‘have validity.’”