Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
The author attempts to prove that “a market economy based on private property, if left to itself, contains powerful forces” that result in increasingly, unequal distribution of income and wealth which is “potentially threatening to democratic societies and to the values of social justice on which they are based … The principal destabilizing force has to do with the fact that the private return on capital, r, can be the significantly higher for long periods of time than the rate of growth of income and output, g.” Many economists agree that with his conclusion that income or wealth inequality has been increasing and some disagree with his methodology, his data, his conclusions, or his policy proposals. One noted economist has said, “So what?” Capitalism has made possible the huge increase in the welfare of workers and the middle class. As Keynes concluded in 1920, you cannot have economic growth without income inequality.
Piketty differs from Marx who argued that the capitalist contradiction was that the rate of return tends to fall, not increase, over time. Piketty’s view is just the opposite although some have called him a Marxist because of his policy proposals. What all the critics and supporters and Marxists alike seem to lack is an understanding of the reason economies keep growing which maintains the rate of return on capital. The reason is innovation and invention. To induce invention and innovation, governments grant patents and copyrights, legal monopolies, for a limited number of years. And the monopoly rate of return is greater than the competitive rate as a rule. Failure to recognize this fact is what makes Piketty’s Capital just a political tract.
In his introduction, Piketty lists as the major result of his study the conclusion that “the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence.” But he is wrong then he states that “there is no natural, spontaneous process to prevent destabilizing inegalitarian forces from prevailing permanently.” Most monopolies are created by law and are limited by law and by the competition of similar products. Monopolistic competition, Prof. Edward Chamberlain’s great contribution to economics, is the force that determines price and ultimately rates of return. Besides what really matters is inequality of consumption and based on physical appearance the rich eat less, wear one suit or dress at a time, sleep in one bed, etc. Museums, universities, hospitals, libraries, and charities are what the billionaires spend most of their money on, and income, inheritance, gift, and estate taxes take much of the rest.
Piketty is not clear of that his major concern is. He confuses income and wealth. He shifts after his Fig 1 "Income inequality in the US," to discussing the distribution of wealth. The word “innovation” does not appear in the index nor the word “invention,” nor the phrase “patents and copyrights” although these are the principal causes of the unequal distribution of wealth.
He writes, “as I will frequently show in what follows, the history of income and wealth is always deeply political, chaotic, and unpredictable. How this history plays out depends on how societies view inequalities and what kinds of policies and institutions they adopt to measure and transform them.” We can agree with this.
What is his prescription for dealing with the “problem” of inequality? He writes, “Many observers deplore the absence of any real “return of the state” to managing the economy. They hold that the Great Depression, as terrible as it was, at least deserves credit for bringing about radical changes in tax policy and government spending.”
We disagree with the notion that the state is a benign player in the economy. For example, the state abetted by the Fed caused the Great Recession by its foolish meddling with the economy, particularly the sad effects of the Community Investment Act of 1977 and the failure of the Fed to maintain lending standards as it was legally obliged to do. The reality is that the measures taken by government since 2009 have slowed the recovery in my view. He thinks a marginal income tax rate of 80% would be appropriate.
He proposes an annual “global” tax on capital. Possible rates could be a tax of 1 percent on net assets between 1 and 5 million Euros, 2 percent on net assets over 5 million, or possibly 5 or 10 percent on net assets over 1 billion. He proposes a redistribution of petroleum rents because petroleum seems limited to a few lucky countries and allow people to migrate from poor to rich countries.
The author demonstrates no ability to analyze economic cause and effect. As mentioned above, it is a political tract like Marx’s Das Capital, and equally bad economics. Like Marx, from historical data, he derives what appears to be a fundamental trend. But the trend depends on the pace of innovation and invention. Picketty does not try to explain the cause of the changes in the data he observes. He believes they show a trend which he calls a la Marx the fundamental “capitalistic contradiction.” But like Marx, he is wrong.
The survival of capitalism depends on continued innovation and invention. The inequality of wealth was exacerbated in recent years by the Fed’s quantitative easing, printing money and lowering interest rates. Combined with a modest economic recovery, lower interest rates caused a rise in the values of securities and real estate, which are simply the capitalized value of an expected stream of income. When interest rates fall, asset prices rise; when interest rates rise, the values of securities and real estate fall. It was not a capitalist contradiction .
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