Piketty, Capital in Twenty First Century, egalitarian agenda, class warfare, inequality

Ignorance of basic market economics:

Malthusian-style fallacies immediately afflict Thomas Piketty's work.
&

Piketty frets that shortages of oil and urban real estate could cause debilitating scarcity and price increases.

The Ricardian "scarcity principle" is invoked in the introduction to "Capital in the Twenty-First Century." Piketty frets that shortages of such vital economic assets as oil and urban real estate could cause debilitating scarcity and price increases enough "to destabilize entire societies."

"The problem is that the price system knows neither limits nor morality."

This is deplorable ignorance of basic market economics. Although just a minor element in his book, Piketty felt it important to introduce it right at the beginning. Drastic constraints on demand are the inevitable market response, according to Piketty. That energy and real estate markets will routinely respond to the higher prices of shortages by increasing supply and/or increasing efficiency of use sufficient to sustain the extent of use is economic wisdom that is apparently beyond his feeble understanding.

"It would be a serious mistake to neglect the importance of the scarcity principle for understanding the global distribution of wealth in the twenty-first century. To convince oneself of this, it is enough to replace the price of farmland in Ricardo's model by the prices of urban real estate in major world capitals, or alternatively, by the price of oil. In both cases, if the trend over the period 1970-2010 is extrapolated to the period 2010-2050 or 2010-2100, the result is economic, social, and political disequilibria of considerable magnitude, not only between but within countries -- disequilibria that inevitably call to mind the Ricardian apocalypse."

This is applicable only for bumpkins who can't visualize the market response to such price increases, or who think that the inability to live in the vicinity of government facilities is somehow a disaster. It is, after all, the ever-enlarging government Leviathans rather than capitalist markets that create the affordability problems in major world capitals.
&
If the economic line is projected to go off the chart, the line will not go off the chart in any reasonably competitive market economy.
&
There is nothing as effective as even marginally competitive markets at imposing limits on the prices of even such essential commodities and assets as oil and real estate. The catastrophist "Peak Oil" and similar Malthusian resource scarcity myths have yet again been mugged by reality. Deplorably, markets repeatedly disappoint catastrophists by easily resolving one Malthusian resource shortage after another.
&
True, god makes no more land, but there is no limit to the capital that can be invested in land, so real estate booms and busts will continue unabated. Market pricing can easily eliminate water shortages. As FUTURECASTS has assured its readers now since the beginning of the century, even if energy prices rise in real terms during this century, productivity increases will assure more miles for the inflation-adjusted energy dollar by 2100, and those higher prices will bring copious new energy supplies on line that could not be economically accessed at lower prices.
&
Markets are thus in practice if not in ideological theory the most moral method of allocating the bulk of scarce resources. Government administered alternatives routinely become cesspools of waste, fraud and abuse, and repeatedly fall victim to catastrophic results. Administered alternatives are repeatedly mugged by political and bureaucratic reality while even those market mechanisms that are far from perfect routinely raise billions of people out of subsistence levels of poverty and provide a cornucopia of material and social benefits.

Thankfully, "the worst is never certain to arrive." (Thank goodness that Piketty has an agenda to save us from the worst.)
&

An egalitarian analysis:

There is no pretense of objectivity in Piketty's book. With commendable candor he explains that the purpose of the book is to put wealth inequality "at the heart of economic analysis." The book is intended to play a role in "distributive conflict."
&

The book is intended to play a role in "distributive conflict."

If growth is slow and capital yields about 4%, then wealth will accumulate. There will be an "inheritance society," expressed as r>g.

Increasing concentration of wealth, according to Piketty, involves the relationship of growth and the return on capital. If growth is slow - 0% to .5% - as it was in agrarian societies, and capital yields typically 4% to 5%, then wealth will accumulate from generation to generation. There will be an "inheritance society." Piketty expresses this phenomenon mathematically as r>g, rate of return is greater than economic growth.
&
Piketty engages in the broad brush form of analysis beloved of the advocacy scholar. Indeed, the book is of use only as an egalitarian propaganda tract, not as serious economic analysis. The inherent ineptness of government management is totally ignored, as are the unintended consequences of elevating policies that politicize markets above those that facilitate markets. The devils, after all, are truly in the details.
&

A global progressive capital levy is needed to reduce inequality and to "modernize" wealthy societies.

National and international agencies must keep track of "high net worth individuals."

Governments should require "annual declaration of wealth" from everyone.

Piketty intends to rouse redistributionist fervor. He creates a picture of a stagnant absurd zero-sum world, where the growth of large fortunes is at the expense of and holds down middle class and wage earner prospects. He attempts to divide middle class interests from the interests of the wealthy so that both can be plundered. He advocates a progressive capital levy implemented on a global or at least regional basis as his primary method to reduce inequality and to further "modernize" wealthy societies.
&
It is "essential to study capital and its distribution in a methodical, systematic way" to make sure the bottom economic half of the population is fully aware of how much wealth the economy is generating, he asserts. National and international agencies must gather and keep accurate track of "high net worth individuals" because "democratic transparency requires it" to facilitate public debate on inequality. Governments should require "annual declaration of wealth" to inform the public debate about "the delicate question of the role of inheritance in capital formation or the evolution of inequalities of wealth."
&

The gross imprecision of the statistics he relies on is also commendably acknowledged by Piketty, especially with respect to developing countries. However, he reasonably points out that the economic characteristics and trends involved in his analysis are themselves so broad that they are not undermined by statistical imprecision. That economic inequality was extraordinary before WW-I, declined substantially during the period of the great wars and depression, and has since considerably recovered is simply beyond question.
&

Household surveys indicate a level of inequality measured by shares of national income of just about 25% to 33% of that shown by tax records, so Piketty unsurprisingly prefers the tax records.

Piketty prefers to use tax data rather than household surveys. The latter give a "biased and complacent view of the distribution of wealth," according to Piketty, but are used by the World Bank and other international organizations. They indicate a level of inequality measured by shares of national income of just about 25% to 33% of that shown by tax records, so Piketty unsurprisingly prefers the tax records.
&
Piketty relies on statistics for income before taxes for his analysis, a huge factor in the overestimation of income inequality. However, he points out that tax figures clearly understate capital income and inequality. "They are mere indicators of orders of magnitude" and should be taken as "low estimates" of inequality. He estimates a 2% to 3% underestimation from tax avoidance and evasion.

He apparently does not, however, factor in the impacts of major changes in marginal tax rates on the willingness to report income levels. As marginal tax rates were increased after 1913, it was natural that less income would be reported. As marginal tax rates declined after 1980, it was natural that more income would be reported. Not only was there a considerable increase in the income reported by the wealthy, but vast sums of middle class income disappeared from view into tax advantaged pension accounts that now total in excess of $13 trillion. The ebb and flow of inequality was thus substantially exaggerated by the tax records.

Even wealth distribution data that is vastly speculative can indicate broad orders of magnitude and are useful "for focusing one's thoughts."

Piketty's three income classifications are very broad. Piketty's "middle class" ranges broadly from the 50% level to the 90% level.

Piketty characterizes the rising share of income at the top as a "transfer between social groups."

Piketty's statistics on returns on capital are also pre-tax, and do not include the capital losses that are periodically huge during recessions. However, even wealth distribution data that is vastly speculative can indicate broad orders of magnitude and are useful "for focusing one's thoughts."

Piketty does not tell us anything about purchasing power gains not captured by official inflation adjustments - changes over time in actual living standards - of those who receive the average wage or lesser wage levels. He does not factor in earnings from gray market and black market activities, a huge source of income in undeveloped nations and a substantial source of income - estimated as between 18% and 8% - even in advanced nations. He does not factor in existing government in-kind benefits such as education, health, police and fire safety, etc.
&
The extraordinary increase in productivity after 1980 means that even stagnant income was increasing substantially in purchasing power. The working lower class as well as the middle class gained considerable increases in their material creature comforts and pleasures. They enjoyed i-phones and i-cameras and i-tunes and i-pads and other electronic equipment - often several of them - and the internet, all of which didn't even exist in 1980.
&
More to the point, air travel became available to the masses. The Chevrolet car of 2010 is far superior to that of 1980. Ordinary kitchen, cleaning and lawn appliances are much improved. The size of the average house is much increased. Household surveys undoubtedly capture more of this. It is all invisible in the tax reports.
&
Reliance on average wages hide the fact that Piketty's three income classifications are very broad. Piketty's "middle class" ranges broadly from the 50% level to the 90% level. Typically, people enter at the bottom of such a broad class and work their way considerably higher during their working lives even if they never reach a higher class. Most wage workers in the bottom half also progress to higher levels in the bottom half over time.
&
Considerable economic mobility becomes evident if viewed on the basis of ten deciles or even of five quintiles. Large numbers rise out of the bottom quintile each decade, while large numbers fall out of the top quintile each decade.
&
Those who reside permanently in the bottom quintile include among others high school dropouts and first generation immigrants and the physically or mentally handicapped and people from single parent households, and those who do not participate fully in the economy. Those who reside just temporarily in the bottom quintile include among others young people just starting and part timers supplementing income during studies or retirement and those who will find better opportunity. The Economist reports that "a child born to the bottom fifth has an 83% chance of escaping it if his parents remain married, compared with 50% if they were never wed."
&
Piketty characterizes the rising share of income at the top as a "transfer between social groups." However, the poor are not poor because the rich are rich. Wealth accumulation for the middle class within reasonably free capitalist markets has never been hindered because of the pace of wealth accumulation for the wealthy. That capitalism is not a zero sum game is a fact that Piketty studiously ignores.

Piketty frets at the extent that the middle class has, despite this wealth "transfer," been increasingly able to accumulate wealth.

More than a little inconsistently, Piketty admits that, despite the massive "transfer" of national income to the top in recent decades, "on the order of fifteen points of national income," the incomes of the lower classes did not decline. He further inconsistently frets at the extent that the middle class has, despite this wealth "transfer," been increasingly able to accumulate wealth not only for a massive increase in their own lifestyle but also enough to assure a middle class lifestyle for their offspring. He attributes this mostly to the period before 1980, but its continuation is glaringly visible.
&

A 60% marginal tax rate on the middle class is advocated by Piketty to drag the middle class back down closer to the lower classes

Piketty denigrates the natural middle class desire to save for a comfortable and independent retirement and to help finance the education of their children. He believes that the government should punish such presumptuousness by taxing such savings away.

A 60% marginal tax rate on the middle class is advocated by Piketty to punish this display of class audacity and drag the middle class back down closer to the lower classes where of course they in justice should be content to reside. He pejoratively labels them "the patrimonial middle class" much as Marx pejoratively labeled their 19th century counterparts as "the bourgeois" and thus suitable for plundering.
&
Piketty denigrates the natural middle class desire to save for a comfortable and independent retirement and to help finance the education of their children. He believes that the government should punish such presumptuousness by taxing such savings away, as it already does to a certain extent through inflation.

We must all be content with dependency on the tender mercies of government and its benefits bureaucracy.
&
Piketty clearly believes that all wealth belongs to the governing authorities rather than to the productive individuals who created it. It is therefore appropriate for the political class to determine the distribution of wealth. Of course, they act "for the people." Of course!

Piketty inconsistently recognizes that extreme inequality did not prevent substantial increases in the levels at which 19th century subsistence wage workers were subsisting, or the rise of a substantial middle class.

The extraordinary levels of inequality reached towards the end of the 19th century are examined extensively by Piketty and viewed as a social and economic horror to be avoided. However, he somewhat inconsistently recognizes that this extreme inequality did not prevent substantial increases in the levels at which subsistence wage workers were subsisting during that time, or the rise of a substantial middle class.

Smith, Ricardo, and even the Marxist Eduard Bernstein all commented on the steady increase in living standards for wage workers that accompanied the epic levels of inequality of the 18th and 19th centuries.

The "Social State for the Twenty-first Century:"

Creation of "an ideal social and fiscal system" is Piketty's stated objective. "Capital In the Twenty-First Century" thus has many similarities to Marx, "Capital," which Piketty is not shy about. (See, also, Schumpeter, "Capitalism, Socialism, and Democracy," for similar attitudes.) Production of wealth would be heavily regulated and its distribution directed by government.
&

Production of wealth would be heavily regulated and its distribution directed by government.

High marginal income tax rates on the very wealthy are viewed as perhaps a more pragmatic possibility, even though Piketty admits that "such a tax brings in almost nothing."

The book is global in its ambition. A global progressive capital levy is Piketty's preferred policy instrument, although he admits that this is an utopian ideal. However, he views a regional or continental capital levy as more achievable, particularly in Europe. High marginal income tax rates on the very wealthy are viewed by Piketty as perhaps a more pragmatic possibility, even though he admits that "such a tax brings in almost nothing." It can be justified simply on the basis of egalitarian purposes, and useful politically to cater to public envy.
&
A capital levy cannot be so easily ducked. Using trusts, holding companies, partnerships, and other legal entities, the wealthy shelter the bulk of their incomes from taxation. A wealth tax would get at the income in these entities.

The approximately 2% rate of price inflation that governments today openly seek is in fact a capital levy on fixed income assets.

"Can we imagine a twenty-first century in which capitalism will be transcended in a more peaceful and more lasting way."

"Can we imagine political institutions that might regulate today's global patrimonial capitalism justly as well as efficiently?"

To "transcend" capitalism is Piketty's ultimate goal, just as "transformation" from capitalism was for Marx and Schumpeter.

"Can we imagine a twenty-first century in which capitalism will be transcended in a more peaceful and more lasting way, or must we simply await the next crisis or the next war -- this time truly global? On the basis of the history I have brought to light here, can we imagine political institutions that might regulate today's global patrimonial capitalism justly as well as efficiently?"

Piketty absurdly blames capitalist markets for a volatile business cycle that has clearly been the result during the last century of Federal Reserve policy and government policies of often incredible stupidity. The great conflicts of the 20th century and the conflicts of today are in fact attributable to political and ideological interests and have almost nothing to do with free market economics.

Complexity is an obstacle to the ideal social state even at the national level. The bureaucratic instruments for wealth transfer already in place must be shown to be working properly, Piketty acknowledges. It is "an enormous challenge to our democratic societies" that must be met to "convince a majority of citizens that our governing institutions -- especially at the supranational level -- need new tools."

"[New] instruments are needed to regain control over a financial capitalism that has run amok, and at the same time the taxes and transfer systems that are the heart of the modern social state are in constant need of reform and modernization, because they have achieved a level of complexity that makes them difficult to understand and threatens to undermine their social and economic efficacy."

Whatever of any complexity that the government does, it does badly. See, Schuck, "Why Government Fails," and "Government Futurecast" at Part II, "Government management." The productivity of the government sector is abysmal, as Smith pointed out. See, Adam Smith, "The Wealth of Nations" (I), at segments on "Government economic policy," and "Accumulation of capital." The bigger the government the greater the drag on economic productivity, and the more that government demonstrates its ineptness and declines in public regard.
&
Meanwhile, billions have recently been enabled to rise above subsistence levels of poverty in capitalist systems "run amok," and only in capitalist systems, despite obvious imperfections.

Democratic politics should be expected not only to facilitate market capitalism, it should also take control to determine outcomes.

Governments are entitled to know everything material about everybody and should be able to dictate all economic outcomes. Reporting requirements would cover "the market value of all financial assets."

Piketty wants "democracy to regain control over the globalized financial capitalism of this century." In short, democratic politics should be expected not only to facilitate market capitalism (an absolutely essential endeavor that democracies are periodically forced by a disgruntled electorate to pay attention to), it should also take control to determine outcomes (something it has seldom done well).
&
Extensive reporting requirements must be imposed to provide "a very high level of international financial transparency" and support the global tax on capital. Governments are entitled to know everything material about everybody and should be able to dictate all economic outcomes. Reporting requirements would cover "the market value of all financial assets -- including bank deposits, stocks, bonds, partnerships, and other forms of participation in listed and unlisted firms -- and nonfinancial assets -- especially real estate --, net of debt."

The extensive reporting requirements of Obamacare - much of it designed for reasons that are not even tangential to the healthcare of individual patients - have become a black hole for the time medical practitioners should be spending with their patients and a substantial addition to administrative costs of health care. Piketty would spread such productivity destroying recording and reporting requirements broadly throughout the economy. As Marx observed, such regulations are death for small business.

All assets would be covered, "no exceptions." All wealth in effect belongs to the governing authorities. The avoidance of taxes "is outright theft."

"Everyone would be required to report ownership of capital assets to the world's financial authorities."

The annual capital levy would run as high as 10% on the largest fortunes. Even small holdings below 100,000 euros might be taxed at 0.1% so that all would be covered by the reporting requirements. All assets would be covered, "no exceptions." All wealth in effect belongs to the governing authorities. The avoidance of taxes "is outright theft."

As with prohibition, even more than the lawbreakers, it would inevitably be the law that would be tried and found wanting by the people.

The sums realized by such a capital levy would be a modest but useful addition to public revenues, but the primary purpose is the same as with high marginal income tax rates, "to regulate capitalism" for egalitarian purposes and to prevent financial crises. (And also to expose the wealthy to the envious among the populace.)

"Everyone would be required to report ownership of capital assets to the world's financial authorities in order to be recognized as the legal owner, with all the advantages and disadvantages thereof."

Piketty acknowledges that current accounting standards leave much to be desired. Without discussing the inherently nebulous nature of the art of accounting, he simplistically just proposes "to revise the definitions of various asset types and set rules for valuing assets, liabilities, and net wealth." (What could be more simple?) He deplores the defects of existing capital taxes like real estate taxes that are not progressive or assessed on value net of debt, and other capital taxes not based on market values.

Piketty thus would create powerful incentives to encumber all assets with debt. This occurred during the housing and mortgage securities bubble of 2007 in response to existing incentives in the tax codes and other political policy initiatives.
&
He leaves the impression that there are no costs to shaping markets for democratic political reasons in ways that substitute administered alternatives for market mechanisms. Apparently, there would be none. The spread of a vast web of recording and reporting requirements facilitating centralized regulation of the markets is just a matter of democratic political debate and decision-making without regard for economic unintended consequences.
&
Smith had a few words to say about such requirements. See, Adam Smith, "The Wealth of Nations" (II), at segment on "Taxation." "Not just trouble and vexation — but oppression, also — has been the modern history of tax audits." Russia now routinely uses its tax system to deal with public criticism. The Obama administration similarly used the IRS to silence some of its conservative opposition.
&
A huge wealth police force would be required with broad discretion to examine accounts and safe deposit boxes and dig up back yards, among other things. It would be a persistent target for corrupting influences and its employment against political opponents would be as irresistible a temptation as such employment of the campaign finance laws. The price inflation of easily hidden and hard to evaluate valuable objects would skyrocket, as they do today under the pressures of tax laws and the capital levy impacts of inflation.
&
The benefits for autocratic governments would be immense. Chinese and Russian wealth could no longer flee. The new administrative "tools" will greatly facilitate enslavement of the multitudes, just as Hayek warned. See, Hayek, "The Road to Serfdom."

Ultimately, a combine of major nations would have to be established to impose international reporting requirements on recalcitrant minor nations.

The utopian nature of this program is readily admitted by Piketty. However, he suggests that it might be imposed incrementally - first on continental or regional bases - and then expanded from there. He discusses the dismaying shortcomings of such international reporting schemes that exist at present and the currently slim prospects for any improvement. Ultimately, a combine of major nations would have to be established to impose international reporting requirements on recalcitrant minor nations.
&

Analyzing inequality:

Marx' "principle of infinite accumulation" of wealth by leading capitalists and the possibilities for social destabilization from the resulting inequality are taken seriously by Piketty, although he candidly acknowledges the biased ideologically fraught nature of Marx' work.
&

If the average rate of return on capital exceeds economic growth, inherited wealth grows faster than output and income. A "patrimonial" form of capitalism arises where the past devours the present.

Stagnant or slow rates of economic growth are a primary culprit in the increase of inequality. If the average rate of return on capital exceeds economic growth, inherited wealth grows faster than output and income. A "patrimonial" form of capitalism arises where the past devours the present.

"In slowly growing economies, past wealth naturally takes on disproportionate importance, because it takes only a small flow of new savings to increase the stock of wealth steadily and substantially."
&
"If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time -- which is more likely when the growth rate is low, though not automatic --, then the risk of divergence in the distribution of wealth is very high."
&
"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--levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies."

The growing scarcity of resources like oil and real estate will concentrate use and control of such assets in the wealthy.

Piketty indulges in the Nirvana Fallacy: the comparison of reality with all its ambiguities and warts with some "ideal society" that provides an "optimal division" of income.

Piketty invokes a Malthusian bogey man. The growing scarcity of resources like oil and real estate will concentrate use and control of such assets in the wealthy. In a world where population and economic growth rates are slowing, wealth concentration trends become increasingly worrisome to Piketty. (However, doesn't slow growth of population and economic activity prevent economic resource scarcity and price increases?)
&
Piketty indulges in the Nirvana Fallacy: the comparison of reality with all its ambiguities and warts with some "ideal society" that provides an "optimal division" of income.

"[What] is the 'right' split between capital and labor? Can we be sure that an economy based on the 'free market' and private property always and everywhere leads to an optimal division, as if by magic? In an ideal society, how would one arrange the division between capital and labor? How should one think about the problems?

This is a version of the Perfect Virtue propaganda ploy that is widely employed by advocacy scholars. If free market and private property systems are not optimal, then why not replace them with the administered alternatives of "an ideal society?"
&
Ignored is the cornucopia of benefits bestowed by free market and private property systems that are far from "optimal," and the routine horrors of administered alternatives. Both the "ideal society" and the calculation of such an "optimal division" of income are clearly impossible, but they can be invoked like socialism to beguile the naïve, attract the envious, and even to be used like socialism to justify the enslavement of the multitudes.

Statistical adjustments deal rather badly with the impacts of inflation and fall apart completely after a few decades. Past monetary statistics after a few decades "bear no relation to present quantities. Aggregating major economic transformations over time with some single index produces at best numbers that should "be taken as indications of orders of magnitude and nothing more."

This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in."

The concept of increasing economic inequality is expressed by Piketty in mathematical terms. However, he perceptively has a low opinion of mathematical economics. (See, David F. Hendry and Neil R. Ericsson, "Understanding Economic Forecasts," a Bank of England study of the weaknesses common to all of its mathematical models.)
&
Economic theory must take account of historical research and the learning of the other social sciences, he wisely insists. He spends much ink discussing the inherent ambiguities of statistical studies, especially over longer periods of time. Statistical adjustments deal rather badly with the impacts of inflation and fall apart completely after a few decades. Past monetary statistics after a few decades "bear no relation to present quantities." Aggregating major economic transformations over time with some single index produces at best numbers that should "be taken as indications of orders of magnitude and nothing more."

"Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in."

Analysis of economic performance within and among nations can never be simplistically confined to aggregate factors like GDP or some measure of inequality. These aggregates must take their place with a host of political economy factors like rule of law, levels of corruption, political favoritism, tax code and other incentive structures, the character of the capital structure, the character of civil society, long-run policies with respect to debt and monetary inflation, and the disabling or facilitation of market mechanisms.
&
The intractable poverty of undeveloped nations is always the result of the poor governance of the nations themselves. It can never be adequately addressed as just a problem of economic policy.

The task is to understand "the historical dynamics of wealth distribution and the structure of social classes,"

Piketty nevertheless expresses in mathematical terms "the three most important concepts for analyzing the capitalist system." These are "the capital/income ratio, the share of capital in income, and the rate of return on capital." The task is to understand "the historical dynamics of wealth distribution and the structure of social classes," Piketty asserts.

None of these "most important concepts" have much to do with economic productivity and growth. History amply demonstrates that economic productivity and growth are hardly automatic. It is the broader field of Political Economy that encompasses all such questions. See, Scott, "Capitalism, Its Origins and Evolution," (I).

The share of income from capital is determined by a=rxβ, where "a" is the share of income from capital, "r" is the rate of return on capital, and "β" is the capital/income ratio, which is generally around 6 (or 600%) in developed countries. This is "a pure accounting relationship," Piketty states.
Wealth concentration is likely if the rate of economic growth, "g," is materially less than the rate of return on capital, expressed as r>g.
Capital/income ratio projections can be made with β=s/g, with "s" being a projection of savings rates and "g" being a projection of growth rates.

If "r" is 5% and "β" is 6 (or 600%), then "a," the share of income from capital, is 30%. The rate of return on capital is the average yield of all capital - profits, interest, rent, royalties, etc. - expressed as a percentage of the value of capital invested. The rate of return is a measure of profitability.
&

There are wide variations involved as well as major ambiguities in the statistics on economic aggregates.

Statistics on economic aggregates are estimates that have many imperfections. There are wide variations involved, Piketty warns, as well as major ambiguities in the statistics.
&
Such things as natural capital and environmental damage are hard to quantify. Qualitative differences are hard to quantify. The acquisition and use of knowledge - human capital - is essential in understanding economic development and growth but is also hard to quantify. But Piketty does not rely on statistical precision.
&
Globalization factors play obvious roles in economic development and growth but are also hard to quantify. The flows of trade and knowledge are vital. Piketty finds little advantage in the free flow of capital, although he acknowledges that technology transfer can accompany capital flows.
&

Piketty applies a = r x β to various industries with the result that wide variations appear between companies and industries. Typically, capital intensive industries may have a lower "rate of return" - they may be less "profitable" - than labor intensive industries producing the same output. (He does not deign to explain why capital doesn't flow from capital intensive industries to labor intensive industries until "profitability" becomes relatively equal.)
&
Piketty, like Marx, is fond of citing "fundamental" economic laws.

No. 1: The share of income from capital equals the rate of return on capital times the capital/income ratio, expressed a = r x β.

No. 2: "[The] higher the savings rate and the lower the growth rate, the higher the capital/income ratio," expressed as "β."

No. 3: Pursuant to "the law of cumulative growth," small cumulative annual increases have massive results over time. Small annual increases in inequality will increase inequality massively in a generation or two, with destabilizing impacts.

No. 4: Wealth concentration is thus made increasingly likely as capital yields exceed growth rates, expressed as r>g.
&

The trend since 1970 has been for a very substantial increase in the private asset/income ratio in advanced nations.

It takes time for capital to accumulate. Thus, the "second fundamental law of capitalism" is a trend - an end point - never perfectly realized. Thus, if projected results don't come to pass, transitory intermediate factors can always be blamed. It applies only to forms of capital that people can accumulate. Natural resource wealth is an apparent exception. The law applies only if asset prices evolve on average in line with consumer prices, with asset price inflation and deflation equaling out over time.
&
Short term booms and busts aside, the trend since 1970 has been for a very substantial increase in the private asset/income ratio in advanced nations. Private wealth has risen from between 2 years and 3½ years of national income in 1970 to between 4 years and 7 years in 2010. Piketty attributes this trend to

slower demographic and economic growth;
high savings rates;
privatization;
the catch-up in asset values due to a favorable political climate.

Privatization typically took place at very favorable prices that enriched private wealth, Piketty asserts.

Privatization is, of course, something that governments do and is thus notoriously vulnerable to corrupt practices as well as the simple ineptness typical of government management. However, much of the apparent disparity between privatization price and subsequent value may simply reflect the greater value that assets routinely achieve under private management.

The increase in asset prices - stock, real estate - account for about 25% to 33% of the increase in the capital/income ratio. Piketty takes note of the financialization of the U.S. and British economies during this period of Keynesian infatuation with debt.

"Broadly speaking, the 1970s and 1980s witnessed an extensive 'financialization' of the global economy, which altered the structure of wealth in the sense that the total amount of financial assets and liabilities held by various sectors -- households, corporations, government agencies -- increased more rapidly than net wealth.

Leverage more than doubled as a percent of national incomes in some nations, and quadrupled in Britain. It involved "unprecedented" levels of cross-investments involving financial and non-financial corporations and "significant inflation of bank balance sheets" above their capital levels. Much of the private sector leverage had no economic purpose.

"[These] international positions are in substantial part the result of fictitious financial flows associated not with the needs of the real economy but rather with tax optimization strategies and regulatory arbitrage -- using screen corporations set up in countries where the tax structure and/or regulatory environment is particularly attractive."

Small countries with substantial budget problems have experienced heightened levels of popular resentments and political tensions when economic contraction tested their heightened leverage levels.
&

Piketty calculates the U.S. savings rate during this period as 7.7%, including 3.1% corporate net savings. However, government debt reduces the national savings figure to 5.2%. The greater capital/income ratios in Europe conform to Europe's higher savings rate and lower growth rate.
&

Many left wing theorists seek public acceptance of a future without substantial economic growth so they can concern themselves with just wealth distribution and justify the enhanced or even total government control of economic systems.

A future of low economic growth rates is expected by Piketty, as like Marx and Schumpeter and other left wing theorists. Indeed, they seek public acceptance of a future without substantial economic growth so they can concern themselves with just wealth distribution and justify the enhanced or even total government control of economic systems. Piketty asserts that about half of the long term growth rate is due to population growth, which is currently in substantial decline worldwide.

The problem for left wing views is that administered systems of wealth distribution impose economic burdens that constrain or even prevent economic growth, while policies that promote rapid economic growth involve the removal of administered alternatives and political constraints and the reduction of regulatory and tax burdens. Egalitarians and welfare policy advocates thus encourage the acceptance of a slow growth economy as "the new normal."

Historical levels of economic growth have been less than 2%. For advanced nations, future per-capita annual growth rates somewhat below 1.5% are reasonably likely.

Rapid rates of economic growth decrease the impacts of inherited wealth, while slow rates of economic growth increase the impacts of inherited wealth, as the economic output of each generation either far outpaces or is just almost equal to that of the previous generation. Declining rates of population growth increase the impact of inherited wealth per capita. With declining rates of population and economic growth, "inherited wealth will make a comeback---a long-term phenomenon whose effects are already being felt in Europe and that could extend to other parts of the world as well."
&
Only periods of economic "catch-up" permit per-capita growth rates above 3% per year, Piketty explains. This has occurred in newly developing nations and nations recovering from the ravages of war or depression. Historical levels of economic growth have been less than 2%. For advanced nations, future per-capita annual growth rates somewhat below 1.5% are reasonably likely. However, over one generation - about 30 years - this is enough to increase per capita income by 33% to 50%.
&
Piketty asserts that these growth rates are relatively inherent in market economies - that neither economic liberalization nor state intervention has had much impact since WW-II. He reviews centuries of economic history to confirm these views.
&
He applies the formula, β=s/g, to savings projections of about 10% to reach capital/income ratios of about 700% by 2100. This is about the same level of inequality reached in Europe before WW-I. It illustrates "the crucial role of slower growth in the accumulation of capital." However, when growth rates are low, he concedes, "small variations in the rate of investment produce enormous differences in the long-run value of the capital/income ratio."
&

Economic and population growth in the future should be no more than 1.5% and may be stagnant, Piketty concludes. At 1% economic growth rates, capital stock could reach 10% of national income. Yet he continues to expect capital to yield 4% to 5%, taking 30% to 40% of global income.
&
Technology remains a wild card. It could favor labor as skilled labor becomes increasingly critical. Even with this, however, political responses are required to satisfy "democratic and meritocratic rationality."

"[Technology], like the market, has neither limits nor morality. The evolution of technology has certainly increased the need for human skills and competence. But it has also increased the need for buildings, homes, offices, equipment of all kinds, patents, and so on, so that in the end the total value of all these forms of nonhuman capital -- real estate, business capital, industrial capital, financial capital -- has increased almost as rapidly as total income from labor. If one truly wishes to found a more just and rational social order based on common utility, it is not enough to count on the caprices of technology."

The patrimonial middle class:

The "middle class" ranges upwards from the 50% to the 90% income levels as Piketty defines it. Its wealth is predominantly in housing. The wealthy, above the 90% income level, typically still have about half their wealth in real estate, while those in the top 1% income level have their wealth predominantly in partnerships, stock and other securities.
&

Middle class income and wealth is now not only sufficient to support its rising middle class lifestyle, it is now typically also capable of financially helping its offspring on their way.

The wealth of this "propertied middle class" has "deeply altered the social landscape and the political structure of society and helped to redefine the terms of distributive conflict."

The "patrimonial" middle class is a major innovation of capitalism. Its income and wealth is now not only sufficient to support its rising middle class lifestyle, it is now typically also capable of financially helping its offspring on their way.
&
The middle class has advanced during the last century from being about as capital-poor as the average in the bottom half today - essentially owning almost nothing - to today owning close to the average wealth for society as a whole.
&
While this constitutes mere "crumbs" compared to upper class wealth, "the crumbs that the middle class has collected are important, and it would be wrong to underestimate the historical significance of the changes." It has "deeply altered the social landscape and the political structure of society and helped to redefine the terms of distributive conflict."
&
This "propertied middle class" developed during the period of income and wealth compression between WW-I and 1970, supported by the egalitarian political policies of that period and the destruction of wealth during the Great Depression and Great Wars. There was massive destruction of capital wealth but much less impact on labor income. Piketty emphasizes that the reduction in income inequality thus had nothing to do with natural economic developments.
&

The wealthy top 10%:

Capitalist systems build wealth and increase income in normal economic times. Absent major wars or depressions, most of the wealth and income increase is "captured" at the top, resulting in an increase in inequality.
&

That both the capital/income ratio and capital's share of national income have been slowly rising since 1970 is amply supported by Piketty's analysis.

Factoring in the vast modern increase in human skills - or human capital - brings substantial ambiguity into these calculations, but certainly not enough to eliminate Piketty's thesis.

Inequality has thus risen sharply between 1980 and 2010, with the bulk of this increase attributable to the top 1%.

The top 0.5% make in excess of $1.5 million.

The first nine deciles of the top 10% are comprised of managers, college professors, engineers, senior public sector officials, and other professionals, as well as merchants, entrepreneurs and restaurateurs. In the 1930s, even senior grade school teachers made the cut, and foremen and skilled technicians came close. The top 1% is comprised increasingly of those with income from financial assets, especially with respect to the top 0.1%.
&
Globalization has massively increased both the wealth and income for top managers. Top managers comprise 60% to 70% of the top 1% of income earners. Approximately 20% are in the financial sector. Less than 5% are superstar artists and athletes. Piketty finds "astonishing" the increase in income of the "supermanagers."
&
Inequality has thus risen sharply between 1980 and 2010, with the bulk of this increase attributable to the top 1%. In 2010 dollars, income for the first 5% of the top 10% ranged from $108,000 to $150,000, and for the next 4% of the top 10% up to $352,000. The top 0.5% make in excess of $1.5 million.
&

Wage inequality:

The increased competition of a globalized world for both capital and jobs has apparently suppressed labor negotiating leverage.

The period 1980 - 2010 is distorted by the entry of China and other Southeast Asian nations as the world's premier exporters of the products of cheap labor. This has surely suppressed manufacturing wages worldwide while just as surely increasing the purchasing power of those wages.
&
However, capitalist markets have absorbed the labor available even in China. Wage levels are rising rapidly throughout China's export industries, just as they did previously in Taiwan, Japan and South Korea - and exactly as Adam Smith and David Ricardo would have expected. Unless India gets its act together and deals with its infrastructure problems, this globalization impact on manufacturing wages is now surely in decline and will largely have run its course by 2030.

Differences in education levels correspond to differences in wages. "The most prestigious schools tend to favor students from privileged social backgrounds."

The growth of wage inequality in the U.S. since 1980 is attributed by Piketty in large part to inequality of educational opportunity. Differences in education levels correspond to differences in wages. "The most prestigious schools tend to favor students from privileged social backgrounds."

There are a host of other factors, such as the marital status of the parents as pointed out above. A book could be written about such other factors, and many such books in fact have been written, but Piketty does not deign to dwell on them.
&
Financial assistance of many types has been increasingly made available to students since 1980. Ivy League level universities dedicate considerable resources for low-income students. Excellent state universities are also available and can provide considerable assistance.
&
Unfortunately, all of this assistance has generated massive levels of price inflation in college costs and tuition, rendering even most of the middle class dependent on assistance. Price inflation generated by government assistance is having the same impacts on health care and housing markets. The more that government and others provide assistance, the more unaffordable the pertinent markets become.

Marginal productivity based on technology and education are predominant factors in determining long-term trends in wage inequality.

Minimum wage levels play a major role in inequality measured by comparison of minimum wage workers with average wage levels. Unionization is also an obvious factor in inequality measured against average wage levels.

Labor markets are extensively shaped and constrained by political policies and societal factors. This is the subject matter of Political Economy and is beyond the narrow bounds of purely economic theory. Wage inequality thus requires examination of Political Economy factors.
&
Piketty acknowledges that marginal productivity based on technology and education are predominant factors in determining long-term trends in wage inequality, as economic theory would predict. However, he emphasizes that many labor market imperfections heavily impact short-term trends. Civil service salaries and benefits now run substantially ahead of comparable private sector wages and salaries. "It is not always easy to measure the marginal productivity of an individual worker."
&
Minimum wage levels play a major role in inequality measured by comparison of minimum wage workers with average wage levels. Unionization is also an obvious factor in inequality measured against average wage levels.
&
Piketty provides some discussion of these factors. The bottom wage level - composed of those paid no more than about half the average wage - once predominantly included farm laborers and domestic servants. Now, this lowest wage level includes the less-skilled industrial workers, waiters and waitresses and shop clerks, predominantly women.
&

The income of the top 1% of managers has more than doubled in the last three decades as a percentage of national income, ranging from 9% of total national income in Australia to 18% in the U.S.

The explosion of wage inequality between high level wage earners and the highest 0.1% or even of the highest 1% seems to Piketty hard to justify just based on skill and productivity. Education and professional experience differences don't explain the divergence.
&
This "supermanager" phenomenon is typical of the Anglo-Saxon countries, led by the U.S. The income of the top 1% of managers has more than doubled in the last three decades as a percentage of national income, ranging from 9% of total national income in Australia to 18% in the U.S. This is not typical of other wealthy nations, where top manager income has increased modestly, now ranging between about 6% and 11% of national income. It thus appears governed by policy impacting the various markets for top managers.
&

At the highest levels of management, salary decisions "are largely arbitrary and dependent on hierarchical relationships and on the relative bargaining power of the individuals involved."

Piketty describes this phenomenon as a "transfer of income." Technology and productivity factors affect all these nations similarly. Marginal productivity theory can't explain the divergences in the growth of the rate of inequality.

"The central fact is that in all the wealthy countries, including continental Europe and Japan, the top thousandth enjoyed spectacular increases in purchasing power in 1990-2010, while the average person's purchasing power stagnated."

There is no way to reliably calculate the value added by any top-level managers - their marginal productivity - in the rapidly changing, complex circumstances of major firm management. Corporate hierarchies and compensation committees substitute for the "invisible hand" of perfect labor markets. At the highest levels of management, salary decisions "are largely arbitrary and dependent on hierarchical relationships and on the relative bargaining power of the individuals involved."
&

Top management pay soars when corporations do well, even if the primary reason for good sales and profits is a general surge of prosperity. Piketty call this "pay for luck."

Piketty particularly frets at the political influence such wealth can provide, especially when generally united against the higher tax rates that Piketty favors to support his egalitarian agenda.

The primary constraints on high level pay, according to Piketty, are institutional and societal norms that limit what is permissible, rather than economic markets. For the top 1% to 3% of "wealth distribution," societal checks and balances are ambiguous and flawed and vary greatly among different nations.
&
Top management pay soars when corporations do well, even if the primary reason for good sales and profits is a general surge of prosperity. Piketty call this "pay for luck." Piketty particularly frets at the political influence such wealth can provide, especially when generally united against the higher tax rates that Piketty favors to support his egalitarian agenda.

Like most left wing propagandists, Piketty constantly refers to the absence of "pure" and "perfect" competition in markets in general and, here, in the labor market in particular. This is an example of the "perfect virtue" propaganda ploy previously mentioned herein. It ignores the cornucopia of benefits bestowed by even those markets with just rudimentary levels of competition.
&
Over time, the markets weed out the businesses that are poorly led and reward those of superior performance. This is of course far from immediate, and incompetence is often well compensated while a ship is sinking, but it gets the job done adequately for economic purposes.
&
The top managers of globalized firms now have complex global responsibilities and deal with bewildering global complexities far beyond the concerns of previous generations of top managers. Although the intellectual woods are full of utopian dreams, See, Yehezkel Dror, "Capacity to Govern," there is actually no better alternative on offer for evaluating their actual individual worth. Empowering some officious bureaucrats to control corporate pay scales would just establish an additional layer of government complexity and corruption. Administrative agencies involved in economic matters in the U.S. during this last two decades have, for example, a record of numerous regulatory disasters. High marginal tax rates are Piketty's straightforward remedy.

Wealth inequality:

Capital wealth inequality is now slowly rising back to the levels last experienced before WW-I.
&

Piketty concedes inconsistently that the globalized capital markets that have restored inequality to a considerable extent have not been thereby prevented from also eradicating the poverty of vast third world multitudes.

His inequality projections depend on "the shocks to which capital is subject, as well as on what public policies and institutions are put in place to regulate the relationship between capital and labor."

The substantial decline of the wealthiest 10% after 1914 was due not to any natural economic trends but to the great economic shocks of the two world wars and the Great Depression, accompanied by the high marginal tax rates of that period. Growth rates during the recovery periods accelerated to about 4% and were another factor in the compression of wealth inequality. The sharp reductions in marginal tax rates as nations competed for scarce capital in an increasingly globalized world were a factor in the subsequent rebound in inequality.
&
Piketty frets that economic competition in the 21st century will continue to drive nations to reduce tax rates on wealth and income. He concedes inconsistently that the globalized capital markets that have restored inequality to a considerable extent have not been thereby prevented from also eradicating the poverty of vast third world multitudes. (Then, how can the growth of wealth inequality constitute a "transfer" of wealth from the rest of society?)
&
If the marginal capital income tax rate stays around 30%, "which is by no means certain, the net rate of return on capital will most likely rise to a level significantly above the growth rate," at least if the average growth estimates turn out to be right. The inequality projections depend on "the shocks to which capital is subject, as well as on what public policies and institutions are put in place to regulate the relationship between capital and labor."

With national budgets increasingly in actuarial insolvency, long range projections are increasingly works of fantasy.

Piketty advocates that taxes on capital be imposed globally or regionally to suppress international competition. He complains that imposition of international capital levies would demand "a high degree of international coordination among countries that are ordinarily engaged in competition with one another."

The competition amongst nations that obstructs plans for capital levies is deplored by Piketty. He thus advocates that taxes on capital be imposed globally or regionally to suppress such competition. He complains that imposition of international capital levies would demand "a high degree of international coordination among countries that are ordinarily engaged in competition with one another." He - very tentatively - estimates that tax haven wealth is equal to about 10% of global GDP, and may account for the fact the the Earth reports a sizable balance of payments deficit.

It is government hunger for revenues that knows neither limits nor morality, not market price systems. Competition among nations for capital and economic power constrains that hunger and punishes moral failings.
&
Competition is a necessary disciplinary mechanism, not just for economic entities but also for governments, religions, professionals, - and tax authorities. They all chafe often bitterly at the rigors imposed by competition and earnestly advance reasons why they should have protection from competition.

Today, a "patrimonial" middle class holds between 25% and 34% of national wealth in the various advanced nations. The top 10% owns about 66% of capital wealth. The poorer half still divide up only about 5% of national wealth

The middle class was the primary beneficiary of the inequality compression period, rising in capital wealth from practically nothing to about 35% of national wealth by 1970. Today, a "patrimonial" middle class holds between 25% and 34% of national wealth in the various advanced nations. The top 10% owns about 66% of capital wealth. The poorer half still divide up only about 5% of national wealth as they did in the 19th century. The capital wealth of the wealthy shifted during the 19th century from agricultural land to financial, real estate and industrial holdings.
&
The "evil genie of capitalism" escaped from its bottle after 1980 after a "heyday of state intervention to curb the excesses of capitalism." Current levels of economic competition have generated a broad level of European discontent.

Piketty does not deign to cover the 1970s disequilibria generated by that "heyday of state intervention." The disequilibria built to levels so intolerable that even politicians were convinced of the need to surrender some of their levers of economic power and allow capitalism to "escape from its bottle."

Global patrimonial capitalism:

Piketty finds that r>g calculations conform well to 19th and 20th century events. However, growth rates are now in substantial decline due especially to demographic factors.
&

The rate of growth is unlikely to decline to 18th century levels, and capital's share of income will probably be somewhat lower, both of which should suffice to prevent inequality from rising all the way back to 1910 levels.

Capital wealth inequality might be sufficient to cut in half the middle class share of national wealth, "which voters might well find unacceptable,"

Growth rates during the second half of the 21st century will be less than 1.5%, Piketty estimates. Thus, the r>g gap and capital wealth inequality will be dramatically increased. Indeed, the rate of growth tends to be not much more than 1% "once the demographic transition is complete and the country reaches the world technological frontier, where the pace of innovation is fairly slow."
&
Inheritance laws, the average number of heirs, average life-spans, the ebb and flow of economic factors, and political tumults all impact the r>g calculation, as do spending proclivities of the wealthy. Piketty acknowledges that the rate of growth is unlikely to decline to 18th century levels, and capital's share of income will probably be somewhat lower, both of which should suffice to prevent inequality from rising all the way back to 1910 levels.
&
However, capital wealth inequality might be sufficient to cut in half the middle class share of national wealth, "which voters might well find unacceptable," Piketty speculates hopefully. But declining populations and other factors could counter this expectation.

Piketty does not deign to speculate on nominal amounts. A smaller portion can be nominally significantly larger if it is cut from a sufficiently larger economic pie. Only the pathologically envious would complain. A larger portion can be nominally significantly smaller if the pie is substantially smaller. Only the pathologically envious would celebrate.

With large percentages of inherited wealth, "the past devours the present."

The importance of inherited wealth is emphasized by the author. The extraordinary pay levels of the super managers ultimately result in great fortunes for their heirs, increasing the future influence of inherited wealth. With large percentages of inherited wealth, "the past devours the present."
&

Piketty intends to see that everybody is informed of the increasing economic role of inherited wealth. Wealth can certainly generate more envy if it is inherited rather than "earned."

Income from inherited wealth equaled about 24% of national income in 1900, fell to about 4% in 1950, and has risen back to 15% in 2010. Inheritance includes gifts and life insurance.
&
Piketty speculates that those who grew up during the capital wealth compression period - before 1970 - still think inherited wealth no longer plays a major economic role. Piketty intends to see that everybody is informed of the increasing economic role of inherited wealth. Wealth can certainly generate more envy if it is inherited rather than "earned."

Inherited wealth also includes the family business or the family farm, some of which have over the generations been built up to considerable size and are of considerable economic benefit to society. However, attempting to distinguish among the various forms of capital wealth is something Piketty wisely does not contemplate, so the family enterprise would be a casualty of Piketty's egalitarian world.

We are again living "in a golden age of gift giving."

In a low growth economy, it is almost inevitable that wealth will become so concentrated that "top incomes from capital will predominate over top incomes from labor by a large margin."

Today, the dead own nearly twice that of the living. We are again living "in a golden age of gift giving," Piketty frets.

"[Beyond] a certain threshold, capital tends to reproduce itself and accumulates exponentially. The logic of r>g implies that the entrepreneur always tends to turn into a rentier."

With low rates of growth and lengthening life-spans, earned income rates stagnate and capital wealth accumulates with age, increasing inequality. By 2010, the top 1% of income earners received about as much from inherited wealth as from earnings. In a low growth economy, it is almost inevitable that wealth will become so concentrated that "top incomes from capital will predominate over top incomes from labor by a large margin."
&

The middle class is today accumulating a sizable chunk of the inherited wealth. Piketty finds this particularly troubling.

"We have moved from a society with a small number of very wealthy rentiers to one with a much larger number of less wealthy rentiers: a society of petits rentiers if you will."

Piketty finds the rise of the "patrimonial middle class" to be a "fairly disturbing" form of inequality that is far more difficult to politically attack than the small number of the very wealthy.

Heirs generally must achieve some earning capacity nowadays since they generally receive their inheritance after reaching 40 or 50 years of age. However, family wealth still bestows significant advantage due to the increased likelihood of attending top universities and receipt of other kinds of support.
&
Piketty finds the rise of this "patrimonial middle class" to be a "fairly disturbing" form of inequality.

"[It is] more difficult to represent artistically or to correct politically, because it is a commonplace inequality opposing broad segments of the population rather than pitting a small elite against the rest of society."

Marx, too, found it particularly difficult to explain away the rise of the middle class and denigrate it sufficiently to justify its destruction.
&
Piketty implements a divide and conquer approach, first emphasizing the wealth of the top 1% and then the top 10% to generate envy among the middle class. If substantially progressive taxes are first imposed on the wealthy, the "patrimonial middle class" would no longer have the support of the influential rich when middle class wealth becomes the target.
&
Similar divide and conquer tactics are now being used in California to fragment the beneficiaries of Proposition 13 limitations on real estate tax increases. If the electorate can be convinced to exclude businesses from the tax limitation provisions, homeowners will have to defend their rights alone.

A few hundred of the world's wealthiest people appear to be creating enormous fortunes.

Large portfolios tend to yield more than smaller portfolios, Piketty emphasizes. The scant data about very large fortunes indicate that they tend to grow faster than small fortunes, and much faster than average rates of capital expansion.
&
Piketty cites statistics from university endowments demonstrating that the greater the endowment, the greater the return. More sophisticated management and investment strategies account for the difference. A few hundred of the world's wealthiest people appear to be creating enormous fortunes, he points out.
&

The significant increase of wealth of the top 10% threatens "a large upwards redistribution from the middle and upper-middle classes to the very rich." He speculates (hopefully?) that this will "trigger a violent political reaction."

Wealth distribution already seems similar to that of 1910 on a global basis. Inherited fortunes already appear to account for more than half of the total amount of the largest fortunes. The significant increase of wealth of the top 10% threatens "a large upwards redistribution from the middle and upper-middle classes to the very rich." He speculates (hopefully?) that this will "trigger a violent political reaction."

"[It] is important to realize that the inequality r>g, amplified by inequality in the returns on capital as a function of initial portfolio size, can potentially give rise to a global dynamic of accumulation and distribution of wealth characterized by explosive trajectories and uncontrolled inegalitarian spirals."

A tax on capital, sharply progressive on the top 10%, "can effectively impede such a dynamic." It is "the only way of democratically controlling this potentially explosive process while preserving entrepreneurial dynamism and international economic openness."

Of course, this "redistribution" of wealth - this "transfer" of wealth - this "impoverishment of the middle class" - can only occur in a zero sum game government administered economy. A reasonably free capitalist market economy facilitates middle class wealth acquisition regardless of the rate of wealth acquisition of the rich, as demonstrated by two centuries of capitalist history and elsewhere in the book acknowledged by Piketty.
&
And, Piketty does not deign to explain how marginal tax rates ranging from 60% to 80% would "preserve entrepreneurial dynamism." When most of the marginal return is captured by government, the the incentives for the successful entrepreneur will undoubtedly be to just head to the golf course or go fishing rather than to put in the often massive levels of effort and overtime needed to grow the business.

Piketty is cognizant of the tendency for family fortunes to be dissipated by the inevitable "prodigal child." "It is thus unlikely that inequality of wealth will grow indefinitely at the individual level," he concedes. However, family wealth can be preserved through establishment of trusts and purportedly charitable foundations, and other legal entities that can be subjected to capital levies.
&

Sovereign wealth funds are an even greater problem. Although carefully tentative, Piketty stupidly gives credence to peak oil catastrophists. He speculates on the impact for oil exporting nation sovereign wealth funds if natural economic forces push oil prices to over $200 per barrel sometime between 2020 and 2030. Asian sovereign wealth funds seem to be less of a problem due to the capital needs of the Asian nations.
&

Market crises:

Like Marx, Piketty warns of inevitable catastrophic crises if markets are permitted to proceed without suitable government intervention.
&

There is "absolutely no doubt that the increase in inequality in the United States contributed to the nation's instability" during the last century, Piketty unsurprisingly asserts. However, it was not a primary cause, he carefully adds. He is well aware of a few of the political policies that played a role in the 2008 credit crunch recession. He mentions "unscrupulous banks and financial intermediaries, freed from regulation" to tempt poor credit risks among the lower and middle classes with credit "on increasingly generous terms."
&

Piketty views the 2008 crisis as "an indictment of the markets" but as just "a challenge to the role of government." It was "the first crisis of the globalized patrimonial capitalism of the twenty first century. It is unlikely to be the last."

Arguably, it was the dot-com bust of 2000-2001 that was the first crisis of the 21st century economy, but that is a mere quibble. Piketty is undoubtedly correct that the 2008 crisis will not be the last. The business cycle will not be obsoleted by any economic policy. Whether in the public or private sector, men are still not angels.
&
However, Piketty is obviously in determined denial of the dominant role of government policies in these two economic contractions, even though he acknowledges the inadequacy and increasing ineffectiveness of increasingly complex government policies. Indeed, the assertion that inequality played a substantial role in any part of the business cycle of the last century is a blatant propaganda myth.
&
Government policies, often of incredible stupidity mulishly continued, have disabled a host of vital market disciplinary mechanisms during the last quarter century. Indeed, government policies have been the predominant influence on the business cycle since WW-I.
&
Lacking market interest rates, with politically distorted accounting standards, with fear of failure removed from "too-big-to-fail" economic entities, and with massive government subsidization schemes and noxious tax incentives distorting housing, student tuition and health care markets, it is the height of stupidity to assert that the recent business cycle is a result of market failure. See, Morgenson & Rosner, "Reckless Endangerment," about the roles of Fannie Mae and Freddie Mac and Congressman Barney Frank, among others, and Johnson & Kwak, "13 Bankers," about the roles of the major investment banks.

Implementing the egalitarian agenda:

The politicization of economic policy is Piketty's core objective.
&

Economic policy should be based on "the institutions and rules that govern democratic debate and decision-making," on "democratic deliberation and political confrontation."

Economic policy in the 21st century should be based not on economic realities but on "the institutions and rules that govern democratic debate and decision-making," on "democratic deliberation and political confrontation." The 20th century "meager" social state that provided for "social rights to education, health and retirement" based on policies justified within economic realities is not enough.

Unfortunately, it is the logic of the markets that ultimately dictates the outcomes of economic policies generated by democratic decision making. Ultimately, the markets always win - viciously if necessary.
&
This can be seen in the financially troubled nations of Southern Europe and Latin America and elsewhere. There is, in fact, a two century history of economic failure among politicized Latin American economic systems. Wherever economic policy responds predominantly to political rather than economic imperatives, the markets ultimately prove to be distressingly unsympathetic.

Piketty acknowledges the lack of a clear implementation method.

The egalitarian agenda should include, among other things:

Broad economic rights to housing, education, health care, employment, culture, clean energy, the reduction of inequality, and sustainable development, among other things;
Unified retirement systems based on individual accounts with equal rights for all, regardless of career path;
Equal access to universities achieved by substantial public financial incentives for a still-decentralized mix of public and independent private institutions;

Piketty acknowledges the lack of a clear implementation method. (He does not deign to acknowledge that, he who takes the king's shilling is increasingly subject to the king's whims.)

Progressive taxes are "indispensable" to make sure that "everyone benefits from globalization." An absence of progressive taxation "may ultimately undermine support for a globalized economy," Piketty warns.

Piketty deplores cuts in corporate taxes. He does not acknowledge that businesses are generally tax collectors, not tax payers. However, he does acknowledge that total taxes may actually be regressive due to the impact of consumption taxes (which necessarily include business taxes, all of which are included as a cost of goods sold).
&

New forms of governance structures - mandates, government contracts, public-private partnerships, grants to foundations and other associations, new forms of ownership - will be employed to improve government performance.

The already bloated public sector is currently in need of extensive reforms to increase efficiency and facilitate the further expansion needed to achieve the egalitarian agenda. Piketty speculates that new forms of governance structures - mandates, government contracts, public-private partnerships, grants to foundations and other associations, new forms of ownership - will be employed to improve government performance. We already live in a mixed format economic system involving such structures, he correctly points out. (If only it were just a matter of governance structure!)

"Taxation is neither good nor bad in itself. Everything depends on how taxes are collected and what they are used for."

Economic productivity and growth are viewed with acute pessimism and are thus at best of secondary concern for Piketty. He does not deign to comment on the significant loss of economic productivity inevitable when substantial sums are shifted from private to government hands.
&
Piketty's insouciant view of government economic activity constitutes intentional denial of the inherent ineptness of government management, as previously mentioned herein. Government sector activity is considered the equivalent of private sector activity. All that is required to deal with current levels of ineptness is suitable reforms. Such obviously stupid conclusions gain support from those economists prone to rely on inherently simplistic mathematical analyses wherein national aggregates like GDP do not distinguish between the economic productivity of the government sector and the private sector.

Piketty foresees the government tax take rising to 66% or even 75% of national income.

The high marginal rates on the wealthy can actually provide only a small proportion of tax revenues. Thus, the bulk of the needed revenues must come from increased taxes on the multitudes of the middle class.

Massive increases in taxes will be needed. Piketty foresees the government tax take rising to 66% or even 75% of national income. (Piketty does not deign to explain how this would be compatible with "entrepreneurial dynamism.")
&
The tax system would be sharply progressive, but it will have to include tax increases all the way down the line to support Piketty's egalitarian agenda. High levels of taxation must be imposed broadly across the middle class to obtain the needed revenues.
&
The high marginal rates on the wealthy can actually provide only a small proportion of tax revenues. Businesses will simply stop paying salaries at levels that are confiscated by high tax levels. (They will shift to other forms of compensation as in the 1970s, which were often quite wasteful.) Thus, the bulk of the revenues to support the egalitarian agenda must come from increased taxes on the multitudes of the middle class.
&
Progressive tax systems are currently "seriously threatened by international tax competition." It is "an endless race to the bottom."
&

A global or at least a regional capital tax system is essential to prevent capital flight.

A global progressive capital tax is the appropriate response to the globalized patrimonial capitalism of the 21st century. Piketty grieves over the maldistribution of wealth abroad, especially in the oil-rich authoritarian states in the Middle East.
&
Capital taxes are essential to get at wealth hiding in capital assets. A combination of capital levies and inflation are essential to reduce public debt.

For centuries, England depended upon economic growth to successfully deal with the massive debts of its imperial wars. But that possibility ended with the beginnings of the English welfare state in the 1920s. Piketty's welfare state egalitarianism makes slow or stagnant economic growth a self-fulfilling prophecy, so alternative policies that facilitate economic growth are not even contemplated.

Piketty discusses the shortcomings of various capital levies imposed at national levels. The shortcomings of relying on assessed valuations is acknowledged. A global or at least a regional capital tax system is essential to prevent capital flight.
&

Piketty favors a Eurozone "budgetary parliament" with power to impose progressive capital levies and corporate taxes, and debt mutualization, and the vast array of reporting requirements needed to support stakeholder governance of economic entities for the whole region.

Political consolidation in the Eurozone to include a "budgetary parliament" and popularly elected president with suitable powers is thus favored by Piketty. Such a parliament could impose progressive capital levies and corporate taxes, and debt mutualization, and the vast array of reporting requirements needed to support stakeholder governance of economic entities for the whole region. The establishment of the euro is taken by Piketty as an indication that such policies are at least possible.

Piketty appears completely oblivious to the popular EU sentiment running strongly against such further consolidation and even towards more national independence. Talk of wealth taxes and vexatious reporting requirements imposed by an increasingly intrusive and powerful EU government will not improve the public approval levels of the EU.
&
Well, Piketty at least is quite candid in characterizing his agenda as "utopian." He is the personification of the intellectual critic of capitalism described by Schumpeter. He is basically an onlooker, whose "main chance of asserting himself lies in his actual or potential nuisance value." He wields "the power of the spoken word" without any "direct responsibility for practical affairs."

#Peak oil fallacy	#Egalitarian analysis	#Ideal "Social State"
#Inequality analysis	#Global patrimonial capitalism	#Egalitarian agenda