Thomas Piketty, Capital in the 21st Century.
Part One: Income and
Capital
Chapter 1: Income and
Output
Piketty: “In this book, capital
is defined as the sum total of nonhuman assets that can be owned and exchanged
on some market. Capital includes all forms of real property (including
residential real estate) as well as financial and professional capital (plants,
infrastructure, machinery, patents, and so on) used by firms and government
agencies.”
Brian: This broad definition of capital is satisfactory when
considering it from the standpoint of ‘distribution’, which (unfortunately)
Piketty does almost exclusively throughout the book. However, when considering
capital from the standpoint of production, which Piketty (unfortunately) neglects
to do, narrower, more sub-divided definitions are necessary. Piketty’s
definition of capital should then be divided into: 1. Productivity-increasing,
reproducible, investment capital goods (tools, equipment, machines, buildings,
etc…). 2. The non-reproducible elements of real estate (location, ground land,
natural resources). 3. Consumer capital (durable consumer goods, residential real
estate and housing, consumption loans.) 4. Government permissions and
privileges (patents, copyrights, licenses, permits, etc…). All of these play
very different roles in the production process, and should not all be lumped
together. More on this later.
Piketty: “Generally
speaking, the global income distribution is more unequal than the output
distribution, because the countries with the highest per capita output are also
more likely to own part of the capital of other countries and therefore to
receive a positive flow of income from capital originating in countries with a
lower level of per capita output. In other words, the rich countries are doubly
wealthy: they both produce more at home and invest more abroad, so that their
national income per head is greater than their output per head. The opposite is
true for poor countries.”
Brian: No doubt. But
there is no injustice here: the poor countries would be even poorer if they
weren’t helped out by the investments of foreign capital.
Chapter Two: Growth: Illusions and Realities
Piketty: “In the short run,
the problem of “relative prices” can be neglected, and it is reasonable to
assume that the indices of “average” prices published by government agencies
allow us to correctly gauge changes in purchasing power. In the long run,
however, relative prices shift dramatically, as does the composition of the
typical consumer’s basket of goods, owing largely to the advent of new goods
and services, so that average price indices fail to give an accurate picture of
the changes that have taken place, no matter how sophisticated the techniques used
by the statisticians to process the many thousands of prices they monitor and
to correct for improvements in product quality.”
Brian: I wouldn’t be so
optimistic about short-run price indices, but I appreciate your skepticism
about long-run ones.
Piketty: “In fact, neither
the economic liberalization that began around 1980 nor the state
interventionism that began in 1945 deserves such praise or blame. France,
Germany, and Japan would very likely have caught up with Britain and the United
States following their collapse of 1914–1945 regardless of what policies they
had adopted (I say this with only slight exaggeration). The most one can say is
that state intervention did no harm. Similarly, once these countries had
attained the global technological frontier, it is hardly surprising that they
ceased to grow more rapidly than Britain and the United States or that growth
rates in all of these wealthy countries more or less equalized, as Figure 2.3shows
(I will come back to this). Broadly speaking, the US and British policies of
economic liberalization appear to have had little effect on this simple
reality, since they neither increased growth nor decreased it.”
Brian: You say it with
great exaggeration in fact. Did the communist countries ‘catch up’ to the US as
rapidly as the western European countries after the war? Of course not, they
stagnated in misery because of grossly inappropriate government policies.
I don’t know what you
mean when you say that ‘state interventionism’ began in 1945. Germany and Japan
were extremely economically liberal in the post-war period compared to their
fascist recent pasts. France was relatively economically liberal itself during
the post-war and De Gaulle years, it turned to more socialist policies later
on.
There was no
significant ‘economic liberalization’ in the 1980s, it was mainly rhetorical.
In fact, the 80s and the decades that followed were far more statist
(government spending and regulations played a greater role in the economy) than
the post-war years in the US, France, Germany, and Japan. Only in Britain can
we say that some economic liberalization really occurred under Thatcher, when
compared to the socialistic post-war period, although its extent is grossly
exaggerated by most commentators.
Finally, technology
is by no means the overriding factor determining economic growth. Technological
knowledge is useless without the capital to implement it, without the skilled
labor force to operate it, and without the economic freedom to exploit it
effectively.
Part Two: The Dynamics of the Capital/Income Ratio
Chapter 3: The Metamorphoses of Capital
Piketty: “More precisely, remember that national
capital, which is shown in Figures 3.1 and 3.2,
is defined as the sum of private capital and public capital. Government debt,
which is an asset for the private sector and a liability for the public sector,
therefore nets out to zero (if each country owns its own government debt).”
Brian: ‘Private capital’
and ‘public capital’ are two entirely separate things and should not be lumped
into an aggregate figure. In reality, government debt diverts capital from
private uses to ‘public’ uses. These ‘public’ uses might not actually
constitute productive investments, they might just be consumption or
counter-productive (such as war financing or regulatory bureaucracy financing)
instead. In any meaningful measure of capital’s role in the economy, government
debt certainly does not ‘net out to zero’.
While we’re on the
subject of over-aggregation, it is a bit dubious to include residential real
estate in ‘national capital’ as you do. Residential real estate is a
consumption good, not a production good. When free-market economists say that
capital accumulation leads to economic growth, they have in mind capital that
is invested for the purpose of making more money in the future, achieved
through making a production process more efficient in the future. Durable
consumer goods such as residential real estate and random government expenditures
are not of this character, so to aggregate them with real productive capital is
misleading for many purposes.
Piketty: “National capital
(or wealth) is the sum of public capital and private capital. Public capital is
the difference between the assets and liabilities of the state (including all
public agencies), and private capital is of course the difference between the
assets and liabilities of private individuals.”
Brian: While this
definition is okay for private capital, it is misleading for public capital.
The fact is that the bigger the government’s balance sheet, the more of the
economy’s capital stock it is directing. If the government pays for 1 trillion
dollars worth of assets by issuing 1 trillion dollars worth of bonds to the
private sector, this action is not a wash as it is in Piketty’s definitions,
but is very significant. With this action, the government now has the power to
commission, to shape, and to direct 1 trillion dollars worth of capital assets.
Yes, in a certain nominal sense it is the government’s private creditors who
‘own’ these assets, but this 1 trillion dollars of capital is firmly devoted to
the governmental sector, rather than to the private sector. If the government
hadn’t purchased the assets by issuing the bonds, these 1 trillion dollars of
capital would have been invested in the private sector. Some of it would have
landed in durable consumer goods investments such as residential real estate,
but a great portion of it would have turned into private productive investment
capital, which would have contributed significantly to increasing economic
productivity, real wages, and growth. The government’s action thus changes the
character of the capital significantly, and can’t be ignored by any thorough
analysis.
Piketty: “Second, it is also
quite clear that, all things considered, this very high level of public debt
served the interests of the lenders and their descendants quite well, at least
when compared with what would have happened if the British monarchy had financed
its expenditures by making them pay taxes. From the standpoint of people with
the means to lend to the government, it is obviously far more advantageous to
lend to the state and receive interest on the loan for decades than to pay
taxes without compensation. Furthermore, the fact that the government’s
deficits increased the overall demand for private wealth inevitably increased
the return on that wealth, thereby serving the interests of those whose
prosperity depended on the return on their investment in government bonds.”
Brian: Yes, all true.
It should be added though that the high level of public debt did not serve the
interests, and in fact went against the interests, of everyone else. For it
served to divert private capital from productive private investments to
unproductive public consumption (in this case, destructive wars).
Chapter 4: From Old Europe to the New World
Piketty: “In the long run, the
capital/income ratio β is related
in a simple and transparent way to the savings rate s and the growth rate g according to the following formula:
β = s / g
For example, if s = 12% and g = 2%, then β = s / g = 600%.2
In other words, if a
country saves 12 percent of its national income every year, and the rate of
growth of its national income is 2 percent per year, then in the long run the
capital/income ratio will be equal to 600 percent: the country will have accumulated
capital worth six years of national income.
This formula, which
can be regarded as the second fundamental law of capitalism, reflects an
obvious but important point: a country that saves a lot and grows slowly will
over the long run accumulate an enormous stock of capital (relative to its
income), which can in turn have a significant effect on the social structure
and distribution of wealth.
Let me put it another
way: in a quasi-stagnant society, wealth accumulated in the past will
inevitably acquire disproportionate importance.
Brian: This formula is not
very helpful because the savings rate is not a static rate at all. People
aren’t just going to keep accumulating savings in a low growth economy at the
same rate indefinitely. Rather, each person will decide how much in savings
they want, and when they have reached their desired level, they will stop
saving and start consuming all of their income. Some people (for example,
people who have retired) will probably have a negative savings rate, while
others (for example, young people saving for their first home) will probably
have a higher than average savings rate. But if enough savings in general have
been accumulated already, than these kinds of opposing actions will simply
result in a transfer of savings from one person to another, not in a positive
overall savings rate.
This brings us to
another important point. Piketty says that “in a quasi-stagnant society, wealth
accumulated in the past will inevitably acquire disproportionate importance”. Maybe
so, but it is by no means certain that in such a society the people or the descendants of the people who have accumulated this wealth in the
past will acquire a disproportionate economic importance. Individual people and
families gain and lose wealth all the time, quasi-stagnant society or not. This
important dynamic is obscured by the focus on ‘national’ wealth and income
statistics. No investment is absolutely safe, and the safer it is, the lower
the return it will generally make, while those taking more risks will tend to
make a higher return. Even land and housing, once thought to be ‘stable’ and
‘permanent’ investments, have become quite volatile and risky investments in
the modern, rapidly changing world. Those making a low return on their ‘safe’
investments will probably, if they want to maintain a high standard of living,
have to consume some of their capital eventually, while thrifty people making a
high return on their ‘risky’ investments will be able to accumulate additional
capital.
Chapter 6: The Capital-Labor Split in the Twenty-First Century
Piketty: “The principal
conclusion that emerges from my estimates is the following. In both France and
Britain, from the eighteenth century to the twenty-first, the pure return on
capital has oscillated around a central value of 4–5 percent a year, or more
generally in an interval from 3–6 percent a year. There has been no pronounced
long-term trend either upward or downward. The pure return rose significantly
above 6 percent following the massive destruction of property and numerous
shocks to capital in the two world wars but subsequently returned fairly
rapidly to the lower levels observed in the past. It is possible, however, that
the pure return on capital has decreased slightly over the very long run: it
often exceeded 4–5 percent in the eighteenth and nineteenth centuries, whereas
in the early twenty-first century it seems to be approaching 3–4 percent as the
capital/income ratio returns to the high levels observed in the past.”
Brian: These figures make
perfect sense. Generally speaking, the more capital is flowing around the
economy seeking returns, the lower these returns will be (higher supply means,
other things equal, a lower price (rate of return)).
Piketty: “First, the returns indicated
in Figures 6.3 and 6.4 are pretax returns. In other words, they are the returns that capital
would earn if there were no taxes on capital or income. In Part Four I will consider the role such taxes have played in the past
and may play in the future as fiscal competition between states increases. At
this stage, let me say simply that fiscal pressure was virtually nonexistent in
the eighteenth and nineteenth centuries. It was sharply higher in the twentieth
century and remains higher today, so that the average after-tax return on
capital has decreased much more over the long run than the average pretax
return.”
Brian: The after-tax return is
a more important figure than the pre-tax return. It allows proper comparison
between past rates and present rates, which the pre-tax return does not. And,
it represents the return that investors are willing to accept in order to
supply the amount of savings that they do. If the taxes on capital were
repealed, users of capital would pay less in order to induce the same amount of
investment by owners of capital. After-tax returns also seem more relevant for
computing ‘shares of national income’, as in what sense can we say that
‘capital’ has a ‘share of national income’ based on its pre-tax rate of return?
Owners of capital do not receive this ‘share’, the government does.
Piketty: “The
interesting question is therefore not whether the marginal productivity of
capital decreases when the stock of capital increases (this is obvious) but
rather how fast it decreases. In particular, the central question is how much
the return on capital r decreases (assuming that it is equal
to the marginal productivity of capital) when the capital/income
ratio β increases. Two cases are possible. If the return on
capital r falls more than proportionately when the
capital/income ratio β increases (for example, if r decreases
by more than half when β is doubled), then the share of capital
income in national income α = r × β decreases
when β increases. In other words, the decrease in the return on
capital more than compensates for the increase in the capital/income ratio.
Conversely, if the return r falls less than proportionately
when β increases (for example, if r decreases by less
than half when β is doubled), then capital’s
share α = r × β increases
when β increases. In that case, the effect of the decreased return on
capital is simply to cushion and moderate the increase in the capital share
compared to the increase in the capital/income ratio.”
Brian: True, but the thing
which we must keep in mind is that the more private productive investment
capital is invested effectively, the more productive the economy will tend to
be. Thus, whether ‘capital’s share’ of ‘national income’ increases or decreases
as more capital is accumulated, this ‘national income’, in terms of real goods
that both laborers and capitals can consume with their ‘shares’, will consist
of more consumable goods than it would have if there were less capital
accumulated. This is something that we should always keep in mind. How large a
slice of the pie we get at a given time matters less and less the faster the
pie itself is growing over time.
Part Three: The Structure Of Inequality
Chapter 9: Inequality of Labor Income
Piketty: “First, as shown in the
previous chapter, the increase in wage inequality in the United States is due
mainly to increased pay at the very top end of the distribution: the top 1
percent and even more the top 0.1 percent. If we look at the entire top decile,
we find that “the 9 percent” have progressed more rapidly than the average
worker but not nearly at the same rate as “the 1 percent.” Concretely, those
making between $100,000 and $200,000 a year have seen their pay increase only slightly more
rapidly than the average, whereas those making more than $500,000 a year have seen
their remuneration literally explode (and those above $1 million a year have
risen even more rapidly).11 This very sharp discontinuity
at the top income levels is a problem for the theory of marginal productivity:
when we look at the changes in the skill levels of different groups in the
income distribution, it is hard to see any discontinuity between “the 9
percent” and “the 1 percent,” regardless of what criteria we use: years of
education, selectivity of educational institution, or professional experience.
One would expect a theory based on “objective” measures of skill and
productivity to show relatively uniform pay increases within the top decile, or
at any rate increases within different subgroups much closer to one another
than the widely divergent increases we observe in practice.”
Brian: Let me start by saying
that I don’t think the rapid increase in top-earner wages in the US can be
explained entirely by free-market forces. Increasingly, established firms rely
more and more on government privileges and connections rather than on superior
efficiency. They can thus afford to become more indolent and bureaucratic, and
are more likely to acquiesce in paying their top managers unnecessarily large
salaries. Also, the existence of Chapter 11 bankruptcy rules and restrictions
on hostile takeovers make top managers more powerful within the corporate form,
which gives them more bargaining power when it comes to setting their salaries.
These things can and should be corrected by changes in government policy.
Nevertheless, the
marginal productivity theory of wage remuneration of free-market economics can
help explain the existence of very large salaries for top managers. Piketty,
incorrectly, maintains that the theory is based on “objective” measures of
skill and productivity. Actually, it is based on subjective, speculative
anticipations on the part of the people responsible for hiring the top
managers. They determine, not unreasonably, that a person who seems to have the
right intangible personality traits and a solid track record as a top manager
would make a great CEO. They determine, also not unreasonably, that a great
CEO, given the importance of the role, could make the firm a lot more
profitable than just a good CEO. For a large firm, this difference in
profitability could be on the order of hundreds of millions of dollars. As
such, they will be perfectly willing to pay the great CEO tens of millions more
in salary than the good CEO; the great CEO is worth the price in marginal terms.
When it comes to CEOs, choosing someone who isn’t ideal for the job based on
differences of even millions of dollars in salary is not generally a good
policy.
Chapter 10: Inequality of Capital Ownership
Piketty: “Under these
assumptions, we find that the return on capital, net of taxes (and losses),
fell to 1–1.5 percent in the period 1913–1950, which was less than the rate of
growth. This novel situation continued in the period 1950–2012 owing to the
exceptionally high growth rate. Ultimately, we find that in the twentieth
century, both fiscal and nonfiscal shocks created a situation in which, for the
first time in history, the net return on capital was less than the growth rate.
A concatenation of circumstances (wartime destruction, progressive tax policies
made possible by the shocks of 1914–1945, and exceptional growth during the
three decades following the end of World War II) thus created a historically
unprecedented situation, which lasted for nearly a century. All signs are,
however, that it is about to end. If fiscal competition proceeds to its logical
conclusion—which it may—the gap between r (rate of return on capital) and g (growth rate of the economy) will return at some point in the twenty-first century to a level
close to what it was in the nineteenth century (see Figure 10.10). If the average tax rate on capital stays at around 30
percent, 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 central scenario turns out to be correct.”
Brian: Stop it right there. Let’s
say that users of capital currently pay 5% on average to use the capital, but
that with taxes the owners of capital only receive a 3% rate of return. If the taxes
on capital income are now repealed or reduced, then the rate of return on
capital will indeed suddenly increase, from 3% to 5%. But, as a result, the
supply of savings and investment will soon increase, given this higher return.
All those users of capital who were willing and able to pay (implicitly or
explicitly) 5% for the use of the capital were able to get access to all of the
capital that they needed at that rate. But, with the tax, a 3% rate of return
is obviously enough to bring in enough of a supply of capital to meet these
needs, as owners of capital don’t care about their pre-tax rate of return, only
their after-tax rate of return. With the tax repealed, the users of capital
continue paying 5%, but the owners of capital now receive all of that 5%
themselves. But this higher rate will invariably result in more savings and
investment being supplied to the market. The rate of return cannot remain at
5%, given this new supply. The users of capital willing and able to pay 5% were
already doing so. In order to bring forth more users of capital to accommodate
the now larger supply of the owners of capital, the rate of return must fall.
How much it will fall depends on many complicated factors, but fall it
will.
Piketty:
“Let me now turn to the consequences of r > g for
the dynamics of the wealth distribution. The fact that the return on capital is
distinctly and persistently greater than the growth rate is a powerful force
for a more unequal distribution of wealth. For example, if g = 1
percent and r = 5 percent, wealthy individuals have to
reinvest only one-fifth of their annual capital income to ensure that their
capital will grow faster than average income.”
Brian:
Yes, if average r times average % of r saved is > g, than capital will grow
faster than average income. If g= 2 percent and r= 4 percent, then the average
% of r saved to make the capital grow faster than national income must be over
50%. Few wealthy people save over 50% of their capital income though, as,
assuming they have a sufficiently large capital, they generally use most of
their capital income for consumption purposes. Add in all of the people who,
for whatever reason, deem it to be time to start consuming some of their
capital, and the average percent of capital income saved should be well-below
50% (in the US in 2005, the overall personal savings rate was actually
negative!). A growth rate of 2 percent and an average rate of return of 4
percent are not at all unrealistic, and would probably be achieved or surpassed
in a true free-market economy.
In addition though, why all the worry about capital
growing faster than average income? This just means that capital will be
accumulated at a good pace, which will lead to higher growth rates and lower
rates of return on capital in the near future. Piketty seems to treat g as a largely independent variable that
cannot really be changed. But it can be changed, and the primary way of
changing it positively is through more rapid capital accumulation and through
more economic freedom.
Chapter 11: Merit and Inheritance in the Long Run
Piketty: “Whenever
the rate of return on capital is significantly and durably higher than the
growth rate of the economy, it is all but inevitable that inheritance (of
fortunes accumulated in the past) predominates over saving (wealth accumulated
in the present). In strict logic, it could be otherwise, but the forces pushing
in this direction are extremely powerful. The inequality r > g in
one sense implies that the past tends to devour the future: wealth originating
in the past automatically grows more rapidly, even without labor, than wealth
stemming from work, which can be saved. Almost inevitably, this tends to give
lasting, disproportionate importance to inequalities created in the past, and
therefore to inheritance.”
Brian: This seems dubious
for a number of reasons. Incompetent heirs will tend to earn significantly
lower rates of return on their capital than the average. This is because they
will probably hire portfolio managers to manage their investments, whose fees
will be deducted from any return made, and because they will probably prefer
safer investments with a lower rate of return to more risky, entrepreneurial
investments with a higher rate of return. Moreover, they will probably have
become accustomed to a high standard of living, a standard of living which they
will probably not want to impair in order to increase their fortune. As such,
they will probably use most of their capital income for consumption purposes,
and may even dip into the fortune itself and consume some of the capital at
times. These forces will result in a given inherited fortune becoming less and
less significant in the economy as time goes by, the opposite of what Piketty
predicts.
Piketty: “If the twenty-first
century turns out to be a time of low (demographic and economic) growth and
high return on capital (in a context of heightened international competition
for capital resources), or at any rate in countries where these conditions hold
true, inheritance will therefore probably again be as important as it was in
the nineteenth century. An evolution in this direction is already apparent in
France and a number of other European countries, where growth has already
slowed considerably in recent decades. For the moment it is less prominent in
the United States, essentially because demographic growth there is higher than
in Europe. But if growth ultimately slows more or less everywhere in the coming
century, as the median demographic forecasts by the United Nations
(corroborated by other economic forecasts) suggest it will, then inheritance
will probably take on increased importance throughout the world.”
Brian: Forget population
growth, economic growth can occur just fine with or without it. In fact, if
population growth became excessive, economic growth would probably start to
suffer. UN demographic forecasts are largely irrelevant in this discussion.
Yes, it is possible that if the twenty-first
century features low economic growth and high returns on capital, then it is
possible that inheritance might take on increased importance throughout the
world, although this is by no means certain, given the nature of incompetent
heirs discussed above. But is it an immutable law of nature that the
twenty-first century will be one with low economic growth and high returns on
capital? Of course not, economic phenomena are always subject to human control
and modification. So the question is: what can we humans do to avoid this fate?
Piketty has already
hinted at his proposed ‘solution’: lower the after-tax rate of return through
taxes on capital income and lower the significance of inherited wealth through
inheritance taxes. If you are a fan of egalitarianism, this could help ‘solve’
the so-called ‘problem’ of ‘distribution’. But ‘distribution’ is not the only factor
in economics: before there is ‘distribution’ there must first be production.
The more is produced, or the faster the economy grows, the more there is for
any ‘distribution’.
As such, I would like
to propose a solution that not only takes ‘distribution’ into account, but also
takes production and economic growth into account. Piketty worries about the
gap between the rate of return on capital and the economic growth rate. He
doesn’t seem to think that there’s anything that can be done about the economic
growth rate, so he wants to reduce the rate of return on capital through
taxation. But I say that there is something that can be done about the economic
growth rate. With more capital accumulation and more economic freedom, there is
no reason why the economic growth rate cannot increase. At the same time, with
more capital accumulation, the rate of return will fall due to the increased
supply of capital seeking uses. Thus, in this way, not only is Piketty’s gap
reduced, thus mitigating his ‘distribution’ problem, but production and
economic growth are increased, thus resulting in more economic goods to
‘distribute’ in the first place. This positive solution is thus infinitely
better than Piketty’s negative ‘solution’.
Piketty: “Figure 11.1 represents the evolution of
the annual inheritance flow in France from 1820 to 2010.2 Two facts stand out clearly. First, the inheritance flow
accounts for 20–25 percent of annual income every year in the nineteenth
century, with a slight upward trend toward the end of the century. This is an
extremely high flow, as I will show later, and it reflects the fact that nearly
all of the capital stock came from inheritance.”
Brian: Inheritance flow as a
percent of national income is interesting, but it fails to reveal who exactly
is doing the bequeathing. Let us return to the incompetent heirs we discussed
above. A rich father passes a large fortune to his incompetent heir. This is
recorded as an inheritance flow. The incompetent heir squanders half of the
fortune before the end of his life, and passes a reduced fortune to his heir.
What happened to the portion of the fortune that the incompetent heir
squandered? A brilliant and energetic entrepreneur, who was about the same age
as the incompetent heir, accumulated, through his very profitable business
activities and high rates of saving out of these high profits, a fortune equal
in size to the half of the large fortune that the incompetent heir squandered.
This entrepreneur dies at the same time as the incompetent heir, and passes his
fortune down to his own heir. Both halves of the original fortune, now as part
of two separate estates, are recorded as an inheritance flow. If, instead of
this, the incompetent heir hadn’t been incompetent and had managed to maintain
his father’s fortune intact until his death, then the inheritance flow
statistics would look the same.
The point is that large
inheritance flows as a percent of national income do not necessarily imply the
existence of an ever-rich aristocracy of great dynastic families. Yes, large
inheritance flows mean that certain heirs will hit it lucky, but they do not
mean that the same economic inequalities established in the past will remain in
perpetuity.
There is, in fact, some
good evidence that socio-economic mobility is still alive and well, in the US
at least, contrary to Piketty’s implications. Free-market economist Gary Galles
summarizes a 2007 US Treasury study called Income
Mobility in the U.S from 1996 to 2005 as follows:
“The Treasury
found that those with the very highest incomes in 1996 — the top 1/100 of 1
percent — had their incomes halved by 2005 (missed by using statistical
classes, because such decreases move people out of the top category). That
hardly shows a class of rich growing ever richer at the expense of other
classes.
Other income categories
revealed a similar story. From 1996 to 2005, the incomes of those originally in
the top 1 percent and 5 percent both declined; the incomes of those originally
in the top 20 percent increased 10 percent; but those originally in the bottom
20 percent saw a 91 percent increase in income (missed by using statistical
classes, because such increases move people out of the lowest 20 percent)”
Piketty: “the share of
inherited wealth in total wealth has grown steadily since the 1970s. Inherited
wealth once again accounted for the majority of wealth in the 1980s, and
according to the latest available figures it represents roughly two-thirds of
private capital in France in 2010, compared with barely one-third of capital
accumulated from savings.”
Brian: Firstly, one-third
of private wealth accumulated through savings is certainly a big enough
proportion for the kind of gradual shifts of wealth to different estates
described above. It still does not imply that the economy is dominated by
aristocratic, dynastic families.
Secondly, high
progressive income tax rates and corporate tax rates make it much more
difficult to accumulate wealth through high incomes and savings. Reduce these
tax rates and wealth accumulated through savings will increase in relative
economic importance.
Thirdly, for those who appreciates productive
investment capital’s vital, positive role in the economy, these statistics
reinforce the inadvisability of raising inheritance taxes, something which
Piketty will no doubt recommend later on in the book. For the higher
inheritance taxes are, the less of an incentive people will have to maintain
their fortune past their expected time of death. In the extreme case, if
inheritance taxes were 100%, than people would plan to consume all of their
wealth before they died. Unless this capital consumption were offset by
increased capital accumulation through saving elsewhere in the economy (and
there is no reason to believe that the savings rate would increase if the
inheritance tax were raised), than the economy would become less capital
intensive, which would tend to make it less productive and would result in
lower real wages for the workers who are now deprived of the
productivity-increasing tools that they used to work with. Given that inherited
wealth constitutes over two-thirds of private wealth in the economy (in France
at least), any policy which significantly reduced the incentive to maintain
this wealth and invest it productively would be economically catastrophic.
Piketty:
“In France today, there are certainly fewer very large estates—estates of 30
million or even 5 or 10 million euros are less common—than in the nineteenth century.
But since the total volume of inherited wealth has almost regained its previous
level, it follows that there are many more substantial and even fairly large
inheritances: 200,000, 500,000, 1 million, or even 2 million euros. Such
bequests, though much too small to allow the beneficiaries to give up all
thought of a career and live on the interest, are nevertheless substantial
amounts, especially when compared with what much of the population earns over
the course of a working lifetime. In other words, 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.”
Brian: Exactly
the point I was making; though there are still large total inheritance flows,
there are few aristocratic, eternal, dynastic families. This seems a lot less
dire than Piketty’s earlier rhetoric about the past tending to ‘devour’ the
future. So a bunch of lucky people get a significant one-shot bonus when their
parents die, so what? Is it reasonable, out of envy for these people, to
undermine our economies through destructive taxation policies in order to take
away this advantage? Personally, I don’t think it is.
Piketty: “in a democracy, the
professed equality of rights of all citizens contrasts sharply with the very
real inequality of living conditions, and in order to overcome this
contradiction it is vital to make sure that social inequalities derive from
rational and universal principles rather than arbitrary contingencies.
Inequalities must therefore be just and useful to all, at least in the realm of
discourse and as far as possible in reality as well.”
Brian: Firstly, the idea
that every inhabitant of a given region should have an equal vote when it comes
to electing certain officials of the government of that region (political
democracy) is entirely separate from the idea that every such inhabitant should
have equal economic standards of living (economic egalitarianism). Inequality
of wealth and incomes in a democratic country is not a ‘contradiction’ of
democracy.
Secondly, the
inequalities as a result of inheritances are useful to most people in the
country, contrary to popular belief. As I discussed above, the institution of
inheritance results in more productive investment capital being accumulated
than would be accumulated in its absence, which in turn benefits almost
everybody in the world, especially the residents of the country where the
inheritance is accumulated.
Piketty: “In any case, the
unreliability of the US sources makes it very difficult to study the historical
evolution of inheritance flows in the United States with any precision.”
Brian: So you will confine
your conclusions to France then? I somehow doubt it.
Chapter 12: Global Inequality of Wealth in the
Twenty-First Century
Piketty: “The problem is simply
that the entrepreneurial argument cannot justify all inequalities of wealth, no
matter how extreme. The inequality r > g, combined
with the inequality of returns on capital as a function of initial wealth, can
lead to excessive and lasting concentration of capital: no matter how justified
inequalities of wealth may be initially, fortunes can grow and perpetuate
themselves beyond all reasonable limits and beyond any possible rational
justification in terms of social utility.”
Brian: Didn’t you just point
out in the previous chapter how, in France at least, wealth was divided amongst
a number of petits rentiers, rather than a few gigantic rentiers? This hardly
seems consistent with fortunes growing and perpetuating themselves “beyond all
reasonable limits”.
Also, again, you
don’t really appreciate the social utility represented by capital accumulation.
It is not just ‘the entrepreneurial argument’ that is used to justify all
inequalities of wealth by free-market economists, it is also ‘the capitalist argument’
which is as important, if not more important, than the entrepreneurial
argument.
Part 4: Regulating Capital In The Twenty-First
Century
Chapter 13: A Social State for the Twenty-First
Century
Piketty: “The simplest way to
measure the change in the government’s role in the economy and society is to
look at the total amount of taxes relative to national income.”
Brian: No, government
spending as a percent of GDP is a much better measure. Whether financed by
taxation or financed by massive budget deficits and the inflation that enables
them, the more the government spends for its activities, the greater role it
has in the economy. Looking only at taxes relative to national income will lead
to underestimating the relative role of the government in an era of large
government budget deficits, and will lead to overestimating the relative role
of the government in an era of small or non-existent government budget
deficits.
Piketty: “No major movement or
important political force seriously envisions a return to a world in which only
10 or 20 percent of national income would go to taxes and government would be
pared down to its regalian functions.”
Brian: So what? Maybe all
‘major movements’ and ‘important political forces’ are deluded. Personally, I
think that 20 percent of national income going to taxes is already pretty
hefty, 10 percent would probably be more than sufficient. At any rate, majority
vote is not the arbiter of truth or reasonableness.
Piketty: “In the abstract, it
should be possible to combine the advantages of decentralization with those of
equal access by providing universities with substantial publicly financed
incentives. In some respects this is what public health insurance systems do:
producers (doctors and hospitals) are granted a certain independence, but the
cost of care is a collective responsibility, thus ensuring that patients have
equal access to the system. One could do the same thing with universities and
students.”
Brian: No, even in the
abstract, it is not possible. Chronic shortages of the things that customers
want, lack of innovation, and horrible customer service result whenever a
‘public health insurance system’ is implemented. This is not some kind of
strange coincidence: it is what invariably happens whenever profit-motive-based
decision-making is replaced by bureaucratic decision-making. The same features
are present in the public education system up to secondary school, and would
become even more prevalent than they currently are in the higher education
system the more control government sought over these institutions.
Chapter 14: Rethinking the Progressive Income Tax
Piketty: “Taxation is not a
technical matter. It is preeminently a political and philosophical issue,
perhaps the most important of all political issues. Without taxes, society has
no common destiny, and collective action is impossible.”
Brian: You seem to be
employing a strange definition of ‘collective action’. The Oxford English
Dictionary defines the adjective ‘collective’ as: “Done by people acting as a group”.
Thus, collective action means: ‘An action performed by people acting as a
group’.
Are taxes necessary to enable people to perform actions as a group? Of
course not! People can contribute money to voluntary associations such as clubs
or charities in order to enable these groups to act. People can contribute
money as shareholders to a corporation to enable it to act as a unit with all
of the share capital at its disposal. These are a few good examples of
voluntary collective action, something that is very widespread throughout
society. Thus, perhaps what Piketty meant to say was: ‘Without taxes, coerced collective action is
impossible’. If he said that, then I would agree entirely with the statement.
Coerced collective action is of course impossible if the organization that
supposedly ‘represents’ the group (the government in this case) cannot collect
money, through the threat of coercive force, from its ‘members’. In fact, in
this correct form, the statement is almost a tautology.
“Without taxes, society has no common destiny”. This statement is very
obscure. Members of the same group can never have a ‘common destiny’: the
collective actions of the group will necessarily affect each constituent
individual in a different way. No matter what a government of a geographical
area does, it will not affect each of its individual citizens in the same way,
and hence is incapable of creating a ‘common destiny’ for them. If a government
declares war on another country and decides to use conscription to advance the
war effort, do the poor conscript and the President doing the declaring really
share a ‘common destiny’ because of this action? One is shipped off, against
his will, to fight foreigners in muddy trenches, while the other can sit around
in a comfortable office back home issuing commands. This doesn’t seem like a
‘common destiny’ to me. Similar considerations apply to every government
policy, from regulatory policy, to taxation policy, to monetary policy.
Everyone in ‘society’ is affected differently by these policies: there is no
‘common destiny’ involved.
Am I perhaps wasting too much time criticizing Piketty’s rhetorical
statements? I don’t think so. Feel-good rhetorical statements such as these
that, upon examination, don’t actually make sense, can mislead readers into
accepting questionable doctrines which they otherwise wouldn’t have.
Piketty: “When a government taxes
a certain level of income or inheritance at a rate of 70 or 80 percent, the
primary goal is obviously not to raise additional revenue (because these very
high brackets never yield much). It is rather to put an end to such incomes and
large estates, which lawmakers have for one reason or another come to regard as
socially unacceptable and economically unproductive—or if not to end them, then
at least to make it extremely costly to sustain them and strongly discourage
their perpetuation. Yet there is no absolute prohibition or expropriation. The
progressive tax is thus a relatively liberal method for reducing inequality, in
the sense that free competition and private property are respected while
private incentives are modified in potentially radical ways, but always
according to rules thrashed out in democratic debate. The progressive tax thus
represents an ideal compromise between social justice and individual freedom.
It is no accident that the United States and Britain, which throughout their
histories have shown themselves to value individual liberty highly, adopted
more progressive tax systems than many other countries.”
Brian: Free competition and
private property are respected by confiscatory tax rates, these being a
‘relatively liberal method for reducing inequality’?! Sorry, but this is simply
not true. Let us say that the democratically-elected government of a country is
Catholic, and to discourage Protestantism, declares that any money voluntarily
given to support Protestant churches will be taxed at a 90% rate before they
can be spent by the church. ‘For one reason or another’ (ie. because they are
Catholic fanatics), the lawmakers of this country have come to regard
Protestantism as ‘socially unacceptable’ and ‘economically unproductive’. There
is, of course, no ‘absolute prohibition’ on Protestantism, or ‘expropriation’
of Protestants and their churches; this government is ‘relatively liberal’
after all. ‘Free competition’ between churches is still allowed, and the
‘private property’ of Protestants is respected, it’s just that ‘private
incentives are modified in potentially radical ways, but always according to
rules thrashed out in democratic debate’. Of course, after this law is passed,
most of the Protestant churches are forced to close their doors or to radically
downsize their activities. But, that is just the result of the modified
‘private incentives’. Would Piketty regard this hypothetical case as
‘relatively liberal’? I truly hope not.
Free competition and
private property are only truly respected when people are secure in the
ownership of the resources that they have produced, earned, or purchased, and
when they are free to use these resources to engage in the
non-aggressively-violent commercial or personal activities of their choice,
unhampered by physical force and coercion or the threat thereof. Confiscatory
taxation puts a great barrier between resources earned in the market and secure
ownership of those resources. It also puts great barriers between resources
owned and their use for the activities of the owner’s choice. True private
ownership of property implies the right to dispose of that property as the
owner sees fit, without being molested by wielders of physical force.
Confiscatory taxation is entirely incompatible with this.
Piketty: “A rate of 80 percent
applied to incomes above $500,000 or $1 million a year would not
bring the government much in the way of revenue, because it would quickly
fulfill its objective: to drastically reduce remuneration at this level but
without reducing the productivity of the US economy, so that pay would rise at
lower levels.”
Brian: So essentially, we
are talking about an effective price cap on top executive pay of about $1
million, and so we should analyze it as such. In general terms, price caps
below the free-market level result in two main negative effects: the production
effect and the allocation effect. The production effect is when production of
the good with the price cap imposed on it is curtailed because the price cap
makes its production artificially unprofitable for producers, who turn to the
more profitable production of goods without price caps instead. In the case of
top executive pay, I agree with Piketty that this effect will not really apply.
I doubt that people will refuse to acquire the necessary skills and attributes
to become top executives just because of the $1 million price cap.
The allocation effect
is when the more urgent demanders of the good cannot outbid the less urgent
demanders of the good due to the existence of the price cap. If a maximum price
is set on gasoline, the trucker delivering vital food supplies to cities is prohibited
from outbidding the family who plans to drive to a camp site for the weekend
for the scarce supply of gasoline. This effect will apply to the case of top
executive pay. Large companies will essentially be prohibited from outbidding
smaller companies for the scarce supply of world class top executive talent. In
general, leading larger companies is probably more stressful and less pleasant
than leading smaller companies, thus the price cap on executive pay could well
result in too many top executives opting for spots in smaller, less important
companies, where their unique skills aren’t as value productive as they would
be in the larger, more important companies.
Also, why would this
price cap result in pay ‘rising at lower levels’? The marginal productivity of
workers lower on the pay scale will not magically increase because the top
executives are getting paid less, so why would their pay rise? Assuming that
Piketty is correct and that paying any salary past $1 million is pure waste
from the firm’s perspective, the result would be an increase in the relevant
firms’ profits in the short-run. Their production, sales, and sale prices would
remain unchanged, they would just have less labor expense, so the amount saved
would be added right on to profits. In the long-run, if the firm’s profits were
elevated above the general market rate (taking relevant risk premiums into
account) as a result of smaller executive salaries, then more competition or
potential competition would be attracted to the industry, which would result in
a tendency for the firm’s profits to be competed down to the general market
rate. This would result in lower prices for consumers in general, not in
specific pay increases at lower levels of the wage scale.
Chapter 15: A Global Tax on Capital
Piketty: “Here, the important
point to keep in mind is that the capital tax I am proposing is a progressive
annual tax on global wealth. The largest fortunes are to be taxed more heavily,
and all types of assets are to be included: real estate, financial assets, and
business assets—no exceptions.”
Brian: Ok, so accumulation
is to be discouraged and penalized through taxation. On the other hand, present
consumption will be encouraged. People will consume more and save less: the
economy, following people in general, will become more present-oriented and
less future-oriented. The result will be lower productivity as generally, the
more time-consuming, complex, and multi-staged a production process, the more
product per unit of labor it can produce. The Industrial Revolution was based
on the replacement of less time-consuming, more simple, and less multi-staged
production processes with more time-consuming, complex, and multi-staged
production processes. A reversal of the Industrial Revolution would do just the
opposite. I would prefer not to reverse the Industrial Revolution, but to
advance it, so I must oppose policies which penalize capital accumulation.
Piketty: “Nevertheless,
another classic argument in favor of a capital tax should not be neglected. It
relies on a logic of incentives. The basic idea is that a tax on capital is an
incentive to seek the best possible return on one’s capital stock. Concretely,
a tax of 1 or 2 percent on wealth is relatively light for an entrepreneur who
manages to earn 10 percent a year on her capital. By contrast, it is quite
heavy for a person who is content to park her wealth in investments returning
at most 2 or 3 percent a year. According to this logic, the purpose of the tax
on capital is thus to force people who use their wealth inefficiently to sell
assets in order to pay their taxes, thus ensuring that those assets wind up in
the hands of more dynamic investors.”
Brian: If people are forced
to sell their assets in order to pay their taxes, there are other, more
important effects besides the same assets winding up ‘in the hands of more
dynamic investors’. In order to accommodate a higher volume of these kinds of
sales, the price of the relevant capital assets will have to fall, unless the
demand for them goes up. Where would this additional demand come from? Would
private individuals suddenly start saving and investing more because a capital
tax is levied? Of course not, just the opposite in fact. Only if the
government, who now has additional purchasing-power due to the levying of the
capital tax, demanded the assets could their price be prevented from falling.
And yet, governments don’t tend to demand the same kinds of things as private
investors do, to put the case mildly. The government spends most of its funds
for consumption purposes, and when it ‘invests’, it tends to do so in an
inefficient manner, in a way that is governed by very different principles than
private investment (bureaucratic and political principles rather than
profit-seeking principles). So the private capital assets being sold to pay the
tax would fall in price, while the assets that the government will demand with
their tax money will rise in price. Economic actors will adjust accordingly to
this new situation. Thus, what would happen is that the economy would become
less capital-intensive in terms of private capital, and government would take a
bigger role in the economy instead.
Also, the primary
incentive introduced by a capital tax will be an incentive to not save and
invest in the first place, but rather to consume instead. Saving and investment
requires postponing gratification and worrying about preserving one’s
accumulated wealth. With the rewards of doing so reduced, there will be less of
an incentive to engage in this process, and more of an incentive to just
consume in the present. As I explained above, this is bad for general economic
productivity.
Chapter 16: The Question of the Public Debt
Piketty: “A much more
satisfactory way of reducing the public debt is to levy an exceptional tax on
private capital. For example, a flat tax of 15 percent on private wealth would
yield nearly a year’s worth of national income and thus allow for immediate
reimbursement of all outstanding public debt.”
Brian: What? How is this ‘satisfactory’
at all? Rob holders of assets other than government debt in order to repay the
holders of government debt. Why should the holders of government debt be so
privileged? Why should people whose ‘investment’ is dependent upon the ability
of governments to levy large taxes in the future be privileged over people who genuinely
seek to invest in wealth-generating, private commercial ventures? It seems
clear to me that the latter are more praiseworthy and useful investors than the
former.
Piketty: “First, it is always
very difficult to predict the ultimate incidence of a debt repudiation, even a
partial one—that is, it is difficult to know who will actually bear the cost.
Complete or partial default on the public debt is sometimes tried in situations
of extreme overindebtedness, as in Greece in 2011–2012. Bondholders are forced
to accept a “haircut” (as the jargon has it): the value of government bonds
held by banks and other creditors is reduced by 10–20 percent or perhaps even
more. The problem is that if one applies a measure of this sort on a large
scale—for example, all of Europe and not just Greece (which accounts for just 2
percent of European GDP)—it is likely to trigger a banking panic and a wave of
bankruptcies. Depending on which banks are holding various types of bonds, as
well as on the structure of their balance sheets, the identity of their
creditors, the households that have invested their savings in these various
institutions, the nature of those investments, and so on, one can end up with
quite different final incidences, which cannot be accurately predicted in
advance.”
Brian: True, but this
is only because banks are run on a fractional-reserve basis. This wouldn’t be a
problem if banks were on a 100% reserve basis. I outlined a plan to deal with
the government debt, without absolute repudiation, to stabilize the currency,
and to bring the banks to a 100% reserve basis, all at the same time, in a
previous post: (http://thinkingabouthumansociety.blogspot.ca/2013/03/five-political-imperatives-1-monetary.html).
I think that this solution would be infinitely better than Piketty’s draconian 15%
levy on private capital.
Piketty: “To be sure, one
argument in favor of inflation remains: compared with a capital tax, which,
like any other tax, inevitably deprives people of resources they would have
spent usefully (for consumption or investment), inflation (at least in its
idealized form) primarily penalizes people who do not know what to do with
their money, namely, those who have kept too much cash in their bank account or
stuffed into their mattress. It spares those who have already spent everything
or invested everything in real economic assets (real estate or business
capital), and, better still, it spares those who are in debt (inflation reduces
nominal debt, which enables the indebted to get back on their feet more quickly
and make new investments).”
Brian: No, it’s really not
that simple. In an inflation, prices do not all rise at the same time.
Inflation benefits those who are exposed to the new money flowing through the
economy earlier, while penalizing those who are only exposed to the new money
flowing through the economy later. The prime beneficiary of inflation is,
obviously, the person doing the money printing himself (usually the government,
could be a counterfeiter). Then, as that new money flows through the economy,
those whose selling prices rise before their buying prices are benefitted, at
the expense of those whose buying prices rise before their selling prices. What
this means is that those that have the closest economic relations with the
money printer (favoured financial institutions, defense contractors, receivers
of government subsidies in the case of the government as money printer) will
benefit at the expense of those whose economic relations are the most distant
with the money printer (those holding a lot of cash, those on fixed incomes,
people in areas of the economy remote from the needs of the money printer).
Inflation is a wild and arbitrary redistributive force that certainly does
deprive people of resources they would have spent usefully, just in a more
subtle manner than outright taxation.
Also, what’s wrong
with people who want to hold a lot of cash? What act of villainy are they really
committing? The fact that they are holding cash does not withdraw productive
resources from the universe: it just means that prices in general will fall
from what they otherwise would have been and business will carry on as usual at
these lower prices. Besides, cash reserves can be an important force for
financial stability. If companies kept higher cash reserves, they would be more
protected against bankruptcy during financial crises. What’s wrong with that?
You would think this would be something to be applauded after the scarring 2008
financial crisis.
Piketty: “If the global stock
of gold was static but global output increased, the price level had to fall
(since the same money stock now had to support a larger volume of commercial
exchange). In practice this was a source of considerable difficulty.” (Note 17)
Note 17: “An
often-cited historical example is the slight deflation (decrease of prices and
wages) seen in the industrialized countries in the late nineteenth century.
This deflation was resented by both employers and workers, who seemed to want
to wait until other prices and wages fell before accepting decreases in the
prices and wages that affected them directly. This resistance to wage and price
adjustments is sometimes referred to as “nominal rigidity.” The most important
argument in favor of low but positive inflation (typically 2 percent) is that
it allows for easier adjustment of relative wages and prices than zero or
negative inflation.
Brian: Hold on, why would wages have to fall if global output
increased? Global output can only increase if the productivity per unit of
labor goes up. But if the productivity of a kind of labor goes up, then the
employer can afford to, and will have to if they don’t want that labor to be
bid away from them, pay the worker higher real wages. For your ‘average’
worker, this will mean that if the global stock of gold is static but global
output increases, their nominal wages, in gold, will remain unchanged, while
the purchasing-power of each unit of gold will increase with the extra goods on
the market, thus increasing their real wages. The only reason why nominal wages
would have to fall, proportionate to the increase in global output, for the ‘average’
worker, given a static money supply, would be if the supply of labor increased
as dramatically as the supply of goods, that is, if there was constant
population growth at a fairly rapid rate. And yet, population growth has only a
weak correlation with increase in the production of economic goods, and once a
certain standard of living has been achieved, it tends to have a negative
correlation (for example, the low birth rates in wealthy western countries in
the present-day).
Of course, if the
economic progress that resulted in the increase in global output served to make
a worker’s skills less important, than their nominal wages would probably fall.
But this would be counterbalanced by the nominal wage rise of those workers
whose skills have become more important as a result of the economic progress.
Having to occasionally reduce the nominal wages (perhaps not even the real
wages) of workers whose skills have become less important as a result of
economic progress hardly seems like too big of a price to pay to avoid all of
the many evils of inflation (arbitrary redistribution, discouragement of thrift,
catalyst of the business cycle, falsification of economic (monetary) calculation,
risk of a hyperinflationary destruction of the currency, etc..).
Piketty: “The fact is that all
economists—monetarists, Keynesians, and neoclassicals—together with all other
observers, regardless of their political stripe, have agreed that central banks
ought to act as lenders of last resort and do whatever is necessary to avoid financial
collapse and a deflationary spiral.”
Brian: Except for Austrian
economists and libertarians, but I guess they are too ‘radical’ to be even
worthy of a mention by Piketty. Austrian economists point out that central
banking and the fractional-reserve banking system that it encourages are what
create an unstable financial system in the first place, and are what make sudden
monetary contractions possible. Inflation via credit expansion, according to
Austrian Business Cycle Theory, is the primary cause of the boom-bust business
cycle, and fractional-reserve banking serves to make the banking and financial
system vulnerable to major economic shocks. With a gold standard and 100%
reserve banking, banks wouldn’t need ‘lenders of last resort’, and sudden
economic crises would become much less common and severe than they are now. There
would be no major monetary contractions (deflations) because the money supply
is the gold supply, so unless people suddenly decided to shoot their gold bars
into space, there is no reason why the money supply should contract. By
contrast, under a fractional-reserve system, the lending policies and financial
situations of the commercial banks can result in either sudden expansions or
sudden contractions of the money supply.
In this light, the
contention that it is a good idea that central banks act as lenders of last
resort in a financial system characterized by boom-bust cycles and
fractional-reserve banking, promoted by the institution of central banking and
fiat money itself, takes on a different character. It is akin to a thug
shooting you in the leg, and then asking you whether you would like him to try
to patch you up with his first aid kit or not. Given that you have already been
shot in the leg, agreeing to the first aid treatment is probably a good
strategy. Of course, it would have been better if you hadn’t been shot in the
leg in the first place, because then the first aid treatment wouldn’t have been
necessary. Central banks shoot their economies in the leg, and then they try to
treat the wound with their ‘lender of last resort’ first aid kits. The first
aid is perhaps appreciated, but it would be much better if the central banks
hadn’t existed in the first place.
Piketty: “Central banks are
powerful because they can redistribute wealth very quickly and, in theory, as
extensively as they wish. If necessary, a central bank can create as many
billions as it wants in seconds and credit all that cash to the account of a
company or government in need. In an emergency (such as a financial panic, war,
or natural disaster), this ability to create money immediately in unlimited
amounts is an invaluable attribute. No tax authority can move that quickly to
levy a tax: it is necessary first to establish a taxable base, set rates, pass
a law, collect the tax, forestall possible challenges, and so on. If this were
the only way to resolve a financial crisis, all the banks in the world would
already be bankrupt. Rapid execution is the principal strength of the monetary
authorities.”
Brian: The ability to
rapidly plunder the economy, without any democratic deliberation or oversight,
is an ‘invaluable attribute’? Perhaps to the government, the central bankers,
and their crony friends, but it is certainly not ‘invaluable’ to me. In fact, I
would value the opportunity to destroy this authoritarian monstrosity very
highly. It’s hard to see how this enormous power wielded by central banks fits
in with democratic theory, or with the idea of ‘government by laws, not by men’.
I’m sure the apologists could come up with something, but for those armed only
with common sense, a central bank is pretty clearly an authoritarian and
arbitrary institution.
Piketty: “How did Europe come to
create—for the first time in human history on such a vast scale—a currency
without a state?”
Brian: Um, it didn’t? Gold
and silver were currencies ‘without a state’ that lasted for millennia, and
they were far more internationally accepted than the Euro.
