Piketty’s Neoliberal Capital

by Joseph M. Firestone, New Economic Perspectives

Let’s get this out of the way. I agree with Piketty’s overall conclusion in Capital about inequality, that the distribution of wealth in many industrial nations is highly unequal; wealth concentration has been increasing; and there is a high likelihood that the extent of wealth inequality will continue to grow unless appropriate fiscal policy is used to reverse current trends.

Follow up:

However, I don’t agree with:

  • the framework he uses to define and specify “capital”;
  • the way he looks at Government finance and net worth; and
  • the fiscal policy proposals he offers to reduce Inequality and put a stop to current trends of growth in the capital to income ratio.

Defining and Specifying “Capital”

Instead of beginning with what Piketty says about “capital”, I offer an alternative conception of “capital” coming from the literature on Sustainability Theory, and in particular from the work of my frequent collaborator and co-author, Mark W. McElroy (McElroy, 2008, McElroy and van Engelen, 2012). This alternative framework will let me set Piketty’s framework in a broader context.

Following developments in sustainability theory (Costanza and Daly, 1992, p. 38, and Porritt, 2005, p. 112), McElroy (2008, p. 95) defines “capital” this way:

Capital is a stock of anything that yields a flow of valuable goods or services into the future.

You can see from the definition that basic to it is the distinction between a flow of goods and services during a time period, and an accumulated stock of those goods and services at the end of that time period. Then, it is that stock, which through various kinds of actions and interactions with situational contexts, produces a further flow of valuable goods and services into the future, resulting in further accumulation of stocks, resulting in further flows and so on.

McElroy goes on, following Porritt (2005, p. 112), to distinguish five types of capital stocks produced by flows of activity. The first is “natural capital.” He follows Hawken, Lovins, and Lovins’s definition of this type (1999, p.151):

Natural capital can be viewed as the sum total of the ecological systems that support life, different from human-made capital in that natural capital cannot be produced by human capital [or by humans].

McElroy (2008, p. 96) then distinguishes four types of human made or “anthro capital.”

1. financial capital,

2. human capital,

3. social capital, and

4. constructed, or built, capital.

The meaning of financial capital is clear. The meanings of the other three types of anthro capital he defines this way (p. 97).

1. Human Capital

Human capital consists of individual knowledge, skills, experience, health, and ethical entitlements that enhance the potential for effective individual action and well-being . . .

2. Social Capital

Social capital consists of shared knowledge and organizational resources (e.g. formal or informal networks of people committed to collaborating with one another with the intent of achieving common goals) that enhance the potential for effective individual and collective action and well-being in human social systems . . .

3. Constructed Capital

Constructed capital (or ‘built’ capital) consists of material objects and/or physical systems or infrastructures created by humans for human benefit and use. It is the world of human artifacts, in which human knowledge is also embedded. Constructed capital includes instrumental objects, tools, technologies, equipment, buildings, roads and highway systems, power plants and energy distribution systems, public transportation systems, water and sanitation facilities, telecommunications networks, homes, office buildings, etc.

We’ll see shortly, that Piketty decides to exclude “human capital” from his analysis of inequality. I’ll criticize that decision below. He also excludes, apparently, “social capital”, too, and he lumps natural capital in with constructed capital, in his “non-financial capital” category.

One question to keep in mind in evaluating his work is: how can it be relied upon as an analysis of wealth inequality, if he leaves aside two of five types of capital, and fails to clearly distinguish a third? Now let’s move to Piketty’s definition and specification of the term “capital” itself (See pp. 46 – 51):

But what is capital? . . . For now it will suffice to make the following points: First, throughout this book, when I speak of “capital” without further qualification, I always exclude what economists often call (unfortunately, to my mind ) “human capital,” which consists of an individual’s labor power, skills, training, and abilities. 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. . . .

So, Piketty’s capital excludes “human capital”, but includes natural capital that can be owned and exchanged on some market, but excludes natural capital used by humans which cannot. I’m not sure what he means by “professional capital”, but there’s no indication that he includes the social networks within organizations that are critical to their functioning. There’s also no indication that he includes organizational culture, or that he includes the social networks of individuals, which are certainly a dimension of “social capital”.

Piketty’s definition of capital is one tied to markets and accounting (i.e. He speaks of “assets” owned and exchanged). Clearly, this definition of capital is biased towards the ontological categories of capitalism, rather than the ontological categories of sustainability theory. That’s why he looks only toward financial capital, constructed capital, and “owned” natural capital as the bases for his analysis of wealth inequality, and excludes human capital and social capital, an aspect of which is political capital.

Human capital can’t be traded in a market, so from Piketty’s point of view it isn’t capital.
But clearly it does have an important role in generating future flows of goods and services, so from the broader point of view of sustainability theory, it certainly is capital, and wealth as well. The same can also be said of social capital, and of natural capital that cannot be traded on a market. So, Piketty’s conceptual framework for capital excludes many important types of capital.

He continues:

Nonhuman capital, which in this book I will call simply “capital,” includes all forms of wealth that individuals (or groups of individuals) can own and that can be transferred or traded through the market on a permanent basis. In practice, capital can be owned by private individuals (in which case we speak of “private capital”), or by the government or government agencies (in which case we speak of “public capital”). There are also intermediate forms of collective property owned by “moral persons” (that is, entities such as foundations and churches) pursuing specific aims. . . . .

So, the distinction between “public,” or Government, capital, and “private” capital is fundamental for him, while he acknowledges the existence of “moral” persons. He doesn’t point out however, that these ‘moral persons” are “capital” themselves in that they generate a flow of goods and services accumulating into stocks, and that they are “unowned” by individuals, as is the Government itself.

Nor does he mention, while equating “capital” and “wealth,” that there is some “capital,” other than human capital, which cannot be traded in any market, even though it is “owned.” An example of this is the capability of some Governments to create high-powered reserves virtually costlessly and in whatever quantities they wish.

This capability can be delegated to private agents of the Government being tightly regulated by a Government agency, as it is in the US. It can be self-constrained by the governments involved; but it cannot be transferred to any other entity in an identifiable market, even if it can be alienated by political means (as the Eurozone nations have done).

Another example, is the various social networks inside the Government that enable it to function. They are social capital, but does Piketty consider them as part of Government assets? Still another stock of Government wealth varying in degree over time is the legitimacy of the national Government, the social credit it has to rule, clearly a form of social capital that the Government cannot alienate by selling it in any market, but can degrade through poor, unjust performance.

Moving on with Piketty’s capital theory:

To summarize, I define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market. It consists of the sum total of non-financial assets (land, dwellings, commercial inventory, other buildings, machinery, infrastructure, patents, and other directly owned professional assets) and financial assets (bank accounts, mutual funds, bonds, stocks, financial investments of all kinds, insurance policies, pension funds, etc.), less the total amount of financial liabilities (debt). If we look only at the assets and liabilities of private individuals, the result is private wealth or private capital. If we consider assets and liabilities held by the government and other governmental entities (such as towns, social insurance agencies, etc.), the result is public wealth or public capital. By definition, national wealth is the sum of these two terms:

National wealth = private wealth + public wealth.

What happened to the distinctions Piketty makes between “moral persons” owning collective property, and private wealth and public wealth? Isn’t the property of these collectives part of national wealth too?

In addition, this definition excludes private capital/wealth, “moral person” capital/wealth, and government capital/wealth that cannot be traded on any market, even though such capital/wealth qualifies as “. . . a stock of anything that yields a flow of valuable goods or services into the future.” So, it follows that neither private wealth, nor “moral” person wealth, nor Government wealth is limited only to the net assets – liabilities that can be traded in a market. Piketty doesn’t include this kind of wealth because the conceptual categories he uses in his analysis of inequality are the neoliberal categories of capitalist economics.

In any event, saying something is true “by definition,” doesn’t make it true in the real world. One still has to apply an accounting identity to the reality and see if it fits its purpose, which in this case is to play a role in developing a true picture of inequality. I believe that while national wealth may equal the sum of private wealth + public wealth + “moral person” wealth, by definition, I also think that this “definition” is not “true” if wealth includes only financial and constructed capital and neglects human capital, social capital, and much of natural capital.

So, when Piketty looks at his evaluations of national wealth, his identity doesn’t hold because his specification and measurement of private, public, and “moral person” wealth is seriously incomplete. In other words, it’s often not the accounting identity that counts in reaching the truth, but how you interpret its terms.

Piketty next says:

Public wealth in most developed countries is currently insignificant (or even negative, where the public debt exceeds public assets). As I will show, private wealth accounts for nearly all of national wealth almost everywhere. This has not always been the case, however, so it is important to distinguish clearly between the two notions.

I really don’t agree with this at all. And I don’t think Piketty could possibly draw such a conclusion if he had not largely excluded three of the five forms of capital from his analysis, and if he had not tacitly collapsed the wealth of “moral persons” into the “private” capital category. Below, I’ll give one very compelling reason why Piketty’s conclusion about national wealth is certainly wrong in many countries, and can easily be made wrong in most of them. In addition, I also think that Piketty hasn’t correctly evaluated the variety of real property owned by Government agencies of all kinds and “moral persons,” and that he is far too quickly concluding, based on large government debt totals, that the value of the full range of Government assets doesn’t exceed those liabilities.

Piketty is aware that a weakness in his analysis of national wealth may lie in his failure to include a proper valuing of intangible assets and the future stream of goods and services that may flow them, and the following passages may be seen as an attempt by him to fend off criticism based on that idea:

To be clear, although my concept of capital excludes human capital (which cannot be exchanged on any market in non-slave societies), it is not limited to “physical” capital (land, buildings, infrastructure, and other material goods). I include “immaterial” capital such as patents and other intellectual property, which are counted either as nonfinancial assets (if individuals hold patents directly) or as financial assets (when an individual owns shares of a corporation that holds patents, as is more commonly the case). More broadly, many forms of immaterial capital are taken into account by way of the stock market capitalization of corporations. For instance, the stock market value of a company often depends on its reputation and trademarks, its information systems and modes of organization, its investments, whether material or immaterial, for the purpose of making its products and services more visible and attractive, and so on. All of this is reflected in the price of common stock and other corporate financial assets and therefore in national wealth.

What degree of precision is attached to phases such as: “. . . taken into account by way of the stock market capitalization of corporations,” and assertions such as: “All of this is reflected in the price of common stock and other corporate financial assets and therefore in national wealth”? Does Piketty really expect us to believe stuff like this? Does he really think that the stock market price/value of a corporation’s stock measures in any accurate way the immaterial assets of a corporation such as the social and natural capital assets it claims, or the value of the future stream of goods and services that are likely to emanate from those immaterial assets?

I have to admit I’ve seen these kinds of claims often enough. But, they are pure Hayekian nonsense, reflecting the view that the market is the best tool we have for valuing immaterial assets, rather than the only tool that, in their infinite wisdom, neoliberal economists look at. In statements like these, the problem of finding ways of valuing intangible assets and evaluating those assets on all fours with financial and material assets is brushed aside with a neoliberal platitude about the stock market value of a company being a valid indicator of its actual value.

Piketty seems to recognize that there is a problem with this kind of reasoning when he follows with:

To be sure, the price that the financial markets sets on a company’s or even a sector’s immaterial capital at any given moment is largely arbitrary and uncertain. We see this in the collapse of the Internet bubble in 2000, in the financial crisis that began in 2007– 2008, and more generally in the enormous volatility of the stock market. The important fact to note for now is that this is a characteristic of all forms of capital, not just immaterial capital. Whether we are speaking of a building or a company, a manufacturing firm or a service firm, it is always very difficult to set a price on capital. Yet as I will show, total national wealth, that is, the wealth of a country as a whole and not of any particular type of asset, obeys certain laws and conforms to certain regular patterns.

So, let me see if I understand, the value of the private sector’s “immaterial capital at any given moment is largely arbitrary and uncertain. . .” and we also have the same situation with all other kinds of capital; and yet even if we can’t accurately measure the value of private capital at any given point in time, we can still subject to empirical test law-like propositions about regular wealth patterns found in these values. Does that seem like a bit of contradiction to readers of this post, or am I alone in thinking that if you can’t value capital/wealth, then you also can’t test generalizations about how these values are related to other quantities or economic outcomes?

And, of course, if you can’t test them to see if they stand up to challenges, then you can’t very well rationally decide, as Piketty does, that they are fundamental “laws” of capitalism. They may be accounting identities, true by definition alone. But that doesn’t mean that they are true propositions when applied to the real world.

To provide good reasons to believe they are, one has to measure “wealth” with a fair amount of accuracy. You can’t do that while ignoring two categories of capital, a large part of a third, and also making mistakes in evaluating the categories you do decide to work with fully. We’ll turn to the most serious of those mistakes now.

The Issues of Government financing and Net Worth

On Government financing, Piketty (p. 540), says:

There are two main ways for a government to finance its expenses: taxes and debt. In general, taxation is by far preferable to debt in terms of justice and efficiency. The problem with debt is that it usually has to be repaid, so that debt financing is in the interest of those who have the means to lend to the government. From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them. . . . At the moment, the rich countries of the world are enmeshed in a seemingly interminable debt crisis.

There may be two main ways for Governments like Piketty’s France and other members of the Eurozone who have given up their currency issuing authority to the ECB, to finance their expenses, but other nations of the world who employ non-convertible fiat currencies, with floating exchange rates, while seeing to it that they owe no debts in currencies they cannot issue, don’t actually finance their spending through taxes and debt. Instead, they finance spending, deficit or otherwise, through keystroking reserves into private accounts. Taxes and debt, on the other hand, function to a) regulate interest rates, b) hide the reality of Government’s ability to spend while creating money out of thin air, c) drive the value of the currency, d) counter the possibility of inflation, and e) minimize unwanted or undesirable behavior.

In nations such as the UK, Japan, the United States, Australia, New Zealand, Canada, Denmark, Sweden, Norway, and many others, the Government can generate high-powered fiat money at will. That doesn’t mean it should generate it in overwhelming quantities or through indiscriminate “helicopter drops”, since deficit spending beyond full employment would cause demand-pull inflation. But the fact that it can act this way shows that 1) whatever debts are incurred by such Governments can always be repaid when they fall due, however large such debts and the interest “burden” on them is, and 2) such Governments no longer need to issue debt instruments at all. Unless, of course, they want to maintain the fiction that there is a necessary financial constraint on their potential spending, beyond the myriad impacts of such spending, including possible inflation, on their economies.

I have to say that I find it astonishing that Piketty’s discussion of public debts doesn’t distinguish between fiat sovereign nations like the ones I’ve listed, and the nations of the Eurozone. Enough research in economics has surely been done prior to his book publication, for him to be cognizant of the distinction and the differences between currency issuing governments and currency using governments. So, why didn’t he address the distinction and explain why he thinks it is not relevant to his discussion of public debt in rich nations?

It’s almost as if he deliberately avoided this distinction because he didn’t want to discuss the obvious implication that one option for dealing with Eurozone debt burdens is for the various member nations to just withdraw from it. Nor did he discuss the further implications that they can then reclaim their national currencies, and use their reclaimed fiat sovereignty to increase deficit spending benefiting the poor and the middle class. For Piketty, the options of taxation, inflation, and austerity are the only methods of dealing with public debt that are worth discussing. As we’ll see below, this limits his policy proposals in a critical way.

On the issue of the net worth of governments Piketty says:

. . . This shows that the question of public debt is a question of the distribution of wealth, between public and private actors in particular, and not a question of absolute wealth. The rich world is rich, but the governments of the rich world are poor. Europe is the most extreme case: it has both the highest level of private wealth in the world and the greatest difficulty in resolving its public debt crisis— a strange paradox. . . .

And also:

I begin by recalling the structure of national wealth in Europe today. As I showed in Part Two, national wealth in most European countries is close to six years of national income, and most of it is owned by private agents (households ). The total value of public assets is approximately equal to the total public debt (about one year of national income), so net public wealth is close to zero. . . .

Again, Piketty doesn’t recognize the capital/wealth comprised of natural capital, human capital, and social capital and also lumps in Eurozone currency using nations, with other rich nations whose Governments can issue their own currency. He doesn’t recognize that the net worth of Governments sovereign in their own fiat money is far different from that of currency using nations.

This is true if we ask a simple question: Looking at the assets and liabilities of fiat sovereign Governments, how much monetary value ought we to attribute to the Government’s continuing capability to create as much money as it needs to meet its mandated spending obligations, however great those turn out to be? I think that capability is a current asset that at least covers all of the current liabilities of such nations, leaving the current net worth of such a national government equal to the sum of its other assets, which in the case of the US Federal Government yields a net worth of many trillions of dollars.

In fact, the capability can be used to create enough reserves to exceed all current liabilities as is easily illustrated by supposing that the US Treasury used its legal authority to mint a 1 oz. $60 Trillion platinum coin and deposit it at the Federal Reserve. The Fed would then credit Treasury accounts and the result would be that $60 Trillion in reserves would be added to the primary Treasury spending account at the Fed. That sum would exceed current US liabilities subject to the debt limit by $42.5 Trillion, and the current net worth of the US would instantly rise to the sum of its prior asset value plus $42.5 Trillion.

It’s easy to see from this, that at any point in the future, the capability of a nation to create fiat coins, currency and reserves covers at least all the current liabilities of such nations, leaving their net worth equal to the value of their other current assets. If this is true, then it is an accounting mistake to exclude this capability as an asset when assessing the balance sheet of a fiat currency issuing government.

It is also true that in excluding this capability from his analysis, as well as his evaluation of the social, human, and natural capital held by national governments Piketty has committed a serious error in estimating the net worth of all governments, but, in particular, the net worth of fiat currency sovereign governments. That error has implications for his policy proposals, as we will see.

Policy Proposals to Reduce Inequality and Reverse Current Trends of Growth in the Capital to Income Ratio.

None of what I’ve said above should lead us to think that there isn’t a serious problem of both absolute and increasing wealth inequality today. Piketty’s data certainly indicates that financial inequality and inequality in non-financial constructed capital are increasingly serious problems that reinforce each other, create increasing political inequality and threaten democracy. Other sources, such as OECD, and Credit Suisse, also agree that inequality is an increasingly serious problem. The experiences of most of us who pay attention to politics are painfully aware of the impact of inequality in that sphere.

Piketty sees the inequality problem from the viewpoint of the inequality r > g, where “r” is the annual rate of return on capital and “g” is the annual rate of economic growth. He correctly points out that as long as that inequality holds, there will be increasing economic stagnation and concentration of wealth unless governments use fiscal policy to shift results to a state in which r < g. One way to get to r < g, is to reduce r until it is lower than g. One can do that through inflation, or one can do it through taxation. Piketty prefers taxation, because the distributional consequences of a progressive tax on capital can be more clearly anticipated than the results of deliberately inducing inflation.

Piketty proposes a Global Tax on Capital, which he acknowledges is a utopian idea, but also one that establishes a reference standard progressives can work towards. Here’s what he says (pp. 516 – 517)

. . . To my mind, the objective ought to be a progressive annual tax on individual wealth— that is, on the net value of assets each person controls. For the wealthiest people on the planet, the tax would thus be based on individual net worth— the kinds of numbers published by Forbes and other magazines. (And collecting such a tax would tell us whether the numbers published in the magazines are anywhere near correct.) For the rest of us, taxable wealth would be determined by 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. So much for the basis of the tax. At what rate would it be levied? One might imagine a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 and 5 million, and 2 percent above 5 million. Or one might prefer a much more steeply progressive tax on the largest fortunes (for example, a rate of 5 or 10 percent on assets above 1 billion euros). There might also be advantages to having a minimal rate on modest-to-average wealth (for example, 0.1 percent below 200,000 euros and 0.5 percent between 200,000 and 1 million).

And (pp. 518 – 519):

What tax schedule is ideal for my proposed capital tax, and what revenues should we expect such a tax to produce? Before I attempt to answer these questions, note that the proposed tax is in no way intended to replace all existing taxes. It would never be more than a fairly modest supplement to the other revenue streams on which the modern social state depends: a few points of national income (three or four at most— still nothing to sneeze at). The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.

Why is the goal of transparency so important? Imagine a very low global tax on capital, say a flat rate of 0.1 percent a year on all assets. The revenue from such a tax would of course be limited, by design: if the global stock of private capital is about five years of global income , the tax would generate revenue equal to 0.5 percent of global income, with minor variations from country to country according to their capital/ income ratio (assuming that the tax is collected in the country where the owner of the asset resides and not where the asset itself is located —an assumption that can by no means be taken for granted). Even so, such a limited tax would already play a very useful role.

And then he names and discusses three very important aspects of such a role: 1) generating information about the distribution of wealth; 2) providing much more accurate statistics on “. . . the global distribution of financial assets, and in particular of the amount of assets hidden in tax havens. . . . ” and 3) forcing “. . . governments to clarify and broaden international agreements concerning the automatic sharing of banking data.”

There is much more on the details of such a tax, and also a recognition that a world-wide global tax on capital of this sort isn’t feasible right now. However, Piketty does call for attempts at regional implementation of such a tax, especially in the European Union to constrain the divergence of r and g.

Apart from treating the problem of growing inequality with progressive wealth taxation, the other side of the r > g coin is that one could attempt to increase the annual growth rate of modern economies until it is greater than g. Piketty, however, believes that such an approach is unsustainable at present, when clear limits to growth caused by resource, environmental, and climate factors are in view. Piketty says he expects that economic growth in the 21st Century is likely to more closely approach the norm in the 19th century, than it will the unusually rapid growth in the 20th century. So, he thinks it unlikely that r < g (that is, g > r) can be reached and sustained.

I disagree with Piketty’s argument that reducing inequality ought to focus on implementing progressive taxation alone or even mainly, for these reasons.

  • First, Piketty doesn’t consider the possible role of heavy government deficit spending in directly increasing, multiplying, and maintaining g > r.
  • Second, even if getting to the point where g > r isn’t possible using deficit spending alone, it still may be possible to get there with an approach that combines increased deficit spending with a highly progressive tax on great wealth that lowers the rate of return on capital.
  • Third, even if a combined approach to getting to g > r is necessary, there’s no apparent necessity for both the increased deficit spending and the progressive tax on wealth aspects to be implemented at the same time. Governments can pursue increased deficit spending initially and for a considerable time with progressive wealth taxation coming later, if necessary for achieving social and political ends (it is never needed to “fund” government), after economies are at full employment and the effects of extreme inequality are alleviated by government programs.
  • And fourth, I’m also skeptical because I think Piketty is arguing from a position that holds that today’s levels of high public debt must be handled in traditional ways.

About those high levels of debt, he says in part (pp. 540 – 541):

How can a public debt as large as today’s European debt be significantly reduced? There are three main methods, which can be combined in various proportions: taxes on capital, inflation, and austerity. An exceptional tax on private capital is the most just and efficient solution. Failing that, inflation can play a useful role: historically, that is how most large public debts have been dealt with. The worst solution in terms of both justice and efficiency is a prolonged dose of austerity—yet that is the course Europe is currently following.

So, Piketty thinks that large public debts of governments are a problem for them, and also that 1) they must be reduced; and 2) that the above three methods are the primary ones that can be used for reducing them. Given the high levels of public debt in most nations today, and the need he perceives to implement an exceptional tax on private capital to reduce debt, it’s no wonder that he seems to think that deficit spending on the part of governments can’t drive g to a level high enough to exceed r.

However, Piketty is wrong in thinking that all governments a) must reduce their debts; and b) can only contemplate reducing it with one of the three methods he names above. This may be true for governments that don’t have non-convertible fiat currencies with floating exchange rates and no debts in foreign currencies, but it is not true for those nations that issue such fiat sovereign currencies.

As I’ve pointed out, fiat sovereign governments can always repay public debts and other obligations, no matter how large, without being driven into involuntarily insolvency. So, they can always roll over and expand their stock of debt obligations. In fact, their debt obligations are private sector assets, but are never liabilities to the government that cannot be repaid. So, Government debt is not debt, “as we know it”!

And if they wish to reduce their debt for political reasons, then they can continue deficit spending, and cease to roll over their debts, while also repaying them as they fall due. All without insolvency because they can create reserves at will. How they want to handle their debts is up to them, they can roll it over, pay it down, or do both, but they need not restrict their policy by pulling back on the deficit spending they need to create and sustain g > r, so long as they target that deficit spending properly.

This is a long essay on the flaws I see in Piketty’s Capital, and I don’t want make it any longer, so I won’t rehearse the details of arguments showing that fiat sovereign governments don’t have to concern themselves with debt levels or with debt-to-GDP ratios, and also, that if they want to do so, they can just pay down levels of debt by keystroking reserves unaccompanied by debt issuance. Instead, I’ll leave the details of this to books by Warren Mosler, L. Randall Wray, and myself, which I encourage readers puzzled by my claims about fiat money sovereignty to read.

Now, what about nations without sovereign fiat currencies such as those of the Eurozone? They have a choice. They can stay in the Eurozone, and face Piketty’s difficult choices among exceptional taxes on capital, inflation, or and/or austerity, and a long-term moderate tax on individual wealth constraining the growth of r relative to g, or they can withdraw from the Eurozone, recapture their own currency, and use the recaptured policy space to run deficits to drive their growth rates high enough to outpace r and to target producing benefits for the 99%.

So, the conclusion which presents itself is this: to all the costs of membership which nations of the Eurozone and their citizens have experienced since the crash of 2008, one must now add the likely cost that by staying in the Eurzozone and selecting among the alternatives Piketty mentions, they will escape neither the burden of currency-user public debt, nor growing inequality in their nations. And if, on the other hand, they fail to select among these alternatives, while still remaining in the Eurozone, then the dynamics of r > g suggest that their experiment will end with the kind of stratified society that characterized Europe during most of the 19th century, along with the end of political democracy in Europe. So, what is to be done if you want democracy?


Piketty’s work extends and strengthens the conclusion that inequality in financial and constructed capital is accelerating and that the statistical trends he maps suggests that we will not overcome its consequences economically, socially, culturally, and above all politically, without strong government intervention to reverse current trends. He advocates more progressive taxation but doesn’t give attention to the possible effects of much more vigorous government deficit spending across the world. I think the primary key to the problem of inequality lies in dispelling the fairy story that governments cannot deficit spend to attain and maintain full employment at a living wage with little inflation over a long period of time.

That fairy tale has its roots in the oil crises of the 1970s, and the rise in neoliberalism as a reaction to the inflation and other problems experienced in that decade. Neoliberalism has occupied globalization efforts, political democracy, health care and nearly every aspect of our lives in modern consumer societies. Its occupation of democracies is leading to their subversion and evolution, now nearly completed, to plutocratic oligarchy.

To attack the inequality that is the result and support of advancing oligarchy, people need to reject neoliberalism and embrace economic doctrines that don’t limit their possibilities to taxation proposals that will clearly take many years to implement, and many years after that to make a dent in the inequality problem. So much, I think for Piketty’s proposals.

As for my proposal for greatly increased deficit spending, political victories are needed that add to the financial wealth and security of the 99%. In the US, policies such as enhanced Medicare for All, a Federal Job Guarantee (JG) at a true living wage with full fringe benefits, a doubling of Social Security benefits, free public education at all levels, and debt jubilees for the victims of the crash of 2008 are all necessary.

In addition, people also need economic victories that will allow them to create constructed capital that they can control through cooperative/collaborative forms of organization, of the kinds we see in the cooperative movement. They also need the social capital of the 1% diminished through the breakups of the big banks, their lobbying arms, and associated think tanks, and prosecutions for those whose frauds were a major cause of the crash of 2008, and which continue to threaten the stability of the world economy even today.

To get this done, there is a need for big political victories even larger than the victory in 2008 which created an opportunity for major change that was squandered by the President, his allies in Congress, and his cynical opposition. And next time it is vital that we be much more sure of who it is that we are electing to architect and steward the big changes we need. There is no guarantee that the persons we elect will act as we would like them to, but the key here is to elect people who will come forward with very specific policy agendas about what they will work to get done, and to avoid voting for those who deliver vague shibboleths and refuse to be tied down, because they must remain flexible to facilitate compromise in the legislatures.

Democracy is too far gone to tolerate half measures. Prosperity and greater equality for the 99% must be achieved in the short run. And the only way that might be done is to make politicians commit to policies that will deliver concrete benefits to the 99%, and to agree to pass nothing that will help the 1% in their endeavors. They don’t need to be helped with additional profits. And they don’t need tax “incentives” or subsidies to persuade them to “create jobs.” Governments can directly create jobs at a living wage until sales increase enough that the “job creators” decide that they can profit from actual business investments rather than just financial games. And the 1% have plenty of wealth already, the problem is that they use it to block everyone else from having decent, rewarding lives.

The way to stop that is to go after their social/political capital, increase the 99%’s financial capital and constructed capital so that their financial influence increases, and also increase the human capital of the 99%, so they can understand the issues that effect them better. Finally, we must also stop the degradation of the climate and the environment, both because it destroys our most important patrimony, and also because it is being destroyed for only one reason, and that is so that the financial, constructed, social/political (including especially the power) capital of the 1% over the rest of us is continually increased.

We need to put a stop to all that quickly, and it won’t happen in the near term through a Global Tax on Capital. We need to use other methods to redress this balance and we need to do it fast, before everything of value is lost to us!

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