Misdirection: Galbraith on Piketty’s Book on Capital

by Philip Pilkington

Article of the Week from Fixing the Economists

Note:  This article was written in April 2014.

I’ve been waiting for this for some time but now Jamie Galbraith has come out and provided an extensive discussion of Thomas Piketty’s new book Capital in the Twentieth Century. While I haven’t yet read Piketty’s book its difficult not to have heard about it given how much of a response it is getting among economics types.

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The moment the hype started I thought that something was amiss. In 2012 Galbraith and his team published an extensive empirical investigation of income distribution using new datasets that they constructed. Beyond the interview I did with Galbraith and a few other articles and the like the release of the study didn’t get much play among economist types. The reason should be obvious: whereas Galbraith arrived at heterodox conclusions, Piketty’s are mostly orthodox.

As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance.

It is new types of income that are tied to asset price valuations that are important to explain rising inequalities. Galbraith makes this clear when he writes that what is really at issue today is a rise in rents. Piketty remains blind to this because he has a fairly woolly notion of what exactly constitutes ‘capital’ (the start of Galbraith’s piece discusses the implications of some aspects of the Capital Controversies).

If Piketty had distinguished between earned and unearned income — between income generated as a result of productive physical plant and income generated from financial assets — he would have been able to discuss his findings much more consistently. But unfortunately he does not and this, to Galbraith, renders his analysis confused.

Galbraith also makes clear that Piketty’s policy proposals — mostly dealing with higher taxes on the rich — are probably not fit for purpose in a globalised, financialised economy. Rather Galbraith asks us to consider alternative approaches.

If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.

I think that Galbraith is on the right track here. More importantly from my perspective, however, is that Galbraith’s analysis provides us with a much more immediate way of focusing the discussion. In order to get people to understand what is going on in the economy these days we need to point the finger time and again at the financial sector. The general public already sense that the main purpose of Big Finance is to redistribute income and this needs to be supported by the opinions of those who claim to be experts.

Ultimately, Piketty’s work will not refocus the opinions of the experts in this regard. And that is unfortunate. Rather it will speak to a worn-out left that is unable to properly articulate itself. While its base intuitively sense that something is up with Big Finance, policymakers and experts continue to talk in outmoded tones.

From what I have seen so far the logical outcome of Piketty’s book is the government of Francois Hollande — with its insistence on high marginal tax rates for the sake of high marginal tax rates; an economic policy based on envy with no real productive aspect. And the logical outcome of the government of Francois Hollande will be, if the Socialist Party in France is unable to reformulate itself, the rise of the Front National.