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20140705 Capital in XXI Century



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This book contains a few simple ideas illustrated by significant amount of graphs and contemplations that all ends with on big and fearless recommendation.

The simple ideas are:
• Inequality of private wealth is very bad for society and could lead to cataclysm.
• This inequality is huge and constantly growing because there is the “first law of capitalism: return on capital if growing faster then rate of economic growth.”
• The mechanism of inequality growth includes inheritance, that is playing bigger and bigger role in the level of capital available to individuals, and unequal returns on labor when top earners make disproportionally higher compensation then regular people.
• However despite all these elements of ugly capitalism there is no real alternative to maintain viable economy without necessary evil of private property and unequal returns.

The suggestions therefore are limited and do not included such decisive measures, actually implemented by Marxists of the past, as complete confiscation of private property and physical elimination of capitalists and high earners. It is just mild global tax of 80% with objective not to raise revenues, but rather limit inequalities and assure stability of society.


Part One: Income and Capital

1. Income and Output
It starts with the story of bloodily suppressed strike of South African miners with statement that cause was not that much low pay of miners, as extremely high pay to top managers. From this point author rejects idea of market provided division of income between labor, capital, and management as being optimal without any attempt to provide some logic why it is not, and presents a question of how it should be divided in ideal society.

Then it goes to contemplate a pretty obvious fact that split between labor and capital is not stable and tend to change over long period of time with capital getting higher share in peaceful time while labor getting higher share as result of wars, revolutions, and massive government intervention into economy.

A number of economic definitions follow with very important for this book caveat that capital is defined as the same as wealth and excludes human capital, which brings us back to XIX century Marxist understanding of economy. Also everything “national” is defined as “national”=”public”+ “private” whether it is income or wealth or whatever.

The final statement defined as fundamental law of capitalism is that national income = capital * rate of return on capital or a=b*r.

After that there is a historic review of development of national accounts and changes in distribution of population and production by continents over last 3 centuries starting with Asia decline and raise of Europe in 17xx and Europe decline and raise of Asia in 20xx. There is an interesting statement at the end about inequality of global income distribution in relation to output.

Then comes review of idea of convergence with inference that an optimistic idea of growing convergence of rich and poor areas is not fully realistic because it assumes free movement of capital and labor which could not be a case with poor countries alternating between periods of confiscation of foreign capital and protecting private property.

Finally the chapter ends with very interesting statement for guy who excluded human capital from his analysis: the conversion occurs and continues to be possible most of all via knowledge transfer from rich countries to poor.

2. Growth: Illusions and Realities
The main point here is expectation of low growth for foreseeable future. This includes both population growth and economic growth. The review of demographic growth and its trends comes up with conclusion that it will stop or even turn negative everywhere except Africa. From point of view of equality, the demographic growth is considered as positive because it divides wealth of rich between many children. After this author moves to economic growth demonstrating that it was huge in western world with industrialization. Author provides trivial, if somewhat unusual insight that purchasing power grew in such highly diverse way for different goods and services, with many new goods and services created, that any attempt to compare current and past are deeply flowed.

After analyzing demographic growth, author moves to the main point: slowed growth would lead to major social change by increasing value of inheritance and diminishing opportunities for self-starters. There are a few graphs with various projections all of them showing a slow growth. At the end of chapter author goes into discussion of monetary issues tracing money from stability of gold standard of XIX century to fiat money and correspondent inflation of XX century. The note about disappearance of specific money sums cited in fiction literature used as prove of inflation is somewhat touching.
Part Two: The Dynamics of the Capital/Income Ratio

3. The Metamorphoses of Capital
This chapter is about change in capital structure overtime from mainly land + residential to mainly residential + other. Interestingly enough, author does not go into details of what is this “other”. Quite a bit of space dedicated to foreign capital investment with inference that it did not play such a significant role in development of western countries. It follows by review of relationship between public and private debt and capital in Britain and France. The interesting side effect of government taking over money supply in XX century was annihilation of rentier – the guy who financed public debt with his savings. At the end author makes a point that despite change in capital structure its total amount in relation to income did not change.

4. From Old Europe to the New World
At first author provides similar analysis of capital change for Germany and then goes to changes of capital/income ratio history for Western Europe, which decreased from about 7/1 to 3/1 during WWI to WWII and came back only after return to peace in 1950 achieving ratio 5/1 to 6/1 by now. Nothing like this happened in America, however he is going back to XIX century to find big drop in capital/income ratio for America after civil war when slaves stop being counted as capital stock.

5. The Capital/Income Ratio over the Long Run
This chapter continues capital/income ratio analysis over long run of 150 years. Interesting point is that ratio of public capital remains approximately the same while ratio of private capital going up and down. After that the second law of capitalism stated as: ” Capital/Income = Savings rate / Growth rate. There is a bunch of qualifiers for this law that make it not really applicable in many cases. Author reviews relationship between private and public capital with overall inference that public capital is staying at the same level, while private capital is growing as ratio of capital/income in all developed countries. At the end of chapter author predicts that with rate of growth going down from 3% to 1.5%, savings rate assumed to be constant at 10%, the ratio capital/income will grow to 7/1 by the end of XXI century.

6. The Capital-Labor Split in the Twenty-First Century
This is analysis of relations between labor and capital in production. The main points are:
• Split of returns is changing to benefit capital because return is the same, but ratio of capital/income is growing
• Returns on capital increases for big corporations due to economy of scale
• Counter trend is decrease of marginal return on capital if there is more capital then could be used productively.
• The split also changes for capital because elasticity is more then one – additional capital could substitute labor to the extent defined by technology.
• The value of human capital should be discounted because material capital still remains there.
The most important lesson author believes he provided is that there is no natural force decreasing capital’s importance and flow of income it provides.
Part Three: The Structure of inequality

7. Inequality and Concentration: Preliminary Bearings
This chapter is about distribution at individual level and its inequality. Author divides it into inequality in income from labor, inequality from returns on capital, and interaction between those two.
It starts with reference to classic French literature of XIX century to pose the question: What is the best way to obtain wealth in a given society: Labor or Inheritance. The obvious answer in France XIX century is inheritance (Vautrin’s lesson). After brief reference to decrease in value of inheritance during period of wars and revolutions in the first half of XX century the author goes back to statement that inheritance again becoming superior to labor.
Author is trying to make case that capital is more unequally distributed than labor. To support this idea distribution tables are provided that show top 10% of labor providers get 25%-45% of all returns while top 10% of capital owners get 50%-90% of all returns on capital. The interesting note in relation to progress is what author calls “Patrimonial Middle Class” – people who own capital, but also get income from labor. For some reason he calls it “A Major Innovation” even if it is no innovation for America where farmers mainly owned their own land since the beginning of the country.

8. Two Worlds
This chapter is a comparison of dynamics of inequality in France and USA over XX century. The France went from society of rentiers to society of managers and capitalists. The top income obtained moved from rentiers who derived income from rent on capital invested in government securities to individuals selling high-end labor (managers) or investing in business enterprises. It also went down dramatically from top 10% receiving 45% of income to something around 30% and staying at the same level as result of wars and strength of socialist movement in this country. Similar path was taken by USA when New Deal cut share of top income, but in 1980s USA moved back to a little bit more of capitalism resulting in inequality going back to levels of early XX century. Author also reviews significant change in source of top income that become much more salary related and also obtained not only by men, but also by their spouses practically doubling return on highly marketable abilities. Interestingly enough according to graphs in this chapter income from returns on capital is breaking even with income from labor only at the 99.9 percentile level in USA.

9. Inequality of Labor Income
In this chapter author concentrates specifically on income from labor and its inequality. The point he makes is that income from labor, even very high quality labor, did not grow that much but for the very top individuals in control of big companies who basically write their own checks. He identifies it as mainly Anglo-Saxon phenomenon where share of top 1% grew up dramatically more then in Europe or Japan. Author specifically rejects theory of unlimited growth of marginal productivity due to technology as explanation of this growth. He quite reasonably suggests that there is no way to define marginal contribution of top manager to corporation’s profit, so the only reasonable explanation of this growth is political power of top manger within corporation.

10. Inequality of Capital Ownership
Here it is turn of Capital ownership to be analyzed as source of income. Author goes through history of capital ownership in France and USA with specific attention to appearance of middle class with significant capital ownership. Overall the top 10% in France went down from 90% of all capital to 60% during wars and revolutions and then slightly rose at the end of century to about 65%. USA the dynamic was much milder from 80% down to 65% and then up to 75%. The reason for this author sees in the fact that rate of return on capital exceeds rate of economic growth constantly increasing share of capital in overall income distribution. The attempt to explain this discrepancy seems to come down to analysis of dynamic change of rates. Author adds to this a reference to time preference in savings that gives advantage to owners of capital because they can reinvest higher share of returns. This follows by quasi-historical analysis based on literature and legal arrangements for inheritances. At the end of chapter author analyses reason why inequality did not return so far to the levels of XIX century and expresses fear that it will achieve or even exceed this level in XXI century

11. Merit and Inheritance in the Long Run
This chapter is about dynamics of wealth acquisition: inheritance vs. labor. Author believes that increase of rate of return on capital over growth rate inevitably leads to increase in role of inheritance. However provided graphs show that even if share of inherited wealth grew over late XX century as percentage of national income it is still way lower then it was at the beginning of this century. Moreover living standards of top 1% rich by birth are undistinguished from the living standards of top 1% of self-made people.

12. Global Inequality of Wealth in the Twenty-First Century
This starts with analysis of inequality of returns on capital stating that there is significant economy of scale based on investment size. This results in continuing growth in wealth size of top 400 richest people and correspondingly in their share of global wealth. From there author switches to global distribution of wealth. He finds an interesting statistical anomaly that if calculate total wealth by country and summarize it, the result will be the negative financial position of the world where both rich and poor countries have a negative position. Another interesting point made in this chapter is about moral hierarchy of wealth with entrepreneurial wealth being at the top and generally considered a positive phenomenon. Author believes that it does not justify inequality and consider it as a sample of Euro-centric approach. Somehow he is trying to support this attitude by referring to dirty wealth obtained by oligarchs of third world countries and references to fiction describing criminal creation of wealth. Finally significant attention is paid to rise of China, India, and sovereign funds of oil producing countries. In addition to billionaires these owners of capital may try to own the world meaning to extract rent income from everybody else, especially western people. Amazingly he shows some common sense in this respect by coming to conclusion that it would probably not going to happen without political push back.

Part Four: Regulating Capital in the Twenty-First Century

13. A Social State for the Twenty-First Century
This chapter starts with author expressing believe that global tax on wealth is needed to avoid “inequality spiral” and regain control over wealth accumulation. This is based on believe in supremacy of “general interest” over “private interest”. After that he reviews recession of 2008, expressing hope that it facilitates “return to the state” followed quite convincing remonstration that the state never really go away and grew nearly exponentially until 1980s. There is interesting discussion about contradictory understanding of rights between USA and France. USA rights are about “pursuit of happiness” and freedom from oppression, while France it extends to social equality meaning that “ social distinction can be based only on common utility”. This follows by call to modernize contemporary social state (welfare state) with specific review of education and retirement financing functions with inference that they are pretty much too complicated to reform. There is also a short review of social safety net in poor countries.

14. Rethinking the Progressive Income Tax
This is review of various taxes with detailed analysis of history progressive taxes in France and USA. The case is made for oversized executive salaries being result of tax arrangements, specifically dramatic decrease in marginal tax rates in 1980s. Author considers this development dangerous for society moving it from democracy to oligarchy and proposes 80% tax on high income. He seems to be understands that it would not generate that much revenues, but believes that it is necessary for the sake of society.

15. A Global Tax on Capital
This chapter discusses a global tax on capital. Author seems to understand that it is impossible, but he likes to dream. He does not see global tax as source of revenue, but rather as method of regulation of capitalism. He expands his tax all the way down to middle class just to make sure that everybody get robbed, even if just a little bit. I guess it is just a reminder to people not to get rich. There is quite a bit of technicalities of how to tax, how insure transparency, and so on, but it is beyond the point. The point is that author sees the world as global polity and believes that some equalizing power should control this polity and redistribute wealth the way author sees fit not only from rich to poor, but also from rich countries to poor countries. He also sees immigration as another form of wealth redistribution only instead of wealth it is people who are moving.

16. The Question of the Public Debt
The last chapter is dedicated mainly to discussion of public debt and ways to eliminate it through increase in taxes and inflation. Also in this charter author provided an interesting discussion on Euro and European unification. The Euro being not under control of any specific government seems to provide a relatively stable money supply by limiting governments ability for counterfeiting. However it does not help when one government wants to increase money supply to liquidate debt, while another government in the same monetary union has significant number of this debt holders who do not really want to see their money disappear.

Here author formulates what he sees as central contradiction of capitalism: return on capital is growing faster than rate of economic growth, which leads to the growth inequality between owner of capital and provider of labor. It becomes more and more dangerous for stability of society, especially because owners of capital even if it created by entrepreneurial labor tend to turn into parasitic rentiers completely separated from people who live by labor and see diminishing returns on their effort. Contrary to previous Marxist thinkers he is not calling for revolution or looking forward for day when immoral and unequal capitalist society will be destroyed, but is rather scared that it could happen. The global tax for him is something needed to avoid upheaval with all its cruelties, blood, and totalitarianism that could come from such upheaval.


Majority of reviewers of this bestselling book point out problems in author’s economic analysis and I think in many instances they are correct. However I see it as an honest attempt to prevent over-boiling of envy that proved to be able to destroy wellbeing of millions for long periods of time.

The problem is that author completely missing another source of envy that is caused by much more dramatic inequality between individual in control of “public wealth” and individuals who are in control of only their own wealth. For example if some capitalist is rich enough to fly a small plane to Hawaii at cost of $20,000 while regular person had to fly economy class at cost $200, it is awful, but if high level “public servant” uses 2 huge wide body planes and hundreds of people for weekend golf outing on Hawaii at cost $20,000,000 it is just fine according to author because it is in “public interest” to pamper “public servant”. Somehow consumption ratio of 100/1 seems to author awfully unequal if based on private property, while consumption ratio of 100,000/1 seems to be just fine as long as high-end consumer uses “public wealth” for his consumption. The history shows that this “public” wealth control inequality arrangement is as dangerous as private wealth inequality and could lead to similar cataclysm.

Another problem is not with analysis, but with suggestion of high global property tax remedy. It remains unclear what makes author think that high earners who really deserve extremely high returns will continue to apply effort to produce at the top of their ability. I think it is save to assume that these people are not idiots, so if there is some ceiling of what they can make, they would apply some ceiling on what they produce. Again, history shows that red banner of top producer (big reward in Soviet Union) does not really provide incentive for best effort.

My own suggestion to resolve issue of inequality is to establish equal, unalienable, and marketable property rights on natural resources so individual who use more then average would buy rights to use these resources from individuals who use less then average.

As for the inequality of returns division between employees of profitable private corporations, I agree that it is often result of ability of individuals in control of corporation to write their own checks. However the solution should not be robbery of their property via tax, but rather legislative limitation their ability to write checks to themselves and assignment of this ability to individual shareholders, obviously in proportion to share of corporation owned. If combined with legal requirement to distribute 100% of profit to individual owners even if it is required to go through multiple layers of mutual funds this measure could have significant positive impact on economic growth because it would reward really good producers of wealth rather then really good business office politicians who managed to get control over other people wealth.

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