Author Topic: Capital in the 21st Century by Piketty  (Read 1314 times)

Stash Man

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Capital in the 21st Century by Piketty
« on: February 14, 2020, 06:01:09 PM »
This is more of an economics question but I'll post it here anyway, for those of you who have read Piketty's book.

1) Why does r (the rate of return on capital) tend to be greater than g (the economic growth rate)?

2) Is it possible for r > g to persist indefinitely on a global level, as Piketty seems to assert? Since capital income + labor income = total income, r > g implies that capital income grows faster than total income, which of course doesn't last because a part can't outgrow the sum forever.

maizeman

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Re: Capital in the 21st Century by Piketty
« Reply #1 on: February 14, 2020, 07:37:02 PM »
1) As far as I recall from reading the book a few years ago there is no particular reason r tends to be greater than g, Piketty just presents a lot of evidence that it has indeed tended to be the case most of the time in most countries over a number of centuries.

2) It can certainly persist for quite a long time. But every so often you get violent resets.

-World War I and II destroyed an awful lot of the capital in european nations, and a lot of what remained was inflated away in the interval between the world wars.

lost_in_the_endless_aisle

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Re: Capital in the 21st Century by Piketty
« Reply #2 on: February 14, 2020, 08:16:56 PM »
I'm terrible and haven't read it because I've read reviews like this:

"5. Give these lenses, it is impossible for Piketty to offer any commentary on recent events (about the last 400 pp. of the book) that is anything other than distorted and unreliable.  There is massive distrust of the wealthy in this book, and virtually no distrust of concentrated state power.

6. There is a considerable sum of useful and valuable material in this book, and I would not try to dissuade anyone inclined from reading it.  Nonetheless I suspect its main import is as another sign of the growing compartmentalization of academic discourse ó good work intermingled with highly questionable partisan material ó and how so many academics, if the mood affiliation tilts in the right direction, will tolerate or even encourage that."

Those are relatively non-Straussian declarations by TC so I am inclined to weight his opinion more heavily than I would otherwise.

maizeman

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Re: Capital in the 21st Century by Piketty
« Reply #3 on: February 14, 2020, 08:43:01 PM »
Keep in mind that review started out this way:

"1. About 600 pp. of this book is a carefully done history of the accumulation and sometimes dissipation of wealth and property.  You can evaluate that material without reference to any particular set of political views."

I was curious and went back to my digital copy. Apparently I read it in 2014 (six years ago, a bit more than the "a few" that I guessed). The page numbering is quite different, but despite finding the book fascinating, I apparently stopped 58% of the way through the book, remarkably close to where page 600 would come if the book where 1,000 pages (as Tyler Cowen's copy apparently was).

In my personal situation 600 pages of interesting historical data and analysis (or 450 pages using amazon's page numbering) was a good value for my time and money, regardless of whatever is contained in the last two fifths of the book.

marty998

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Re: Capital in the 21st Century by Piketty
« Reply #4 on: February 15, 2020, 02:58:26 AM »
This is more of an economics question but I'll post it here anyway, for those of you who have read Piketty's book.

1) Why does r (the rate of return on capital) tend to be greater than g (the economic growth rate)?

2) Is it possible for r > g to persist indefinitely on a global level, as Piketty seems to assert? Since capital income + labor income = total income, r > g implies that capital income grows faster than total income, which of course doesn't last because a part can't outgrow the sum forever.

Rates of return on capital tends to be accelerated by the use of debt. As long as the supply of credit continues to grow, then yes I do believe the rate of return on capital can be higher than the economic growth rate.

Fractional reserve banking, which is basically conjuring money out of thin air by creating deposits through lending, has done wonders for the growth of capital.

FIRE 20/20

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Re: Capital in the 21st Century by Piketty
« Reply #5 on: February 15, 2020, 05:04:36 AM »
Keep in mind that review started out this way:

"1. About 600 pp. of this book is a carefully done history of the accumulation and sometimes dissipation of wealth and property.  You can evaluate that material without reference to any particular set of political views."

I was curious and went back to my digital copy. Apparently I read it in 2014 (six years ago, a bit more than the "a few" that I guessed). The page numbering is quite different, but despite finding the book fascinating, I apparently stopped 58% of the way through the book, remarkably close to where page 600 would come if the book where 1,000 pages (as Tyler Cowen's copy apparently was).

In my personal situation 600 pages of interesting historical data and analysis (or 450 pages using amazon's page numbering) was a good value for my time and money, regardless of whatever is contained in the last two fifths of the book.

If my memory is correct, the last few hundred pages were footnotes.  I'll check my copy, but I know I finished the main text but Amazon says I only read part of it and didn't finish the book.

maizeman

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Re: Capital in the 21st Century by Piketty
« Reply #6 on: February 15, 2020, 07:42:32 AM »
Keep in mind that review started out this way:

"1. About 600 pp. of this book is a carefully done history of the accumulation and sometimes dissipation of wealth and property.  You can evaluate that material without reference to any particular set of political views."

I was curious and went back to my digital copy. Apparently I read it in 2014 (six years ago, a bit more than the "a few" that I guessed). The page numbering is quite different, but despite finding the book fascinating, I apparently stopped 58% of the way through the book, remarkably close to where page 600 would come if the book where 1,000 pages (as Tyler Cowen's copy apparently was).

In my personal situation 600 pages of interesting historical data and analysis (or 450 pages using amazon's page numbering) was a good value for my time and money, regardless of whatever is contained in the last two fifths of the book.

If my memory is correct, the last few hundred pages were footnotes.  I'll check my copy, but I know I finished the main text but Amazon says I only read part of it and didn't finish the book.

Maybe that explains the divergence in page numbers between Cowen and my copy on amazon. I wonder if the copy he read had the footnotes interspersed throughout the document instead of all at the end. I read most of the book and found it fascinating and thought provoking but drifted to a natural halting place a few pages before the end of part 3.

From the Cowen review it sounds like the issues he had with it, and the issues that jumped out to lost_in_the_endless_aisle when he or she read that review, must be located in the last section "Part Four: Regulating Capital in the Twenty- First Century" which just from the chapter headings sounds like it moves from describing the world, supported by data, and pointing out the consequences of some of the things that are observed to describing the author's personal ideas about how to change the world.

I think it would be a shame for anyone to be discouraged from reading the first three sections of the book just because the four section might not hold a lot of value for them.

Stash Man

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Re: Capital in the 21st Century by Piketty
« Reply #7 on: February 15, 2020, 10:25:13 AM »
This is more of an economics question but I'll post it here anyway, for those of you who have read Piketty's book.

1) Why does r (the rate of return on capital) tend to be greater than g (the economic growth rate)?

2) Is it possible for r > g to persist indefinitely on a global level, as Piketty seems to assert? Since capital income + labor income = total income, r > g implies that capital income grows faster than total income, which of course doesn't last because a part can't outgrow the sum forever.

Rates of return on capital tends to be accelerated by the use of debt. As long as the supply of credit continues to grow, then yes I do believe the rate of return on capital can be higher than the economic growth rate.

Fractional reserve banking, which is basically conjuring money out of thin air by creating deposits through lending, has done wonders for the growth of capital.

Leverage props up borrowers' rates of return, at the expense of bank depositors (whose money are lent out) who get a subpar rate of return.  Someone has to be getting the short end of the stick, so it all balances out in the end.

And if capital grows higher than the economic growth rate indefinitely, capital income will make up an ever higher percentage of the nation income until there's nothing left for labor income!

Or maybe I'm missing something. Really appreciate your feedback.

habaneroNorway

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Re: Capital in the 21st Century by Piketty
« Reply #8 on: February 15, 2020, 10:27:40 AM »
Fun fact: It topped the list of "unfinished books" after it was published.

I read it and found it quite interesting, but it could and should have been much shorter.

caleb

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Re: Capital in the 21st Century by Piketty
« Reply #9 on: February 15, 2020, 11:05:39 AM »
This is more of an economics question but I'll post it here anyway, for those of you who have read Piketty's book.

1) Why does r (the rate of return on capital) tend to be greater than g (the economic growth rate)?

2) Is it possible for r > g to persist indefinitely on a global level, as Piketty seems to assert? Since capital income + labor income = total income, r > g implies that capital income grows faster than total income, which of course doesn't last because a part can't outgrow the sum forever.

r > g because under normal conditions (i.e. peace and prosperity) people are willing to pay more to borrow cash than material goods of the same value.  In times of war, scarcity, high uncertainty, or famine, it doesn't hold.

r can be greater than g indefinitely on paper, but in practice it doesn't work.  About 2/3 of the way through (I forget which chapter) he talks about how the extreme inequality that capitalism naturally produces tends to lead to disruptions that destroy capital stocks, most often war, that resets inequality lower.

In the background is Foucault's idea of a limit possibility, in which our theories of reality hit a natural limit and no longer hold when played out to their extremes.

My two takeaways from the book, even years later, are that (1) capitalism naturally produces extreme inequality, and (2) that extreme inequality leads to instability for everyone over the long term.  The implication is that we all - rich and poor - have an interest in not seeing inequality become extreme.

While I think he has an insightful diagnosis of capitalism, his global wealth tax isn't going anywhere soon.  Instead, I'd say A.O. Hirshman's classic Exit, Voice, and Loyalty has more practical advice to offer us.

ChpBstrd

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Re: Capital in the 21st Century by Piketty
« Reply #10 on: February 18, 2020, 11:06:58 AM »
This is more of an economics question but I'll post it here anyway, for those of you who have read Piketty's book.

1) Why does r (the rate of return on capital) tend to be greater than g (the economic growth rate)?

2) Is it possible for r > g to persist indefinitely on a global level, as Piketty seems to assert? Since capital income + labor income = total income, r > g implies that capital income grows faster than total income, which of course doesn't last because a part can't outgrow the sum forever.

Rates of return on capital tends to be accelerated by the use of debt. As long as the supply of credit continues to grow, then yes I do believe the rate of return on capital can be higher than the economic growth rate.

Fractional reserve banking, which is basically conjuring money out of thin air by creating deposits through lending, has done wonders for the growth of capital.

Leverage props up borrowers' rates of return, at the expense of bank depositors (whose money are lent out) who get a subpar rate of return.  Someone has to be getting the short end of the stick, so it all balances out in the end.

And if capital grows higher than the economic growth rate indefinitely, capital income will make up an ever higher percentage of the nation income until there's nothing left for labor income!

Or maybe I'm missing something. Really appreciate your feedback.

I havenít read the book, but the above seems like a mostly logical explanation.

Bear in mind that ALL net wealth creation comes from labor, not capital. I.e. I can convert labor into goods and services that did not previously exist in the world for a net gain in worldwide wealth, but if I earn interest on my loans that is just a transfer from someone else to me for no net gain across my accounts plus their accounts. This is the difference between production and rent extraction. R can come from either source, but g can only come from labor.

As for how r > g, consider that g factors in the costs involved in maintaining a population of workers who age, die, and must be replaced at great cost to parents and taxpayers, and who require other services, while r only includes the returns on the immediately profitable subset of economic activities. I.e. money in investment markets is not used to buy schoolbooks, police cars, courts, food for unproductive children, or care for the indigent.

hodedofome

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Re: Capital in the 21st Century by Piketty
« Reply #11 on: February 19, 2020, 10:30:22 AM »
Keep in mind technology is allowing us to produce more with the same or less labor. So, the return on capital for the owner of the machines or software can continue to go higher while the labor can fail to keep up. At least for now.

PDXTabs

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Re: Capital in the 21st Century by Piketty
« Reply #12 on: February 19, 2020, 12:32:12 PM »
Bear in mind that ALL net wealth creation comes from labor, not capital. I.e. I can convert labor into goods and services that did not previously exist in the world for a net gain in worldwide wealth, but if I earn interest on my loans that is just a transfer from someone else to me for no net gain across my accounts plus their accounts. This is the difference between production and rent extraction. R can come from either source, but g can only come from labor.

Is that true? During the first industrial revolution in England craftsmen who hand made buckets were replaced with machines that made buckets. In the end there were a lot more buckets, the price of buckets fell, and a lot of those craftsmen lost their jobs. But none of that would have been possible without capital.

It is true that you still needed some laborers to run those machines, but not nearly as many.

mjr

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Re: Capital in the 21st Century by Piketty
« Reply #13 on: February 19, 2020, 01:45:35 PM »
No, it's not even close to true.  Capital is not just a pile of money being lent to someone, it's fundamental to the construction and operation of machines and plant.

Imagine a utopian society where robots do all the that humans do now. Sure, there's still labour being done, but it's no longer human labour.  Now, set aside all the discussions that follow about artifical intelligence and slavery and come back to reality a bit.  The robots are just advanced machines and there's no question that machines (autonomous or not) dramatically increase productivity and wealth and the machines come from the judicious use of capital and labour.

A lazy human produces as much wealth as lazy capital.

ctuser1

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Re: Capital in the 21st Century by Piketty
« Reply #14 on: February 20, 2020, 06:42:35 AM »
I haven't read the book - yet.

I worked in consulting for some time. Back then, capital was just a final, convenient representation of labor for me. A project would be estimated in terms of people at various levels of seniority X # of days X % allocation. This would then get reduced to a $ (i.e. capital) and sent to the client. Eventual capital, when it was deployed, was just a mechanism to direct labor to specific initiatives. Any megacorp will do personnel budgeting similarly, even though it may not be as exposed to everyone in the organization like it would for a consulting organization.

If you think about it, ALL capital requirements would fundamentally boil down to:
1. Labor (which includes intellectual property, since it is just a distilled form of labor)
2. Natural resources/materials. This has a large labor component baked in as well.
3. Leverage. Hedging/reserves required to support leverage, and the Cost Of Funds therein.

If you show me any capital spent, I'm quite confident we can probably slot it into one of these three.

Back in the days of Adam Smith and Marx (based on my reading of the Wealth of Nations and other popular economics stuff) seems to have concluded only #1 matters to determine intrinsic value - and undervalued #3. Milton Friedman seems to have made the opposite mistake. He concluded that labor is just another insignificant and interchangeable input and that it is moral to let the owners of leverage (not even capital) manipulate the free market any which way they can.

Capital is able to extract more than it's share at times due to #3. This would nominally be okay, except that:
1. Owners of leverage abuse the free market with their monopolistic and monopsonistic powers.
2. Losses from leverage are often backstopped by the government guarantees - implicit and explicit. i.e. upside risk is private, but downside risk is public.

No wonder capital will extract higher than it's share with such favorable treatment. But, I don't think it is "good" for the society. It is ripe for a violent reset as other posters have pointed out.

The cult of Friedman is as dangerous for a country as the cult of Marx was for Soviet Union.
« Last Edit: February 20, 2020, 06:46:52 AM by ctuser1 »

ChpBstrd

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Re: Capital in the 21st Century by Piketty
« Reply #15 on: February 20, 2020, 07:28:39 AM »
Bear in mind that ALL net wealth creation comes from labor, not capital. I.e. I can convert labor into goods and services that did not previously exist in the world for a net gain in worldwide wealth, but if I earn interest on my loans that is just a transfer from someone else to me for no net gain across my accounts plus their accounts. This is the difference between production and rent extraction. R can come from either source, but g can only come from labor.

Is that true? During the first industrial revolution in England craftsmen who hand made buckets were replaced with machines that made buckets. In the end there were a lot more buckets, the price of buckets fell, and a lot of those craftsmen lost their jobs. But none of that would have been possible without capital.

It is true that you still needed some laborers to run those machines, but not nearly as many.

Who invented and built the machines? Inanimate British pound coins didnít do it.

Sure, money can be traded for labor, but it is not labor in itself. We are so used to trading that we think of them as the same thing, but they are not.

Suppose 10 of us are stranded on an island and need to produce food, shelter, and tools. In scenario 1 we are stranded with a suitcase full of $5 million but with no ability to work because everyone has an illness or injury (sufficient capital, no labor). In scenario 2, we are stranded with no money but we have the labor of 10 healthy, educated people (no capital, sufficient labor). In which scenario does economic production occur, and in which scenario does everyone promptly starve?

PDXTabs

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Re: Capital in the 21st Century by Piketty
« Reply #16 on: February 20, 2020, 10:17:11 AM »
Suppose 10 of us are stranded on an island and need to produce food, shelter, and tools. In scenario 1 we are stranded with a suitcase full of $5 million but with no ability to work because everyone has an illness or injury (sufficient capital, no labor). In scenario 2, we are stranded with no money but we have the labor of 10 healthy, educated people (no capital, sufficient labor). In which scenario does economic production occur, and in which scenario does everyone promptly starve?

How about scenario 3, where we are stranded in a foreign land and I have a bunch of money in my wallet? We use the money to buy the tools to start a farm.

You aren't wrong, I'm just not sure how much you island metaphor helps when interacting with the rest of the world.

ChpBstrd

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Re: Capital in the 21st Century by Piketty
« Reply #17 on: February 20, 2020, 12:27:03 PM »
Suppose 10 of us are stranded on an island and need to produce food, shelter, and tools. In scenario 1 we are stranded with a suitcase full of $5 million but with no ability to work because everyone has an illness or injury (sufficient capital, no labor). In scenario 2, we are stranded with no money but we have the labor of 10 healthy, educated people (no capital, sufficient labor). In which scenario does economic production occur, and in which scenario does everyone promptly starve?

How about scenario 3, where we are stranded in a foreign land and I have a bunch of money in my wallet? We use the money to buy the tools to start a farm.

You aren't wrong, I'm just not sure how much you island metaphor helps when interacting with the rest of the world.

As you note in scenario 3, the money is only useful if it can be bartered for someone elseís labor. If there was no labor available, no tools or technology or economic production would appear, even from a large pile of money.

Money is a cultural concept for storing and exchanging labor, not a force that builds things or delivers services on its own. Suppose in scenario 3 that you worked 80 hours in exchange for the money, and then you gave the money to the toolmaker in exchange for 100 hours of their labor. In reality you bartered 80 hours of your labor for 100 hours of theirs, and money was used as a symbolic medium of exchange and a technique to facilitate transactions more complex than a simple barter.

PDXTabs

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Re: Capital in the 21st Century by Piketty
« Reply #18 on: February 20, 2020, 01:19:27 PM »
Suppose in scenario 3 that you worked 80 hours in exchange for the money, and then you gave the money to the toolmaker in exchange for 100 hours of their labor. In reality you bartered 80 hours of your labor for 100 hours of theirs, and money was used as a symbolic medium of exchange and a technique to facilitate transactions more complex than a simple barter.

That ignores the fact that large amounts of capital allow you to fund projects that could never have been bartered by an individual. At least in my mind, for a sufficiently large project, you need both. You need labor and capital.

EDITed to add - I was once part of a software team where 85% of the team got laid off all at once. We tried to sell the whole team to another company. We had the labor, but we lacked the capital to keep working on our project. It did not work, 85% of us lost our jobs.
« Last Edit: February 20, 2020, 01:21:31 PM by PDXTabs »

Davnasty

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Re: Capital in the 21st Century by Piketty
« Reply #19 on: February 20, 2020, 02:31:06 PM »
Suppose in scenario 3 that you worked 80 hours in exchange for the money, and then you gave the money to the toolmaker in exchange for 100 hours of their labor. In reality you bartered 80 hours of your labor for 100 hours of theirs, and money was used as a symbolic medium of exchange and a technique to facilitate transactions more complex than a simple barter.

That ignores the fact that large amounts of capital allow you to fund projects that could never have been bartered by an individual. At least in my mind, for a sufficiently large project, you need both. You need labor and capital.

EDITed to add - I was once part of a software team where 85% of the team got laid off all at once. We tried to sell the whole team to another company. We had the labor, but we lacked the capital to keep working on our project. It did not work, 85% of us lost our jobs.

Another way to say "capital funds projects" is "capital convinces other people to contribute their labor to projects". The value creation still originates with labor.

It's been pointed out several times that capital is a critical component of making certain projects happen, and I think we can all agree with that, but I don't think the statement "All net wealth creation comes from labor" is at odds with that fact.


PDXTabs

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Re: Capital in the 21st Century by Piketty
« Reply #20 on: February 20, 2020, 03:28:26 PM »
It's been pointed out several times that capital is a critical component of making certain projects happen, and I think we can all agree with that, but I don't think the statement "All net wealth creation comes from labor" is at odds with that fact.

I guess that's where I disagree. There are the set of project that would create value to society with no capital backing, only labor. Then there are another set of projects that never would have happened without capital backing. As far as I'm concerned the delta is the amount of value created (at least in part) by capital.

For a personal anecdote, I worked for a large US company during the great recession. We had a good enough name and balance sheet to sell lots of bonds to raise capital. Then we turned around and used that capital to sell products to customers. In part, we extended credit to other businesses so that they could buy our products. We didn't have more labor than the competition, but we did have more capital, and it gave us a leg up in the market.
« Last Edit: February 20, 2020, 03:30:08 PM by PDXTabs »

ChpBstrd

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Re: Capital in the 21st Century by Piketty
« Reply #21 on: February 20, 2020, 07:21:38 PM »
It's been pointed out several times that capital is a critical component of making certain projects happen, and I think we can all agree with that, but I don't think the statement "All net wealth creation comes from labor" is at odds with that fact.

I guess that's where I disagree. There are the set of project that would create value to society with no capital backing, only labor. Then there are another set of projects that never would have happened without capital backing. As far as I'm concerned the delta is the amount of value created (at least in part) by capital.

For a personal anecdote, I worked for a large US company during the great recession. We had a good enough name and balance sheet to sell lots of bonds to raise capital. Then we turned around and used that capital to sell products to customers. In part, we extended credit to other businesses so that they could buy our products. We didn't have more labor than the competition, but we did have more capital, and it gave us a leg up in the market.

I don't disagree that money makes it easier to coordinate large numbers of economic actors. The modern corporation would be inconceivable in a pure barter economy. If I was going to launch a company, I would be primarily concerned about my funding in money terms, because I might assume the labor could be bought in the marketplace.

As you note, money as a technology allows for more leverage and scale in our economic activities. It performs important functions such as value storage, price signaling, and transaction facilitation. But these functions only happen in exchanges of labor. I can't think of one example where money created economic value (a good or a service) without involving anyone's labor. Money makes it a lot easier to trade for labor and its products - but that's all it does.

Even if I loan to someone else and collect interest from them, they are only using my money to transact for some third party's labor - which is the true object of their borrowing and spending activities. Three or four of us could all loan $100 to each other in a circle but nothing of economic value would be created. We would just be exchanging tokens, paying each other interest, and collecting each other's interest. Production happens when someone is given a job to do (whether for barter or for money or for charity).