What’s Really Wrong with Piketty’s Capital?

Are you wondering whether to read Thomas Piketty’s 700-page book or give it to a loved one this holiday season?

I was too.

So I picked it up in Barnes & Noble while having coffee with my partner. As is my habit with new books, I checked the index first.

The book flunked my first test. Its index was only 15 pages, a mere two percent of the total book pages.

Given that Capital in the Twenty-First Century looks like a groundbreaking economics text, one that’s already creating discussion, the index should have been at at least 50 pages (or seven percent of the book).

Then I looked at the 35-page Introduction. The first paragraph left me cold. I stopped reading right then and there. As intensely as I care about the distribution of wealth and income inequality, I wasn’t interested in proving Karl Marx wrong or Simon Kuznets right.

However, Capital found its way into our home via the library. I looked at it again. This time I started with Chapter 1.

After reading five pages of Piketty’s first chapter, “Income and Output,” here’s why I will read this book and recommend you take a look.

First of all Piketty is not defending Karl Marx. Indeed, Piketty pays homage to “entrepreneurial labor,” a concept my conservative friends always bring up when we talk about things like “passive income” or “wealth redistribution”.

I’ve always felt that Karl Marx was wrong in his insistence that the only labor that counts is the labor of the workers who made those goods. According to Marx, capitalists along with their managers and other “minions,” did not add one whit to the value of goods produced. I believe Marx’s thinking was constricted by the 19th century world he lived in.

We, particularly we Americans, now live in an economy where the service industry far outweighs the manufacturing sector when it comes to providing jobs for workers. It no longer makes sense to say that value (and to a certain extent) prices of goods are not affected by the labor of office workers, truck drivers, retail store employees, and a host of others.

Note too that it has been almost 100 years since Keynes published his famous macroeconomic formulas. Can economics really justify using a century-old theory?

Piketty says his own thinking is rooted in three different ways of measuring wealth inequality. The way most of us (just about all of us) look at income inequality is by comparing the amount a billionaire earns to what we earn. Obviously there’s a huge gap. But comparing individual situations is only one facet of measuring wealth inequality.

Piketty points out that we could measure income inequality within two categories; labor(ers) and capital(ists), and see a continuum of incomes from low to high within each group. (This, of course, begs the question of which category self-employed workers, 10% of American laborers, belong to—assuming that the capital assets of their businesses are also counted).

However, Piketty is not so much interested in either intra-group or inter-group wealth inequalities among individuals. What Piketty is interested in the big picture of what economists call the “aggregate” wealth difference between labor and capital as a whole.

Most of us know pretty well where we as individuals fit into the continuum of whichever economic  group we belong to. And we have a rough idea of how much those in the opposite group make every year  compared to what we make. But few of us know the total amount of income received for all entrepreneurial labor and control of capital or know the total earnings of all employees.

Piketty starts with a notion he believes most economists have accepted uncritically for a long time that labor should be two-thirds and capital one-third of a country’s national income, Piketty says he’s traced shifts in the ratio of these two economic groups over the 20th century

What did he find? The proportion of wealth controlled by each side (labor and capital) has shifted back and forth over time, sometimes being stable and sometimes not. And why is this important? Here’s what I think. Clearly we still haven’t found a good way to deal with financial crises.

No matter which political side of the spectrum or which income continuum we’re on, real data about wealth distribution and wealth transfers among labor and capital is essential to form a clear idea of which economic theories have or haven’t worked. Is it time to leave behind economic thinkers of the 18th, 19th, and 20th centuries: Adam Smith, Marx, and Keynes?

And a burning question I have for scholarly authors in the 21st century – is it perhaps time for academics to move long-winded introductions to an Appendix to the back of their books and pay more attention to their indexes?

(Reprinted from Huffington Post by the author)