Piketty returns ignorant as ever

This is a review of Thomas Piketty’s new book, Capital and Ideology. From The Financial Times in London, demonstrating that the capitalist class has no concerns about the jerks who write articles where the final para reads, “Advocates of inequality will come up with the usual justifications. But now is the redistributionists’ best chance.” What chance that is I have no idea.

The thing is that a billionaire has virtually nothing to distribute. Their billions comes from owning businesses that produce things like iron and steel or caustic soda, not from having a mountain of consumer goods stashed away that they keep to themselves and refuse to share with others. What they do own are the means of production with which the goods and services sought are produced. There is plenty of sharing the wealth that goes on already, especially with many who do nothing themselves to help create that wealth, living quite all right. The writer of this article is a typical modern twit with no idea about anything at all, even though he works for the financial press. The Jeff Bezos and Mark Zuckerbergs of the world must laugh themselves silly at the pretension idiocies these people write.

Of course, for many the surest way to wealth, often their only way to wealth, is to enter politics on the left. I think there is a need for psychiatric evaluation for the people who vote for socialists, although oddly every psychiatrist I have ever met has been on the left themselves. Here’s the article.

Thomas Piketty’s new book, Capital and Ideology, appears in English translation next March. But I got a sneak preview by walking into my local Parisian bookshop and handing over €25 for the French edition. My conclusion: the 1,200-page tome might become even more politically influential than the French economist’s 2013 overview of inequality, Capital in the Twenty-First Century.

Helped a little by that book, inequality has soared up the left’s agenda, especially in the particularly unequal US and UK. Now Elizabeth Warren has a shot at becoming the most redistributionist US president since Franklin D Roosevelt, while an electable post-Corbyn Labour leader could achieve similar in Britain.

Piketty explains why this could be the moment for a turn to equality, and which policies could make that happen.

His premise is that inequality is a political choice. It’s something societies opt for, not an inevitable result of technology and globalisation. Whereas Marx saw history as class struggle, Piketty sees it as a battle of ideologies.

Every unequal society, he says, creates an ideology to justify inequality. That allows the rich to fall asleep in their town houses while the homeless freeze outside.

In his overambitious history of ­inequality from ancient India to today’s US, Piketty recounts the justifications that recur throughout time: “Rich people deserve their wealth.” “It will trickle down.” “They give it back through philanthropy.” “Property is liberty.” “The poor are undeserving.” “Once you start redistributing wealth, you won’t know where to stop and there’ll be chaos” — a favourite argument after the French Revolution. “Communism failed.” “The money will go to black people” — an argument that, Piketty says, explains why inequality remains highest in countries with historic racial divides such as Brazil, South Africa and the US.

Another common justification, which he doesn’t mention, is “High taxes are punitive” — as if the main issue were the supposed psychology behind redistribution rather than its actual effects.

All these justifications add up to what he calls the “sacralisation of property”. But today, he writes, the “propriétariste and meritocratic narrative” is getting fragile. There’s a growing understanding that so-called meritocracy has been captured by the rich, who get their kids into the top universities, buy political parties and hide their money from taxation.

Moreover, notes Piketty, the wealthy are overwhelmingly male and their lifestyles tend to be particularly environmentally damaging. Donald Trump — a climate-change-denying sexist heir who got elected president without releasing his tax returns — embodies the problem.

In fact, support for redistribution is growing even faster than Piketty acknowledges, especially in the US. Twice as many Americans now feel more distrust than admiration for billionaires, according to a HuffPost/YouGov poll. Millennials are especially suspicious of success.

More American adults under 30 say they believe in “socialism” than “capitalism”, report the pollsters Gallup. This generation owns too little property to sacralise it.

Centre-right parties across the west have taken up populism because their low-tax, small-state story wasn’t selling any more. Rightwing populism speaks to today’s anti-elitist, anti-meritocratic mood.

However, it deliberately refocuses debate from property to what Piketty calls “the frontier” (and others would call borders). That leaves a gap in the political market for redistributionist ideas. We’re now at a juncture much like around 1900, when extreme inequality helped launch social democratic and communist parties.

Piketty lays out a new redistributionist agenda. He calls for “educational justice” — essentially, spending the same amount on each person’s education. He favours giving workers a major say over how their companies are run, as in Germany and Sweden. But his main proposal is for wealth taxes.

Far from abolishing property, he wants to spread it to the bottom half of the population, who even in rich countries have never owned much. To do this, he says, requires redefining private property as “temporary” and limited: you can enjoy it during your lifetime, in moderate quantities.

He proposes wealth taxes of 90 per cent on billionaires. From the proceeds, a country such as France could give each citizen a trust fund worth about €120,000 at age 25. Very high tax rates, he notes, didn’t impede fast growth in the 1950-80 period.

Warren (advised by economists who work with Piketty) is proposing annual taxes of 2 per cent on household fortunes over $50m, and 3 per cent on billionaires. She projects that this would affect 75,000 households, and yield revenues of $2.75tn over 10 years. Polls suggest most Americans like the idea.

Paradoxically, the plutocratic US may be ideal terrain for a wealth tax. Mark Stabile, economist at Insead, points out that, first, rich Americans now have so much wealth that even if Warren captures just a small proportion, it could add up to a lot; second, Americans are taxed on their passports, so moving wealth abroad won’t save them (and Warren would slap hefty exit taxes on anyone giving up citizenship); last, thanks to SwissLeaks and the Panama Papers, we’ve learnt a lot about how the rich hide money.

Advocates of inequality will come up with the usual justifications. But now is the redistributionists’ best chance.

Piketty is an economic illiterate

I have finally put my hands on a copy of Thomas Piketty’s Capital in the Twenty-First Century. And what do I find, that this world famous book, this book that is going to set our economic world on its head, in its introductory chapter makes a fundamental error in basic economic theory I would fail any first year student for making. Forget about fraudulent data. He has confused a shift in demand (ie a movement of the demand curve) with a change in quantity demanded (the effect on the number of units bought caused by a change in the price). For an economist, you cannot be more wrong than that. Here is the passage in which, of all things, he is discussing Ricardian land rents in a section he titles, “Ricardo: the principle of scarcity”:

“To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which should lead to a decline in its price.” (p.6 – my bolding)

He has here basically stated that insufficient supply (a shortage) will lead to a fall in price which you can see from the bits in bolding. An economist should immediately see the flaw, but for those not trained in the dark arts, let me explain.

1) The phrase, “if the supply of any good is insufficient” means, suppose there is more being demanded at the price than is being supplied. That is, suppose the price is below its equilibrium level so that there is upwards pressure on the price. He doesn’t say it quite that way, but only that “its price is too high” which, in theory terms, is a nonsense statement. But since he is talking about the pressure of demand on supply, he can only mean that the increase in demand is pushing the price up which is driving some people out of the market. As economists like to put it, the demand curve has moved to the right and prices have therefore gone up.

2) But because “its price is too high,” he writes, “then demand for that good should decrease.” Big, big mistake. He has shifted his meaning of “demand” from representing a movement of the entire demand curve to a movement along the demand curve. Higher prices, he is saying, cause the quantity demanded to fall. The demand curve stays put but with a higher price some people are leaving the market. That is why demand curves are downward sloping.

3) Then he writes that “demand for that good should decrease, which should lead to a decline in its price”. He has now mistaken a fall in quantity demanded, a movement along the curve, for a fall in demand, a movement of the entire curve to the left. He has confused a fall in the quantity demanded caused by a rising price with a fall in the level of demand, which is a shift of the entire curve.

This is one of the things I harangue my students about to stop them from making such elementary mistakes. Compare what Piketty wrote with the text of my Free Market Economics where I warn my students against making this absurd but common enough error, at least common enough amongst economic illiterates. From page 100:

Demand versus Quantity Demanded

People often do talk about demand as if it is a specific amount and it is therefore important to make sure that when someone is talking about “demand”, that one is aware of which meaning they have in mind.

Compare these two statements:

(1) if the price goes up demand goes down (and who would deny this is so?)

(2) if demand goes down the price goes down (and similarly, who would deny this?)

This becomes the following conclusion if the two statements are run together:

(3) if the price goes up [demand goes down; if demand goes down] the price goes down.

That is, if the price goes up the price goes down. A higher price is the cause of a lower price. Obvious nonsense, but it comes from using the word “demand” in its two different meanings.

In (1), this is using the word demand to mean a movement along the demand curve when the price happens to rise. In (2), this is using the word demand to mean a shift of the entire demand curve when one of the underlying factors has changed.

It is therefore essential to always make sure which meaning of demand is intended. You can usually tell from the context of what is being said, but the words here are slippery and can lead you into trouble.

This is trouble, all right. I find it absurd that Piketty cannot tell the difference between a shift of the demand curve and a movement along the demand curve.

To trust anyone’s economic judgment on serious economic matters who makes such a fundamental error would be ridiculous. He has 650 pages of stats and data but almost literally doesn’t know the first thing about economic theory?