I have recently read Thomas Piketty’s book Capital. It was a gift from a wonderful and generous friend. I wrote an earlier blog, over three months ago, about Piketty’s book based on reviews by Robert Solow and Gregory Mankiw.
My blog three months ago was in perfect timing to coincide with the ideological scaffold of Lefty-union politics about income distribution that was being promoted at the time by President Obama in his fund raising ventures. Piketty was consequently the subject of great interest in the pop media world and the professional economics world.
What Piketty has done is to look at major nations’ data on income distribution and productivity going as far back as he can. In some cases he can go back several centuries. In most cases he gets less than a century of data.
Most of his data comes from France, where he did his own extensive research. Other parts of the developed world were added by Anthony Atkinson. The most relevant part for us, the U.S., was added by Emmanuel Saez.
Piketty’s conclusion is that there is a simple linear relationship between national output, productivity and income distribution. His data apparently is different for most of the world from the United States in the past 40 years, which he admits. He is unable to understand why this data distinction exists. Nevertheless he goes on to predict that significant and perverse global income distributions will persist into the future because productivity increases go to capital which in turn goes to the hereditary richest top of the society.
One chart was surprising to me. On page 348 he shows the percent of wealth held by the richest 1% of Americans going back to 1810. At the time of President James Madison, the top 1% held 25% of the U.S. wealth. Nearly all wealth was in land. By the time of President Barack Obama, that had risen to 32% with virtually none in land. That 7% increase over two centuries seems to be driving Obama and the Democrats nuts.
I see numerous problems with Piketty’s material.
* First anything abstract at this level is subject to ideological distortion. The best example is Malthus who wrote a book in 1798 projecting global famine. His linear projections of food production and geometric population growth did not take into account the radical technological improvements in food production that were occurring in England at the exact time he was alive. The abstract equations looked fine. The reality had no connection except in countries that continued to have Malthusian levels of food production.
* The second problem is that Piketty and Saez do not acknowledge how the structure of income distribution in the United States has changed since 1960. We no longer have an hereditary elite class that can pass on its capital to its family. The rest of the world does. I explain what caused the change here. 396 of the top 400 billionaires in the U.S. did not come from the hereditary elite. Nearly 100% of the top economic population in America has earned its money de novo since 1960 as a byproduct of productivity.**
* Moreover the middle class in America gets nearly all of its benefits of productivity in income from capital improvements and capital investments. These benefits to the middle class are promptly passed on in the form of bonuses and stock from their companies. Separation in income distribution from the middle to the top income brackets has no reason to expand adversely. Middle income families in the urban U.S. now earn over $92,000 average per year. Those in the top 10% earn over $106,000 average income per year.
* Fourth and lastly, projections into the future, have been disastrously bad. Two recent examples are the population explosion and global warming.
Piketty calls himself a Marxist. This makes one more Lefty making a linear projection into the future. It may be accurate for the world outside of the U.S. but it is inapplicable here.
** I will discuss whether an hereditary elite class can return in the U.S. in another blog.