Piketty Doesn't Understand Capitalism
Years ago I drove from London to Edinburgh in Scotland with stops to visit family on the way. I had a commission from a guy in Spokane to go to a particular store in Edinburgh and buy some single-malt Scotch whisky. The closer I got to Scotland the more people seemed to know about whisky. One relative even showed me a book on Scotch complete with Wine Spectator style ratings.
When I got to Edinburgh the man in the store was contemptuous of the Scotch book's author. “The man's a buffoon. He knows nothing of whisky.”
Having read nearly all of Thomas Piketty's Capital in the Twenty-First Century I'm tempted to say the same. Piketty seems to know nothing about capitalism. But then why would he? Born into a lefty family, educated at a grande école, raised to head up the new Paris School of Economics at age 34, advisor to lefty politicians, how in the world could the poor man know anything about capitalism?
The further you get into the book (and I've now read and blogged on thirteen of the seventeen chapters) the more you realize that the guy is smart, of course he is, but he really doesn't understand capitalism.
My biggest problem is that Piketty completely whiffs on “time preference,” the basic concept that explains economic action. Let us see what God says in Human Action. Writes Ludwig von Mises,
Acting man distinguishes the time before the satisfaction of a want is attained... Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods.
And so on, for pages.
But Piketty tells us (p.359) that time preference is merely a “theory”, “somewhat tautological”, “simplistic and systematic”. Oh really? Then how come that there has been actual empirical confirmation of time preference, starting with the “Stanford Marshmallow Experiment?” (There's even a YouTube video). In Nicholas Wade's controversial (as in liberals don't like it) A Troublesome Inheritance we naturally get into time preference because the notable characteristic of modern capitalism is a widespread ability to defer gratification. “Children have a very high time preference which falls as they grow older and develop more self-control.” And so on. Interest rates are the way in which time preference enters into the working world.
That's not all. Piketty also wants us to believe, given the high rate of return on capital achieved by billionaires and university endowments, that wealth inequality, or “divergence,” will grow without limit. No it won't! To think that is to misunderstand the whole nature of capitalism!
Under capitalism you can only increase your wealth if you are in the middle of delivering a must-have new innovation to the consumers. Then, after a while, you are so over. Bill Gates makes a fortune from Microsoft Windows, and then the world moves on to Amazon and Apple and Google. Carlos Slim is now the world's richest man, as Mexico's one and only cell-phone guy. But pretty soon the Mexicans will finally get around to relieving Carlos of his monopoly and we won't hear about Carlos Slim any more.
Then there's the Berkshire Hathaway problem. Back when Warren Buffett was just an anonymous stock-picker in Obama, Nebraska, he could easily beat the market and grow Berkshire Hathaway into a behemoth. But when BRK is capitalized at $300 billion? Warren's up 170% since the market bottom in 2009, the same as the S&P 500. The NASDAQ is up 260%.
What's to be done? Get the workers into the wealth game? Shake up the dysfunctional behemoths of the welfare state? Oh no, nothing like that because the “social state” is such a wonderful thing with its intergenerational solidarity. It needs modernizing, of course, for “it would be good to improve the organization and operation of the public sector.” We could certainly tinker with education to make sure that more poor kids get to university. So what about pensions? Why not convert pay-as-you-go pensions into a real investment programs and build wealth for the workers. But Piketty rejects this idea on the lame and false excuse that the generation in the middle wouldn't get any pensions.
Back in 1895 socialists Sidney and Beatrice Webb founded the London School of Economics to generate socialist ideas, influence politicians, and build a socialist society. More than a century later the politicians created the Paris School of Economics in 2006 out of the other grandes ecoles. They put bright young thing Thomas Piketty in charge and he now obligingly comes up with the brilliant idea that the government needs more money so politicians can control those crazed capitalists. Who could have seen that coming?
Here's a guy telling us how to fix capitalism and he doesn't know the first thing about it.