Tuesday, April 29, 2014

Thomas Piketty II

I'm slowly working my way through Capital and will make a few more comments. What has interested me the most so far is Piketty's account of the economic conditions under which people have lived over very long historical periods. Prior to the Industrial Revolution, wealth was based mainly on land ownership, there was little economic growth or inflation, and people lived to about age forty. Since 1700, the value of agricultural land has plummeted as a percent of national income. Foreign capital owned by Britain and France peaked around 1900 and crashed starting around 1914. Domestic capital, i.e. financial assets and the value of businesses, declined up to World War I but was offset by increases in foreign capital. Then the two World Wars devastated the world economy. From that time onward, foreign capital and agricultural land have been insignificant in value, domestic capital (as a percent of national income) has returned to 1700's levels, and housing has skyrocketed to become the largest component of national wealth in Britain and France.

Piketty's analysis is highly detailed, and the above is just one small part of it. He seems to be moving in a direction that will show that the Industrial Revolution was a one-time event that is unlikely to be replicated, and that a peak of wealth inequality occurred just before World War I, corresponding with the Belle Epoque in France. This seems like an appropriate benchmark to me, because I have long seen that period in France as a flowering in the arts that could never have occurred without phenomenal wealth. Somehow the Eiffel Tower, Impressionism, Post-Impressionism, modern art, Proust, Debussy and countless other artists emerged during that period. Reading Proust, it is obvious that his contemporaries were swimming in money.

One of Piketty's theses is that wealth would have continued to accumulate at the top, and inequality would have continued to increase were it not for the World Wars, which inadvertently reduced wealth inequality. He thinks that, even though the world economy has been significantly restructured since the wars, wealth has resumed accumulation at the top, returning us to a state of increasing inequality. Furthermore, although he has not gone into detail as far as I have read, most of the economic growth since the wars was a natural rebound that occurred regardless of economic strategy. Europe, for example, recovered with strong central governments, while the U.S. thinks it recovered by emphasizing entrepreneurial activity in the private sector. Thus, Piketty seems to have an underlying theme saying that America's free enterprise dogma has little support in economic history. I believe that later in the book his recommendation will be to address this problem by instituting higher taxation on wealth.

I find it refreshing to read Piketty, because he is not a one-dimensional economist. For example, he cites the novels of Balzac and Jane Austen to show how differently people thought about meeting their living expenses in the early 19th century compared to now. To some extent, the variation in income from land was negligible and inflation did not exist, so it was much simpler to judge a person's financial status in those days. The economic structure of society was far more stable. Piketty seems to have a breadth of knowledge that makes most American economists look like narrow academic specialists and a far cry from genuine public intellectuals. Over the last few years I have come to dislike Paul Krugman and Joseph Stiglitz for their inability to create an economic narrative that would effectively demolish the absurd and self-serving narrative that has been successfully advanced by American conservatives for more than thirty years.

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