Wednesday, April 30, 2014

"Capital in the Twenty-First Century" by Thomas Piketty

I've begun reading the new book by Thomas Piketty, Capital in the Twenty-First Century. I have not read the entire book yet. Indeed, I may never find the time to do so. However, let me share two observations based on what that I have read so far:
  • This book seems to be well written and well organized. As such, I believe the central concepts should be accessible to any moderately intelligent person - anyone who occasionally reads a book and ponders over it.
  • Piketty disparages the expression of mere prejudiced speculation on the subject of wealth distribution, but he seems to engage in exactly that type of speculation when it comes to politics.
The first observation does not require any amplification, but the second observation most certainly does. Nevertheless, let me point out in advance that Piketty's political naivete (if I may call it that) does not significantly diminish his contribution in the fields of economic research and economic analysis. It merely diminishes the credibility of his proposed solutions, essentially the final one-fourth to one-third of his book.
At the bottom of Page 10, we read:
Some people believe that inequality is always increasing and that the world is by definition always becoming more unjust. Others believe that inequality is naturally decreasing, or that harmony comes about automatically, and that in any case nothing should be done that might risk disturbing this happy equilibrium. Given this dialogue of the deaf, in which each camp justifies its own intellectual laziness by pointing to the laziness of the other, there is a role for research that is at least systematic and methodical if not fully scientific.
But when it comes to politics, Piketty has already declared his own intellectually lazy and effectively deaf position. Earlier on that very same page, he dogmatically asserts:
Democracy will never be supplanted by a republic of experts—and that is a very good thing.
Regrettably, Piketty makes no effort whatsoever to substantiate either of those two assertions. Nevertheless, dogma aside, Piketty presents as an honest academic. And so, interestingly (or perhaps better to say, inevitably), Piketty does appreciate the importance of economic democracy. If not earlier, this becomes apparent in the last portion of his book, "Part Four: Regulating Capital in the Twenty-First Century". (Part Four is essentially Piketty's proposed countermeasures to the inequality issues that he painstakingly exposes in the first three parts.) For example, on Page 515, we read:
It is then easy to say that workers and their representatives are insufficiently informed about the economic realities facing the firm to participate in investment decisions. Without real accounting and financial transparency and sharing of information, there can be no economic democracy. Conversely, without a real right to intervene in corporate decision-making (including seats for workers on the company’s board of directors), transparency is of little use. Information must support democratic institutions; it is not an end in itself. If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again.
Unfortunately, Piketty's aforementioned political prejudices severely blinker his vision of practical solutions to the very problems he diligently describes over the course of the first 420 pages of his book. For example, on Page 465, Piketty presents what he describes as the ideal solution and then quickly dismisses it as utopian. I quote:
To regulate the globalized patrimonial capitalism of the twenty-first century, rethinking the twentieth-century fiscal and social model and adapting it to today’s world will not be enough. To be sure, appropriate updating of the last century’s social-democratic and fiscal-liberal program is essential, as I tried to show in the previous two chapters, which focused on two fundamental institutions that were invented in the twentieth century and must continue to play a central role in the future: the social state and the progressive income tax. But if democracy is to regain control over the globalized financial capitalism of this century, it must also invent new tools, adapted to today’s challenges. The ideal tool would be a progressive global tax on capital, coupled with a very high level of international financial transparency....
A global tax on capital is a utopian idea. It is hard to imagine the nations of the world agreeing on any such thing anytime soon.
Indeed, even before presenting this solution Piketty had already dismissed it at least once and possibly twice or more. I quote from Page 425:
As I have already noted [perhaps a reference to Page 32, around the middle of the "Introduction"], the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a progressive global tax on capital. Such a tax would also have another virtue: it would expose wealth to democratic scrutiny, which is a necessary condition for effective regulation of the banking system and international capital flows. A tax on capital would promote the general interest over private interests while preserving economic openness and the forces of competition. The same cannot be said of various forms of retreat into national or other identities, which may well be the alternative to this ideal policy. But a truly global tax on capital is no doubt a utopian ideal.
To be fair to Piketty, he does grudgingly admit that his own ideal solution might be possible (eventually). On Page 466, he writes:
To reject the global tax on capital out of hand would be all the more regrettable because it is perfectly possible to move toward this ideal solution step by step, first at the continental or regional level and then by arranging for closer cooperation among regions.
While that does indeed make sense, Piketty then offers reasons why what he described as perfectly possible is not so simple – reasons that are outside the scope of my remarks.

Democracy regaining control over capitalism seems to be a recurring theme in the book. It starts as early as Page 9:
There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions. The policy recommendations I propose later in the book tend in this direction.
Unfortunately, as evidenced by the type of pessimism about solutions that Piketty demonstrates, the notion of political democracy satisfactorily restraining capitalism is just a pipe dream. Had Piketty opened his mind just a bit more, he might have grasped the symbiotic relationship between political democracy and capitalism. The prospect of economic democracy in an environment of political democracy is a fantasy, far more utopian in nature than the notion of establishing a global progressive tax on capital. All that is required for a global progressive tax on capital is the establishment of a world government. But nowhere in the 605 pages of Piketty's impressive book does he contemplate such an institution. Indeed, even the few times that Piketty mentions the United Nations (not at all the equivalent of a world government but tending in that direction), it is only as a reference for data and not as an institution that could be instrumental for socioeconomic change.

If there is a lesson to be learned from all of the above, it is the importance of understanding the interplay among the various elements (or levels) of our social existence. In this respect, the five fundamental principles of Prabhat Ranjan Sarkar's Progressive Utilization Theory (PROUT) are highly educative. In PROUT, economics is located as the second tier of a five-tiered pyramid in which practice flows upward and theory flows downward.