While his book is ostensibly
devoted to the study of capital and its rate of return, Piketty comes to his
subject apparently without having read a single page of Ludwig von Mises or
Eugen von Böhm-Bawerk, the two leading theorists of the subject. There is not a single reference to either of these men in his book.
There are, however, seventy references to Karl Marx.
In his book,
Piketty argues that saving and capital accumulation by wealthy capitalists serves
to reduce wages. The capital accumulated does nothing to increase production,
he claims (pp. 228, 358, passim). All that it accomplishes is allegedly to
increase the share of national income going to profits while equivalently
reducing the share going to wages (p. 361). Because there is no additional
production, the effect of the change in shares is a corresponding change in
absolute terms, i.e., real profits up, and real wages down.
In order to avoid endless
such destructive capital accumulation and its accompanying “inegalitarian
spiral,” Piketty advocates a progressive income tax as high as 80 percent “on
incomes over $500,000 or $1 million a year,” accompanied by a progressive tax
directly on capital itself, as high as 10 percent per year (pp. 512f., 572).
Now Piketty’s
claims about the wage and profit shares are refuted simply by imagining an
increase in saving and investment by capitalists and then observing the
consequences both for wage payments and for the amount of profit in the
economic system. It will be found that wage payments necessarily rise and the
amount of profit necessarily falls, results in diametric opposition to
Piketty’s claims.
Thus, assume that
initially the total amount of profit in the economic system is 200 units of
money. (Each unit can be conceived as representing as many tens of billions of
dollars as may be necessary for 200 units to equal the actual current amount of
aggregate profit.)
Assume also that
accumulated capital in the economic system is initially 2000 units of money.
Thus the initial average rate of profit is 10 percent.
And, finally, assume
that the capitalists, who have up to now been consuming their 200 of profit,
decide to save and invest half of it. They now make an additional expenditure
for capital goods and labor in the amount of 100.
Whatever portion of
this 100 is wage payments necessarily increases the total of wages paid in the
economic system. At the same time, the spending of an additional 100 on capital
goods and labor must sooner or later add 100 to the aggregate costs of
production of business that are deducted from sales revenues, thereby equivalently
reducing aggregate profits.
The rise in costs
can take place immediately or over many years, depending on what the 100 is
spent for. At one extreme, if it were spent entirely on items that were not
capitalized, such as, typically, selling, general, and administrative expenses,
it would show up immediately as equivalent additional costs. At the other
extreme, if it were spent entirely on the construction of buildings with a
40-year depreciable life, it would take 40 years for it to show up as equivalent
additional costs of production. But one way or the other, it will show up as
equivalent additional costs and thus equivalently reduce the amount of profit
in the economic system.
Thus, Piketty’s
“findings,” as they are called, are reversed. The capitalists’ saving and
investment that increases the ratio of accumulated capital to income, increases
the wage share of national income and decreases the profit share.
Moreover, the
larger supply of capital goods that results from the transition to a higher
capital/income ratio serves to raise the productivity of labor and increase the
total of what can be produced, including a still larger supply of capital
goods. With technological progress to offset diminishing returns to a growing
supply of capital goods, capital accumulation in physical terms can potentially
go on indefinitely, without further increases in the ratio of capital to
income. But a higher ratio would reinforce this process. This is because insofar
as it represents a more abundant supply of savings, it makes it possible for
the economic system to implement more costly technological advances, thereby
increasing the contribution of technological progress to capital accumulation.
Piketty’s program
is one of unmitigated economic destruction. America and the world, above all
the wage earners of the world, need the abolition of taxes and regulations that
stand in the way of capital accumulation and the increase in production. Capital
accumulation and more production, not egalitarianism and its absurd theories
and programs, are the foundation of rising living standards in general and
rising real wages in particular.
Copyright © 2014 by George Reisman. George Reisman, Ph.D. is Pepperdine University Professor
Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). See his Amazon.com
author's page for additional titles by him. His website is www.capitalism.net and his blog is georgereismansblog.blogspot.com.
On Twitter @GGReisman.
