Piketty, Chapter 5

This blog is moving forward at a distressingly slow pace. I often marvel at serious bloggers frenetic production. I am just not that smart. Not that fast.

Anyways, Chapter Five of Capital in the 21st Century, “The Capital/Income Ratio Over the Long Run,” features the appearance of Piketty’s “Second Fundamental Law of Capitalism,” β = s/g. The first law, α = * β (describing the share of capital in national income, equal to r, the rate of return on capital, times the capital/income ratio) is related through the term β, which represents the capital/income ratio. The first law is an accounting identity, an instantaneous definition, and the second law describes a long-run relationship. The long run capital/income ratio, Piketty tells us, is equal to the savings rate over the growth rate. He spends the rest of the chapter filling out what this means, and just what counts as capital.

What really strikes me about his observations is that, by focusing on the capital/income ratio, and how it is determined by the activities of the market economy, he brings out the capitalist character of what he calls “rich countries” like the US, France, Germany, the UK, and Japan. The world of the modern, capitalist countries is the modern world itself, I think – and one of it’s essential characteristics is that it keeps these records such that one can observe the long term processes of growth and development. That he proposes “fundamental laws” seems like useful hyperbole: despite the fact that existence within the parameters of modern capitalism can feel unfree in the way a cork floating in an ocean is subject to the forces around it, the market economy really is under our control. And the fact that I can take a hermanuetical position demonstrates how economics is different from physics.

Marx famously wrote that, up until his own time, philosophy merely described the world, but that the point was to change it. In some sense, I feel like Piketty is focused on mere description – in its way a powerful move to make. One of the things I really came to understand when I got into Andy Warhol is the power of focusing on how repetition changes appearance. An image seen for the millionth time will look different than it did at first sight. Within the past 400 years, there are lots of moments in history where you could say that “everything” changed – but what Piketty is doing is making all those years continuous and comparable. And so far I feel like he’s been pretty non-judgemental about it, too. Its a part of his tone I appreciate greatly.

Getting to what Piketty actually writes about in the chapter, it’s mostly about how the capital stock is calculated, and other nitty-gritty details concerning long-term evaluations. One interesting detail was that, in rich countries, between 30 and 50% of national income is held in durable goods. Durable goods are things like refrigerators and sofas and what not – one of the way economists categorize consumption is in terms of “durables” and “non-durables,” which is stuff like pizza and concert tickets. Durable goods are not counted as wealth (as Samantha finds out in the episode of Sex and the City when she realizes that she cannot sell her closet full of shoes when she needs money to buy her formerly rent-controlled apartment). “Valuables,” however, such as paintings and jewelry, are counted, as “nonfinancial assets,” among wealth. However, they account for wealth valued around just 10% of national income, and are therefore not really that big a deal.

More interesting is the extended discussion of how businesses are valued – there are two different ways of looking at the value of a corporation. There is the “market” valuation, which reflects the value of stocks, in the case of a public corporation, or the estimated selling price of a private firm. Then there is also the “book” value reflected by a firm’s own internal accounting. As mentioned before, in some cases there can be a considerable discrepency between the “market” value and the “book” value of a firm. Piketty brings in the idea of Tobin’s Q, which is the ratio between the two values. James Tobin was an economist at Yale for many years – his star pupil was Janet Yellen, now Chairman of the Federal Reserve. He used her notes from his classes as the basis of a study guide handed out to later students. Although the value of Tobin’s Q can vary greatly in short periods, if one observes long-run trends of the ratio, it can be seen that some countries have a Q above 1, while others have a Q below 1. An example of an above 1 ratio (it occurred to me) would be Apple, which is valued highly for its brand, an intangible asset. As discussed earlier, Germany has a Q persistantly below 1, due to the characteristics of “Rhenish capitalism.”

The other really interesting observation I found in this chapter was a kind of off-the-cuff theory of organizations, categorized by form of income. Government organizations are financed by public subsidy; corporations are financed by sales; and non-profits are financed by charitable contributions. This comes up because one of the rising categories of wealth is the private foundation, a consequence of the fall of publicly held wealth. Again, the use of the concept of income is just a super-useful way to thing about how the economy all first together.

The transfer of wealth out of the public sector and into the private is definitely a major theme of the chapter. It tempting to say that such an outlook is bleak, but Piketty is perfectly non-chalant about it. The main idea is that the capital/income ratio is determined in the long run by the ratio between saving and growth, and I think that’s a fairly open ended way of looking at the economy. Capitalism is dynamic – you can change it over time, and those changes can be directed by changes made in present time. Which is to say, if we wanted to a lower capital/income ratio, we could make that happen. I think that, often enough, people want to say that capitalism is just unalloyed badness, and Piketty’s view seems to refute this in favor of a more plastic view of capitalism

At the end of the chapter, there is a short section on the mystery of land values that I think is delightful. Land has a storied existance in American capitalism – from the agrarian idealism of Thomas Paine and Thomas Jefferson to the bitter legacy of former slaves denied their forty acres and a mule to the rise of the 30-year mortgage as an essential element of middle class existance. It’s an important component of what we deam “wealth” but its value is not nearly so stable as we might like.

Looking ahead a bit, the next chapter is going to look at how capitalism is shaping up in the 21st century, and then we get to Part Three, which is the core of the book. So that’s pretty exciting, I think. Even though there’s been a great deal of refining and shaping to the argument so far – Piketty is careful to tell us what the book is about and what it isn’t about – in some ways it feels like more has been left open than closed. There’s a really big discussion here, that goes way past the customary discussion of national political economy.




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