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article imageOp-Ed: David Harvey on Piketty's 'Capital in the 21st Century'

By Ken Hanly     May 19, 2014 in World
New York - Thomas Piketty is a professor at the Paris School of Economics. His new book "Capital in the Twenty-First Century" has been well received especially from liberals and leftists because of its well-documented analysis of inequality over two centuries.
There are numerous reviews of Piketty's book. Paul Krugman, a well-known liberal economist has an excellent review here. While Krugman's review is probably worth an article in itself I will concentrate on another review by David Harvey. Harvey is Distinguished Professor of Anthropology and Geology at the City University of New York (CUNY).
Liberals will no doubt welcome Piketty's suggestions that progressive taxation and a global tax on wealth are the only means to counteract a further concentration of wealth among a few and increasing inequality. His data also shows that capitalism without redistributive interventions produces wealthy oligarchies. Wealth becomes concentrated rather than more evenly distributed.
Harvey notes that some see Piketty's work as a replacement for Marx's analysis in his famous book Capital written in the nineteenth century. However, Piketty claims this was not his idea at all and he even says that he has not read Capital. According to Harvey, some right-wing critics claim Piketty is a Marxist in disguise.
Nevertheless, Piketty's conclusions do at times converge with some of Marx's own conclusions. Picketty shows through his extensive statistics that on the whole capital over the two centuries he examines generated increasing levels of inequality. Marx came to the same conclusion in Volume one of his Capital written in the 19th century.
What Piketty fails to do is provide any explanation for many trends as Harvey points out. His statistics do not explain why since the 2008 crash, unemployment has continued high and and why so many houses are lost to foreclosure, or why growth remains sluggish in the US but not in China, while Europe remains in austerity mode with a relatively stagnant economy. While this may be true, surely Picketty could reply that this was not his aim in the first place. After all, he was concentrating on an analysis of the empirical data on inequality.
However, Harvey has a more relevant complaint about Pikkety's analysis. Basically Pikkety finds that the rate of return on capital "r" always is greater than the rate of growth of income "g." This "law" explains why the top one per cent are accumulating more and more. Pikkety even calls this "the central contradiction" of capital.
Harvey points out that what Pikkety has found is simply a statistical regularity that is hardly an adequate explanation or even a law. As for the latter point surely statistical regularities could qualify in a broad sense as laws but it hardly explains why the regularity comes about.
Harvey claims that Marx on the other hand would explain the "law" as resulting from such factors as the uneven power between capital and labor within the capitalist system. Harvey claims the decline in labor's share of national income starting in the seventies derived from the increasing power of capital through the use of new technologies, globalization that shipped production overseas to lower cost countries, and policies that were anti-labor.
Marx pointed out as well that eventually lowered wages would result in a problem of decreased demand for products. This resulted in some economists suggesting Keynesian policies after World War II as a means to stimulate demand and increase economic growth. These strategies may have resulted in some reductions in inequality during the post-war period. By the end of the sixties many capitalists saw the development of the welfare state funded by progressive taxation and the high wages and benefits achieved in some sectors as giving too much power to labor and reducing their returns on capital. Harvey should have noted that this period was one during which labor in the developed capitalist countries was privileged. It was not just the power of labor but power of the developed world over the rest of the globe and the technological advantages of the developed world that led to the possibility of labor in advanced countries to be paid higher wages by their capitalist bosses.
By the end of the sixties Keynesian strategies were replaced by more free market thinking among economists with supply side economics of the sort commended by Milton Friedman gaining more support. At the same time after 1980, tax rates were lowered on the wealthy and rates on capital gains were lowered. As Pikkety shows there was little impact of these policies on growth but much on inequality. However, as Harvey points out this had little to with any statistical correlation rather it had to do with politics and the strength of labor. Picketty' statistics do show however that the vaunted trickle down effect did not occur.
Given that labor was losing power, how could production expand without increasing demand. Harvey claims that Piketty ignores the question. During the 1990's Harvey claims demand was increased by a vast expansion of credit, including the vast extension of mortgage financing, that eventually resulted in a bubble that broke causing the 2007-8 recession.
In the consequent recovery, profit rates recovered quickly and are now as high as ever with stock markets also reaching new highs in the US. Piketty's statistical law cannot explain why this is happening. Harvey suggests that Warren Buffet has a better grasp of the forces at work: As Warren Buffett has noted, “sure there is class war, and it is my class, the rich, who are making it and we are winning.” One key measure of their victory is the growing disparities in wealth and income of the top one percent relative to everyone else.
One of the most important critical points that Harvey makes about Piketty's work is that he has a mistaken concept of capital. Piketty conflates capital with wealth. He defines capital as "the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not. This includes land, real estate and intellectual property rights as well as my art and jewelry collection." For Harvey capital is a process in which money is employed to make more money usually through the exploitation of labor power. Harvey claims that money, land, real estate, or plant and equipment that are not being used productively are not capital.
At present many corporations are sitting on hordes of cash and assets are held that are not being productively employed: Money, land, real estate and plant and equipment that are not being used productively are not capital. If the rate of return on the capital that is being used is high then this is because a part of capital is withdrawn from circulation and in effect goes on strike. Restricting the supply of capital to new investment (a phenomena we are now witnessing) ensures a high rate of return on that capital which is in circulation. In other words capitalist investors ensure a high rate of return only by investing that amount of capital that will generate a high rate of return that will be larger than the growth of income.
A key contradiction in Marxist analysis as I understand it, are the potentialities that exist within capitalism that are left unrealized because the productive forces will be put to work only if there is to be a sufficient return on capital invested. Thus we have the capital strike at present described by Harvey in which there is certainly the wealth available to finance unmet needs for jobs, medical care, education, and on and on but those needs are not met by the system and cannot be when investors do not see expenditures in those areas as leading to an acceptable return on their investments. Only socialism based on production for need not profits could employ such unused wealth.
The entire issue of inequality is in no way central to Marxist thought as it is to many liberal thinkers out to reform capitalism. The Marxist aim is to abolish the system of wage labor and production based on profit through the socialization of the means of production, distribution and exchange. Production will be based upon need and ultimately distribution also is based upon need.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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