Piketty Digest #5: From Old Europe to the New World
7th Annual Wheelwright Lecture: Leo Panitch

Piketty Digest #6: The Capital/Income Ratio over the Long Run

by Adam David Morton on August 19, 2014
Piketty Forum

With all the furore surrounding Thomas Piketty’s Capital in the 21st Century my aim here is to carry a weekly focus on the book reblogged from For the Desk Drawer. The purpose is modest. There is already in existence some rather excellent coverage and detailed engagement with the book both in the general media and on specific blog sites. I am thinking here of the analyses by Michael Roberts on his blog site; the competing viewpoint or ‘afterthoughts’ of David Harvey; Benjamin Kunkel’s assessment in ‘Paupers and Richlings’ for London Review of Books  matched by Knox Peden’s great essay on ‘The Abstractions of History’; or Paul Krugman’s rather different tone in ‘Why We’re in a New Guilded Age’ for The New York Review of Books. My own endeavour is much less ambitious than any of these engagements. It seeks to offer a weekly equivalent to the ‘Pocket Piketty’ provided by Duncan Green. Each week my intention is to carry a blog post that summarises my notes on each chapter in just a few hundred words that can be read quickly. The purpose of these summaries is to produce an interpretative synopsis of each chapter drawn from my more detailed notes.

These interpretative digests will also enable me to formulate my engagement with a reading group on Piketty’s Capital in the 21st Century, organised by Chris Hesketh at Oxford Brookes University. They will also provide a quick précis for teaching purposes at the University of Sydney and through this novel pedagogical exercise conclude with a question each week to be developed in my Department of Political Economy classes on ‘The Political Economy of Global Capitalism’ (linked to the Twitter hashtag #ECOP2613). Such short interpretative digests may thus provide a different and original form of engagement with the book. Without attempting to rival or replace the importance of detailed engagement, these ‘Piketty digests’ will facilitate a quick and accessible read for people ‘on the go’. The posts will be formulated and produced after reading each chapter, in dialogue with the Oxford Brookes University reading group and colleagues at the University of Sydney, rather than polished after completing the reading of the whole book and then subsequently edited; although I may tidy up a little week-to-week. Perhaps these ‘Piketty digests’ will also provoke some wider resonances and points of contact. Here is the sixth ‘Piketty Digest’ on ‘The Capital/Income Ratio over the Long Run’.

The Capital/Income Ratio over the Long Run

Piketty further develops his second fundamental law of capitalism (see also Chapter 1 Income and Output) that allows him to relate the capital/income ratio in an economy to its savings and growth rates, which is defined by β = s/g where the capital/income ratio, β,  is related to the savings rate, s,  and the growth rate, g. This is also referred to as the ‘dynamic law of accumulation’ — The argument is that a country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital (relative to its income) which can in turn have a significant effect on the social structure and distribution of wealth — In a useful phrase, referring to such a situation of a slow growth regime, this is termed capital’s comeback — Piketty also introduces a distinction between the first fundamental law of capitalism (∝ = r x β), outlined in Chapter 1, and this second fundamental law of capitalism — To recap, the first fundamental law of capitalism is ∝ = r x β is where the share of capital income in national income, ∝, is equal to the average rate of return on capital, r, times the capital/income ratio, β, that Piketty states here ‘is actually a pure accounting identity, valid at all times in all places, by construction’ — Piketty further states that ‘one can view it as a definition of the share of capital in national income . . . rather than as a law’ — By contrast, the second law β = s/g applies in all cases, regardless of the exact reasons for a country’s savings rate but it does not explain the short-term shocks to which the capital/income ratio is subject, the existence of world wars or crises — However, Piketty argues it does allow an understanding of the potential equilibrium level toward which the capital/income ratio tends in the long run, when the effects of shocks and crises have dissipated’ — In contrast to the likes of David Harvey in, for example, The Enigma of Capital: And the Crises of Capitalism or his earlier book The Limits to Capital, there is no structural account here of the conditions of crisis within capital accumulation or how shocks, crises, and global war emerge — Instead, capital’s comeback is explained by the strong comeback of private capital in the developed countries, since the 1970s, and the emergence of ‘patrimonial capitalism’ by a supposed ‘structural’ evolution of three sets of factors: 1) slower growth; 2) the gradual privatisation and transfer of public wealth into private hands into the 1970s and 1980s; and 3) the long-term catch-up phenomenon affecting real estate and stock market prices — But this is no rival to David Harvey’s account in The Limits to Capital in terms of the tendency towards overaccumulation as expressed in capitalist history by the origins of crises embedded in production in which we witness gluts on the market, massive rises in inventories, idle productive capacity, idle money capital, unemployment and falling money rates of profit leading to the problem of surplus absorption (first cut theory), which is linked to the financial and monetary aspects of speculation, fixed capital formation, and commodity futures (second-cut theory), and is then integrated with the geography of uneven development and global war as the ultimate means through which devaluation is enacted in order to secure new bouts in the cycle of capital accumulation to stave off the crisis tendencies of overaccumulation  (third-cut theory) — A convincing theory as to why there was slower growth in the 1970s, what initiated the privatisations of public services, and how this entailed the turn to financialisation thereafter is missing in Piketty’s ‘structural’ evolution — Equally troubling in Piketty is the transhistorical essence he attaches to capital — Witness here his statement that ‘when we think of the property owned by churches over the centuries, or the property owned today by organisations such as Médecins Sans Frontières or the Bill and Melinda Gates Foundation, it is clear that we are dealing with a wide variety of moral persons pursuing a range of specific objectives’ — This falls way short of an historically specific appreciation and understanding of capital capable of unlocking the secret or ‘hidden abode’ of production as detailed by Karl Marx in Capital, Volume 1 — Setting aside these qualms, Piketty asserts that ‘The very sharp increase in private wealth observed in the rich countries, and especially in Europe and Japan, between 1970 and 2010 thus can be explained largely by slower growth coupled with continued high savings, using the law β = s/g’ — As a summary, Piketty notes that the privatisation or gradual transfer of public wealth into private hands leads to an underestimation of the magnitude of transfers of public wealth to private hands and the ‘catch-up’, or historic rebound, of asset prices (the comeback of capital) over the long run that have further increased the capital/income ratio, or inequality — Piketty then raises an important question: ‘To what extent will some countries find themselves owned by other countries over the course of the twenty-first century? Are the substantial net foreign asset positions observed in the colonial era likely to return or even to be surpassed?’ — But further gaps loom large here, not least the lack of mention of the invasion of Iraq in 2003, resource conflicts over extractivism, land grabbing, water, gas and food wars — Allusion to ‘the dynamics of wealth and foreign asset holdings in the petroleum exporting countries’ is simply deferred for later, to Chapter 12 — So, much hangs on how these struggles over the dispossession of oil, land, food and additional resource extractivism will be treated later in the book — Finally, on land values, Piketty posits the value of ‘pure natural resources’, including ‘pure land’, or land prior to any human improvements without even questioning the category of ‘nature’ as pure and undefiled, or nature as a social product, as detailed by Neil Smith in Uneven Development: Nature, Capital and the Production of Space — The consequent problem is that, once again, Piketty struggles to understand the historical development of capitalism and here the capitalist relation with nature in the production process.

Question: What is at stake in questioning how nature is socially produced under capitalism and what are the concrete relationships through which nature becomes invested with social priorities?



Adam David Morton
Adam David Morton is Professor of Political Economy in the Department of Political Economy at the University of Sydney.

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