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Piketty Digest #7: The Capital-Labor Split in the Twenty-First Century

by Adam David Morton on September 3, 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 seventh ‘Piketty Digest’ on ‘The Capital-Labour Split in the Twenty-First Century’.

The Capital-Labour Split in the Twenty-First Century

With this chapter, we draw to a close Part II of the book on the Dynamics of the Capital/Income Ratio before embarking on the series of six substantive chapters constituting Part III on The Structure of Inequality — What does the chapter  yield? — Quite simply, a series of contentious positions across political economy and economic theory that are likely to pique the interests and ire of many — As a starting point, take Piketty’s assertion that too much capital kills the return on capital — Interesting in itself, Piketty then continues with his rhetoric from the earlier chapters, especially in the Introduction and Chapter 1to stress the need for a ‘calm consideration of the facts’ in contrast to Marxist economists that are accused of ‘twisting the data’ — It was only with publications in the 1930s, such as The Economic History Reviewthat ‘calmer debates’ were enabled on labour’s share of national income, according to Piketty  Following his claims to originality, the novelty of Piketty’s analysis in the book is that his is, ‘the first attempt to place the question of the capital-labour split and the recent increase of capital’s share of national income in a broader historical context by focusing on the evolution of the capital/income ratio from the eighteenth century until now’  Proceeding with his argument, Piketty details that over a long period of time, an increase in the capital/income ratio, β, seems to have led to a slight increase in ∝, capital’s share of national income, and vice versa so that the tendency for the capital/income ratio, β, to rise may well be accompanied by a durable increase in capital’s share of national income — Consequently, capital’s share of national income increased in most developed countries between 1970 and 2010 to the extent that the capital/income ratio increased, with Piketty arguing that ‘no self-corrective mechanism exists to prevent a steady increase of the capital/income ratio, β, together with a steady rise in capital’s share of national income, ∝’  So where are the controversies? — Two whoppers can be highlighted in relation to: (1) debates on the tendency of the rate of profit to fall; and (2) the so-called Cambridge capital controversy — First, Piketty’s argument necessarily draws him onto the terrain of Karl Marx’s analysis of the dominant ‘law’ of the tendency of the falling rate of profit within capitalism — Piketty again peddles the view that Marx argued that the overaccumulation of capital would lead ‘inexorably to a falling rate of profit’ — Piketty also adds that ‘Marx did not use mathematical models, and his prose was not always limpid, so it is difficult to be sure what he had in mind’ — Further, Marx is accused of an inability to assess long-term structural growth ‘owing to lack of historical perspective and good data’ — Summing up, despite some ‘important intuitions’, it is maintained that ‘Marx usually adopted a fairly anecdotal and unsystematic approach to the available statistics’ — This is all quite troubling, to say the least, for a scholar taken so seriously to produce such a hackneyed commentary on the falling rate of profit — A basic point to make here is that the falling rate of profit is a tendency affected by various counteracting influences to slow down and reverse the fall in the rate of profit e.g. by raising the rate of exploitation and/or lowering the organic composition of capital, including in overview lower wages, the importation of cheap wage goods or means of production, or the migration of capital to areas of cheap labour  J. M. Keynes once wrote on the ‘clue to the economic riddle’ to be found in Marx that ‘I can discover nothing but out-of-date controversialising’ (Letter to George Bernard Shaw, 1 January 1935) — Piketty does little here but add to the ignorance about Marx’s method of abstraction related to the ‘law’ of the tendency of the rate of profit to fall — This problem is, second, compounded by his summary of the Cambridge capital controversy referring to the 1950s and 1960s debates between Robert Solow and Paul Samuelson in Cambridge, Massachusetts, at MIT, pitted against Joan RobinsonNicholas Kaldor and Luigi Pasinetti in Cambridge, England — The debate was about whether or not capital can be seen as a completely mobile factor of production which can be moved from one production technique to another under the laws of the competitive market, the MIT position, versus that of the England-based economists arguing that economic techniques are defined, and chosen, in advance so that a decision-maker faces not mobile and competitive markets for factor inputs, but had to choose between predetermined techniques — Piketty fails to mention the importance of Pierro Sraffa to these debates and the latter’s focus on ‘re-switching’ one level of capital input to another one with even higher wage costs that could still get more output while holding the level of capital constant — Again, Piketty holds this debate with low esteem with its ‘sterility’ driven in his view by the lack of historical data that was needed to clarify its terms — He does, however, nail his colours to the mast when stating that ‘it was not until the 1970s that Solow’s so-called neoclassical growth model definitely carried the day’ — Within the parameters of this debate, a more reasonable judgement has been made by Avi Cohen and G. C. Harcourt in Journal of Economic Perspectives,‘while many of the key Cambridge, England, combatants stopped asking questions because they died, the questions have not been resolved, only buried’  — So, what’s all the fuss about? — Whether it is wider Marxist debate about the ‘law’ of the tendency of the rate of profit to fall, or post-Keynesian and Sraffian viewpoints on the capital controversy, Piketty fails to deal rigorously and convincingly with significant competing analyses of the composition of capital — As Michael Roberts has detailed on his blog, Piketty’s rate of return on capital, r, ‘actually depends on the  rate of profit on capital. And it’s the law of the tendential fall in the rate of profit that is the central contradiction of capitalism, not the rising inequality of wealth’  — Nevertheless, Piketty concludes with his view on capital’s comeback that since the end of the twentieth century there is a return to a regime of low growth and low or zero demographic growth, leading to the return of the dominance of capital so that wealth accumulated in the past takes on considerable importance  But the deep structures of capital have not been altered, where the importance of capital relative to labour has not been reduced, with the chapter and this part of the book finishing on a bridging questioning to the next  ‘How much has the structure of inequality with respect to both labour and capital actually changed since the nineteenth century?’

Question: For such a prominent book, why does Thomas Piketty in Capital in the Twenty-First Century seemingly appear to be so remiss in failing to directly engage the texts and debates he dismisses?

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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