A Critique of Piketty’s Capital in the 21st Century

Preliminary Remarks

When it comes to Piketty’s Capital in the 21st Century, I have plenty to say. The book was popularly successful and for several months created the temper that a fatal blow had been struck to free-market economic philosophy. Supporters of the book were pleased that for several months no one could offer a more sophisticated rebuttal than “is not,” or “nuh uh.” Naturally it takes time to deconstruct a 600-page tome. But by the time of this writing, many devastating critiques have surfaced. Even initial supporters are changing their tune. Reviews have turned from rave to mixed as scholars continue to expose technical and theoretical flaws that undermine the book’s central thesis.Capital_in_the_Twenty-First_Century_(front_cover)

Since the book is a synthesis of empirical research, theory, speculation and policy, one could critique it on a variety of levels. One could challenge the accuracy of the data, the sources from which they are derived, the narrative, the theory, the conclusion, the problem itself, and the solutions proposed. Critiques have already appeared on each of these topics.

But unfortunately, the lengthy and multilayered nature of the work precludes a definitive or comprehensive critique, at least for the time being. Critiques on any single theme appear insufficient and draw the counter criticism that the point refuted is not the central or only point of the research. Although there is nothing fallacious about dismantling a body of research by pulling out a single theoretical or technical linchpin, this approach appears dismissive to supporters, who will continue to back Piketty until they receive the elusive comprehensive critique.

To add another challenge for the critic, Piketty’s book is a technical treatment on a popular message. Many lay readers have a predilection for the book’s conclusions despite their unfamiliarity with the theory and methods of economic research. Technical debates on economic theory and methodology exclude the casual audiences who so eagerly absorbed Piketty’s conclusions. Now that Piketty’s message has penetrated the public mind, it is difficult to get them to reexamine the chain of reasoning that led to their conclusion, especially if that chain becomes more technical than their casual interest supports.

An effective critic must keep these challenges in mind. As my reader, I encourage you to ask yourself, how much of what kind of proof is necessary to overturn Piketty’s thesis? Is it enough to remove one fundamental linchpin? Or must every aspect of the book be proven false, including its moral sentiments? Ultimately, as with all things, for those who believe no proof is necessary. For those who do not, no proof is possible.

Unfortunately I don’t have the time undertake a comprehensive critique of Capital in the 21st Century, although I wish I did. My more modest goal here is to show that the soil of his book is rich for critique, and to offer several alternative ways of thinking about the issues Piketty raises. I will examine four points that I believe to be weaknesses in Piketty’s work. If you would like me to critique a specific point in the work, please comment below and I will speak to your concern to the best of my ability.

First, as always, let me disarm the impending straw man – my critique of Piketty’s work is NOT an endorsement of income inequality, or support for the rich and disdain for the poor, or a defense of the “status quo,” whatever that might mean. In fact, my critique is motivated by a deep concern for the poor and a corresponding concern that Piketty’s proposal hurts them rather than helps them. I ask hard question because I care, and I challenge policies backed by good intentions because I foresee them working contrary to purpose – not because I oppose their sentiment.

The Critique

Let’s begin with a restatement of Piketty’s thesis:

The rate of return on capital (r) exceeds the rate of growth (g) in the economy (r>g). If the return on capital always exceeds growth, then those who own capital will always receive a greater share of income. In other words, if r>g, then capitalism necessarily produces income inequality in favor of capital owners and away from wage earners. Since inequality is inimical to democracy, democracy must put the reigns on capitalism to protect itself. Final recommendation: institute a global tax on capital, not for redistributive purposes, but simply to eliminate capital accumulation.

Claim 1: r >g

Rebuttal: r is rarely greater than g.

If the return on capital is not greater than the growth rate, then Piketty’s central thesis falls. Interestingly, amidst a mostly positive review of Capital, Harvard economics professor emeritus Lawrence Summers indicates that this is indeed the case:

“Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.”

In other words, according to Summers, Piketty’s central thesis is false. Piketty overestimates the return on capital because he does not include depreciation, which increases in proportion to accumulation. If Summers’ observation is correct, it invalidates the primary contribution of Piketty’s book: that capitalism contains an inherent mechanism that produces systematic inequality.

In addition to this major problem, many free market economists of the Austrian tradition have pointed out that Piketty treats capital as a homogeneous stock, when in fact it is heterogeneous stock of goods that earn and depreciate at a variety of rates. There is no way to establish a “return on capital” because of the endless variety of capital, employments, and returns.

Needless to say, little else matters about Piketty’s book if these vital linchpins fall out.

Claim 2: Capitalism produces inequality.

Rebuttal: Crony capitalism produced the inequality we are seeing, not free-market capitalism. 

Piketty’s narrative is a straw man. He uses one of the most popular phony narratives among the political left: as the world (or America) has become freer and more capitalistic, it has become more unequal. Rarely does anyone take the time to prove that we are trending in the direction of economic freedom. We assume the deregulation and laissez faire that require proof, and ignore the massive apparatus of government confiscation, spending, regulation and central banking that plague every modern economy. Consider these excerpts from George Reisman’s paper “The Myth that Laissez Faire is Responsible for Our Present Crisis:”

“Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements as those quoted above…  if one considers the following facts about the present-day United States:

  1. Government spending in the United States currently equals more than forty percent of national income
  2. There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education…
  3. The economic interference of today’s cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions
  4.  …as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations…
  5. And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level

The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.”

From these facts, one could argue that America is half socialist! No country that Piketty examines is “capitalist” in a meaningful sense; and America is just as rife with centralization, taxation, and social programs and military spending as many countries who actually call themselves socialists, if not more.

As Friedrich Hayek argues in The Road to Serfdom, the more planned an economy becomes, the worse it will perform. The worse it performs, the more people will blame the vestiges of freedom rather than the rise of planning. The more we blame the vestiges of freedom, the more eagerly we embrace leaders who take complete control. This is exactly where we are now, and exactly what Piketty advocates. We are misdiagnosing the problem and prescribing the poison as the cure.

Claim 3: Capitalism creates inequality

Rebuttal: Central banking creates inequality.  

It is true that capitalism does not ensure income equality; but we ensure the massive inequality we are seeing now when we allow the collusion of business and government and when we allow central banks to play favorites behind the scenes.

It is hard to take seriously the claim that economic freedom creates inequality when we consider the ascendance of central banking. Many people have written on the correlation between central banking and inequality (read here for an introductory essay).  Virtually all first-world economies operate under the power of a central monetary authority, which decides interest rates, lending standards, stock-footage-money-printing-press-making-hundred-dollar-banknotes-loop-able-animationreserve requirements, inflation rates, foreign lending, credit swaps, and the production of credit. These banks have no congressional oversight and they are not accountable to democratic vote.

In the last 20 years we have seen unprecedented transfers of wealth from central banks to private institutions through bailouts and credit swaps, as well as perpetual “quantitative easing” to favored institutions. We have seen them create trillions of dollars out of thin air. For the last one hundred years the nation’s money supply has been under the unilateral control of a government oligarchy; now we are told to blame the growth of the super-rich one percent on economic freedom. This sounds pretty fishy to me.

Claim 4: Inequality is inimical to democracy, thus we must curb it immediately to protect democracy. 

Rebuttal: Maybe, but where’s the proof? 

The urgency of the book relies on the sentiment that it really matters that inequality is getting worse. To be clear, I oppose all extra-market means of gaining wealth. I fully oppose the cronyism and central banking that have demonstrably led to our current state. But I do support freely functioning markets and would argue that free markets will produce a much more equal distribution of wealth than we are seeing now. I am against wealth inequality when it is created artificially through protective policies and privileges; I am not against it on principle.

Those of us who don’t condemn economic inequality simply for its own sake are left to question the urgency of Piketty’s argument. Perhaps inequality does matter greatly, but in what way? The latest polls on this issue indicate that it is not as popular of an issue as some would have you believe; as few as 0.5% of people polled in the last year consider income inequality the most important issue challenging the U.S. today. (compare that with the #1 concern “dissatisfaction with government” coming in at 18%)

If the argument is that income inequality is inimical to democracy because the rich buy political protection from government, then the proper medicine is to reduce the scope of government to such that there are fewer policies for the rich to buy. It’s not the rich, but the rich’s influence on politics that threatens democracy. The medicine for this problem is not more government, but Crony Capitalismless! Take away the means by which the rich protect their interests and you will preserve democracy.  Despite the public’s good intentions, big businesses co-opt the very regulations we levy against them and use them to protect their status. Libertarians like myself have argued that the biggest threat to privilege and inequality is a truly free market. Perhaps it’s time we give it a try?

The only way to make people economically equal is to make them equally poor; we must accumulate capital if we all want to get richer. The economy is not a zero-sum game in which the rich having more means that the poor have less. As more capital is accumulated the productive capacity of labor rises, goods become cheaper and more abundant, more jobs are created, purchasing power is increased and the general standard of living rises. Ban capital accumulation and you will destroy the basis for productivity.

Phony historical narrative

Piketty distorts facts deliberately to perpetuate the narrative that Republicans are enemies of the poor and Democrats are their champions. For instance on page 473, he claims:

“Indeed, within a few years of his inauguration, Roosevelt increased the top marginal rate of the federal income tax to more than 80 percent on extremely high incomes, whereas the top rate under Hoover had been only 25 percent..”

And again on page 506:historical accuracy

“Roosevelt came to power in 1933, when the crisis was already three years old and one-quarter of the country was now unemployed. He immediately decided on a sharp increase in the top income tax rate, which had been decreased to 25 percent in the late 1920s and again under Hoover’s disastrous presidency. The Top rate rose to 63 percent in 1933 and then to 79 percent in 1937, surpassing the previous record of 1919.”

This is not true. Calvin Coolidge cut tax rates to 25% in 1925; Republican Hoover raised them to 63% in ’32, not Democrat Roosevelt in ‘33.

Likewise, on page 309, Piketty says:

“From 1980 to 1990, under the presidents Ronald Reagan and George H. W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008.”

This is not true either. George W. Bush signed the Fair Minimum Wage Act in 2007, which included increases that went into effect during the first years of Obama’s presidency. In both of these instances, Piketty betrays his bias and fudges the facts to prove a point. Not that his bias wasn’t clear with the premise of his book.

I’m not sure how far I should dig into the original research when the common facts are incorrect.


Are these criticisms comprehensive? No. Are they grounds for reasonable doubt? You be the judge of that.

I could critique this book point by point, so I’ll stop here for now. If I missed a specific point that you would like to hear a response to, please comment below.

Thanks for reading!

Further resources: 

Listen to Robert P. Murphy refute Piketty on the Tom Woods Show here.

If you have the time and interest to read a comprehensive critique, read this paper by George Reisman.


One thought on “A Critique of Piketty’s Capital in the 21st Century

  1. Pingback: Lekker spinnen met … de Volkskrant! | The Logic Free Zone

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