A CRITIQUE OF THOMAS PIKETTY’S ‘CAPITAL IN THE TWENTY-FIRST CENTURY – 6

 

CONTAINING CAPITAL – 6

 

PRASANNA K CHOUDHARY

3. CAPITAL SOCIAL AND SELF-EXPANDING (Continued) – 4

CAPITAL ETERNAL AND TRANSIENT

TRUE WEALTH …. [IS] THE COMPLETE ENJOYMENT NOT ONLY OF THE NECESSITIES OF LIFE BUT ALSO OF ALL THE SUPERFLUITIES AND OF ALL THAT CAN GIVE PLEASURE TO THE SENSES. .. THESE METALS (GOLD AND SILVER) HAVE BEEN TURNED INTO AN IDOL, AND DISREGARDING THE GOAL AND PURPOSE THEY WERE INTENDED TO FULFIL IN COMMERCE, i.e. TO SERVE AS PLEDGE IN EXCHANGE AND RECIPROCAL TRANSFER, THEY WERE ALLOWED TO ABANDON THIS SERVICE ALMOST ENTIRELY IN ORDER TO BE TRANSFORMED INTO DIVINITIES TO WHOM MORE GOODS, VALUABLES AND EVEN HUMAN BEINGS WERE SACRIFICED AND CONTINUE TO BE SACRIFICED, THAN WERE EVER SACRIFICED TO THE FALSE DIVINITIES IN BLIND ANTIQUITY WHICH FOR SO LONG WERE THE WHOLE CULT AND THE WHOLE RELIGION FOR MOST PEOPLES. THUS THE SLAVE OF COMMERCE HAS BECOME ITS MASTER. .. MONEY .. HAS BECOME THE EXECUTIONER OF ALL THINGS. .. MONEY .. DECLARES WAR .. ON THE WHOLE HUMAN RACE.

BOISGUILLEBERT.1

In Piketty’s definition of capital everything is included – from Upper Palaeolithic and Mesolithic caves, tents, huts, to land in Middle Ages, to smart phones of our time. He writes, “Historically, the earliest forms of capital accumulation involved both tools and improvements to land (fencing, irrigation, drainage, etc.) and rudimentary dwellings (caves, tents, huts, etc.). Increasingly sophisticated forms of industrial and business capital came later, as did constantly improved forms of housing.” (Chapter Six/What is Capital Used For?)

Thus, so far as human society is concerned, capital is presented as an eternal category, permanently embedded in all civilizations/societies. To strip this divine category off its divinity and to reduce it to its historicity, to make an eternal element a transient one, is tantamount to blasphemy in the eyes of ‘pure’ (in Marx’s term ‘vulgar’) economists. And for this blasphemy, they never forgave Karl Marx. (By the way, anarchists too regard money/capital as a category immanent in all civilizations – the only difference is that while the vulgar economists view it as an underlying positive force propelling human society from one stage to another, the anarchists term this force as ‘satanic’ responsible for the fall of humankind. Both refuse to assign it its historicity, to characterize it as a mode of production arising at a certain stage of historical development, and hence liable to be superseded by other mode of production due to the same historical movement.)

However, when you deny divinity or eternity to capital, then, for these pure economists, the entire edifice of human society will come crashing down – hence they describe Marx’s propositions as apocalyptic.

THE THEORY OF MARGINAL UTILITY

But this view of capital, this mixing of use-value and exchange-value, of wealth and capital is nothing new. Its origin can be traced back to the early years of classical political economy, and in case of France, especially to the writings of Etiênne Bonnet de Condillac (1750-1780). Condillac’s ‘Le Commerce et la Gouvernement’ and Adam Smith’s ‘Wealth of Nations’ were published in the same year (1776), and some economists still believe that due to the paramount influence of England in the first half of the nineteenth century, Condillac’s work and fame was eclipsed by Adam Smith and his ‘Wealth of Nations’.

According to Condillac’s theory of value, “The value of a thing consists solely in its relation to our wants. What is more to the one is less to the other, and vice versa. .. It is not to be assumed that we offer for sale articles required for our own consumption. .. We wish to part with a useless thing, in order to get one that we need; we want to give less for more. .. It was natural to think that, in an exchange, value was given for value, whenever each of the articles exchanged was of equal value with the same quantity of gold. .. But there is another point to be considered in our calculation. The question is, whether we both exchange something superfluous for something necessary.”2 On this Marx remarks, “We see in this passage, how Condillac not only confuses use-value with exchange-value, but in a really childish manner assumes, that in a society, in which the production of commodities is well developed, each producer produces his own means of subsistence, and throws into circulation only the excess over his own requirements. Still, Condillac’s argument is frequently used by modern economists, more especially when the point is to show, that the exchange of commodities in its developed form, commerce, is productive of surplus-value.”3

Condillac’s utility theory (making use-value the basis of exchange) was in opposition to the labor theory of value (with all its limitations, confusions and contradictions) then propounded by leading figures of classical political economy at that time. In opposition to mercantilists, these prime movers of classical political economy shifted their attention from the sphere of circulation to the sphere of production and put forward their versions of labor theory. We may have a quick look at this stream of classical political economy:

Benjamin Franklin (1706-1790), ‘scholar of American Enlightenment was among the first supporters of the labor theory of value. He for the first time deliberately and clearly (so clearly as to be almost trite) reduces exchange value to labor time.’ Boisguillebert (1646-1714), founder of classical political economy in France, ‘can be included among these figures (although he may not be aware of the implications of his observations in this respect). He reduces the exchange value of commodities to labor time, by determining the true value according to the correct proportion in which the labor time of individual producers is divided between the different branches of industry, and declaring that free competition is the social process by which this correct proportion is established.’4

Adam Smith: ‘Labor .. is the real measure of the exchangeable value of all commodities.’ (‘Wealth of Nations’, Book I, Chapter V)

Sismondi (1773-1842): ‘A profit is made not because the industry produces much more than it costs, but because it fails to give to the workmen sufficient compensation for his toil. Such an industry is a social evil.’ (‘Nouveaux Principle’, Volume I)

Marx’s theory of surplus value evolved in course of the critique of these prevalent theories of labor value.

In the last third of the nineteenth century, Condillac’s theory was resurrected in the Theory of Marginal Utility expounded in the works of William Jevons (Britain), Léon Walras (Switzerland), Carl Menger, Friederich von Wiser and Eugen Böhm-Bawerk (Austria). According to this Austrian School of Economics, the value of anything is deduced from its ‘marginal utility’, i.e. the utility of the last unit that satisfies the least important requirement of the subject – thus, exchange is based not on the exchange value, but on use-value, to which is ascribed the ability to directly correlate benefits. Their analysis centered on use-value or utility, and its subjective-psychological interpretation. Later, this school split into two camps – the cardinalists (Alfred Marshall in Britain being the most prominent representative who argued that it was possible to calibrate the absolute magnitude of marginal utility) and the ordinalists (Paul Samuelson in the USA and John Hicks in Britain, who considered that impossible and therefore preferred using the method of ordinary collation of preferences). The ‘marginal utility’ advocates deny social labor time as the determinant of value, replace labor theory of value by their subjective marginal utility theory, conceal the source of surplus value (unpaid labor of workers), and thus disguise the exploitation of labor by capital.

THE THEORY OF MARGINAL PRODUCTIVITY

Side by side with this theory of marginal utility, there arose the theory of marginal productivity around the same time (late 19th century) elaborated by the American economist John Bates Clark (1847-1938). According to this theory, the source of value is the productivity of the ‘production factors’ (labor, capital and land). Each production factor is involved in the process of production and is therefore productive. Each factor of production participates in creating a product’s value to the extent of its marginal productivity, i.e. the amount of the ‘marginal product’ it creates. The ‘marginal product’ is the increase in output resulting from increasing this production factor by one unit, with all the factors being unchanged. According to this theory, the ‘marginal product’ determines the ‘fair’ incomes paid to each of the factors. Thus the ‘marginal product’ of capital is interest. The workers’ wages are determined by the ‘marginal product of labor’. An increase in the number of people working at an enterprise tends to reduce the productivity of labor of each newly employed worker, given the unchanged amount of capital and same technical level. The entrepreneur stops employing workers when a worker is unable to produce the amount of commodities needed to provide for his existence. The productivity of this particular worker is ‘marginal productivity’, and the marginal product he produces is ‘natural’, or ‘fair’, payment for his work. Thus, the amount of one’s wages is made dependent on productivity and employment levels. The more the workers are employed, the lower the productivity and the lower the wages. According to this reasoning, unemployment is caused by workers’ demanding wages which exceed the ‘marginal product’. Thus, wages are taken out of the context of social and class relationships and are divorced from capitalist relations of production, those of exploitation of labor by capital. They are presented as the ‘natural’ price of labor, as a non-historical category.

RETURN ON CAPITAL

On the question of rate of return on capital, Piketty knows that “the very notion of an ‘average’ rate of return on capital is a fairly abstract concept. In practice the rate of return varies widely with the type of asset, as well as with the size of individual fortunes. The capital shares and average rates of return were calculated by adding the various amounts of income from capital included in national accounts, regardless of legal classifications (rents, profits, dividends, interest, royalties, etc., excluding interest on public debt and before taxes) and then dividing this total by national income (which gives the share of capital income in national income, denoted by α ) or by the national capital stock (which gives the average rate of return on capital, denoted r ). By construction, this average rate of return aggregates the returns on very different types of assets and investments: the goal is in fact to measure the average return on capital in a given society taken as a whole, ignoring differences in individual situations.” (Chapter Six/The Capital-Labor Split in the Twenty-First Century)

He further accepts that “in any event, it is important to point out 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, α.”

Moreover, he is quite aware that ‘pure return earned by the largest fortunes are significantly higher than the levels indicated here’; and ‘it is likely that such high returns also include a non-negligible portion of remuneration for informal entrepreneurial labor.’ (Chapter Six/The Notion of the Pure Return on Capital)

Criticizing Marx’s concept of the ‘falling rate of profit’(on this subject I will come back later) and providing a summary of the controversies during 1950s and 1960s between Robert Solow and Paul Samuelson (based primarily in Cambridge, Massachusetts) on the one hand, and Joan Robinson, Nicholas Kaldor and Luigi Pasinetti (based in Cambridge, England) on the other hand, Piketty reveals his own theoretical foundation guiding his data mining and processing. (Chapter Six/Beyond the Two Cambridges/What is Capital Used For)

Piketty further explains, “In any case, the rate of return on capital is determined by the following two forces: first technology (what is capital used for?), and second, the abundance of the capital stock (too much capital kills the return on capital). .. It is natural to expect that the marginal productivity of capital decreases as the stock of capital increases. In particular, the central question is how much the return on capital r decreases (assuming that it is equal to the marginal productivity of capital) when the capital/income ratio β increases. Two cases are possible. If the return n capital r falls more than proportionately when the capital/income ratio β increases (for example, if r decreases by more than half when β is doubled), then the share of capital income in national income α = r x β decreases when β increases. In other words, the decrease in the return on capital more than compensates for the increase in the capital/income ratio. Conversely, if the return r falls less than proportionately when β increases (for example, if r decreases by less than half when β is doubled), then capital’s share α = r x β increases when β increases. In that case, the effect of the decreased return on capital is simply to cushion and moderate the increase in the capital share compared to the increase in the capital/income ratio.” (We will later see how Marx explains this phenomenon in his theory of the ‘tendency of the average rate of profit to decline’.

NEO-KEYNESIANISM AND CONCEPT OF PRODUCTION FUNCTION

Here, it will not be out of place to mention that in the 1950s the British economist Roy Harrod and the America economist Evsey Domar developed a neo-Keynesian theory of economic growth. Actually, for almost four decades (from 1930s to 1970s), Keynesians of different schools ruled the economic scene – i. Alvin Hansen, John Hicks, Stuart Chase, Paul Samuelson (neo-Keynesian theory of the cyclical development of the capitalist economy). They maintained that the public sector has lost its capitalist nature, and due to the revolution in the functions of a bourgeois state in the 20th century, state economic and social measures can eliminate any contradictory developments and ensure crisis-free progress, and stable and high growth rates; ii. Paul Davidson, Robert Clower, Alex Leijonhufvud: they emphasized on restoring the monetary aspects of Keynesianism in order to adapt them to the analysis and regulation of inflationary situations; iii. Joan Robinson, Piero Sraffa and Luigi Pasinetti: they were left and radical interpreters of Keynes; iv. Roy Harrod and Evsey Domar (neo-Keynesian theory of economic growth): models created by them emphasized on the rate of accumulation as a principal strategic factor and a basic parameter for regulating long-term growth. The growth rate is stable if the share of savings in the income and the capital co-efficient are also stable (the so-called guaranteed growth rate). However, they cautioned that this stability is not maintained automatically. Deviations of actual growth rates from the guaranteed rates engender cyclic vacillations. To maintain stable growth, the state has to interfere and make it sure that demand is effective.

American economist Robert Solow improved upon the Domar-Harrod theory of economic growth and provided an upgraded neo-classical growth model – in 1956 he introduced the concept of ‘production function’ with substitutable factors and inverted Domar’s formula (g = s/β) and wrote β = s/g. According to him, in the long run, the capital/income ratio adjusts to the savings rate and structural growth rate of the economy rather than the other way round. (Robinson, Kaldor and Pasinetti ‘saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attached to short-term fluctuations. ..) ‘It was not until 1970s that Solow’s so-called neo-classical growth model definitively carried the day.’ (Piketty/Beyond the Two Cambridges)

The world economic crisis of 1974-75 (stagflation) signaled the decline of Keynesianism, giving way to the rise of supply-side monetarist Chicago School of economists led by Milton Friedman. After the Thatcherite reforms in Britain (1979) and advent of Reaganonomics in the United States (1980), this Chicago School dominated the economic scene for the next (almost) three decades (since 1980s).

PIKETTY’S NOTE OF CAUTION

Piketty has seen all this and, therefore, he sounds a note of caution, “In fact, the stability of capital’s share of income – assuming it turns out to be true – in no way guarantees harmony; it is compatible with extreme and untenable inequality of the ownership of capital and distribution of income. Contrary to a widespread idea, moreover, stability of capital’s share of national income in no way implies stability of capital/income ratio, which can easily take on very different values at different times and in different countries, so that, in particular, there can be substantial international imbalances in the ownership of capital. The point I want to emphasize, however, is that historical reality is more complex than the idea of a completely stable capital-labor split suggests. ..From 1990s on, however, numerous studies mention a significant increase in the share of national income in rich countries going to profits and capital after 1970, along with the concomitant decrease in the share going to wages and labor. ..The only thing appears to be relatively well-established is that the tendency for the capital/income ratio β to rise, as has been observed in the rich countries in recent decades and might spread to other countries around the world if growth (and especially demographic growth) slows in the twenty-first century, may well be accompanied by a durable increase in capital’s share of national income α. To be sure, it is likely that the return on capital, r, will decrease as β increases. But on the basis of historical experience, the most likely outcome is that the volume effect will outweigh the price effect, which means that accumulation effect will outweigh the decrease in the return on capital. .. Share going to capital overall continued to increase between 1990 and 2010 despite the stabilization of the profit share. .. (Chapter Six/from various sections)

PIKETTY’S THEORETICAL MODEL

Despite notes of caution and matter-of-fact statements, if one goes through Piketty’s analyses and explanations, his theoretical lineage can well be detected. His data points to other direction (towards Marx); he is aware that various supply-side and demand-side prescriptions to realize somewhat stable and balanced growth of capitalist economy have been futile, and at best, have only short-term effects; he accepts that no self-corrective mechanism exists to prevent a steady increase of the capital/income ratio, together with a steady rise in capital’s share of national income; yet, he clings to the theory of marginal utility and productivity that masks the social relationships and contradictions inherent in capital. Taking recourse to aggregate data too helps in this task. Piketty revives, in a somewhat modified form, a particular strand of neo-Keynesianism in the background of the Great Recession of 2008-09, and widespread resentment and protests against the neo-liberal free market policies that have been ruling the economic scene for the last three decades. Although opposed to free market fundamentalism, he does not oppose neo-liberal market reforms and strives to marry opening of the markets with neo-Keynesian state interventions in order not to strike a harmony (he knows such an attempt would be impractical), but to contain the free run of capitalist accumulation as well as to strengthen the forces of convergence. He is very much disappointed on the score of raising the growth rate, and hence, apart from his ‘utopian’ proposal of global progressive tax on capital, he emphasizes on ‘diffusion of knowledge’. He writes, “To sum up, historical experience suggests that the principal mechanism for convergence at the international as well as the domestic level is the diffusion of knowledge. In other words, the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy. The diffusion of knowledge is not like manna from heaven: it is often hastened by international openness and trade (autarky does not encourage technological transfer). Above all, knowledge diffusion depends on a country’s ability to mobilize financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on. It is therefore closely associated with the achievement of legitimate and efficient government. Concisely stated, these are the main lessons that history has to teach about global growth and international inequalities.”

On this, the less said the better. Piketty conveniently puts the entire question of distributive justice under the carpet. Historical experience and the data provided by him of the last two centuries tell the opposite story – diffusion of knowledge over the past two centuries in Europe and America has not reduced inequalities within those countries as well as international inequalities. (One need not mention that basic necessities of life, living standards, etc. are relative categories. Rise in living standards of the working masses does not necessarily mean reduction in inequality. Instead, it may also mean rise in inequality, if wage rise is accompanied with faster rise in income from capital.)

His subjective-psychological theoretical foundation of marginal utility and productivity can lead him up to this level only, and put him in stark opposition to his data. His objective data clashes with his subjective theoretical conviction.

Piketty’s theoretical genealogy may be summed up as follows: Piketty → Robert Solow → Domar-Harrod → Paul Samuelson → J B Clark-Austrian School → Condillac. He camouflages reality under occasional anti-capital radical rhetoric, while pursuing a subjective theoretical strand of ‘pure’ economics. The theory behind his big data methodology is thus revealed, and the theory is found to be miserably incapable of incorporating in its fold the full implications of data disclosures. Data defeats Piketty’s theoretical model. This is the third major inconsistency of the book. (It is altogether another matter that if we follow alternative line of reasoning and theoretical model, we need fresh set of data and Piketty’s data will prove to be very much wanting.)

NOTES

  1. Boisguillebert, ‘Dissertation sur la nature des richesses, de l’argent et des tributs’, Daire edition. Quoted in Marx, ‘Original Text of A Contribution to the Critique of Political Economy’, Chapter Two, ‘Money’. Karl Marx- Frederick Engels Collected Works, Volume 29, Progress Publishers, Moscow, 1987.
  2. Marx, Karl; ‘Capital’, Volume I, Chapter V, ‘Contradictions in the General Formula of Capital’, Moscow, 1977.
  3. Ibid.
  4. Marx-Engels Collected Works; Volume 29, Moscow, 1977.

[This critique is divided in eight parts, tentatively titled as: i. Apocalypse and Exuberance; ii. Data and Dialectics; iii. Capital Social and Self-Expanding; iv. Wealth Inherited and Created; v. Century Twentieth and Twenty-First; vi. Yes Marx No Marx; vii. London Chicago Paris; and viii. Thank You Mr Piketty.]

August, 2014.

CONTINUED.

NEXT: 3. CAPITAL SOCIAL AND SELF-EXPANDING (Continued) – 5

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