Paper No. 5716 Dated 04-Jun-2014
Guest Column by Dr Kumar David
Thomas Piketty has done a splendid job validating one of Marx’s key expectations that relatively the rich will get richer and the poor poorer. However, after saying ‘thank you very much’ many Marxists are savaging him. Maybe they feel reinvigorated these post-2008 days and show little mercy to deviants.
An unknown guy comes out of nowhere and establishes something the Master’s disciples have been saying for 150 years but found hard to establish conclusively empirically. A data savvy young group, after 10 years labour, proves sustained and growing wealth-inequality in the UK and Germany over 150-200 years; that’s a contribution to knowledge. Though Piketty admits he is weak on theory and abstraction Capital in the Twenty-first Century is outselling everything on Amazon’s list, pulp fiction, do-it-yourself, even thrillers, which is remarkable for a 600 page tome on economics.
The excitement is because Piketty, a youngish French economist and his team, have amassed a mountain of data about the English and German capitalist economies from the Industrial Revolution two hundred years ago to the present and processed it to come up with an unremarkable finding. It is as well known as the sun setting in the west that inequity grows ever more acute when capitalism is left to itself without the heavy hand of state intervention, war or revolution. Feeling it in the bones is one thing, but pages of empirical proof is another. That’s Piketty’s contribution; he shows from raw data that capitalism, if allowed to function normally and undisturbed, possesses a natural tendency that swells wealth inequality between the very rich and the rest of society. The cynic will say this has been known all along; but the book establishes it from raw data. Chris Giles of the Financial Times tried to pick holes in Piketty’s inequality findings but only managed to point at minor errors that do not shake the basic thesis at all.
Today, current data is available in company reports, government and multilateral agency statistics (the data in US Federal and State statistical sites is gigantic) as well as university research output. What is more, data, going back decades and centuries, is being uncovered, published and the Internet makes access easy. Marx would have given an arm and a leg for this detail of information; instead he toiled for thirty years in the British Museum Reading Room poring over parliamentary reports, factory inspector’s bulletins, trade journals and newspapers. Darwin similarly sailed around the world collecting specimens and laboured for a quarter of a century visiting animal breeders and scientists at great museums and laboratories. Finally, both arrived at ground-breaking conceptual revolutions. It is amazing that to see farther we still stand on their shoulders, fitting in the findings of thousands of new researchers and volumes of new data, and pushing frontiers onward.
Maito says Piketty made a silly blunder
Argentinian Esteban Ezequiel Maito and a phalanx of other Marxists have shot down Piketty’s critique of Marx’s “Tendency of the Rate of Profit to Fall” (TRPF) thesis. I make no attempt to recap Marx’s detailed workings in Capital Volume 3 but his conclusion was this. In general, under normal circumstances, as capitalism goes through its life cycle, the rate of profit declines. It may go up or down or fluctuate for a year or two, but in the long-term a secular decline is the theoretical norm. Marx said this was so for reasons to do with labour-capital relationships, accumulation, expansion and competition, and that this is a natural feature of the capitalist process. Therefore Marxists see TRPF as a natural Law of capitalism.
It’s a Law, and it’s a Tendency; now isn’t that a contradiction? No! Newton’s Law of Gravitation says that an apple will fall to the ground with a known acceleration. However, it does not deny that if you stand under the tree and catch it, or if you bounce it back with a tennis racket it will behave differently. A Law and contingent differences that occur if something violates the assumptions of the Law (e.g. Marx’s normal evolution of capitalism, Newton’s not interfering with the motion of the apple) are theoretically compatible. This is why Marx used the qualifier “Tendency” to preface TRPF because he granted that: (a) If there were new inventions that caused a spurt in productivity, (b) harsh political changes (a military coup for example) crushed workers and drove down wages, (c) new markets (colonies, globalisation today) or production centres (China in recent decades) were opened, then the rate of profit may go up for a while. But when things settled down again to normal hum-drum capitalism, the tendency of the rate of profit to decline would return.
Piketty claimed that his data showed that Marx was wrong; the rate of profit did not decline over the secular long-term but remained steady, he said. Estaban Maito in 13 pages in Piketty against Piketty (http://mpra.ub.uni-muenchen.de/55839/) shows that Piketty blundered; that he was comparing apples with oranges. A little simplified, his “proof” goes like this. Piketty defines rate of profit as [Total national profit of capitalist enterprises] divided by [Total wealth of the rich classes], say P/W. However, Marx and most economists, Smith and Ricardo included, define the rate of profit as [Total national profit of capitalist enterprises] divided by [Total capital in action in the production process], say P/C. Piketty shows that P/W has remained steady, but what about P/C? His own data set is so rich, says Maito, that one could take Piketty’s W data, subtract from it non-production assets like private houses and private financial savings, and treat the remainder as capital in production; that is C. What Maito says he did was to use data called ‘total business assets’, which he could ferret out of Piketty’s book, as a stand in for C. Maito also seems to have collated this with data from other sources.
The graph in fig 1 (attached as a file) (fig 2 in Maito’s paper) comparing Marx’s steeply declining P/C as computed by Maito, with Piketty’s steady P/W for the UK, makes the point clear. Maito has another graph replicating this for Germany over the same time period but I am not reproducing it because the relationships are similar.
There is a serious unresolved problem in this graphic for the UK (it is not present in Maito’s graphic for Germany). How is it that from about 1980 onwards the two graph lines in the figure converge? Wouldn’t W always be larger than C and, since the numerator is the same, wouldn’t P/C always be bigger than P/W? I contacted Maito by e-mail but his explanations were unsatisfactory.
Another graph from Maito (my fig. 2 – attached as a file) details the world rate of profit. The secular decline in the global rate of profit over the last 130 years is abundantly clear; a fact that could not have been proved except by using the data that Piketty himself made available.
There are two breaks in the graph during the two World Wars when no sense can be made of the data, and there is a sharp rise in the rate of profit during the Great Depression when masses of poor quality capital (C) was destroyed followed by the New Deal when Roosevelt intervened with a heavy hand upsetting free market capitalism. It is also quite interesting to observe the slow steady rise in capitalist profitability from 1980 to 2007. Initially this was the period when neo-liberalism intervened and imposed politically driven repression on the working class and lowered real wages and living standards. This was followed by the post mid-1990s phase when China entered the global production chain revitalising production economics and boosting the profitability of Western companies that had invested heavily in the Dragon’s economy.
Critique of Pikkety on fundamentals
Unrepentant Marxists have another problem with Piketty; he is made out to be a Marxist but he is not; he doesn’t claim to be one. The crucial difference is that for Marx and Marxists capitalism is a process, a system, an arrangement of the relations between classes. Piketty has no such depth; that is all too hard to understand he is likely to say.
Capital, Marx’s masterwork is not a book on economics nor as often described is it about political-economy. One could say it’s about man, his material world and the refection of that world in men’s minds. Wages, prices, profits, the working day, production activities, capital outlaid and revenue recovered, what are all these things? Marx held a mirror to the world and saw more a skewed reflection in men’s minds of real social relations present in the real world; classes, struggles, power, exploitation, state and the structures and processes of society. Men’s true relations in society seem to them to be economic categories. There is this famous passage about reification in Capital Volume 1, Chapter 1, Section 4 (Fetishism of Commodities).
“A commodity, therefore, is a mysterious thing simply because in it the social character of men’s labour appears to them as an objective character stamped upon the product of that labour; because the relation of the producers to the sum total of their own labour is presented to them as a social relation, existing not between themselves, but between the products of their labour. This is the reason why the products of labour become commodities”.
This would all be Greek to the non-Marxist Piketty. Marxists find it ridiculous that Piketty is passed off as a second Marx by an untutored bourgeois world despite his own strenuous insistence that he is not. Piketty exposed the inequality and the inequity of the capitalist world during the last 200 years. Why not say thank you and leave it at that?
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