Thomas Piketty and the search for ‘r’

Just about every man and woman and their dogs have reviewed French economist Thomas Piketty’s magnum opus, Capital in the 21st century.  Most reviews are laudatory (but not all) and most reviews are superficial (but not all).  “A watershed in economic thinking” Branko Milanovic; “could change the way we think about the past two centuries of history” The Economist; “a defining issue of our era” John Cassidy, New Yorker and so on.

I am not going to review Piketty’s book here as I have been asked by the Historical Materialism journal to do a review and I don’t want to steal the thunder from that.  But as that won’t be published for some time, I can’t resist posing a few questions for everybody to consider if they plan to read the 677 pages plus a myriad of statistics and charts offered by Piketty.

The book’s title immediately suggests a reference to Marx’s Capital, written in the 19th century. By implication, Piketty sets out to deliver an analysis of capitalism relevant to the 21st century as an improvement on Marx.

So here are the questions.

Piketty’s definition of capital is different from that of Marx.  Is Piketty’s better, more realistic and appropriate or is Marx’s?  Does it matter?

Piketty presents “two fundamental laws of capitalism”.  Piketty’s laws are different from Marx’s laws of motion of capitalism.  Are they realistic and more compelling in explaining capitalism in the 21st century?

Piketty’s main thesis is that inequality of wealth will grow as the share of income in an economy going to capital rises faster than national income increases.  This will happen if the net rate of return on capital (r) rises faster than the nominal rate of national income growth (g).  Is he right?

What is this r, how do we measure it and is it a realistic category?  I challenge the reader to search for Piketty’s r and the data behind it.

Piketty says r and g are independently determined and exogenous to his model of capitalism.  Is it realistic to assume that the rate of return on capital is not affected by the rate of growth in an economy, or vice versa?

Piketty says that, over centuries, r is pretty much steady at about 4-5%.  How does Piketty reach this conclusion?  Does he explain? Marx would not agree that the rate of profitability in capitalist economies has not moved much?  Is Marx wrong and Piketty right?

Piketty says, as r is steady, the only swing factor is g and he forecasts that the growth of national income will fall below r during the 21st century and thus inequality will rise further.  Is he right about g slowing down while r stays steady?

Piketty uses the neoclassical aggregate production function model to make forecasts about future growth in an economy?  Is this robust and realistic?

Rising inequality is the issue for 21st century capitalism for Piketty.  But what about booms and slumps and the recurrent breakdowns in capital accumulation?  What does Piketty have to say about those in relation to his ‘fundamental laws’?

Piketty suggests policy solutions to the rising inequality of wealth.  Are they appropriate and realistic?

My review will try to answer these questions.


19 thoughts on “Thomas Piketty and the search for ‘r’

  1. Michael, as usual you get to the heart of the matter. Marx never based his revolutionary demands on inequality(increasing, declining or stable) Instead, he bases those demands on the increasing difficulty of accumulating capital. That is why he talked constantly about capitalism being an historically limited system for developing the means of production. There is a long-winded discussion in the Nation magazine contrasting Piketty to millenarium Marxist that weakly deals with this contrast.

    1. Marx, The Rate of Profit and Accumulation

      Marx does not base his revolutionary demands on some supposed difficulty of capital accumulating either. He didn’t believe any such problem existed, other than temporarily.

      To set some things straight. The discussion over the falling rate of profit is largely based on false premises. When Marx uses the term “Rate of Profit”, he uses it in its capitalist context, i.e. it is what we would call the profit margin, the proportion of surplus value to cost prices of the commodity, or what amounts to the same thing, the annual surplus value as a proportion of the laid-out capital for the year.

      What is ironic is that Marx’s analysis of this “Rate of Profit”, and its falling tendency was designed to refute the catastrophist interpretations of it by Malthus and Ricardo and others. The reason Marx says the concept was important for these previous economists, and for capitalists, is precisely because of their catastrophist interpretation of it, i.e. that it is some kind of Natural Law, which leads inevitably to the collapse of capitalism under its own weight, as the generation of surplus value reaches these supposed limits. Marx thought this was nonsense and says so!

      In Theories of Surplus Value Marx writes,

      “A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”

      It is undeniably true that aside from the “countervailing forces” to the falling rate of profit described by Marx in Capital III, Chapter 14, this rate of profit, i.e. the profit margin must fall for the reasons described. But, Marx and Engels believed that this Rate of Profit used by the capitalists and the political economists was a fraud! In Capital III, Chapter 4, therefore, Marx distinguishes the real rate of profit from this bourgeois counterfeit version. He calls the real rate of profit, the annual rate of profit.

      “To make the formula precise for the annual rate of profit, we must substitute the annual rate of surplus-value for the simple rate of surplus-value, that is, substitute S’ or s’n for s’. In other words, we must multiply the rate of surplus-value s’, or, what amounts to the same thing, the variable capital v contained in C, by n, the number of turnovers of this variable capital in one year. Thus we obtain p’ = s’n (v/C), which is the formula for the annual rate of profit.”

      And later in Capital III, Chapter 13, Marx and Engels emphasise this point. Marx writes,

      “However, the rate of profit, if calculated merely on the elements of the price of an individual commodity, would be different from what it actually is. And for the following reason:”

      and Engels adds,

      “[The rate of profit is calculated on the total capital invested, but for a definite time, actually a year. The rate of profit is the ratio of the surplus-value, or profit, produced and realised in a year, to the total capital calculated in per cent. It is, therefore, not necessarily equal to a rate of profit calculated for the period of turnover of the invested capital rather than for a year. It is only if the capital is turned over exactly in one year that the two coincide.]”

      And, of course, the latter will almost never be the case, and the same causes of a rise in the organic composition of capital bring about an equal rise in the rate of turnover.

      Whilst it MAY be the case that the Rate of Profit (profit Margin) may fall as a result of a rise in the organic composition of capital, the same process means that it MUST be the case that the annual rate of profit rises, because any rise in the organic composition of capital bring about the same proportional increase in the rate of turnover of capital. Because that increase in the rate of turnover of capital results in the release of capital (alongside any rise in the mass of surplus value due to the rise in productivity, reduction of capital value, rise in rate of surplus value) it MUST result in a rise in the annual rate of profit.

      Far from capital then having a problem in accumulating, it continually benefits from this release of capital to be used in the development of new lines of production, which Marx again makes clear have low organic compositions of capital, and very high rates of profit. If capital had a problem with accumulation as the catastrophists believe it would have collapsed under its own weight long ago.

      Socialism does not slither from the carcase of capitalism it springs from its powerful shoulders. If you want to understand Marx’s view its necessary to abandon these Malthusian/Ricardian catastrophist misconceptions. As Marx points out in Value, Price and Profit Socialism does not arise from the collapse, or some absolute limitation of capitalism, but from Socialist production arising as a superior alternative. Marx writes,

      “They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society.”

      In Capital III, he sets out exactly what those material conditions and social forms are. He writes,

      “The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”

      The means by which they achieve this, he argues is the use of credit. So, he also writes,

      “Aside from the stock-company business, which represents the abolition of capitalist private industry on the basis of the capitalist system itself and destroys private industry as it expands and invades new spheres of production, credit offers to the individual capitalist; or to one who is regarded a capitalist, absolute control within certain limits over the capital and property of others, and thereby over the labour of others.”

      Today, aside from the massive expansion of co-operative industry, and aside from the large amounts that workers have in various forms of savings etc., the workers pension funds are themselves sizeable, and invested in these forms of socialised capital as Marx describes it. In Britain around £800 billion is invested in the workers pension funds, which is about the same value as around three-quarters of the share value of the FTSE 100 companies.

      Of course, Marx was under no illusion that capital would simply allow workers to exercise control over these huge sums of their money. When I discussed this with Mike McNair of the CPGB some time ago, he pointed out that although the money in these funds is the workers money, legally it is the property of the companies they work for. He rightly pointed out that for workers to obtain real control over these funds would require at least a Judicial Revolution, because even if the law was changed to ensure workers control over the funds, the capitalist judges would strike it down.

      Yet, that in itself describes the real territory on which this struggle should be fought, the basic right of workers to control their own property. The reason is quite obvious. Take the situation with the workers pension fund of the workers in the Mondragon Co-op. The average pension is around £13,000 p.a., in a country where the average wage is lower than in Britain. Yet, this pension is around 4 times the figure for the supposed gold plated pension of a worker in the state capitalist sector in Britain! Nor is it because the Mondragon pensions are over generous. Their pension fund is generating twice as much income as it is is paying out in pensions.

      The difference is that the Mondragon pension scheme is under the ownership and control of its workers not under the ownership and control of the capitalist state, or capitalist banks and finance houses as in Britain.

      1. I should have added that the only longer term problem capital faces in accumulation is that described by Marx in the Grundrisse. That is the problem of developing ever newer use values to produce.

        That is really a problem for science and technology, which is why the periods of stagnation are tied to the Innovation Cycle. But, it has to be said that at the moment there is absolutely no sign that capital faces a problem with finding new use values to produce. On the contrary the range of use values has been increasing rather than contracting.

      2. There is another reason why this process leads to a rising rate of profit, which is due to the size of the fixed capital, and the role of moral depreciation.

        I have previously in another post cited the following example.

        9 machines £9,000
        £9,000 material
        £9,000 Variable capital
        Surplus Value £9,000.

        The machines are replaced by 9 new machines of the same value that are nine times more productive. The turnover period is thereby reduced to one-ninth its previous length. So, the advanced capital is

        £9000 Machines
        £9,000 Material,
        £1,000 Variable capital
        £1,000 Surplus Value.

        The annual rate of profit is then 9000/19000 47.37%, compared with a previous rate of profit of 33.3%.

        But, it we look at the laid out capital, it is

        Machines £9,000
        Materials £81,000
        Variable Capital £9,000
        Surplus Value £9,000.

        Rate of profit = 9000/99000 = 9.09%.

        In the latter the fixed capital comprises 9.09% of the total capital, which is consistent with Marx’s argument that the value of the fixed capital continually falls as a proportion of the total capital, and the proportion of value it transfers to each commodity unit, thereby also continually falls. Compared to the original position it has fallen from 33.3%.

        However, looked at from the perspective of the advanced capital, the fixed capital represents 47.37%.

        Now consider the effect of moral depreciation. If productivity rises so that the value of these machines falls by 20%, in the original situation this 20% reduction was 20% of 33.3% of the total advanced capital. In other words, it is a reduction of around 6% of the total advanced capital value. But, in the second case, it is a reduction of more than 9% of the total advanced capital value, even though the actual reduction in the value of the machines is the same in each case.

        Because, the rising organic composition of capital, means that although the proportion of fixed capital falls in relation to the total laid out capital, it rises in relation to the advanced capital, any moral depreciation resulting from rising productivity must have a larger effect on raising the rate of annual profit, the more capital is developed.

      3. “Socialism does not slither from the carcase of capitalism it springs from its powerful shoulders.”

        This is yet to be proved. From what I can see relative abundance and high productivity lead to less thinking and more mindless consuming. Those who link communism with abundance have surely been proved wrong?

      4. Actually, no its not yet to be proved. If Socialism is to arise it can only be on the back of an advanced state of the productive forces developed under Capitalism. If it doesn’t arise on that basis, it will not arise at all. In that case we will be back to the situation described by Marx in the Communist Manifesto in relation to the collapse of slave society. It results in the ruination of the contending classes and a step back in Man’s historical development. It would be the situation described by Trotsky where some new form of slave society would arise, and the best we could do would be to try to defend workers interests within it.

        The greatest development of the workers movement and socialist ideas came with the Long Wave booms of the 19th Century, particularly with the powerful boom that ran from the early 1890’s to around 1914-20, which saw the development of mass labour movements across the globe, and the rapid spread of socialists ideas.

        Without that boom, which brought rapid industrialisation to places like Russia, the Bolsheviks would not have arisen, and the 1917 Revolution would not have happened. In fact, as Lenin points out there problem was also not enough Capitalism. It was the lack of a sufficiently strong Capitalism in Russia, which posed the Bolsheviks with the greatest problem in trying to develop the productive forces on a socialist basis.

        In fact, wherever Capitalism has collapsed or come near such collapse, the consequence has always been a step back historically. The rise of Fascism in Italy and Germany, the creation of a neo-feudal regime by Pol Pot in Cambodia etc.

        The problems you cite are in fact not a consequence of the development of Capitalism for the development of Socialism, but reflect rather a failure of socialists, and in particular Marxists over the last 100 years, who have offered workers a false prospectus.

        Workers themselves recognised the validity of what Marx sets out in the Critique of the Gotha Programme in relation to the kind of Lassalleanism and Fabianism that socialists, including those that call themselves Marxists, have offered up to the workers, as well as the limited nature of Economism that many of the latter have offered in the form of “more militancy” trade union struggle.

        They recognised from their own experience that state capitalism in the form of nationalisation and welfarism instead of liberating them only led them into even more dependency and subordination to capital. They may have not fully understood why, but they knew these routes offered them no real alternative, which is why they have rejected them along with visions of Socialism based on the Statism of Stalinism, and the abominations it created.

        The problem is that socialists, and marxists in particular have failed to catch up with the workers own realisation of the failure of that Lassalleanism and Fabianism, and continue to offer up a vision of Socialism based on it rather than a vision of Socialism based upon the liberation of the workers by their own actions in developing their own alternative forms of property here and now in opposition to those of Capital.

        The socialists continue to offer workers those failed visions, which the workers reject, or else they offer the alternative of Revolution now, which the workers reject because it is too far removed from their current reality and experience, and based on a vision of society they cannot comprehend, because they can currently see no working model on a large scale to provide them with inspiration.

        The workers across the globe continue to develop the Socialist future largely despite the actions of the socialists, as the workers continue to develop their co-operatives, but their task is made harder because of the failure of socialists to provide them with the necessary organisation and education to achieve that task.

      5. Incidentally, because as Marx points out “there are no permanent crises”, and crises are merely the temporary means of resolving the contradictions that arise from the dynamism of Capitalism, if Capitalism were to collapse on a global scale, that would signify the impossibility of Socialism too, because it would mean not only that Capitalism could no longer develop the productive forces, it would mean that Man had reached the limits of that possibility.

        Capitalist crises arise as a means of resolving the contradictions which flow precisely from the dynamism of Capitalism, its continued development of the productive forces. The crisis resolves the contradictions, and Capitalism moves on in a period of even greater growth and prosperity.

        Its when Capitalism does not enjoy that dynamism that periods of stagnation arise rather than periods of crisis. If capitalism were to go into a period of permanent stagnation, it would mean also that the contradictions also no longer applied. It would be the stability of the graveyard.

      6. Thanks Boffy, i suddenly feel more optimistic!

        I am not sure I fully go with your idea that enlightened Marxists are the pivot upon which the entire future of mankind rests but most of what you said makes sense to me. I certainly think Marx had libertarian tendencies that, incidentally, seem totally lost on people like Piketty, who, judging from what I have read of his dreary magnum opus so far, has an extremely caricatured view of Marx.

      7. @Henry, April 16th

        Yes, relative abundance and high productivity leads to more fetishism. High productivity means less man-hours/output, so there is a tendency to miscalculations and overproduction, since the prices, based on human work become smaller and smaller, and susceptible to error. Neverthe less, the appeal of commodity fetish increases, due to higher exposure to ads. It’s similar to mind altering drug consumption (like alchool, tranquilizers…) the way to satisfy the desire becomes harder, you have to buy more and more. Like with these drugs, comes also the desire to cheat colleagues in workplaces, unions become corrupted to satisfy employers needs.

        Of course, that happens among those who have more wealth. Those who have less, that is that are permanently left in lower paid jobs, part time jobs, or simply are hopelessly unemployed, will get desperate, and the fetishism of commodities will transform a higher percentage of the latter generations, into lumpen proletariat. That is, people who steal, murder, kidnaps, to satisfty their fetishist needs.

        There is a vice circle, well intelligent machines and higher production will yield a circle of unemployed and lumpen. This is a not a result of a fault of circulation process of commodities, but rather, the psychological and sexual element that is not present in economics.

      8. This: “The machines are replaced by 9 new machines of the same value that are nine times more productive. The turnover period is thereby reduced to one-ninth its previous length.”

        is nonsense. Turnover is not production time; turnover is the time of circulation. Capital always aims at reducing circulation time to zero– to achieving circulation without the expense of circulation– but obviously cannot achieve that.

        Productivity does not, in and of itself, automatically generate more rapid turnover.

        The circulation time of any particular capital, the turnover time, is dependent not on the productivity of that capital alone, but upon the overall development of the total social capital, which is made up of an in-determinant number of other circulation times–hence the development of credit- to maintain, and facilitate, production while circulation times, turnover, etc. occur at differing rates which would interrupt the self-expansion of value.

      9. “Whilst it MAY be the case that the Rate of Profit (profit Margin) may fall as a result of a rise in the organic composition of capital, the same process means that it MUST be the case that the annual rate of profit rises, because any rise in the organic composition of capital bring about the same proportional increase in the rate of turnover of capital. Because that increase in the rate of turnover of capital results in the release of capital (alongside any rise in the mass of surplus value due to the rise in productivity, reduction of capital value, rise in rate of surplus value) it MUST result in a rise in the annual rate of profit.”

        More nonsense. There is “no must case” for the annual rate of profit rising with the increase in the organic composition of capital. No rise in the organic composition automatically increases the rate of turnover in the same proportion, or necessarily at all.

        Marx never describes such a “necessity.” All Boffy is arguing is another iteration of the old “supply is its own demand” argument– where every increase in output automatically generates in perfect proportion the increase inputs for any and all capitals.

        If Boffy’s argument had validity then there would never be any overproduction, nor would there be differing rates of profits which through transfers, allocations accomplished via prices of production become a general rate of profit. Yet we can see different rates of profit and different rates of surplus value when we examine the inputs and outputs of capitalist production, and yes, these examinations do measure “c” and measure it accurately– see for example the historical data of the US Census Bureau’s Annual Capital Expenditures Survey Statistics for Industry Groups:

        I don’t know where Boffy gets his “Marx’s” rate of profit, but it has nothing to do with the impact of the declining rate of profit that Marx describes in Volume 3, nor in the Grundrisse, nor even in Theories of Surplus Value.

  2. Good questions. Wish I’d read them (wish you’d written them) before I plunked down $40. Caveat emptor strikes again.

  3. According to the Credit Suisse report on wealth, the top 10% of the world’s population accumulate over 80% of the wealth. I assume a similar division of the wealth produced by 90% of the people all around the globe within nation States. Does Piketty demonstrate that less wealth was going to the upper 10% in the past?

    For sure, workers are producing more wealth today and that makes the upper 10% wealthier. But has the division of the wealth labour produces become even more concentrated, say in the top 1% than it was in the past?

  4. Hi Michael, I hope that the review will be posted here for those of us without HM subscriptions.

  5. One curious aspect of the book is that housing makes up a large share of what he calls capital but is really wealth. Yet he never discusses house prices in relation to income.

    1. Yes good points. For piketty capital are just assets owned by households not the way in which value is appropriated and circulated to expand value ie productive piketty hides that distinction as does mainstream economics

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