In his book “Capital in the Twenty-First Century”, the French economist Thomas Piketty gives a stunning demonstration of how capital has become concentrated in the hands of a few and grown faster than the economy, except during the 30 years of post-war growth. This trend has inevitably made the rich even richer and caused the inequality gap to widen. Labour has thus become a casualty of capital. Piketty is fascinating. I had the occasion to be a modest participant at his side in a discussion at the University of Brussels. Ever since, the conviction that I had met one of the most brilliant political economists of our time has never left me.
Piketty is an applied economist. He has basically made a statistical study from which he draws conclusions without propounding a general theory. Likening Piketty to Marx (1812-1883) betrays a misunderstanding of what economic science represents. The intellectual comparison, never endorsed by Piketty, is made by an Anglo-Saxon press always ready to stoke emotions in quickly subsiding media furores that end up promoting US-style capitalism. The intellectual enchantment with Piketty felt by the likes of Krugman and Stiglitz should therefore be treated with benevolent scepticism. Anglo-Saxon attempts to disqualify Piketty began with suspicions of statistical misrepresentation which, even if proven, do not detract from the high quality of his work.
Viewed from another angle, I still have reservations. Can capital grow faster than the economy itself indefinitely? No it cannot, as the social factor would unavoidably act as a counterweight. If Piketty is right, however, it means that state institutions, which are the political embodiment of the will of the majority, are systematically biased. In the most extreme cases, democracies are in reality plutocracies. However, capital is a symbolic representation of value. The value of a euro, a dollar, a gold coin or a building is fixed purely by constantly changing convention. Its value depends on what others perceive as its value. Capital is therefore a stream of value and not a stock of value. Its value oscillates according to its rate of exchange with goods and services. There can never be more absolute capital than intrinsic value because capital, like money, is the result of a conversion measurement.
The Marxist approach illustrates very well the conversion measurement aspect of capital by equating it to a “quantum of labour”. Broadly speaking, capital is past labour that has been saved. Capital is therefore a repository for past labour enabling the execution of present-day labour. Capital and labour are to a significant extent indissociable. Both output factors draw upon work supplied at different times.
It is somewhat redundant then to view labour and capital as conflicting macroeconomic output factors. They are not naturally antagonistic. Moreover, the longevity of capital is dependent on a stable socio-governmental order, i.e. on a sustainable exchange ratio between past and future labour. Piketty’s reasoning falls short on this point. A stable social order is needed to accumulate power and monopolise authority. Capital only succeeds in dominating labour until it is mobilised, as capital must be invested and “put to work” if it is to retain its value. Capital becomes an illusion when it is concentrated in the hands of a small number of rent seekers and is too oppressive for labour. To cite Marx again, his theory of capital states that the only purpose of capital is its own accumulation. That is impossible without labour creating value from capital.
Thomas Piketty’s work seems to miss this point. The French economist also explores ways of curbing the excessive growth and concentration of capital. He suggests a progressive tax on capital while acknowledging its illusory nature. Marx would have likely anticipated a social implosion. In the capital versus labour debate, my feeling is that a natural solution will emerge in the shape of monetary depreciation and consequential capital depreciation. By virtue of money’s symbolic role, monetary adjustment is easier than social adjustment. It acts as an automatic brake on capital concentration, protecting capital itself from collapse. In my view, social adjustment represents a break in the stability of capital’s purchasing power. During the discussion with Piketty, I shared the thought with him that inflation was a stealth tax and sometimes can be replaced by monetary confiscation, as with the Gutt operation of 1944, which he did not know about.
A further question is how to measure capital correctly. In other words, does the nominal worth of capital, an expression of value but not a store of value (unlike forms of money with intrinsic value like gold or real estate), reflect capital’s long-term purchasing power? Money being a symbolic representation par excellence, there is little prospect of it remaining stable if fast capital growth starts oppressing labour. We always return to the fact that the credibility of capital cannot be dictated in an authoritarian way. Capital has to be backed by a bigger metric than that which is guaranteed. Inevitably, that metric is labour. In an extreme scenario, a rent seeker owning the entire world’s capital could be financially ruined merely if the capital was declared no longer convertible into cash.
This brings to mind a sentence in Jérôme Ferrari’s extraordinary novel “Sermons on the Fall of Rome” which echoes St Augustin’s thought that worlds created by man are destined to collapse under their own weight: “He was like a man who, after unbelievable efforts, has just made a fortune in a currency that was no longer legal tender.” This sentence perhaps highlights the real issue at stake regarding capital, namely money illusion.
Article written by: Bruno Colmant, published earlier by Risk & Compliance Platform Europe
Comments
Mr. W. Buffett claims he is going to set up his estate to put 90% of his cash into a vanguard SP500 fund, and 10% into short term treasuries. That way, if the market is down and his heirs need cash, they can take it from the treasuries. He doesn't want his wife to have to care about investing."
Most of his estate (Berkshire shares) will be given to charities. A considerable sum will be placed in a trust for his wife. My guess is that the amount will be so large that just the interest from the treasuries and the dividends from the stock index will be more than enough to meet his wife's needs with a significant margin of safety. It won't matter if the prices of the stocks go down significantly - dividends are more stable than stock prices. The fund would be set up to be so large that there would never be any conceivable need to sell anything - just live off of the income stream. If you have enough money, it is pretty easy to set up a trust so you can "set it and forget it" - you don't need to be a brilliant investor.
I would like to respond to Mr. Colmant by sharing the below article by Mr. Damon
The Bank Bailout and the Forbes 400
By Andre Damon
World’s Billionaires Grew 50 Percent Richer in 2009
Six years ago this past Friday, the US Congress passed the Emergency Economic Stabilization Act of 2008, which established the $700 billion Troubled Asset Relief Program, the first of the bank bailouts. It was followed by a series of Federal Reserve and Treasury programs that allocated some $7 trillion in free loans to the financial system.
The day after the passage of TARP, October 4, 2008, the World Socialist Web Site offered the following analysis:
“The [Bush] administration has invoked the worst economic crisis since the Great Depression in an attempt to terrorize the American people into accepting the greatest transfer of public resources to the financial elite in history…[The bailout] will facilitate an ever-greater concentration of wealth that can only produce a drastic deterioration of living conditions and the undermining of basic democratic rights.”
Six years later, not a word of this assessment needs to be revised, except for changing the future tense to the past. The outcome of the past six years of government policy can be seen in the figures released last week by the business magazine Forbes, ranking the 400 wealthiest Americans. The report revealed that since 2009, the 400 richest people in the US have nearly doubled their net worth, to a shocking $2.9 trillion. This is nearly a fifth of the total value of all the goods and services produced in the United States in an entire year.
The accumulation of this vast wealth takes place under conditions not of general prosperity, but rather of an economic stagnation and falling living standards for the majority of the population. Since 2010, the median household income in the US has fallen by five percent.
This outcome is the intended result of the entire policy of the ruling class since the economic crash. From the beginning, the ruling class’s response, initiated under Bush and vastly expanded under Obama, was characterized by two interrelated aspects: the provision of unlimited funds to prop up the financial system—and with it the wealth of the financial oligarchy—to be paid for through sweeping attacks on social programs and the living standards of the working class.
Earlier this year, Timothy Geithner, the former Treasury Secretary who now heads a private equity firm, published his memoir, which makes clear that every single substantial policy question related to the financial crisis was decided solely from the standpoint of maximizing the most predatory profit interests of Wall Street.
According to Geithner, by September 2008 it became clear to the Bush administration and the Federal Reserve that every major US financial institution was insolvent, and would go bankrupt without government intervention. Under these circumstances, the Federal Reserve and Treasury allowed Lehman Brothers to collapse, a move that had the effect, to use a phrase recalled by Geithner, of “shock[ing] the political world into taking the crisis seriously.”
Following the collapse of Lehman, the Federal Reserve and Bush administration crafted TARP, which, amid broad popular opposition, was initially voted down in the House of Representatives before passing amid a lobbying campaign by the presidential candidates of both parties (Democrat Barack Obama and Republican John McCain).
After coming to office, the Obama administration has carried out a set of clear policies: the banks would get rescued, but their executives would remain in place, there would be no criminal prosecutions despite clear evidence of illegal activities, no “haircuts” for bank creditors and no meaningful restraints on executive pay.
The Obama administration’s actions in the aftermath of the 2008 crash were dictated by the same considerations as the bank bailout. In his own memoir, Neil Barofsky, the former inspector-general for TARP, noted that the Obama administration’s mortgage modification program, touted by the White House as a means to help homeowners avoid foreclosure, was in fact nothing more than “an aid to the banks, keeping the full flush of foreclosures from hitting the financial system all at the same time.”
Which brings us back to the Forbes 400. Beyond the total mass of wealth that the rich now control, the most salient fact revealed in the report is the manner in which this wealth has been, to use the word loosely, “earned.” As the magazine began its report, “Thanks to a buoyant stock market, the richest people in the US just keep getting richer.” A “buoyant stock market”—that is, through speculation on an historically unprecedented scale, aided and abetted by the government and the Federal Reserve.
Finance is increasingly dominant among America’s wealthy. While the finance and real estate sectors made up about 4.4 percent of the first Forbes 400 in 1982, they now make up 21 percent. Beyond those who derive their wealth immediately from the financial sector, the fortunes of billionaires in other sectors of the economy is increasingly based on share values. For example, Facebook CEO Mark Zuckerberg, currently 11th on the list with a net worth of $34.1 billion, had his wealth increase seventeen-fold from 2009 as a result of Facebook’s speculative initial public offering.
What is revealed in these figures is that the very processes that erupted in 2008 are continuing. The crash was itself rooted in the protracted crisis of American capitalism, characterized by the growth of financial parasitism proportionately with the decline of manufacturing and productive activity. Yet six years later, the big banks are bigger than ever, and even more dependent on speculation on Wall Street.
To resolve a problem, it is necessary to understand its cause. Yet the cause of all the great problems facing the working class, in the United States and internationally—soaring social inequality, the destruction of democratic rights, unending war that threatens to engulf the entire planet—is rooted fundamentally in the stranglehold of finance capital over all aspects of society.
The task of freeing society from the grip of the financial parasites is an existential question for mankind. This task can only be accomplished one way: through the building of a mass political movement of the international working class to expropriate the banks and major corporations, hold the financial criminals to account for their crimes, and reorganize society in the interest of social need, not private profit.