Thomas Piketty – Capital in the Twenty-First Century

Few books have captured the imagination of the intelligentsia like Thomas Piketty’s Capital in the Twenty-First Century. The book has reshaped how people think about inequality. It is not necessary to agree with his basic thesis. This is one of those books anyone who is well-versed in political theory must understand to converse on complex topics.

I will admit this is not technically a book of political science. Technically it is a work of economics. But Piketty described his own work with the old-fashioned term Political Economy. He views his economics as intertwined with policy implications and political theory. It is impossible to remove the political from his economics because his economics have enormous implications for public policy.

Piketty does not use too many equations or complex mathematics. Indeed, this was a work meant to be read by the general public. Or rather the educated public. Yet few people have gotten around to reading the work. Fortunately, it is available on Audible so you can listen to it while working out, cooking dinner or on a commute. It’s about twenty-five hours long but it’s not as long as it sounds. Go to the gym for an hour a day and you’ve finished it in less than a month.

Central to the work of Piketty is a doubt in the productivity of excessive capital accumulation. Economists nearly all agree capital is necessary for economic growth. Indeed, Piketty accepts this basic premise, but he implies there are diminished returns as wealth is concentrated. It helps to break down the way the economy and business work within a capitalistic economy. Capital accumulation is necessary for economic growth. Without capital businesses are not created because they don’t have the money to build the necessary organization to provide value for customers. Google, Facebook and Amazon lost money for a long time before they had created the size necessary to monetize their enterprises.

Unfortunately, Piketty never says but seems to imply capital can outpace quality business ventures. He notes wealth inequality grows as the return on capital outpaces economic growth. Typically, politicians argue an increase in savings increases economic growth, but Piketty argues the savings rate can increase with little to no increase in economic growth especially when the rate of return is exceptionally high.

A problem within Piketty is his terminology no longer matches the economy. He talks about capital as though investments are necessary for large manufacturing equipment. Yet many businesses have little to no actual “capital” beyond regular cash flow, yet they deliver value as an employer. In theory, an employee can create a similar business because there is little capital equipment. Yet employees continue to value their employment.

Anyone familiar with business will recognize the book value of a firm is different from its market capitalization. The book value represents the value of its assets minus its liabilities. Yet the market capitalization may represent several multiples beyond the book value because the organizational structure of a company represents valuable infrastructure. Many companies today offer few tangible assets. Its value is in its organizational infrastructure. Its ability for a person to step into a role and add value beyond what they could produce outside the organization.

Regardless of my many tangents, Piketty will introduce you to a few key economic concepts and formulas economic textbooks rarely introduce. His work is highly regarded. Professors will not be surprised if you name drop him. But they may show you some respect when you demonstrate that you understand his ideas and effortlessly reference him in a paper. The rest of us will simply have a better grasp on economics from a new perspective. This is not a left-wing diatribe based on feelings and emotions. This is a serious work of economics that will make you think and reconsider preconceived notions. Some of his conclusions will surprise you. He is NOT a proponent of the Modern Monetary Theory. He argues the public debt exacerbates income inequality. But he’s certainly not a Conservative. His answer to the public debt is simply to tax the wealthy more. Nonetheless, it catches me off-guard when many liberals will say the public debt does not matter. It continues to come up quite often. And nobody brings up Piketty’s analysis as they discuss the question of the public debt. Their views might be different once they read Thomas Piketty.

jmk, carmel, indiana,

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