Thinking About Piketty’s “Capital”
The quotes in this post’s subject line are very much intended as a double entendre. I’m of course referring to the title of Piketty’s book (which I’ve read about 80% of, jumping around). But even more, I’m talking about his definition of “capital.”
I’ve ranted frequently about economists’ failure to define this term or agree on what it means, and Piketty is very much laboring under the burden of that failure.
Don’t take my word for it. This confusion about the nature of capital (and the associated term, wealth) is the central point of James Galbraith’s critique of the book:
First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial.
You’ll find that “capital” conundrum lurking or leaping out within every review you read.
Piketty deserves great credit. Unlike many or most economists, he makes a good-faith effort to define his usage of the term, and a not-altogether-successful effort to think coherently and consistently within the terms of that definition. He addresses his definition head-on on pages 47-49, and wrestles with various aspects of it throughout the book. See for instance page 149 (on the market value of assets), page 163 (on “human capital” that can be bought and sold in a slave society), page 188 (again on the market value of real capital), and page 210 (on “real” vs. “nominal” assets).
I’ll just highlight one subject: In the course of things he expresses disdain for the notion of “human capital.” Many will find this to be problematic, since most estimates would suggest that human capital — our ability to work and produce in the future — constitutes the great bulk of world and national capital. But Piketty’s stance is reasonable or even inevitable: it’s largely impossible to measure this kind of capital outside a slave society (and then you’re only measuring the “value” of the slaves). So for his purposes of analyzing the subject based on recorded numerical data, human capital is a non-starter.
But still, Piketty fails to address the extent to which human capital is increasingly being “capitalized” or “finacialized.” Think, for instance, of the extraordinary runup in U.S. student-loan debt, and asset-backed securities packaging those loans — debt and securities whose only collateral is those students’ enhanced ability to…work and produce in the future.
Here one measure that is at least a proxy for that runup: government-held student loans as a percent of GDP.
Where are the lines between “real” capital, “human” capital, and “financial” capital? What are their economic relationships? (If you’re under the impression that they’re obvious or clearly understood and agreed-upon, you’re not thinking very hard. At all.)
My purpose here is not to solve that capital conundrum — far be it from me. I come not to bury Piketty, but to praise him. His usages and definitions provide a very useful framework in which to discuss issues that have been hard to discuss coherently absent such framing. The evidence he’s assembled within that framework, and his remarkably cogent discussion of that evidence, gives ample evidence of that.
But even more: By tackling these definitional issues head-on (if not always successfully), he has brought an inconclusively theorized crux of economic thinking — the nature of capital (plus wealth, value, and even money) — back to the forefront of discussion. We can all hope that much good will come from that.
Cross-posted at Asymptosis.
We can measure the cost of education, including before college. The true value may be understated or overstated. Experience is more difficult to measure.
The U.S. has tremendous human capital, although high unemployment in recent years has reduced the capital stock.
Reducing the capital stock through unemployment can work similar to the “paradox of thrift.”
Education and/or experience raise the capital stock. However, if that education isn’t employed, and to gain experience, the capital stock can fall.
@PeakTrader:
Right. Hell, we value government services at cost, no reason education couldn’t do likewise. Might be worth classifying all education spending as investment rather than consumption so it gets added to “capital.” Depreciation would be pretty easy to calculate at least in aggregate based on actuarial tables. What about health? How much do we credit teh capital account when a kid gets born?
IMHO, capital is money to be lent AT INTEREST. Other wealth could also be considered, land, goods, labor, etc., if it is ON LOAN AT INTEREST.
The academic interest in the definition of capital seems rather, er, “academic” to the question of what to do about the growing starvation in the American labor market.
I’m up to about page 330 in Capita in the Twentieth Century. The book is supplying me with what I needed which is a comprehensive summing up the workings of the Big Squeeze (known in some quarters as “inequality”, though I’ve yet to hear the word on the Six O’clock news). Now I may confidently hatch my “Squeeze a Toothpaste Tube on the Bottom and It All Comes Out the Top”, unequal pressure summing up of the American labor market.
Piketty gently lays aside the “education and technology” and “marginal productivity” explanations for “inequality” – putting most of his emphasis on the end product of the big squeeze: the rise of the super managers. Did teach me that most of the “toothpaste” comes out the top to CEO types – ballplayers, artists and TV anchors mostly coming along for the ride.
To me it is all about repairing labor’s bargaining muscle. We only have to look at the difference between organized truck driver pay and unorganized regional airline pilot pay (the epitome of training and technology productivity).
The alpha and the omega of solutions to me is legally mandated, centralized bargaining (mandatory unionization automatically fixes the political forum too with financing equal to ownership’s plus most all the votes).
LAST WEEK I POSTED THIS SOMEWHERE (everywhere?) as an example of how well one American example works – OOOOOOPS!:
The Teamsters Union has a version of its own: the “National Master Agreement” — or else Teamster truck drivers and warehouse workers would be as poor as regional (half the) airline pilots. I was a member of local 804 [1970] — Ron Carey, local president (later national president) — just a warehouse worker pushing and shoving furniture (didn’t get my driver’s license till years later; New Yorker). Last I heard, some years back, 804 raised its defined retirement benefit (all securities kept under ownership of the union) from $3300 to $3600 a month.
This week, ALL the UPS drivers of my old local 804 are being fired over a 90 minute work stoppage in protest of an supposedly contrived firing of a labor activist. They do have a no strike contract. Federal law prohibits firing for work stoppages unless there is no strike clause in the contract – excepting some kind of conditions protests – we’ll see.
Point is: 25 years ago such action would have been socially unthinkable. Piketty’s magnum opus may be a necessary tool with which to paint the results of the Big Squeeze – but it is not of any immediate interest to local 804.
Given the overall greatness of Piketty’s work I was thoroughly disappointed at his typically academic, shallow insight into the machineries of the US minimum wage.
“On the basis of these studies (Card and Kruger) it seems likely that an increase in the minimum wage of nearly 25% (from $7.25 to $9 an hour) currently envisaged by the Obama administration will have little or no effect on the number of jobs. Obviously, raising the minimum wage cannot continue indefinitely; as the minimum wage increases, the negative effects on the level on employment eventually win out. If the minimum wage were doubled or tripled, it would be surprising if the negative impact were not dominant.”
How much of the 45% of the US workforce are likely to get laid off over a 3.5% increase in overall prices that a $15 an hour minimum wage hike would cause? Did anyone ever ask the 45% how they would like it handled? Ask how many would die to quit one job (a lot!)? To stretch a point: if a one-third of the 45% were laid off (crazy1?) they 45% would take home the same money – for less work.
Does the fact labor costs typically are only a small fraction of the price tag actually dawn on academics? I wouldn’t get that impression – correct me somebody if I am wrong – simple thought that simple connection is. ??? Wal-Mart prices go up 3.5% at $15 an hour. The high labor costs extreme fast food (where 65% of the business goes through the drive through in their 4-wheelers) would go up 25% — better bring a peanut butter sandwich going shopping? – the 35% who walk in will be getting an average $8000 a year raise.
If the Berkeley economics faculty had to walk home alone through the most dangerous parts of nearby Oakland late every night they would be a little more overanxious about getting the minimum wage upped. And – they would understand how much a difference in quantity makes in quality – to wit: a $10 an hour minimum wage would probably change the gang situation not at all; a $12 an hour wage would probably improve things, but I don’t think too much (from being around this country for 70 year – including 15 years in New York City’s very bad lands); a $15 an hour minimum wage would probably evaporate the gangs.
100,000 out of 200,000 (the latter my estimate) Chicago gang-age minority males are in drug selling gangs today. The only surge in unemployment likely to be caused by a $15 an hour minimum wage here might be them wanting to go to work in the legit world all of a sudden.
@Denis:
You’ll see many posts out there addressing Piketty in many ways. On this one: The academic discipline of economics is deeply complicit in the political structure of inequality that we live with. Reforming that discipline is certainly not sufficient to change that structure, but it may be necessary.
Yes giving workers power is a great idea, but how’s that working out for us? And yes the minimum wage alone is a tiny step, but it’s one of many.
I’d also quote a recent line from an Erica Payne post:
“Don’t empower women. Pay them. And trust them to empower themselves.”
We might say that for all workers, in fact. Or all members of our society. We need major redistribution in the form of a total tax system that actually is strongly progressive, and that delivers everyone a decent, secure economic future. That is quite posssibly, maybe even necessarily, not tied to work.
And there are certainly some incentives for union leaders not to like that idea, even if it does comport to their general inclinations.
DeLong , who I don’t usually praise , does a good job of dissecting Galbraith’s critique , here :
http://delong.typepad.com/sdj/2014/04/thomas-piketty-attempted-smackdown-watch.html
Piketty’s works on income and wealth inequality are unquestionable tours de force , and this may be precisely why we’re seeing these odd and pissy critical reviews. Galbraith has devoted a good part of his career studying inequality , slicing and dicing the data in every way imaginable , but to what end ? Has he really had a major impact on the conversation ? Piketty’s graphs on income inequality are everywhere you look. His database is the go-to source for economists , journalists , and even mere blog-crawlers like myself. He’s had a profound impact on the inequality debate – in short , he’s been extremely effective in compiling and presenting his research. For those who haven’t been so effective , finding things to criticize about Piketty is one way to avoid confronting that uncomfortable truth.
Steve Roth: TAX THE RICH @ 91%, its NOT progressive its 1950’s regressive but it worked VERY well then and will work well today. Who knows, maybe the leaches actually will “Go Galt”, or maybe become citizens of China, to start over again in that “Brave New World” while The Invisible Hand Of The Free Market divides up what lands, buildings and other property they leave behind amonst the REAL Americans that stay behind in America.
99 to 1, Folks, 99 to 1, think about it.
Steve,
I don’t want to seem picky but where did you get the idea that raising the minimum wage would be a tiny step — at least if we are talking $15? It would essentially win the war on poverty.
I cannot think of anything — in the short run anyway — that could be more momentous. But, my perspective is from 30 years of cab driving — which once was a good job — especially for an intelligent 30 year veteran who could pick the best end — once.
Here is my Chicago taxi driving experience:
one 30 cent increase in the mileage charge from 1981 to early 1997;
at which 1990 midpoint the city began building subways to both airports, opening up unlimited limo licenses and finally putting on free trolleys between all the hottest spots downtown — fine; but why did it add 40% more cabs at the same time?
The connection to the minimum wage? While my job was being outsourced at home, everything else disappeared too. We are doubling up in apartments, can’t get our teeth fixed, forget vacations — we are starving. $15 an hour would seem like a miracle.
* * * * * *
Reforming the discipline could educate the reformers — but reforming the labor market would be as easy as somebody making a public issue about CENTRALIZED BARGAINING, which could be the instant coffee of Democratic politics. People, believe it or not, do not need to be educated about all the highways and byways of the big squeeze. Like I keep repeating (well I’m no expert — except on selling maybe — call it my one-note-tune) supermarket workers and airline workers would kill for centralized bargaining. Perfect place to start — somebody just run for office on it (I’m too old).
People are hearing more and more and more about so called inequality (that’s what academics call the “big squeeze” — would “Great Squeeze” sound better) — but they don’t really need that. 50% already said they wanted to be in unions a long time ago — something that would only grow once the issue becomes a normal part of the culture.
As far as taxation, I’ll go along with that in the sense of drastic confiscation that Mike is talking about. The lure of great wealth should be like a patent: incentivize for long enough to encourage creation but after that you break up the concentration of wealth to preserve democracy. Bill Gates always said that it’s a game and the score is kept with money — also said he would give away 95% of it in the end.
Couple centralized bargaining (best example Germany) pl;us confiscatory taxation (best example post WWII US) and you would have a light shining on a hilltop for the world.
* * * * * *
In the infantry you reinforce success, not failure, so if we cannot get the profession of economics’ doctors to mention centralized bargaining out loud, the next best thing we can do for the moment is push the $15 minimum wage. I say that because it is going to hit more and more over the three west coast states and everybody will be happy and nobody will be out of work (even though if it is seen as a market demand somebody should ask the minimum wage earners if they are the least bit worried about losing a few jobs over a doubling of pay).
I say making the $15 minimum wage a success is the first step because until something happens, nobody will believe anything else — like centralized bargaining — can happen too (if you are used to me you know my explanation for this is male hunting pace fixation).
“Here one measure that is at least a proxy for that runup: government-held student loans as a percent of GDP.”
This actually isn’t a good measure of government student loans for two reasons. One, several years ago, the government began buying up a lot of student loans held by private banks. Two, the government changed some accounting rules for measuring securitized assets that jumbled the numbers. A better measure of the runup of total student loans, not just government, is on the New York Fed’s Web site: http://newyorkfed.org/microeconomics/hhdc.html
Also, student loans are a dubious measure of human capital because it requires assuming that higher education alone causes higher productivity. Under signaling theory, the loans end up being liens on workers’ future incomes like a wage surtax. Indeed, the NY Fed says the 90-day delinquency rate for student loans is over 10 percent.
Matt:
Interesting blog you have there. Why just pick on law schools to write about when the entire student loan debt situation is an issue? Also, I am assuming you are talking about measuring risk through Fair Market Valuation in accounting. Your last two sentences are true.
I have been tussling with “human capital” for a few years now. Seems to me it can be divided up along a few dividing lines.
Primary HC would consist first of core elements of HC like strength, intelligence, persistence, health, and functional belief systems (versus dysfunctional. No, not religion, but more like attitudes towards life, honesty, fairness, cheerfulness, tolerance and so on.)
These can be amplified by education, public services, healthy family and friend relationships, good health care and so on, and degraded by their opposites — ignorance, hunger, anxiety, suspicion, illness, and avoidable burdens like long travel times, expensive daycare, and many others.
Primary HC would be the HC available to the individual and their close social connections.
Secondary HC (HC-S) would be the aggregate of other people’s primary human capital (HC-P) mobilized and directed by others for their own benefit, or towards a common goal. There are many ways to mobilize and direct HC-S, only one of which is by hiring people. Some are generally viewed as good — Churchillian rhetoric, pep talks, appeals to idealistic goals, rational discourse and education, as examples.
Neutral, or apparently neutral methods of control include laws and credit systems, educational systems and accepted items of “common knowledge,” and reputation.
Others are generally agreed to be bad. Threats, murders and disappearances “pour encourager les autres,” confinement, restriction of education and information, hostage-taking, and restriction of options are very common methods. The extreme of these is legal slavery, but one can achieve a similar level of control by using an array of these methods (whether “good,” “bad” or neutral”) in concert.
The key to HC-S as wealth is that it amplifies the HC-P of individuals or small groups, to such an extent that money can become superfluous, or merely a handy adjunct to the other tools.
Finally (at last!) great wealth in the form of HC-S must be judged by how it is used and what it’s aims are. Looking back to WWII, England mobilized and directed the energies of its people to a noble goal. By contrast, in modern day North Korea people’s energies are mobilized towards the wishes of a tiny dictatorship, and purposely muted, muzzled and blinkered to the detriment of the whole nation in the service of ironclad control.
Noni
Noni
I think you are on a better track than Roth. Human “capital” is too precious to be thought of in terms of money.
Roth seems to think that “highly progressive” taxation is the answer to inequality. Great, instead of being exploited by the rich, we can be exploited by the politicians. Instead of finding a way to get honest pay for honest work, we can just set back and use government force to rob the rich and give to the poor.
I don’t like Åyn Rand, but at least she had the excuse of coming out of the Soviet experience. Substituting one known path to misery with another one is not my idea of human progress.
Meanwhile, it ought to be fairly obvious that education, training, health care, decent living conditions, and decent concern for the “souls” (liberal education? time for “recreation”) of the workers, if not the rich themselves, add to our productivity, and therefore are “capital” in the same sense that building a machine to create “product” is capital.
On the other hand there is absolutely no reason why the word “capital” needs to mean the same thing to everyone. If a writer can make clear what HE means by “capital” that should be sufficient, and should save us from the fallacy of “one word one meaning” which is a source of so much trouble to small minds and the people they coerce.
As for high marginal taxes on the rich… I am in favor of that. There is no reason for the country to support the kind of “wages” that lead to a class of super rich who then control the country. Nor is there any reason the “well off” should avoid paying for the services they get from government. Nor is there any reason even the “poor” should avoid paying for their own retirements and health care… though we need to see to it they get the wages they need to afford that. Doesn’t mean that the very poor who just “can’t” need to be thrown in the streets. Welfare is a reasonable solution to that problem, though it needs to be better thought through than the welfare programs I saw in the 80’s… but it is NOT a solution to the ordinary aspects of life like health care and retirement… and education… real education.
could be confusion in what i said about education. education needs to be the business of government… paid for by the country as a whole.
on the other hand education as an arm of politics has not been a wonderful thing in my opinion.
We’re talking about changing the *culture*, and that’s a big project. It takes time and serendipity too. For example, it is difficult to underestimate the power of popular figures–athletes in particular–speaking out. This doesn’t happen often. But when someone like Muhammed Ali, to take a 50 year old example, opens their mouth on a political issue, it has tremendous power.
Run75441:
I do write about about student debt generally, but I came to it via legal education, which also happens to produce more topics. In fact a gave lecture on higher education and student loan debt at the Henry George School of Social Science in NYC a few months ago.
In my post, I wasn’t referring to fair value accounting. The federal government has evaluated its direct loans and loan guarantees with accrual accounting since 1990 or so, and before that it used cash accounting.
Rather, there was an innocuous change in the accounting rules that affected the macro distribution of nonrevolving debt (“FAS 166/167” I think). It’s not too important, but it isn’t right to point to the federal government’s student debt holdings because they don’t include Federal Family Education Loan Program loans that are still around and held by private banks.
Piketty is using the wrong definition of “capital?”
As a sometime physicist and long-time engineer, this complaint really jars. He defines his terms and then analyzes his observed phenomena using them. The analysis does not depend on the name; see Shakespeare for further comment.
If it makes anyone feel better, replace all of his uses of “capital” with “latipac” or “jabberwock.” The analysis stands independent of the names chosen for the variables.
@D.C. Sessions:
If none of Piketty’s analysis conflicts with his definitions, all is good. Are you prepared to say that’s true?
Hey I’m crazy about his work. Comports beautifully with my preferred beliefs.
But I’m even more crazy about really understanding his work, and how it contributes to our understandings of how economies work.