Bill Gates Agrees with Me on Piketty
He really likes the book, but expresses frustration that Piketty (emphasis mine):
…doesn’t adequately differentiate among different kinds of capital…
Imagine three types of wealthy people. One guy is putting his capital into building his business. Then there’s a woman who’s giving most of her wealth to charity. A third person is mostly consuming, spending a lot of money on things like a yacht and plane. While it’s true that the wealth of all three people is contributing to inequality, I would argue that the first two are delivering more value to society than the third. I wish Piketty had made this distinction.
This is not exactly my point (here), but still it cuts right to the crux. There’s a conceptual flaw at the book’s core that makes it hard or impossible to think coherently about the levels, trends, and mechanisms that Piketty portrays:
Piketty defines capital as synonymous with wealth.
Wealth consists of all the tradable claims on real capital (specific ownership claims, generalized claims like dollar bills, and everything in between). The market constantly reprices those claims, resulting in a constantly-adjusted best-guess market estimate of what the underlying assets are worth — ultimately expressed as household net worth (with all firm net worth imputed to household shareholders).
The market reprices the claims, based on its revaluation of what the underlying assets are worth. If it thinks the assets are worth more (will produce more in the future), it bids up the prices on the claims.
Important: that stock of real assets is not just the “fixed capital” tallied (because it can be measured) in the national accounts; that’s actually a small part. Knowledge, skills, and abilities (think: education, training, health), business/organizational systems (this is huge), and similar unmeasurables constitute the bulk of real capital — the stuff that allows us to produce in the future. Most of that stock is not specifically claimed, but it is that whole body of real capital that the market it trying to value properly via pricing of claims — basically, holding up its collective thumb and squinting.
Piketty should have called it Wealth in the 21st Century. That’s what he’s really talking about, because we really have no idea (beyond the market’s best guess expressed in household net worth) what our real capital is worth.
“Financial capital” is an oxymoron.
Cross-posted at Asymptosis.
Then you have to figure out what is charity. Sorry, but leaving a billion to Harvard or some religion doesn’t strike me as charity as there is very little “value to society” involved.
Bill Gates believes that there would be some benefit by dividing capital into 3 categories. It would be divided according to HIS perceptions of their benefit to society.
The guy who is putting his capital into building his business is probably also avoiding capital gains taxes which are used to support the society as a whole. (Someone is going to have to pay for keeping roads paved.) And in the end, his business will not be an altruistic endeavor, he will profit from his investment in his business if at all possible. And heaven help anyone or anything that gets in the way. (The EU decided that Microsoft had abused its dominant position in the market place.)
The woman who’s giving most of her wealth to charity is not going to divide her wealth equally between every non profit in the country. She is going to contribute to entities that favor her own religious or political beliefs. (Currently we are awash in political ads paid for by nonprofits.) If part of the wealth is in the form of capital income earned then she will shift part of the burden of funding those entities to the taxpayers because of tax deductions. And last but not least she is being self serving by raising her status via public giving. I don’t see why we should assign her wealth some higher value to society as a whole.
We should pity the third person, he is merely a consumer.
Can hundreds of billionaires better determine where money should be spent to benefit society? (Or a few millions of millionaires.) Or would hundreds of millions of working Americans come to a better determination? That is a value judgement and where you stand on that issue will probably depend on whether you are one of the billionaires.
I believe that Piketty got it right.
Your wider point is we really don’t know the value of our real capital. But if 401K account owners have to be content with estimations from constantly shifting valuations then some estimation of capital doesn’t seem inappropriate. There is no sense in making the perfect, the enemy of the good. (Especially since the perfect seldom exists in the real world.)
And I rebel completely at the thought of any valuation of my knowledge, skills, or abilities, pathetic as they may be. Next would come the discussions about taxing me based on the valuation.
There are only two forms of “capital.” Real capital is ownership of assets based on investment in real capital goods and financial capital I is money saving and financial “investment” which is actually saving.
Capital ownership of either capital goods or “financial capital” in the form of savings. Net worth (wealth) is assets minus liabilities. Gates is talking about uses not ownership.
Someone send Gates a link to the Real-World Economics Review special issue on Piketty.
Galbraith confronts Piketty’s neoclassical stance on the Cambridge capital debate even though Samuelson conceded defeat on the ambiguity of “capital.”
Michael Hudson’s article cuts to the chase by reminding of the the classical distinction between productive contribution and economic rents that neoclassical economics ignores. Some would even argue that John Bates Clark purposefully deleted it from discussion and since then frictions arising from call, status, power and privilege that underlie rent and rent-seeking have been banished from orthodoxy, or at least carefully controlled.
I haven’t finished Piketty’s book yet but I am very impressed with it on many counts. He is definitely on the heterodox side even though he is criticized for taking a neoclassical approach. His answer is that complex issues can be illuminated by simple models as heuristic gadgets, which is what he has attempted to do in painting with broad brush strokes. He doesn’t think that his book is an ending but it is offered as a beginning. His contention is that conventional economics has lost its way and needs to get back on track. So I am not too concerned with his loose use of capital.
As he says, it’s an approximation he uses to work with, and he supplies as much data as he and his colleagues found historically available. There is no indication he regards this as definitive and he has responded to critics concerning the empirical basis. He is extraordinarily well-prepared given the vastness of the subject matter he has undertaken. He seems to welcome criticism, which he deals with deftly. So I think that the so-called loose ends will be addressed down the line, especially as questions arise and objections raised. Piketty is quite aware of the direction this is taking, I believe.
It’s true that Piketty doesn’t take heterodoxy much into account, and some see that as a weakness. But heterodox economists have been hammering on this for a long time, and as Hudson points out, classical economics, ending with Marx’s reaction to Smith and Ricardo, deals with it, too, at the beginning of economic thought. Henry George dealt with land rent. This seems to have sparked the reaction of John Bates Clark.
Actually, Picketty regards all return on capital as economic rent, and, indeed, in the neoclassical stylized model with no friction, profit is competed away. See, for example, Peter Thiel’s new book, Zero to One, on monopoly rent as the basis of successful entrepreneurship.
Neoclassically oriented economists including New Keynesians are the odd people out. That includes people like Krugman and DeLong. Piketty’s genius has been to get noticed when relative celebrities like Stiglitz and Galbraith writing on inequality have not been. Piketty came out of obscurity to dominate the debate and change the subject. If he didn’t look like a neoclassical economist that would not have happened
“The rent is too damn high.” Economics is finally nudging in that direction.
If, for “capital,” you substitute the word “influence,” you come closer to a comprehensive view of the sort of capital we should be studying.
Of course, our everyday understanding of influence sees it as a soft power, difficult to quantify, store, or transfer. This is not the definition I have in mind. Rather, it encompasses all the ways in which one human being can mobilize and direct the efforts of others to their own benefit. A single form of influence generally cannot stand alone, but mountains of cash may be as close to stand-alone influence as might be envisioned.
With those mountains as a starting point, other forms of influence can be deployed to fill in the gaps. These include violence, slander, bribery, lobbying, mobility, charm, compassion, fraud, and more. Legal forms can be fuelled lavishly, and the illegal ones can be covered up or made legal.
Which of these forms can be deployed by the cashless? Very few, and seldom to any lasting benefit. The illegal ones are hindered by the legal system, and the legal ones, such as charm exercised by a clever or beautiful person, or compassion awakened by a destitute or ailing person, have comparatively little influence, and scant staying power. That sort of influence can’t be stored or passed on.
@JimH: “Can hundreds of billionaires better determine where money should be spent to benefit society? (Or a few millions of millionaires.) Or would hundreds of millions of working Americans come to a better determination?”
Agreed, and this cuts to an important point. If wealth and income are more concentrated, that leads producers and new-product creators to target their efforts toward that concentrated market of spenders, not toward creating goods that have value for the larger market of lower-spenders. Seems like less aggregate utility would result.
“And I rebel completely at the thought of any valuation of my knowledge, skills, or abilities, pathetic as they may be. Next would come the discussions about taxing me based on the valuation”
My point is that that value can’t be measured. But claims on that value form a huge component of the rough, long-term measure that we do have: total wealth/net worth based on the prices of outstanding claims.
@Tom Hickey: “Gates is talking about uses not ownership.”
Absolutely right. He’s kind of confused there. I admit to doing a dodge and weave around that to make my point.
I’m excited to get deep in the new Piketty/Saez article to see how they talk about wealth vis-a-vis capital.
There’s no doubt that 1. wealth is the only measure we have of what our capital is worth, and 2. it’s a very reasonable and representative measure of capital over the long term, especially when viewed in relation to income/production. To the extent possible, that is the best way to cut the Gordian knot of capital valuation revealed in the CCC.
I also agree with everything else you say. Especially love your use of Yglesias’s book title. Brilliant.
@Noni: “mountains of cash may be as close to stand-alone influence as might be envisioned”
Right. Money is power. Which is why I (to some extent contra those who champion unions as the only source of labor power) am so in favor of large-scale (re)distribution via every method from EITC to infrastructure, health, and education. Want widespread distribution of power and voice? Try widespread distribution of money.
Money delivers power and power delivers money. I’m for pushing on both sides of that equation.
Steve: “…that stock of real assets is not just the “fixed capital” tallied (because it can be measured) in the national accounts; that’s actually a small part. Knowledge, skills, and abilities (think: education, training, health), business/organizational systems (this is huge), and similar unmeasurables constitute the bulk of real capital — the stuff that allows us to produce in the future.”
And here we are back again to the 2005 World Bank report Where is the Wealth of Nations. I quote from my 2007 posting in which the report notes: “Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity,” the study concludes. According to Hamilton’s figures, the rule of law explains 57 percent of countries’ intangible capital. Education accounts for 36 percent.”
I concluded that the true wealth is trust.
“We as a whole can be educated to the hilt, but if we can’t trust that our efforts will be put to constructive use, we have problems. Think habeas corpus, FISA, election fraud, threatening of the press, intimidation of speech, extension of free speech to none human entities, the equating of one voice-one vote to spending of one’s money, K Street project, etc. Think of the use of fear. If only a few are educated to the hilt or have access to the governance, we can not build capital.”
It’s not new. What I don’t understand is why this report from 2005 did not have more made of it.
My posting is here: http://angrybearblog.strategydemo.com/2007/10/human-capital-is-where-its-at.html
A beautiful condensation of the conundrum. Thanks.
To contribute, hopefully not too tangentially:
Competition is pernicious except to the extent that it promotes cooperation.
So reifying competition for its own sake is also pernicious.
Cooperation — eusociality — is what set us apart as a species, what got us to the top of the food chain.
Sorry to be late getting to this comment. Before I respond, can you tell me what you mean by savings (the stock). What measure in the national accounts gives us a measure of (say, household-sector) savings?
Just clarifying that “savings” indicates a stock while “saving” is a flow (change in stock). “Wealth” is generally equated with net worth as the balance sheet stock aka equity as assets minus liabilities. But wealth is also used wrt total portfolio (gross savings) as market valuation of real assets like RE and precious metals and financial assets like cash, shares, etc. So there is some ambiguity in ordinary usage of “wealth” wrt to net and gross savings, which the accounting clarifies.
Total of real assets plus financial assets = gross assets (gross savings), and gross assets less all liabilities is “net worth”, or “equity” (net savings). For example, the market value of one’s home less the remaining mortgage is counted toward net worth as real savings or portfolio wealth. At the same time, someone that can command a huge place is considered “wealthy” even though the place might be underwater in value. “Wealth” might be ambiguous in ordinary language but it can be made precise in terms of balance sheets.
Piketty distinguishes income (flow) from capital (stock) Return on total assets or gross savings as “capital” can distinguished as flow from work income as a flow. So there are two separate flows, one from an existing stock and another from work. PIketty further distinguishes “inherited wealth” from (personal) “savings” (p. 18) as contributing to total capital.
Some would propose calling the latter a flow from the stock of human capital. Piketty rejects that notion of human capital. BTW, I posted a commentary on “human capital” at MNE
Here are some of PIketty’s definitions:
“To simplify the text I use the words ‘capital’ and ‘wealth’ interchangeably, as if the were perfectly synonymous…” also pointing out how in other contexts they are not taken to be synonymous. (p. 47), e.g., in other contexts, land would not be a component of capital.
“To summarize, I define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time.…” (p. 48)
“To be clear, although my concept of capital excludes human capital (which cannot be exchanged on any market in nonslave societies), it is not limited to physical capital. I include ‘immaterial capital’….” (p. 49)
Then comes one of the key points at the heart of his analysis (p. 50):
“I begin by defining the capital/income ratio.
“Income is a flow. It corresponds to the quantity of goods produced and distributed in a given period…
“Capital is a stock. It corresponds to the total wealth owned at a given point in time.…
“The most natural and useful way to measure the capital stock is a particular country is to divide that stock by the annual flow of income. This gives the capital/income ratio…
Going back to your three examples:
In the first case, everything depends on the kind of business the
businessman is building. Is he producing hand guns or affordable
In the second case, we need to keep in minds that in the U.S.
the bulk of “charitable giving” goes to religions. Do those churches
benefit society as a whole?
Finally, in the third case consumption (and excess consumption) creates jobs, but it also creates other problems.
You are right, of course, that a large part of a nation’s wealth is
intangible and cannot be measured.
But there is a portion that we can measure– the dollar value of
assets that are inherited. So much money is concentrated in so few
hands largely because over the past 34 years the value of financial
assets (and real estate) has been compounding. As thees bubbles built, they were protected from taxation. Most importantly, inheritance
taxes have been slashed, and “estate planning” has let the top 10%
shelter these assets in various ways.
If we are concerned about inequality and concentration of wealth at the
top we need to hike inheritance taxes, and institute a 15 year “look back