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A Critical Analysis of Thomas Piketty’s Account in "Capital in the Twenty-First Century"

Updated on December 8, 2017

A critical Analysis of Thomas Piketty’s account in Capital in the Twenty-First Century of the equalizing process of knowledge and productive technology between

Introduction

Thomas Piketty’s account follows a 15 years of studies (1998–2013) that were essentially focused at comprehending the historical dynamics of income and wealth. The research is done by Piketty in collaboration with other researchers. In this book, the authors who are leading experts in the discipline of wealth and income inequality document a rising concentration of income and wealth in the hands of small elite of populace. The findings from this extensive research presents a significant case that the world is heading to what can be considered as a patrimonial capitalism where the veil of economy has not only been dominated by wealth but by also inherited wealth where the issue of birth are regarded to be more important compared with effort or talent. The key theme in this book is that the inequality structures that are inherent in a given society are the outcome of the political choices and not really economic or immutable tendencies and that pretending otherwise is tantamount to ‘ideological fiction’. According to Piketty, capital inequality has disposed people, particularly those leaving in less developed nations of their democratic sovereignty,’ and that this is a concern to worry about. According to the data presented, advanced states and the elite will continue exploiting the poor and that the current system does not do anything to reverse the situation.

Discussion

In picket’s account, the author has presented fresh insights and ideas backed by reliable data that traces the flow and ebb of productivity and wealth around the world for more than three centuries. Picket has also come to an observation that the twenty-first century has instead of limiting the situation propagated the continued the accumulation and flow of wealth from the less fortunate towards the economic elite. He has made a quite convincing presentation that the rising size of the capitalist hegemony in the world which was stirred by colonial expansion increased the desire for wealth accumulation, subsequently leading to the turning of the aristocracy on itself in squabbles over who looted the colonies.

The goal of capitalism is to allocate reward on the basis of ‘merit’. It also proposes that capital is moved to the hands of people who have the capability of doing the most out of it. In addition, the authors observe that policy decisions are made in favor of capitalists whose wealth are chiefly generated by workers without him or her sweating. Ideally, there is no reason why someone should enjoy the efforts of another. Therefore, in order to effectively deal with capitalism, there need to be something like “a global wealth tax” where capitalists are taxed, although most capitalists would not like this idea (Piketty, 2015: p70).

The point of departure for Piketty is that the debate concerning wealth and income has for a long time been framed around the paucity of fact and a profusion of class (Piketty, 2015: p76). The classical liberals of the early and late eighteen century and nineteenth century were largely motivated by the fear of France revolution. Furthermore, they were also stirred by contrary and wrong economic assumptions. Since 1840s, there has been an extra ordinary trend of an inequality concentration but which began to stabilize from 1870 to 1914. We do understand that there is a possibility for the trend of inequality to continue if the shocks of war world war 1 had not been put in place. Morgan (2015), claim that Marx’s prophecy came to a realization at the height of colonialism. According to the infinite accumulation by Marx, accumulation comes to a halt at the finite level, but which can be high enough to be destabilized (p.820).

With considerations that comparisons that run over a long period of time and pace are core, there are always problems regarding establishing comparable units for measuring capital or total wealth in say, the United States in 1950 or France in 1850. Picket and his coauthors have attempted to solve this issue by diving wealth by national income measured in local currency of the respective countries. This means that the wealth-income ratio harbors the perspective of “years”. According to the comparison in this book, in 1850, the total wealth in France was worth approximately 7 years of income, while for the United States, it was approximately four years in 1950. This viewpoint of the national capital and wealth in relation to the national income is fundamental to the whole business. In economics, it is common to regularly refer to the capital income-ratio or the capital-output (Modigliani, Brumberg, 1954, p.67).

Piketty’s data apparently exhibits a clear and consistent pattern. For instance, in Great Britain and France, the national capital was steady and fair at approximately seven times of the national income from 1700 to 1910 but began to fall drastically from 1910 to 1950. The consequences for this was presumed to be the result of depression and wars, leading to less than 3 in France and a 2.5 in Britain. In both of these countries, the ratio of the capital income began to rise significantly, reaching slightly less than 6 in France in 2010 and 5 in Britain. In the United States, this trajectory was different, starting at just 3 in 1770 but significantly rising to 5 in 1910 and slightly falling in 1920. However, it regained recovery in 1930 by 5.5, falling below 4 in 1950 and again gaining track in 2010 to 4.5(Piketty, 2015: p73).

It should be taken into consideration that the United States wealth-income ratio has been lower compared to that of Europe. During the early years, the main reason for this phenomena was that there was a less bulking of land values particularly in North America which had always wide open spaces. Although there was of course a much readily available land, the cost was far much below the expectations (Keynes, 1930). Nonetheless, from the twentieth century to the present perspective, the level of productivity in the United States have been rising has reflected in the lower capital income ratio. In this respect, a given level of capital may have a potential of supporting a larger production output compared with what the same level of capital can do in Europe (Gordon, 2012, p66).. It is not surprising then that the impact of both World War 1 and 2 to capital dissipation were much less in the United States compared to the situation in France and Britain (Morgan, 2015 : p.821). From Piketty’s argument, it can be observed that for all the three nations and others as well, there has been an increasing trend of the wealth-income ratio since 1950 while this level is also most reaching that of the 19th century (Piketty, 2015: p.68). Furthermore, this increase is projected to go on increasing even in the modern day perspective, culminating into weighty consequences in the world economy (Solow, 2014: 1).

There are many who wonder whether Piketty’s thinking that the future will be similar with the past holds water. According to Theory, it is increasingly becoming real that earning a good return on capital and wealth is becoming harder and harder. Furthermore, today’s rich moguls including but not limited to Donald Trump, Mark Zuckerberg, and Bill Gates acquired their wealth mainly through hard work and not through inheritance (Harry, 2014, p.12). However, there are those who view that the recommendations by Piketty are more ideologically oriented than being economically driven and that due to these; they have a prospect of doing more harm than actual good if implemented. Nonetheless, majority of these skeptics have no problem with the data and analysis presented (The economist.com 2014).

In fact, approximately 3% of the world overall private wealth is owned by sovereign wealth funds and billionaire capitalists (World Bank, 2014: 11). In this regard, Piketty projects that 10-20 % of the world capital will be exclusively owned by the sovereign wealth funds. The projection further continues that there will be a continued growth of the sovereign wealth funds particularly for the petroleum exporting nations and states while their respective share of global assets will be more than three times in 2040 than it is currently (p.85). Accordingly, the Western nations will find themselves being partly “owned” by the sovereign wealth funds of the oil producing nations (Morgan, 2015: p.822). This will subsequently culminate into political reactions including restrictions regarding purchase of financial and industrial assets by sovereign wealth funds. On the equal level, there are expectations of nations such as China to increase their investments in Africa, leading to a serious level of tension. This phenomenon is also being experienced to some level.

Realistically, there are divergent forms of capitalism in various economies around the globe. The trends elaborated by Piketty and the mostly flawed (from the formalized and reductive observations of economic theorists), markets and capitalism expressions around the globe presents a suggestion that a total private ownership of all forms of production, minimum governmental intervention and perfect competition are markets may not be necessarily be regarded as the basic dynamics described by Piketty in order to sustain themselves. Accordingly, standard neoclassical theory and model presents a uniform and idealized expression of capitalism. The production means is owned private by households which are free to purchase any form of goods and services in a free and open market (Harry, 2014). In addition, households are free to apportion their budget between current saving and consumption for the present day and in future, to allocate their time between leisure and work. What is more, the goal of producers is to maximize profits but perfect competition constrains them (Modigliani, Brumberg, 1954: 2).

Through establishing the root of wealth inequality between nations, Piketty has painted a scenario where the discrepancy at the helm of the wealth ladder has the potential of winning out over the forces of global convergence and catch-up. In light of this, the wealth share at the top of the hierarchy will continue to rise on a significant note while wealth redistribution from the upper middle class and the middle class will move upwards towards the very rich and thus stirring a potential to generate political reaction. In essence, the economic inequality has a high likelihood of creating a dynamic of distribution and accumulation of wealth which is featured by unrestrained inegalitarian spirals and explosive economic trends. According to Piketty, such a significant dynamic can only be effectively leveraged by progressive capital tax (p.77).

Conclusion

Whether Piketty’s assumptions are essentially aimed at changing policy or not, there is no doubt that his writings and analysis do have a significant influence on economists and reader’s views and thoughts concerning capitalism and its effect on the world.

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