Friday, July 18, 2014

Piketty (17) Capital v Wealth

Piketty uses the terms capital and wealth interchangeably. I think that his is a serious problem with his thinking. For an economist, capital is productive stuff like factories, machinery, and computers. The purpose of capital is production.

Wealth is a broader concept. It includes all assets that give a rate of return. Many of these are financial assets, which represent the ownership of real capital (eg shares). Others are loans that are only loosely linked to assets. The focus of wealth is income, which is Piketty’s concern. He is not interested in production. He focuses on understanding how wealth gives people control of income. This is a legitimate concern, but his interest is in wealth, not in capital. Therefore, his use of the word capital to describe wealth is not helpful.

For example, Piketty says that the Industrial Revolution allowed European nations to claim a huge share of world income (59). He ignores the fact that the accumulation of capital enabled them to expand production extensively, which created enormous wealth.

Viewed in this way, wealth becomes a bad thing. This means that by association capital is a bad thing too. For example, Piketty sees 1914-1945 as a good period, because inequality decreased. It was actually a really bad period, because massive capital destruction occurred all over the world. Immense resources went in the production of armaments, where then blown up. That loss of capital made everyone worse off.

Piketty is wrong. Capital is really important. That reason that so many people in the world have escaped from subsistence is the last few centuries has been the accumulation of capital equipment. Capital makes people more productive. Most of the world needs more capital.

Wealth is a different issue. It may be distributed unfairly and obtained illegally. However, we must be careful that we do not destroy capital in an attempt to eliminate unequal distributions of wealth. That would make everyone worse off.

No comments: