Piketty’s “Capital,” and the Rest of the World

Video: Thomas Piketty Discusses, “Capital In The 21st Century” with Ryan Grim and Alexis Goldstein

The book by the French economist Thomas Piketty’s Capital in the Twenty-First Century has already become part of everyday discussions and is being referenced among academics. The research by Piketty has come in the perfect time and there are plenty of reasons why. Piketty’s book discussion brings some light to the study of income quintiles and deciles into a new debate of the “the skyrocketing incomes of the 1% — and the mind-boggling gains of the 0.1% and 0.01%  — by gathering and publishing income tax data that nobody had bothered with before. Piketty was behind similar projects in France, Britain, Japan, and other countries.” (via Justin Fox at the Harvard Business Review)

I finished reading the book this weekend and it was eye-opening. The book presents great challenges to the study of capital and inequalities in the developed economies as well as in the rest of the world. The book also opens the doors for a wider discussion on the effects European Capital has had in the global economy. Further, the book invites globalists to challenge our understanding of European-centric terms that over longer periods of time become, perhaps, insufficient to comprehend global economic processes over the passing of centuries and how these processes have changed and transformed themselves by a complex evolution and redefinition.

It can’t be denied that capital during all of the 19th Century and in the beginning of the 20th Century was centered in the main European metropolises and extracted most of the goods from the periphery. Few Capital remained in colonies and protectorates. Wealth belonged to the Empires and Poverty remained in colonial territories. Even the poorest of the European was considered Rich by comparison to the inhabitants of Colonies.

Today, European Empires are gone for a while, U.S. Capital increased and gained from the fall of the European Empires and new economies started developing in former Colonies. Giant Economies like China and Russia woke up after decades of isolation from global trade and today reconfigured our understanding of Capital. Piketty’s book somehow fails to explore this Global political changes and its economic effects.

Piketty’s central argument has a gigantic weakness since it is tied to nation-states and cannot be compared or understood in reference to Global Capital flows in today’s multinational economy. Very few references are made to the role played by Multinational Companies and foreign national investments and savings by State Companies in the world.  And less is mentioned of global inequalities and the North-South divide that has been increased by the investments done by Developed and Developing Economies in the rest of the world.  Piketty argues that Capital has tended over time to grow faster than the overall economy (he focuses on European and US economies); and that income from capital is invariably much less evenly distributed than labor income (again he focuses on European and US economies). Thus failing to acknowledge how Labor income stopped been localized during the 20th Century and it involved multiple polities far away from the metropolis.  Piketty argues that together (Capital growth and its uneven distribution) amount to a powerful force for increasing inequality.

Piketty doesn’t take things as far as Marx and this is a pitty. Marx’s methodology involved the State but it also referenced to its effects both and from the peripheries through the pass of longer periods of time. This is one of the most important contributions of Marx: his global understand of the economy.

Piketty shows how over the two-plus centuries for which good records exist, the only major decline in capital’s economic share and in economic inequality was the result of World Wars I and II, which destroyed lots of capital and brought much higher taxes in the U.S. and Europe. However, he again fails to acknowledge how Capital grew in the Global South after these wars as a result of increased inequalities in the Colonies and Agriculture-centered States in South America and Asia. During the wars Capital destruction was followed by a spectacular run of economic growth that involved the entire globe and not only Europe and the U.S.  The Cold War is a good reference for finding how Capital flows went from Europe to Asia, America and Africa.  As well, the run of economic growth started involving non-State actors in which Capital continue increasing at a higher and faster rate than the one he references and studies. Failing to study this shows in Piketty’s book that after decades of peace, slowing growth, and declining tax rates, capital and inequality are on the rise all over the developed world only, and it’s not clear what if anything will alter that trajectory in the decades to come.  However, the declining tax rates, capital and inequality are on the rise at a faster pace in the developing economies and in the “puppet states” (Nigeria, Chile, the Middle East countries) which have emerged around them as sources of petrol, minerals and rare earths.

Piketty’s main worry as points out Justin Fox is that “growing wealth in Europe will bring a return to 19th century circumstances in which most affluent people get that way through inheritance.” Plus, “U.S. median income will continue lossing ground relative to other nations in the following years”. But this are not the only worries that we should identify.  The BRICS countries are probably a good source of comparison to see how the growing wealth of the 20th Century remains on the hands of the few rich and is currently been passed through inheritance. Further, developing economies in South America and Africa are an extreme case of the last.

Piketty’s solution to Europe’s and U.S. problems is that a progressive global wealth tax be established. But this tax will fail to be the best response to the current dynamics of inequality if Capital continues flowing outside of Europe into multinational capital investments overseas and into State companies overseas. 

I enjoyed this political economy analysis and will continue learning a lot from it. Piketty’s solution is a challenge for the study of global political economy and the reconfiguration of the global economy in the 21st Century. Perhaps if a new book is published studying the shareholders who own the most stock in almost every Fortune 500 company and the Capital of any major global company instead of only the economies of France, Germany or the United States more accurate insights will be found.

 

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A Satellite’s View of Ship Pollution and globalization

Cargo-Ship650The geographical hotspots of the world are all related to economic trade and global exchange of political interests. Places such as the Panama and Suez Canals have always been in the Western media. However, from an economic and strategic perspective, the Strait of Malacca is one of the most important shipping lanes in the world in the 21st Century. The history of this Strait’s geopolitical relevance goes as back as 400 years of history.

For centuries the strait has been the main shipping channel between the Indian Ocean and the Pacific Ocean. It has been controlled by the major regional powers and also by the mayor global power during different historical periods. In 2011 hundreds of thousands of containers in more than 60,000 vessels crossed its waters carrying about one-quarter of the world’s traded goods including oil, Chinese manufactures, and Indonesian coffee.

In order to understand which is the geopolitical importance of the Strait of Malacca for the Chinese government we need to overview the current geopolitical dynamics and economic investments in the region.

The following image from NASA clearly depicts what are some of the IMPRESSIVE negative externalities caused by the transport of global goods in the region and opens the door for discussing

  • How can we fix this?
  • Who should fix it?
  • Can it be fixed?
  • Can we reduce the future impacts in the area?
  • What solutions are available?
A Satellite’s View of Ship Pollution

Color bar for A Satellite’s View of Ship Pollution
acquired 2005 – 2012 download large image (2 MB, JPEG, 1800×1800)

Elevated levels of nitrogen dioxide pop out over certain shipping lanes in observations made by the Aura satellite between 2005-2012. The signal was the strongest over the northeastern Indian Ocean.

Data from the Dutch and Finnish-built Ozone Monitoring Instrument (OMI) on NASA’s Aura satellite show long tracks of elevated nitrogen dioxide (NO2) levels along certain shipping routes. NO2, is among a group of highly-reactive oxides of nitrogen, known as NOx, that can lead to the production of fine particles and ozone that damage the human cardiovascular and respiratory systems. Combustion engines, such as those that propel ships and motor vehicles, are a major source of NO2 pollution.

To learn some more on the importance of the Strait of Malacca and the value of this shipping lane you can read the essay I wrote titled “The Strait of Malacca as one of the most important geopolitical regions for the People’s Republic of China. Download (.pdf)

Satellite images of negative externalities caused by Globalization

I always keep track of the images from space taken by NASA.  They usually have impressive “natural hazards” photographed with the highest technology available.  However, sometimes the natural hazards to humanity are not caused by the natural cycles of Earth.  In those cases, it is humans who have created hazards for themselves and people die.  Now, why would we create things that harm us so much? Why would we support and contribute to such terrible things?  A good explanation is the one given by economists with the complex and difficult term negative externalities.

A negative externality is a spillover of an economic transaction that negatively impacts a party that is not directly involved in the transaction. The first party bears no costs for their impact on society while the second party receives no benefits from being impacted. This occurs when marginal social cost is greater than marginal private cost (MSC > MPC).

The case of pollution in China elucidates very well how the market-driven approach to correcting externalities by “internalizing” third party costs and benefits fails to work in a globalized economy.  For example, by requiring a polluter to repair any damage caused. But, in many cases internalizing costs or benefits is not feasible, especially if the true monetary values cannot be determined.  In fact, our technological gadgets and thousands of products imported from China are the cause of the hazardous health conditions in that country.  We as consumers are part of this chain by buying the products. How can we do something?

I would suggest that the best way to participate in a positive way is to continue creating awareness of the failure of the government of China to protect the lives of the Chinese people.  It is at the end of the day the responsibility of that government to protect the life and property of its citizens, not ours.  We as consumers can only morally sanction them and stop consuming their products whenever possible.

This is a good (and very unfortunate) example of how globalization without an objective code of values becomes a zero sum game.  I share with you the information regarding how dangerous has become the air in the surroundings of Beijing and Tianjin,

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Air Quality Suffering in China

acquired January 14, 2013download large image (7 MB, JPEG, 5000×6400)
acquired January 14, 2013download GeoTIFF file (47 MB, TIFF)
Air Quality Suffering in China

acquired January 3, 2013download large image (8 MB, JPEG, 5000×6400)
acquired January 3, 2013download GeoTIFF file (51 MB, TIFF)
acquired January 3 – 14, 2013download Google Earth file (KMZ)

Residents of Beijing and many other cities in China were warned to stay inside in mid-January 2013 as the nation faced one of the worst periods of air quality in recent history. The Chinese government ordered factories to scale back emissions, while hospitals saw spikes of more than 20 to 30 percent in patients complaining of respiratory issues, according to news reports.

The Moderate Resolution Imaging Spectroradiometer (MODIS) on NASA’s Terra satellite acquired these natural-color images of northeastern China on January 14 (top) and January 3, 2013. The top image shows extensive haze, low clouds, and fog over the region. The brightest areas tend to be clouds or fog, which have a tinge of gray or yellow from the air pollution. Other cloud-free areas have a pall of gray and brown smog that mostly blots out the cities below. In areas where the ground is visible, some of the landscape is covered with lingering snow from storms in recent weeks. (Snow is more prominent in the January 3 image.)

At the time that the January 14 image was taken by satellite, ground-based sensors at the U.S. Embassy in Beijingreported PM2.5 measurements of 291 micrograms per cubic meter of air. Fine, airborne particulate matter (PM) that is smaller than 2.5 microns (about one thirtieth the width of a human hair) is considered dangerous because it is small enough to enter the passages of the human lungs. Most PM2.5 aerosol particles come from the burning of fossil fuels and biomass (wood fires and agricultural burning). The World Health Organization considers PM2.5to be safe when it is below 25.

Also at the time of the image, the air quality index (AQI) in Beijing was 341. An AQI above 300 is considered hazardous to all humans, not just those with heart or lung ailments. AQI below 50 is considered good. On January 12, the peak of the current air crisis, AQI was 775 the U.S Embassy Beijing Air Quality Monitor—off the U.S. Environmental Protection Agency scale—and PM2.5 was 886 micrograms per cubic meter.

  1. Resources

  2. Air Pollution in China: Real-time Air Quality Index Visual Map. Accessed January 14, 2013.
  3. China Air Daily. Accessed January 14, 2013.
  4. U.S Embassy Beijing Air Quality Monitor. Accessed January 14, 2013.
  1. References

  2. Associated Press, via Yahoo News (2013, January 14) Beijing warns residents after off-the-charts smog . Accessed January 14, 2013.
  3. NASA (2010, September 22) New Map Offers a Global View of Health-Sapping Air Pollution.Accessed January 14, 2013.
  4. NASA Earth Observatory (2012, March 23) Satellites Map Fine Aerosol Pollution Over China.
  5. The New York Times (2013, January 14) China allows media to report alarming air pollution crisis. Accessed January 14, 2013.
  6. Yahoo News (2013, January 14) China’s air pollution problem slideshow. Accessed January 14, 2013.

NASA image courtesy Jeff Schmaltz, LANCE MODIS Rapid Response. Caption by Mike Carlowicz.

Walmart’s Irrational “buy American” Campaign

Walmart-Stores-home-offic-007

Walmart‘s latest push to Buy American and Hire Veterans is irrational.  In a world of interconnectedness in which products from pencils to airplanes are produced with parts and components made all over the world the “buy American” argument falls into pieces.

In today’s world mass consumption economy there is not a single product that can be claimed to be “national” or “unique” without ignoring the intertwined network of global production.  If your argument is “yes” there is such a thing as “100% national” or “100% American” then I will still be able of arguing against your position.  Why?  Because the economy of the United States of America is not only part but dependent on the global economy.

By 2012, only about 32 cents for every dollar of U.S. debt, or $4.6 trillion, was owned by the federal government in trust funds, for Social Security and other programs such as retirement accounts, according to the U.S. Department of Treasury.

The largest portion of U.S. debt, 68 cents for every dollar or about $10 trillion, is owned by individual investors, corporations, state and local governments and, yes, even foreign governments such as China that hold Treasury bills, notes and bonds.

Foreign governments hold about 46 percent of all U.S. debt held by the public, more than $4.5 trillion. The largest foreign holder of U.S. debt is China, which owns more about $1.2 trillion in bills, notes and bonds, according to the Treasury.

In total, China owns about 8 percent of publicly held U.S. debt. Of all the holders of U.S. debt China is the third-largest, behind only the Social Security Trust Fund‘s holdings of nearly $3 trillion and the Federal Reserve‘s nearly $2 trillion holdings in Treasury investments, purchased as part of its quantitative easing program to boost the economy. (Data via: How Much U.S. Debt Does China Really Own?)

So, the next time you think you are “Buying American“, I invite you to reconsider how irrational such an argument is.

Article recommendation: Twentieth Century Flick: Business History in the Age of Extremes

I apologize for posting much these last weeks.  I have been quite busy reading journals on Global Value Chains, Deviant Capitalism, Black Market Trade and theories on Global Political Economy.  While this has driven me nuts… it has also made me pay attention to the field of Business History.

Business history is not the history of Capitalism and it is also not the history of entrepreneurship.  The research in this field is mostly controlled by an European institutionalist approach.  And in the latest decades, it has gained more insights from economic and business studies that are highly afflicted by neo-marxist approaches of the 20th Century.  So, if you are interested in learning about this particular area of research here is the info for a good article on the topic that may get you also interested, and provide you with further bibliography.

Twentieth Century Flick: Business History in the Age of Extremes
Priemel, Kim Christian (2012)
Journal of Contemporary History vol. 47 (4) p. 754-772

.Full Text (PDF)

Poor Haitians Reading #FirstWorldProblems Tweets Might Be The Best Ad Of The Year

I was just told about this ad campaign and I couldn’t more than agree.  Because #FirstWorldProblems are not real problems when understood in a global context,

DDB New York has created an ad for the Haitian charity “Water Is Life” that humiliates whiners on Twitter who use the “#Firstworldproblems” hashtag to complain about life’s trivial challenges.

In the video (below), ordinary Haitians — standing amid shanty huts, broken school buses and wrecked buildings — read the inane tweets of self-entitled idiots who complain about phone cords that won’t reach their beds, and leather car seats that aren’t heated.

A GPE perspective: World’s richest woman makes case for $2-a-day pay

The top 10 most competitive economies in the world. By: The World Economic Forum’s Global Competitiveness Report 2012-2013

Reaction to article: Lazarus, David. 2012. She’s back: World’s richest woman makes case for $2-a-day pay. Los Angeles Times, 5. September, sec. Money.

A month ago the world’s richest woman made a comment that got everyone’s attention.  Major sensationalist papers in the globe elaborated different arguments on Gina Rinehart case for a $2-a-day pay.  But putting emotions aside, what was she really talking about?  Well, she was explaining in very rough terms what globalization is about and what is the role of competition in the global political economy.

In order to understand what Ms. Rinehart referred to, it is necessary first to briefly evaluate the history of the word competitiveness. The term is historically rooted in the writings of classical economics. Its core is the theory of comparative advantage expressed by David Ricardo in 1819, in which he underlined how countries should/do compete.  Later on, the term was used by Marxist economists starting with Marx’s “Capital: A Critique of Political Economy” where he emphasized the impact of the sociopolitical environment on economic development in a global perspective, and therefore the communist idea that changing the political context should precede economic performance. Later, in 1942 the term was integrated to the role played by capitalists and entrepreneurs in the writings of Joseph Schumpeter, who stressed their creative and economic (“economic” here refers to capital as a mean of production) role as a factor of competitiveness by underlining that progress is the result of disequilibrium, which favors innovation and technological improvement.  Further, Israel Kirzner’s emphasis on the redefinition of entrepreneurship by highlighting how global competitiveness is more about the capitalist’s innovative abilities rather than just the capital accumulated and how he/she invests it.

Ms. Rinehart’s comment reflects both the impact she plays as an actor in the global sociopolitical environment and her role as a capitalist and entrepreneur capable of generating innovation and of inciting creative destruction.

A $2-a-day pay in Africa means that many capitalists and entrepreneurs as Gina Rinehart are considering the possibility of moving their investments from less competitive continents to places in which competitiveness allow them to produce at lower costs.

Unfortunately, the region Ms. Rinehart was referring to has disincentives to competitiveness and innovation.  Competitiveness is more than just lower wages and a cheap offer of labor.  By following Ricardo, Marx, Schumpeter and Kirzner in order for Africa to become competitive in global terms the regions will require also to achieve what Stéphane Garelli in the “IMD World Competitiveness Yearbook 2012” explains as the need to also A.) Create a stable and predictable legislative and administrative environment. B.) Ensure speed, transparency and accountability in the administration, as well as the ease of doing business. C.) Invest continually in developing and maintaining infrastructure both economic (road, air, telecom, etc.) and social (health, education, pension, etc.). And finally, D.) Strengthen the middle class: a key source of prosperity and long-term stability.

Ms. Rinehart’s comments were not a call for Australians to lower their wages to a $2-a-day pay since they have already achieved other of Garelli’s requirements for competitiveness. Her comments are a very clear example on how global economy works.  If African governments manage to improve the rule of law in their territories, develop infrastructure and allow for a stronger middle class then the chances that investment will move to Africa are going to be higher.  As such, economies as Australia’s should continue producing at the same efficiency rates or improve and innovate in order to avoid losing investors. Ms. Rinehart’s comment on how “her country’s mining industry couldn’t compete with nations that are willing to pay workers less than $2 a day for their sweat and labor” is as such partially truth. Australia’s economy has many other competitive assets to offer and as such do not require to compete by offering lower wages.  The country has many other competitive assets to offer for investors.  However, as time has passed since Australia’s boom in the last decades many other countries are also trying to spur competitiveness.

There is much more to be said about this topic and on how global competitiveness allows for rising standards of life and prosperity. Also there is much more to be said on how competitiveness in other regions of the world can destroy (remember Schumpeter’s work) the not-so efficient economies of other countries that have not managed to cope with a changing global economy.