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 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.