Capitalism’s Winter: Chapter Two Summary and Open Thread

Chapter two, Growth, opens with a discussion of population demographics, and what these small-seeming percentages mean over time. It has a rapid series of hard to process numbers, but they are important for grasping the scale of things. After laying out the historical growth rate, estimated at less than .02%, probably less than .01% for the world, he takes us into the aggressive curve of the 18th to 21st century.
Ranging from .4% in 18th century Europe to .6% — .8% in the 19th, to the enormous global 1.5%-2% of the 20th century, leading to a five fold increase of population. Growth was 1.8% world wide when I was born, now slowed down to a still staggering 1.3%. But this is probably an anomaly, and projections put 2030 at .4% and 2070 at .1%, closer to where we were before this crazy train began, with even negative demographic growth in Europe.

After laying out all these demographics, Piketty brings us to the point of the whirlwind tour of these figures: that demographic growth combats inequality by lessening the concentrating power of inherited wealth. (Inflation has also been a leveler — allowing debtors, private and public, to get out of debt more quickly, though this is noted much later in the chapter.) Combining slow demographic growth with slow economic growth further expands the power of the previous generation’s capital, leading to even more potential for concentration. Already, inherited wealth is making a come back after the world wars in Europe, and that could be a leading indicator for the world.

When putting this into a social context, Piketty delves into politics again here and, in my opinion at least, takes the myth of meritocracy out for a good beating. He points out that the idea of superior inherent abilities has been used, time and again and up to the current day IT sector, to “justify extreme inequalities and to defend the position of the winners, without much consideration for the losers, much less for the facts, and without any real effort to verify whether this very convenient principle can actually explain the changes we observe.”

Once again, we see Piketty’s calling card: data or GTFO.

We move on from there to the idea of measuring how much our money can buy us, in terms of purchasing parity, and how hard that is to measure. With not only so many more goods but incomparable goods available through time, what rich and poor means, both absolutely and compared against each other, is a moving target both temporally and geographically.

The one thing that doesn’t change as much in purchasing is services. But, because of that, services are different, moving from a third of the economy up towards 70-80% in much of the world. Just health and education can be 20% in the developed countries, and more than anything are effective at changing our quality of life, and relentlessly expensive.

Bad service sectors can juke the stats when it comes to GDP. Just as a broken window when repaired shows up in GDP as productivity no different than a new window being built, so an ineffectively and overly expensive healthcare systems ups GDP without improving health outcomes, as in the example of the US versus sane countries. (Hey, it’s his book, but still my blog.) This is accounting by costs, and it shows why Piketty prefers account by national income over popular measures like GDP. But these kinds of problems remind us why our numbers over time don’t have many sig figs — they are useful, but not granular.

One thing Piketty doesn’t seem great with is understanding where the environment and its degradation fit into the picture. He talks about the depletion of fossil fuels as a major issue, when in fact the greater danger these days is using what we have.

Chapter two closes with literature — showing Balzac and Austin’s writing reflected such a stable and slow growth and inflation rate that the idea of how much wealth you needed for a certain position in society could be referenced by a number, and serve as an abstract for a strata of society altogether. I think this is a particular and amazing feat, and that he doesn’t quite communicate the strangeness of this stability, a stability that has not existed in living memory. A certain property was a certain income, and came with a certain kit of life. What those things were was knowable and stable for decades, and folks tended to stay where they were in society. Coming as I do, from a country of temporarily embarrassed millionaires, this idea of stability is not only without reference, it’s abhorrent to most of the myths of capitalism that arose in the 20th century after WWI. Before that, it was useful for setting the scene. What a shift this is, that we can’t even remember happening!

From 1914 to 1945, we learned about inflation, monetary policy, and of course technology — and our literature and culture lost their economic innocence, and financial memories.

5 thoughts on “Capitalism’s Winter: Chapter Two Summary and Open Thread

  1. Cory Doctorow

    This is the chapter where I started to notice something curious about Piketty, which others have noted, which is that he doesn’t really seem to think much about corruption.

    Piketty treats r > g as an iron law, or an emergent property, instead of unpacking it to say “Once the rich are rich enough, they control policy outcomes to such a thorough extent that they can MAKE r > g by making things VERY favorable to investors as opposed to founders or laborers.”

    If Piketty’s worldview had a healthy lessigian dread of corruption, his story would be so much easier to tell.

    For example, in this chapter, when he talks about the difficulty of comparing wealth and poverty across ages — is a medieval king who shits in a bucket and is crawling with lice richer or poorer than a Bangladeshi textiles worker with modern sanitation and electric lights? — he could say, “You know what, fuck it. It doesn’t matter whether yesterday’s kings are richer than today’s seamstresses. What matters is that when you have wealth concentrated in unwieldy lumps, the prejudices of the rich dominate policy outcomes. So you get rich oil fuckers insisting that the climate isn’t changing, rich bank fuckers insisting subprimes aren’t a house of cards, etc. Even wealth distributions are a necessary precondition for evidence-based policy. Whether you shit in a bucket or sew shirtwaists, your best hope for a better life for you and your children is evidence-based policy for universal prosperity.”

    1. Geoff

      (Hi Cory!)

      I think you may be missing the idea of who Piketty’s audience is. He doesn’t need to convince you (or me) that income inequality is a) increasing and b) a bad outcome. What he’s doing, I think, is addressing economists and market ideologues, and saying “This is an inescapable outcome. It’s a tautological truth. If the return on capital is larger than growth, then inequality increases *no* *matter* *what*.” You could iron out corruption to zero, you could fix every market failure. It would still happen.

      Look, corruption is a huge issue, I agree. But it’s actually a radical idea (not in the political sense — well, yes, that too) that increasing inequality isn’t only an output of bad policy or of other regulatory failure. Those might be mechanisms, and I rather expect him to get into mechanisms of *why* exactly r > g later (and there will be many). And presumably the way we fight inequality will depend on the particular mechanisms. But it’s useful, I think, to have a grand unified theory of the physics of wealth before you start designing your catapults.

    2. quinn Post author

      I think this goes back to Piketty’s data or GTFO policy. Numbers on corruption are notoriously hard to gather and trust, and historical figures are effectively non-existent. My sense of Piketty is that he won’t say what the effects of corruption are without something to support it — and that’s the right choice. We can say with our gut what we believe corruption is and does, but what makes his work powerful is that he never goes with his gut, and isn’t so vulnerable to criticism of his core ideas as a result.

  2. Geoff

    More generally, I was quite struck by the fact that inflation is a 20th Century artifact; I had internalized the idea that it’s just always present. It’s fascinating that despite severe pricing shocks, over time prices always returned to a norm. I don’t think I’ve worked out the implications of that in my own head yet. Why is that? What fundamental monetary rules changed? Is it just a function of the exponential growth catching up, or were there other differences?

    I’m glad Piketty addressed the difficulty of actually comparing prices over time, because (like the illusion of money), it was nagging at me as a way to question his results. Again, I think Piketty is attempting to clear the decks here and address all possible objections before he gets to the really meaty conclusions. But I do wish, somehow, that he had solved the inter-temporal money comparison problem. (Maybe he does later?).

    Quinn, to address the environmental issue: he made a passing reference to natural capitalism, which is, if you haven’t read the book of the same name, essentially a way to calculate GDP and national wealth by including natural assets and the services they provide. So, for example, you’d include all of the coal deposits as part of a country’s wealth, and you’d include the air as an asset that produces “breathability” as a service. When calculating GDP, in the old way you’d just count the value of the coal that was mined and sold. In the new way, you’d still do that, but also debit the coal from the resource wealth reserves, and you’d debit the atmosphere as providing less breathability services. So it would be clear that a country that burns coal ends up poorer.

    My sense is that Piketty is endorsing the idea but not including it in his analysis, at least as far as I’ve read.

  3. Clive

    Whilst my views on this aren’t perhaps as resolved as they could be [I’ll try and claim I remain open to influence and opinion], I’m rather adopting a base datum setting that says capital and/or wealth is rather like radioactive decay:-

    – It has a pseudo-half-life: zoom out far enough and it loses relevance
    – It can be used for good [like electricity generation] or evil [like munitions]
    – Whether we realize it or not, it’s all around us, all the time
    – It’s perfectly safe when widely distributed, but extremely toxic in high concentrations
    – When it’s toxic, it isn’t just toxic in the direct sense, but in high concentrations it can pollute things it comes into contact with…

    Remember the plot to the James Bond “007” movie, “Goldfinger”? Closer to the truth than we realize…

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