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PIKETTY AND THE POLAR BEAR
Reviewed by ANDRE BEAUMONT
Try telling someone that a polar bear's fur is not white and you have an uphill task. Both its guard hairs and undercoat are in fact transparent. Air spaces in each hair scatter the light of every wavelength and we see this as white. No wavelength is absorbed by the fur.
Marx created an analogous problem by telling us capital was bad when in fact it is good. It is an uphill task explaining that some capital in the hands of everyone would be a good thing - for nearly everyone.
So when Thomas Piketty's book on capital surfaced the instinct was to examine it for deficiencies - but who wants to read 700 pages about capital in case it is unreadable like Marx?
So when Piketty admitted he hadn't read Marx for much the same reason, he provided an excuse for not reading him in turn. Reading the summaries will have to do for now. In all events, a much better qualified person, Mervyn King, has read the book and largely punctures the central argument.
King, inter alia, writes:
Somewhat bizarrely, Piketty chooses instead to focus on what he calls "the central contradiction of capitalism", namely the fact that the average rate of return on capital, r. normally exceeds the rate of output growth, g. He interprets this to mean that "the entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases."
The Bank of England in Mervyn King's time as Governor
Now the British have been rather good at making capital from capital, and not necessarily by exploiting poor people or acting as rentiers, so this is not a specialization one should throw away without consideration in a competitive world.
A case in point is the proposal to build a luxury residential tower block on Canary Wharf. The flats in it will be priced so that next to no Briton would buy one and it will do nothing to ameliorate a housing shortage but if selling them helps finance a whopping balance of payments deficit it might not be the worst idea or a bad location to build it. Undoubtedly, too, once it is built capital will have been created in the territory.
If your formative years happened to coincide with when Jim Slater was in his pomp your view of the relative importance of capital and rent may have been changed for ever. One of the central tenets of his intellectual case was that you should ignore the rent in deciding on whether to purchase an asset. You looked to whether the asset could be improved, whether part of it could be split off and sold to someone better able to use it, whether the asset was intrinsically valuable (e.g. due to location) and whether you could visualize who the next buyer would be even if you kept the asset long term. He illustrated this with his casebook purchase of Crittall-Hope.
His subsequent career somewhat undermined using his own companies as examples but not the clarity of his intellectual case. At the core was: ignore the rent, it is incidental.
So a lot of capitalism ignores what Piketty is so exercised about - rent. The valuation of WhatsApp for its recent sale had next to nothing to do with rent, however dressed up. It was sold for whatever the next buyer would pay.
Of course, you may get a buyer that ends up holding a can with not much in it but then that may coincide with the necessary end of an economic cycle or the decline of an industry.
New Labour so little understood business that it tried to abolish boom and bust. That might have been something tried in East Germany where jobs were a right for men and women but not something to be tried in Britain. Business people groaned upon hearing it. It is like never pruning a vine - an overgrown mess will result and it will end badly.
Piketty's preoccupation with labour is also a bit doubtful. Not all capital exploits labour. It would often rather do without it.
Using capital for, say, the satellite that received the pings from the missing Boeing 777 hardly exploits a lot of labour and any rent received from customers does not obviously do so either.
Though its advent may be much delayed, preparing for the day when the computers and robots displace half the jobs in the world should be taken seriously. [1]
More cars of much higher quality are now made in Britain with a fraction of the workforce used in Red Robbo's day.
Socialism has not been wrong about everything. The means of production are important - but not in the sense of taking them into public ownership. Public ownership eventually leads to poor decision making and insufficient surpluses for investment.
Ken Livingstone is getting it right. You do not need to tax ordinary people more at all. All you need to do is have a turnover tax.
Much wealth is generated by the means of production. Those means may be robots not people. You need to take the cut that is tax immediately there is production not further down the line from people's earnings or from profits.
There may be no onshore profits. There may be no earnings when the robots take the strain.
Robotics and the like mean that manufacturing potentially could come back to Britain. Where little labour is used, no labour cost advantage is accorded to other jurisdictions.
Where I differ from Livingstone is I would use the turnover tax to reduce the burden of personal taxation.
The fiscal deficit is not a question of insufficient taxation. The percentage of GDP taken as tax is high enough as it is using international comparisons. It is a question of excess government spending, however we got there.
Capital, 'once constitued', can be a bulwark for ordinary people against coming change. Many types of asset can be improved by people if they can own them. Personal 'labour' is the means by which people get to acquire them but lifelong dependance on it is going to be problematic.
By trying to eliminate the economic cycle Labour created the conditions for phenomena such as buy-to-let: stable conditions for banks to lend and to take much of the rent.
Those with a Slater-type view of things would have kept away: markets should go up and down; keep away from being a rentier.
The second part of the Slater viewpoint is not operational at the moment - releasing assets to those best able to use them. Buy-to-let owners and many other types of asset owner are not going to sell with capital gains tax rates as they are unless, as in France, a cut off date is reached when they are no longer subject to it.
Large and medium sized companies know how to look after themselves irrespective of what governments say.
Everything should be done to encourage capital formation and accumulation by individuals ahead of a possible future storm.