Thomas Piketty and Capital in the 21st century: accuracy in research and confusion in theory

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Thomas Piketty’s Capital in the 21^st century: an ABC

Thomas Piketty and Capital in the 21^st century: accuracy in research and confusion in theory

Part 6

5 May 2021 by CADTM

While Piketty has gathered his data meticulously and provided a useful analysis of the unequal distribution of wealth and income, some of his definitions are somewhat confusing and even questionable. Consider, for instance, his definition of capital: “In all civilizations, capital fulfils two economic functions: first, it provides housing (more precisely capital produces “housing services,” whose value is measured by the equivalent rental value of dwellings, defined as the increment in well-being due to sleeping and living under a roof rather than outside), and second, it serves as a factor of production in producing other goods and services.” He continues: “Historically, the earliest forms of capital accumulation involved both tools and improvement to land (fencing, irrigation, drainage, etc.), and rudimentary dwellings (caves, tents, huts, etc.). Increasingly sophisticated forms of industrial and business capital came later, as did constantly improved forms of housing”. [1] Piketty hereby proposes a scenario that suggests capital has been present from the origins of humankind.

For Piketty capital has been around from the origins of humankind

This major confusion continues in the heart of his analysis in Capital in the Twenty-First Century. For Piketty, an apartment worth €80,000 or €2,000 on a savings account may be defined as capital, in the same way as a factory or commercial premises worth €125 million. The ordinary citizen who owns an apartment, has some reserves in a savings account and a life insurance policy worth, say, €10,000 will readily agree with Piketty’s definition, which corresponds with those found in standard economic textbooks and repeated by their bank manager. However, they are wrong, because capital in our capitalist society is much more complex than these simple definitions. Capital is a social relationship that permits a minority (the richest 1 percent), to get richer by exploiting the labour of others. Yet when Piketty talks of a progressive tax on capital, he confounds the different levels of wealth that are €1,000 on a savings account with the fortunes owned by Lakshmi Mittal, Jeff Bezos, Bill Gates or Elon Musk.

The same confusion continues in his analysis of income: Piketty considers that the income from renting out an €80,000 apartment is a capital gain of the same kind as the income Marc Zuckerberg derives from Facebook.

This also goes for a retired person’s savings account, (if €10,000 is deposited at 2 percent interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. it earns €200 a year), however diminutive Piketty considers it to be capital income.

We must ask ourselves what exactly Piketty means by “capital” and “labour,” and better define the difference between capital income and labour income. For example, below a certain level income from rent, interest on a bank account, or corporate shares should not be defined as capital. Likewise, personal wealth below a certain level should not be considered as capital either.

In addition, if we want to understand how the 1 percent accumulates capital, we must go beyond remarks such as this: “If capital plays a useful role in the production process it is natural that it earns a return.” [2]

Piketty’s confusion is undoubtedly the result of his fundamental convictions: “I am not interested in denouncing inequalities or capitalism as such (…) social inequalities are not a problem in themselves if they may be justified, that is to say for the common good.” [3]

My critique of Piketty’s definitions in no way minimizes the interest of the monumental portrait his research draws of the wealth and income inequalities that have developed over the last two centuries.