My first impression when I read the reviews about this book. I have to say that I agree with the people reviewing the book. Thomas Piketty is indeed the evolved version of Karl Marx.
Captalism: Central Contradiction
He has a couple of main arguments in this book.
1. Quotes from the book:“The principal destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g."
"The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.”
In an economy where the rate of return on capital surpass the rate of growth, Inherited wealth will always grow faster than earned wealth. So it's basically saying people whom is born in a rich family or elite people can continue to be rich because they have a large wealth base, and poor people will continue to be poor,(This is called "Patrimonial Capitalism" that Karl Marx was worried about) therefore inequality continue to rise.
This is the "central contradiction" that Piketty claims about capitalism.
*Return on capital(ROC) = Net operating income after taxes
[Total assets minus cash and investments] - [ Non-interest-bearing liabilities]
** Liabilities mean debts, anything that the company owes.
1. Quotes from the book:“The principal destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g."
"The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.”
In an economy where the rate of return on capital surpass the rate of growth, Inherited wealth will always grow faster than earned wealth. So it's basically saying people whom is born in a rich family or elite people can continue to be rich because they have a large wealth base, and poor people will continue to be poor,(This is called "Patrimonial Capitalism" that Karl Marx was worried about) therefore inequality continue to rise.
This is the "central contradiction" that Piketty claims about capitalism.
*Return on capital(ROC) = Net operating income after taxes
[Total assets minus cash and investments] - [ Non-interest-bearing liabilities]
** Liabilities mean debts, anything that the company owes.
The following chart demonstrates what Piketty thinks about the future:
The blue line shows Piekttey's estimation, where ROC is reverting back to antiquity from now to 2100. The red line subsequently shows the global growth rate over the same period.
Putting aside 19th to early 21st Century (the modernity), the growth rate has always been below ROC, implying steadily rising inequality.
Putting aside 19th to early 21st Century (the modernity), the growth rate has always been below ROC, implying steadily rising inequality.
“consequences for the long-term dynamics of the wealth distribution are potentially terrifying.”
However, coming back to 19th to early 21st Century, where growth rate has exceeded ROC, Piketty claims that it was a historical exception ( such as the two World Wars, the Great Depressio) and its unlikely to be repeated. He expects the growth rate to decline and fall back below ROC in the coming decades. as technology advances.
Therefore Piketty proposes:
An annual Global wealth tax up to 2% (Combined with progressive income tax reaching, 80% maximum) would reduce inequality.
You can now see why I think he's somehow an evolution of Karl Marx.
Therefore Piketty proposes:
An annual Global wealth tax up to 2% (Combined with progressive income tax reaching, 80% maximum) would reduce inequality.
You can now see why I think he's somehow an evolution of Karl Marx.
Evaluation
I think everyone will have the same question as me. Who on earth would be willing to bear this enormous economic burden of a wealth tax? Piketty is suggesting that the wealth tax would be as high as 80% as it’s progressive. The graph on the left illustrates what I predict if Piketty’s wealth tax is imposed.
Due to the imposition of wealth tax, disposable income falls therefore Aggregate demand (AD), shits from AD1 to AD2. Subsequently, GDP falls from Q1 to Q2. Short run Aggregate Supply (SRAS) should follow as well, as they now know that the tax is such a burden and people can no longer consume as much as before, this is shown by a shift in SRAS1 TO SRAS2. (Apologies for not being able to visualize it), but the imposition will also cost various deadweight loss (to both consumer and producer). The essentially mean that there are many economic activity could not happen or are terminated because we have levied the tax. This is what I mean by deadweight loss.
The question that I have for Piketty is that: What’s wrong with wealth inequality? I haven’t seen any reviews about Piketty’s respond to that.
I guess Piketty’s proposal only works on the European zone, (as he is a French Economist). I cannot imagine US would even think about participating in the imposition of such a wealth tax. (I think this is because of US’s some sort of constitutions that prohibits the government from doing that and also it’s well-known imbalanced distribution of wealth; if the tax is imposed, US needs a grand reformation).
I am currently on the fence about Piketty’s proposal to solve his main concern, where r>g (rate of return is bigger than rate of growth). If this plan is applied the Malaysia, I think this country will be doomed and the problem with corruption will rise exponentially. It is already evident that it is perfectly legal to be ‘racist’ from the government point of view. The people who developed Malaysia will have no incentive to innovate and bring a better future for everyone as a whole despite there will be income inequality.
I see some parallels between Piketty and Karl Marx. The plan is extremely idealistic, Piketty claims that we shouldn’t follow “technology’s capricious”, but what else are we supposed to do when our population is growing exponentially? Although capitalism is opposing our values in democracy and meritocracy, it has allowed us to sustain our life with improving technologies.
I would really want to see more of Piketty’s justification on his wealth tax. Is it really worth it to sacrifice the opportunity costs and deadweight loss in exchange for the 'equalness' ? What would equality bring to our world that is better than the current? Or, even, what is Piketty's definition of inequality? Perhaps it’s mentioned in his book, but I haven’t seen it. Unless these questions are answered, I will still be on the fence.
Due to the imposition of wealth tax, disposable income falls therefore Aggregate demand (AD), shits from AD1 to AD2. Subsequently, GDP falls from Q1 to Q2. Short run Aggregate Supply (SRAS) should follow as well, as they now know that the tax is such a burden and people can no longer consume as much as before, this is shown by a shift in SRAS1 TO SRAS2. (Apologies for not being able to visualize it), but the imposition will also cost various deadweight loss (to both consumer and producer). The essentially mean that there are many economic activity could not happen or are terminated because we have levied the tax. This is what I mean by deadweight loss.
The question that I have for Piketty is that: What’s wrong with wealth inequality? I haven’t seen any reviews about Piketty’s respond to that.
I guess Piketty’s proposal only works on the European zone, (as he is a French Economist). I cannot imagine US would even think about participating in the imposition of such a wealth tax. (I think this is because of US’s some sort of constitutions that prohibits the government from doing that and also it’s well-known imbalanced distribution of wealth; if the tax is imposed, US needs a grand reformation).
I am currently on the fence about Piketty’s proposal to solve his main concern, where r>g (rate of return is bigger than rate of growth). If this plan is applied the Malaysia, I think this country will be doomed and the problem with corruption will rise exponentially. It is already evident that it is perfectly legal to be ‘racist’ from the government point of view. The people who developed Malaysia will have no incentive to innovate and bring a better future for everyone as a whole despite there will be income inequality.
I see some parallels between Piketty and Karl Marx. The plan is extremely idealistic, Piketty claims that we shouldn’t follow “technology’s capricious”, but what else are we supposed to do when our population is growing exponentially? Although capitalism is opposing our values in democracy and meritocracy, it has allowed us to sustain our life with improving technologies.
I would really want to see more of Piketty’s justification on his wealth tax. Is it really worth it to sacrifice the opportunity costs and deadweight loss in exchange for the 'equalness' ? What would equality bring to our world that is better than the current? Or, even, what is Piketty's definition of inequality? Perhaps it’s mentioned in his book, but I haven’t seen it. Unless these questions are answered, I will still be on the fence.
Where I got my information from:
1. Everything you need to know about Thomas Piketty's new book
http://www.theguardian.com/books/2014/apr/28/thomas-piketty-capital-surprise-bestseller
2. What's Return on capital?
http://www.investorwords.com/4247/Return_on_Capital.html#ixzz31NX0enLC
1. Everything you need to know about Thomas Piketty's new book
http://www.theguardian.com/books/2014/apr/28/thomas-piketty-capital-surprise-bestseller
2. What's Return on capital?
http://www.investorwords.com/4247/Return_on_Capital.html#ixzz31NX0enLC