French economist Thomas Piketty appears to have shocked some members of the professional economist community with his massive (700 page) tome Capital in the Twenty-First Century. Piketty’s revelation based on solid data and analysis in layman’s terms?
Wealth begets wealth
Except he uses the correct term for wealth: capital. Who knew that capital figures large in capitalism?
PAUL KRUGMAN: Even the title, the first word in the title, “capital.” We stopped talking about capital. Even people like me stopped talking about capital because we thought it was all about human capital. We thought it was all about earnings. We thought that the wealthy were people who one way or another found a way to make a lot of money.
How is it possible that a Nobel Prize winning economist could be that naïve? Or was his comment disingenuous? A cover-up for the propaganda of his profession over the past fifty years? But he claims ignorance and not duplicitousness.
But we’re rapidly moving towards a state where inherited wealth dominates. I didn’t know that. I really was– I should’ve known it. I should’ve thought about it, but I didn’t. And so then here comes this book with– I mean, it’s beautiful– absolutely analytically beautiful, if that makes any sense at all.
Among well-regarded economists Paul Krugman is to the left of most of his colleagues. He’s the “good guy” for liberals and lefties.
Oy vey!
Here Paul, have a clue:
Revenues less costs and less income taxes = net income after tax (NIAT) = capital.
Lower income taxes, and presto, capital grows faster, and those that owned the original capital get a bigger pile of capital faster.
Keeping the minimum wage low and lower than the rate of general inflation and productivity gains also increases the rate of capital accumulation. Owners allowed not to recognize or pay for he real costs of their operations also increases capital and impoverishes the people and/or their government. Outsourcing, off-shoring, financial WMD, etc. were other scams perpetrated in the great game of capital capture by the 1%.
Nobody noticed anything untoward as the wealthy got wealthier and the poor got poorer. Economists and policy makers preaching for decades that that was an aberration and the trickle-down would begin as soon as the wealthy were wealthy enough. Demonstrating once again that ordinary Americans are suckers.
Important people like Krugman may have been ignoring capital, but some nobodies weren’t. From 2011 Derivatives, Counterparties,
Half or more of the additional trillions in the US National Debt is how the wealthy stuck it to the lower 80% and restored their mega-fortunes.
2009 Where has all the Capital Gone
It’s been many decades since I had Economics in college, but I understand Paul Krugman saying the term c-a-p-i-t-a-l had been too often replaced by wealth. Capital was needed to run an enterprise and human capital was an important part to create earnings and make a profit. Capital, stocks and dividends all play a role to build a company. Greed has taken away capital by stock manipulation (Bain Capital) and improper bonuses for workers at the top level. This capitalistic culture depleted the assets for any company to grow and provide an income for its workers. This culture of greed has become so manifest and the profits were stashed away in offshore companies/banks to escape taxation. The workers and the community where the company earns its profits are getting shafted.
In Europe there is still a level of redistribution of income through its tax system for the well-being of the low-income families and for investment in infrastructure of roads, bridges, tunnels and public transportation.
In The Netherlands, we also have seen a number of accounting scandals in the 21st century. I listened to a university scholar on the changes in accountancy seen as a cause for these scandals. The Anglo-American culture has creeped into Dutch society through mergers, building large accountancy groups with wealth and profit as primary goal for its existance. See the KPMG building scandal of its new headquarters in Amsterdam. The ethics of a CPA had gone out the window when profits became a greater motive.
This is mostly incorrect:
It’s been debt that has replaced capital stock. Simple example: Co-D buys Co-B at book value (balance sheet value of capital stock) for cash. Then secures a loan for 100% of the purchase price and distributes the proceeds to the buyers. If the business delivers profits after that, it’s ka-ching for the owners with nothing at risk and if it crumbles into bankruptcy, the losers aren’t the owners.
One trick was to convince investors that debt investment instruments were as good as if not better than capital investments. (Milken played a huge role in this.) Derivatives are debt instruments. Once businesses could operate well enough (or seemed to do so) with less capital and more debt, it created surplus capital that either had to be redeployed as capital in another business, added to the giant pool of lender capital, or consumed. The Great Recession and collapse of the financial markets was the consequence of far too little actual capital.
Just to further complicate all of this — while for accounting purposes capital has more in common with debt than assets, its essence is unique and therefore, substitutions inject risk and not stability into the equation.
I meant manipulation in shares and ownership, indeed adding too much debt to survive as company. The vulture capitalists did well:
Bain Capital Profiting With Milken’s Junk Bonds
Great discussion with Paul Krugman.
Over @ET also a lengthy review with some comments:
First notes on Thomas Piketty’s Capital in the 21st Century
In the discussion with Bill Moyers, Paul Krugman mentions the think-tanks established to keep the inequality of income and the absolute political clout with the wealthiest (Mitt Romney’s 1%).
I would like to remark what globalization has wrecked in the Western world in recent decades will worsen with the advance of TIPP. In my research about Ukraine politics of the US, I came across former NATO ambassador Ivo Daalder and Victoria Nuland at the Atlantic Council. Both persons mentioned the importance of pushing forward TIPP, an extensive deal on free trade and agreements which makes the multinationals more profitable while the workers are cut in salary and social well-being.
NATO and the intelligence community are better organized for major (political) decisionmaking than the countries united in the (political) European Union. Pressure groups will force governments to invest more in the military as we hear lately while making Putin and Russia our Nr. 1 enemy again. NATO should be strenghtened, look at an expansionistic Russia!
It’s the economics stupid! Politicians just lie and the media produce propaganda.
○ Isolating Putin’s Russia by cutting off its economic and political ties to the outside world, and effectively making it a pariah state.
Cyrille’s initial “First Notes” at ET seem consistent with reviews by others. (I did read Galbraith’s review and the tone notwithstanding, it’s a solid critique.) Then I got to this:
If Piketty does that, it’s a huge error. Things owned are assets and not capital. (Assets minus liabilities = capital.) It’s why capital has a mysterious quality.
Sorry to disagree, but you have not found a “huge error.” Everyone’s liabilities are someone else’s assets. 100% of Federal Debt is an asset on another balance sheet, and the recent rise in the wealth of the super-rich is entirely attributible to the increase in the Federal debt. Only the super-wealthy saw a corresponding increases in their assets, so that must be where the capital created by the new debt went.
Sorry — you seemed to be confused. Assets do not equal capital. A business can significantly increase or decrease assets with no change in capital. Capital is generated from investors buying into the business and the sum of retained NIAT (or profit).
So when I borrow money it doesn’t go on the bank’s balance sheet as an asset?
Yes — cash you borrow from a bank is an asset on the bank’s balance sheet. But we don’t combine (consolidate) your balance sheet with that of the bank’s. That transaction (the loan) doesn’t change either the bank’s or your capital (wealth).
Where did the bank get the cash to fund your loan? Or maybe we should ask who/what the bank borrowed the cash from since practically no banks have the capital resources to fund loans internally. By 2008 US banks didn’t even have adequate capital to fund reasonable loan loss reserves — and that’s one reason why they were technically bankrupt with the popping of the housing bubble.
I’ve always identified more with Emannuel Saez than Paul Krugman. In fact there’s a quiz somewhere around here I’ll try and find it when I get home. You answer around 100 questions and land in a spot nearest the economist who shares your views. I ended up closest to Saez. There are like 50+ economists listed as well.
Anyway, IMO, Piketty hasn’t come to terms with his own work based on the critiques I’ve read. Lots of naivety to go around, including the author himself. I’m not sure it’s naivety with Krugman tho. He’s too intelligent. Can there be that much hubris getting in the way? I’ve always thought it’s been common sense to agree that Marx identified the problem more correctly than anyone, but the solutions still elude society. So I’d say it’s more politics than anything. The few “mainstream” economists known in America to even challenge economic “consensus” (if there ever was one) were people like Stiglitz and Baker, both of whom were marginalized when they challenged power, Stiglitz especially. But even with Stiglitz at the World Bank, it requires more than its leader challenging things, tho it helps setting an atmosphere. More have to come out of the shadows and stop worrying so much about their reputations. Especialy people like Krugman who have sufficient foundation that they can start speaking more truths typically shouted down.
I think there’s more reception to these ideas, which is why we see Krugman playing a “whocudaknown”.
Granted, Krugman isn’t included:
http://www.whichfamouseconomistareyoumostsimilarto.com/
Thanks — but far too long for me. Will wait for the CRT version.
Tend to agree most often with Stiglitz, Richard Wolff, and Galbraith. But the field may be in a primitive stage — like pre-Newtonian physics.
The Big Scam and Ukraine’s Decision to Join the EU
<We have our Ukraines in the US. We just call them Detroit, Camden, …</blockquote>
Abandoned as too poor and not profitable to be invest in.
The next generation of plutocrats/oligarchs/capitalists — aka – really rich kids in training to continue their dynasties – feted by the Obama WH.
From the NYTimes report:
Ah yes, micro-credit rentier extraction from the poorest of the poor and closing all those US public schools that do poorly at enriching the oligarchs.
Digby said:
OT, but I wanted to tell you that you were ahead of the local CBS affiliate with regard to Bundy:
http://www.8newsnow.com/story/25301551/bundys-ancestral-rights-come-under-scrutiny
Saw it a few minutes ago and updated my diary. The 8NewsNow reporters had access to more public records than a nobody with internet access like me and therefore, didn’t have to hedge their conclusions. But I sure provided a good road map for where to look and what to look for had anyone been interested. (Diaries regurgitating MSM reports are far more popular than my efforts that often include some research.)
I shared your diary when you posted it. Maybe I should get on the twitters. Well I have an account but can’t be arsed to use it.
That’s nice to know. Tend to assume that Recs indicate appreciation.
The 8NewsNow report diary at dKos is now at the top of the rec list. Lots of “finally some investigative reporting” and the “MSM sucks” comments, but they would have ignored my diary if I could have posted it there.