Piketty's book offers nothing new - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 28 April 2014
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Gualfin, Argentina

"What Ezra Pound exposed in The Cantos is the monstrous aberration of a world in which reality is distorted, down to a degree never so comprehensively indicated before, by the pull of a fictitious money. It is a noble subject and may be the only possible one for a long poem in our age."

- C.H. Sisson

r > g.

Yes, dear reader, we'll come back to that provocative notation in a moment. Stocks sold off on Friday. Gold rose.

Tensions in the Ukraine were said to be driving both markets. Maybe so. But why would the politics of the Ukraine make Procter & Gamble or Nestle or Boeing less valuable? Why would the shareholders of RJ Reynolds care who misgoverns the steppes?

But a lot of investors are just gamblers...betting on whether the price of the stock will go up or down, based on the news. And the big financial firms have their own gamblers...many of them very clever. These guys get the news and then have computer programs that anticipate how the other gamblers will react...and signal their trades a fraction of a second faster than everyone else.

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Dear readers are advised to stay away, both from the news and the gambling. Except for their entertainment value, both are a waste of time.

Now, let us turn back to r > g.

Tomas Piketty is the sort of man history might otherwise forget. And the economics profession might be better off if never met him. He is a French academic...and perhaps the luckiest economist in the world. He has written a book that is probably not worth reading...a book that is apparently wrongheaded and shortsighted...a book with no reported original insights...

All of this is admittedly hearsay. We are still out in the boondocks. There are no bookstores within hundreds of miles. But we are eager to get a copy of Mr. Piketty's tome just to see if it is as lunkheaded as we suspect.

In the meantime, we turn to our expert on French economists, Simone Wapler in Paris, for an insider's view:

    Piketty sticks with the old Marxists cliches. And the success of his book rests on a stupid little equation "r > g." This makes you sound like you know what you're talking about at dinner parties. It tells us that when the returns to 'rentiers' [that is the return on capital investments] is greater than economic growth, 'g,' it's a bad thing and we have to take money away from the rentiers in order to make the world a more beautiful and happy place. Of course, 'g' is not clearly defined...and neither is 'capital,' which is today mostly debt anyway.

    But I only say that because I'm jealous. I'd like come up with an idiotic equation and get rich too!

There is nothing surprising about Piketty's book. Au contraire, it's just what you'd expect -- a 21st century look at the imaginary struggle between rich capitalists and the working stiffs. What's astonishing is that it is Number One on the Amazon best seller list. The LA Times reports:
    Move over, "Fifty Shades of Grey." Instead of romance, a book by French economist Thomas Piketty on income inequality and capitalism is the No. 1 best-selling book on Amazon.com.

    Piketty's "Capitalism in the Twenty-First Century" is generating so much interest among economists and policy makers that it's temporarily out of stock on Amazon.

    At nearly 700 pages, it's not a book for beach reading by casual readers -- unless a mix of dense economic data and history is your thing.

    Piketty examined decades of historical data from 20 countries to compare income inequality over time and concluded that the U.S. economy has seen the wealth of the 1% grow to dizzying new heights. Wealth isn't trickling down as some argue, Piketty said. Moreover, he warns that rising inequality will undermine democracy and generate discontent.
Which makes us wonder. What is wrong with the pornographers...the romanciers...the fat-fighters...and the political liars? How could they let a scarcely-readable economist, whose mother tongue isn't even English, get ahead of them?

Yes, dear reader, we are jealous too. Piketty's book offers nothing new. From what we can tell, he misunderstands the most important lessons of economics. Yet, his book gets widely reviewed, widely purchased, and widely praised. Our books rarely get noticed.

[That will change with the publication of our next book...out next month! Watch this space.]

The gist of Piketty's tome is capitalists have made a lot of money lately; something needs to be done about it. Surprise, surprise - he believes wealth 'inequality' is a problem...and that market economies need the wise hands of professional economists, policy makers and central bankers to help even things up.

We only have the press reports to go on. But none mentions any serious effort by Mr. Piketty to figure out how the rich got so rich in the first place. Mightn't those same economists and policy makers have had a hand in it? We'll come back to that tomorrow...

On the surface of it, his concern that r > g seems absurd. When r is high it means that the investments are good ones. That is, that they produce more wealth than they cost. The higher r goes, the more wealth is created. If you invest in a new technology, for example, the investment only produces positive r if the technology proves successful. The more r you get, the more successful it is...and, theoretically ...the richer our species becomes.

Also, when r is high, people are encouraged to save more money and invest it in newer technology and more productive output. The amount of 'stuff' increases...people are, generally, wealthier.

The other thing that happens is that when more people save and invest (motivated by the high r), more and more investments necessarily lower r. The first investments produce high rates of return. This draws more marginal investors into more marginal investments....and the rate of return goes down. Mr. Piketty's problem solves itself. If it is allowed to...

More tomorrow.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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2 Responses to "Piketty's book offers nothing new"

Kirandeep Atwal

Apr 30, 2014

I do not know why companies do not share profit with their employees. Lao Tzu once told, "Give evil nothing to oppose
and it will disappear by itself".

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Paresh Kapadia

Apr 29, 2014

Hello Bill,
Wealth inequality being a problem is not a new concept as you already know. In the late eighties, Ravi Batra, a professor of economics in some Houston Univ. if I remember correctly came out with a book "Great Depression of the Nineties" that also became a best-seller on NYT. His main thesis was, surprise, surprise, Wealth Inequality. But to his credit, he did manage to say that the economists will avoid the Depression by micro-managing Dollar value which he said would be the Achilles Heel for all concerned. And he advised to hoard gold. He proved right on all those counts. Unfortunately he concludes that this micro-management would not help in correcting the problems, and ultimately the Depression will come with all the potent force of the spring (of mismanaged economy) that would wreak havoc on the world. I hope here he proves wrong.

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