I’m behind again, and again due to travel. I’ll be pushing the schedule out a day to compensate, and plan to catch up next week with a Tuesday/Friday schedule. Thanks for bearing with me!

It’s time to turn to literature, and how writers like Balzac and Austin used wealth to signal people’s positions in stories. The two kinds of wealth mentioned are agricultural land, and interest from government bonds. While narratively interchangeable as simply wealth, from an economic position, they aren’t. In the conception of national income, government bonds can only be private wealth, canceled out by definition by public debt, and representing a transfer payment from taxpayers to debt holders.

The capital income ratio, high in the 19th century, suffered a reversal of fate from the world wars. It fell with the enormous costs of conflict, but it’s made a recovery since, though not to its original heights. But the fall and growth and recovery post-war created an illusion that capitalism wasn’t inherently rent-seeking.

The composition of the assets that make up capital has changed. Agricultural land capital has had to contend with serious newcomers in what we mean within the idea of capital: houses, buildings, businesses, financial instruments, and colonial and post colonial holdings. This fall of relative agricultural capital reflects the smaller role it plays in the economy, and the fact that technology has made buildings and what happens in them much more economically interesting. Communications and travel made foreign assets much more manageable as well.

I’m not going to summarize the summaries of Balzac and Austin. Yo, dawg.

It’s hard to calculate the value of public assets like schools, infrastructure, and government buildings — you can’t exactly go look up how much they regularly sell for on Ebay. But even without knowing that, it’s clear that private wealth far outstrips public wealth, which is largely canceled out by public debt. And that debt also represents more private wealth. But public debt is never a huge portion of private wealth — where a national debt can be as much as 1x (on in some cases close to 2x) national income, private capital can go to 7x to 8x national income.

19th Century France and Britain had far more public debt than I’d ever realized, and much more than they have now. Much of that public debt represented transfers of wealth to the already wealthy. This was unlike the form of debt I grew up with in the 20th century, where debt was seen as a way to provide services and infrastructure, like education and transit, as a great leveler of society. Debt seemed to be a great idea in an era where inflation was guaranteed to make it vanish quickly into an ever widening pool of productive progress. It was almost a reversal of the literary opening of the chapter — representing a transfer of wealth from the rich to everyone else. But in the 21st century, inflation is dipping closer to 19th century levels, and doesn’t seem to have its leveling effect anymore.

The chapter ends on the shocks of the Great Depression, and distrust of the elites who were seen to bring it on or profit from it, and the Second World War. This is where the 20th century’s “mixed economies” came in, where economies that had been laissez-faire now came under state intervention to varying degrees with nationalizations and fiscal policies all over the world, even to the extremes of the communist planned economies. The 1970s and 1980s began to bring privatization and laissez-faire again, starting us back on the road to the 19th century’s patterns of capital, even though the ingredients of capital have changed forever.

Chapter two, Growth, opens with a discussion of population demographics, and what these small-seeming percentages mean over time. It has a rapid series of hard to process numbers, but they are important for grasping the scale of things. After laying out the historical growth rate, estimated at less than .02%, probably less than .01% for the world, he takes us into the aggressive curve of the 18th to 21st century.
Ranging from .4% in 18th century Europe to .6% — .8% in the 19th, to the enormous global 1.5%-2% of the 20th century, leading to a five fold increase of population. Growth was 1.8% world wide when I was born, now slowed down to a still staggering 1.3%. But this is probably an anomaly, and projections put 2030 at .4% and 2070 at .1%, closer to where we were before this crazy train began, with even negative demographic growth in Europe.

After laying out all these demographics, Piketty brings us to the point of the whirlwind tour of these figures: that demographic growth combats inequality by lessening the concentrating power of inherited wealth. (Inflation has also been a leveler — allowing debtors, private and public, to get out of debt more quickly, though this is noted much later in the chapter.) Combining slow demographic growth with slow economic growth further expands the power of the previous generation’s capital, leading to even more potential for concentration. Already, inherited wealth is making a come back after the world wars in Europe, and that could be a leading indicator for the world.

When putting this into a social context, Piketty delves into politics again here and, in my opinion at least, takes the myth of meritocracy out for a good beating. He points out that the idea of superior inherent abilities has been used, time and again and up to the current day IT sector, to “justify extreme inequalities and to defend the position of the winners, without much consideration for the losers, much less for the facts, and without any real effort to verify whether this very convenient principle can actually explain the changes we observe.”

Once again, we see Piketty’s calling card: data or GTFO.

We move on from there to the idea of measuring how much our money can buy us, in terms of purchasing parity, and how hard that is to measure. With not only so many more goods but incomparable goods available through time, what rich and poor means, both absolutely and compared against each other, is a moving target both temporally and geographically.

The one thing that doesn’t change as much in purchasing is services. But, because of that, services are different, moving from a third of the economy up towards 70-80% in much of the world. Just health and education can be 20% in the developed countries, and more than anything are effective at changing our quality of life, and relentlessly expensive.

Bad service sectors can juke the stats when it comes to GDP. Just as a broken window when repaired shows up in GDP as productivity no different than a new window being built, so an ineffectively and overly expensive healthcare systems ups GDP without improving health outcomes, as in the example of the US versus sane countries. (Hey, it’s his book, but still my blog.) This is accounting by costs, and it shows why Piketty prefers account by national income over popular measures like GDP. But these kinds of problems remind us why our numbers over time don’t have many sig figs — they are useful, but not granular.

One thing Piketty doesn’t seem great with is understanding where the environment and its degradation fit into the picture. He talks about the depletion of fossil fuels as a major issue, when in fact the greater danger these days is using what we have.

Chapter two closes with literature — showing Balzac and Austin’s writing reflected such a stable and slow growth and inflation rate that the idea of how much wealth you needed for a certain position in society could be referenced by a number, and serve as an abstract for a strata of society altogether. I think this is a particular and amazing feat, and that he doesn’t quite communicate the strangeness of this stability, a stability that has not existed in living memory. A certain property was a certain income, and came with a certain kit of life. What those things were was knowable and stable for decades, and folks tended to stay where they were in society. Coming as I do, from a country of temporarily embarrassed millionaires, this idea of stability is not only without reference, it’s abhorrent to most of the myths of capitalism that arose in the 20th century after WWI. Before that, it was useful for setting the scene. What a shift this is, that we can’t even remember happening!

From 1914 to 1945, we learned about inflation, monetary policy, and of course technology — and our literature and culture lost their economic innocence, and financial memories.

Sorry for the late post, travel ate my life. This week’s an aggressive one, but we slow down after this for a couple weeks.

— Chapter 2 – Growth: Illusions and Realities
— Chapter 3 – The Metamorphoses of Capital
— Chapter 4 – From Old Europe to the New World

Open thread for Chapter 2 will be posted
Tuesday Feb 16th. (Yes, that’s today, next post. You don’t have to be done by then, that’s just when it’s open!)

Open thread for Chapter 3 will be posted
Thursday Feb 18th. (You don’t have to be done by then, that’s just when it’s open!)

Open thread for Chapter 4 will be posted
Saturday Feb 21st. (Yada yada you know the drill by now)

(Sorry this is coming late in the day! You know life… stuff.)

This chapter opens with a scene of violent conflict between mine workers and state police, acting on behalf of mine owners. He uses this as an example of the fact that much of the conflict over capital arises out of ways society has divided up the fruits of capital between the capitalists, and labor, what he calls the capital/labor split.

He goes on to stake a political flag in the ground, one of the first so far in the book: “(Unrest) is due… to the extreme concentration to the ownership of capital.”

Piketty also spends some more time defining his terms — he wants us to be well aware of what he means by terms like national income, and why he chose it over the popular GDP (the short version of this is the National Income accounts for entropy, the wear and tear of infrastructure, whereas GDP doesn’t.)

This is the chapter where he carefully defines capital, and thereby the scope of the book — he doesn’t make a value judgement of capital at all, but just defines what he’s talking about and therefore how he believes it will behave. This is a clever trick, sidestepping many of the religious wars of economics. His definition is interchangeable with his definition of wealth. As a writer, I suspect this is more a literary convenience than a technical or economic one; having a synonym makes the text less cumbersome and repetitive. And, that’s pretty useful when you’re dragging a general audience along for over 600 pages.

When considering wealth, Piketty gives us the definition of one of his most important numbers: the capital-income ratio. It is defined as the capital stock/annual flow of income, denoted as β. It’s a multiplier, so if capital stock = 6 x national income, β=6, or 600% of national income.

Put another way, If you had $60 saved in the bank, and you made $20 in income, the ratio would be β=3, and so on.

Capital income ratio (β) is usually between five and six on the national level.

The accounting practices of 19th century novels makes its debut in Chapter One as well, with discussions of rate of return in the backgrounds of the drama of Balzac and Austin.

Piketty continues what he started in the introduction by laying out the lineage of his economic data. This is, I think, the most difficult sections for readers who are not economists or statisticians. The history of data isn’t uninteresting, but this is a surface view of how data collection has evolved, waving at the changing nature of the data he and his cohort of economists had to work with when trying to understand income and output. It is of limited value to the general reader, beyond being a declaration that homework got done.

The chapter closes with a discussion of national inequalities and their historical context and possible mechanics. He contrasts much of the “catch up” world of emerging economies with Sub-Saharan Africa, which he describes as largely owned by foreign capital, going so far as to describe this state, and the colonialism that came before it as “when one country owns another.” It’s once again a political statement, but couched in and supported by a specific definition of ownership. That ownership is expressed in terms of a country that performs labor for and also pays another country where capital resides. The political part isn’t mere to describe that as ownership, but also as the cause of a failure to thrive post-colonially. I think this is a compelling argument, especially given countries that largely own themselves seem to grow faster and stronger than those who rely on FDI, which even in the best of cases transfers wealth out of poor countries, even when it has good effects within a country.

Monday, February 8th – Begin reading. This week is
— Introduction
— Chapter 1 – Income and Output (which is shorter than the introduction!)

Open thread for Introduction will be posted
Wednesday Feb 10th. (You don’t have to be done by then, that’s just when it’s open!)

Open thread for Chapter 1 will be posted
Friday Feb 12th. (You don’t have to be done by then, that’s just when it’s open!)

Between the two, the Introduction is longer, but super helpful for understanding what’s coming up. I strongly recommend reading it.

A quick note: the majority of the registrations that have come in have looked… er… kind of shady. Until I know whether we’re being targeted by spammers or worse, I’m going to keep moderation on the comments. I’m sorry about this, but right now it’s the only way to make sure the space stays safe, spam and malware free. Bear with me on comment approval, I will try to get to everything as fast as possible.