Misdirection: Galbraith on Piketty’s New Book on Capital


I’ve been waiting for this for some time but now Jamie Galbraith has come out and provided an extensive discussion of Thomas Piketty’s new book Capital in the Twentieth Century. While I haven’t yet read Piketty’s book its difficult not to have heard about it given how much of a response it is getting among economics types.

The moment the hype started I thought that something was amiss. In 2012 Galbraith and his team published an extensive empirical investigation of income distribution using new datasets that they constructed. Beyond the interview I did with Galbraith and a few other articles and the like the release of the study didn’t get much play among economist types. The reason should be obvious: whereas Galbraith arrived at heterodox conclusions, Piketty’s are mostly orthodox.

As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance.

It is new types of income that are tied to asset price valuations that are important to explain rising inequalities. Galbraith makes this clear when he writes that what is really at issue today is a rise in rents. Piketty remains blind to this because he has a fairly woolly notion of what exactly constitutes ‘capital’ (the start of Galbraith’s piece discusses the implications of some aspects of the Capital Controversies).

If Piketty had distinguished between earned and unearned income — between income generated as a result of productive physical plant and income generated from financial assets — he would have been able to discuss his findings much more consistently. But unfortunately he does not and this, to Galbraith, renders his analysis confused.

Galbraith also makes clear that Piketty’s policy proposals — mostly dealing with higher taxes on the rich — are probably not fit for purpose in a globalised, financialised economy. Rather Galbraith asks us to consider alternative approaches.

If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.

I think that Galbraith is on the right track here. More importantly from my perspective, however, is that Galbraith’s analysis provides us with a much more immediate way of focusing the discussion. In order to get people to understand what is going on in the economy these days we need to point the finger time and again at the financial sector. The general public already sense that the main purpose of Big Finance is to redistribute income and this needs to be supported by the opinions of those who claim to be experts.

Ultimately, Piketty’s work will not refocus the opinions of the experts in this regard. And that is unfortunate. Rather it will speak to a worn-out left that is unable to properly articulate itself. While its base intuitively sense that something is up with Big Finance, policymakers and experts continue to talk in outmoded tones.

From what I have seen so far the logical outcome of Piketty’s book is the government of Francois Hollande — with its insistence on high marginal tax rates for the sake of high marginal tax rates; an economic policy based on envy with no real productive aspect. And the logical outcome of the government of Francois Hollande will be, if the Socialist Party in France is unable to reformulate itself, the rise of the Front National.



About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
This entry was posted in Economic History, Economic Policy, Economic Theory. Bookmark the permalink.

32 Responses to Misdirection: Galbraith on Piketty’s New Book on Capital

  1. Louison says:

    The rise of the Front National is already here and has been for quite a while now. When the “left” betrays, far-right goes up. Polanyi explained everything decades ago: far-right rises in a defense moove against excessive liberalization and disembededness… And it is exactly what the so-called “government left” has been implementing in France since the 1980s (started with financial liberalization under Mitterand and has been pursued since then).

    Anyway, I haven’t read Galbraith review yet, but if Piketty does mention technology and education, he does so with some caution. There are plenty of unsatisfaying things with Piketty’s book, notably his ignorance of heterodox econ insights and of the importance of the rise of financial capitalism, but I think it is a bit unfair to tell that he makes technology and education the above-all explanations. He does mention them, but with caution. At least, it was not my feeling.

    Piketty isn’t in full accordance with Hollande fiscal program, together with Saez and another guy they proposed an alternative fiscal reform. And if he’s more audible than Galbraith in the economics world, I think it is not primarily because he reaches orthodox conclusions, but because he’s orthodox since the beginning. He’s the left of the orthodoxy, he’s methodogically very interesting (economics as History), but he’s still orthodoxy and he does nothing to try going beyond orthodox economics, although he does have a critical stance towards it.

    All in all he’s a bit like Kurgman. The kind of guys heterodox can somewhat talk to, but from who there’s nothing to expect theoretically, execpt an improvement of orthodox theory towards inequality and income distribution issues. This is not trivial..

    • According to Galbraith Piketty doesn’t really have an explanation. He mentions education and technology but never really commits to anything. Do you think that this is an accurate representation?

      • Louison says:

        Yes, it was also my feeling. He describes what happens, mentions usual explanations and adopt somewhat a critical stance towards it without trying to go beyond. I think it is a bit different than saying technology and education are the main explanations according to him.

        Piketty will come at a seminar some friends of mine organize, I’ll ask him the question on that point, amongst others. I can write his answer here afterwards.

      • Yes, I would be very interested.

        Please also ask him,

        (a) what he thinks of Galbraith’s work and the evidence that this is all tied up with the rise of finance and…

        (b) why he states that

        Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s land, too historical for economists and too economistic for historians.

        Galbraith and his team consider themselves working in the line of Kuznets, albeit from a slightly different perspective.

        All in all, I just want to know why he’s not dealing with Galbraith’s work given that it has been out for nearly two years, deals with the same problems and ultimately provides a better explanation than he appears to.

  2. William says:

    Thought that was a good review. There is an interview with Piketty in the latest issue of New Left Review:

  3. Epiphyte says:

    People can get filthy rich by employing the poorest people in the world. But do you think their high profits last forever? High profits are a signal flare…flashing lights…sirens. High profits show alert entrepreneurs where the gold is. As more and more entrepreneurs respond to the value signal…profits decrease. If you have more and more people competing to employ the poorest people in the world…the cost of labor increases and profit margins decrease.

    Adam Smith wrote about this a billion years ago. Yet, liberals still perceive that there’s value to be had by misdirecting the value signal.

    Minimum wages, unions and salary caps all misdirect the value signal.

    • We’re dealing with macro-level profits, not micro-level profits, genius!

      • Epiphyte says:

        Oh, go ahead and continue with your misdirection then. As long as you’re misallocating macro-level profits then it’s all good.

      • Jeez, when did I start getting Austrian cranks on my blog…

        Tell me, buddy, what theory of macro distribution are you basing your claims on and how does this theory account for the massive rise in macro profits in the financial sector in the past 30-40 years?

      • Epiphyte says:

        Heh. Macro theory? Errr…The Ficus Macrocarpa theory.

        What are profits? Profits are revenue minus cost. A massive rise in profit will occur when revenue greatly increases and/or costs greatly decrease.

        In the past 30-40 years…revenue greatly increased and costs greatly decreased. Why? Cheap labor. Globalization. Outsourcing. “They took our jobs”.

        From around 1950 to 1960 unions were at the height of their power. Because everybody wants a free lunch, they forced wages high enough that factories in what is now the Rustbelt started to relocate to the south and west. Some even moved overseas where the risk was high but labor oh so cheap.

        When the value signal was bright enough…other factories took the leap. For reference, 1978 is when China opened its doors to foreign investment. The motivation to do so was because they were surrounded by rapidly developing economies (minus N. Korea for some reason). Deng Xiaoping frequently said that it didn’t matter what color the cat was as long as it caught mice.

        Because of the increased demand for cheap labor…the cost of labor in China and most of the surrounding areas has greatly increased. Millions and millions of people have been lifted out of poverty.

        Clearly you now want Africa to be lifted out of poverty because here you are advocating for more and stronger unions and higher minimum wages. How unintentionally altruistic of you.

        The question is…do you think China will be unintentionally altruistic as well? Do you think they’ll impose minimum wages and facilitate union rent-seeking? For Africa’s sake…I hope they do.

        FYI…I’m not an Austrian. The only thing wrong with the government is the absence of specific exit.

      • philippe101 says:

        “the absence of specific exit”

        What about crossing the border?

      • Epiphyte says:

        “What about crossing the border?”

        Crossing the border is total exit.

        First you move your time/money (specific exit) and if that doesn’t “work” then you move yourself (total exit).

        It’s harmful if people leap (move themselves) without looking (being able to clearly see and compare each country’s value signals).

        If all you have is your unskilled labor…if you’re going to leap…then in order to leap to the most valuable/beneficial country…it’s essential that you are able to accurately ascertain the demand for labor in each country. But that’s not possible when countries have artificially high wages.

        It’s amazing that so many so called economists don’t grasp the concept that workers should move to the countries that have the greatest demand for labor (highest natural wages) and companies should move to the countries that have the greatest surplus of labor (lowest natural wages).

        To learn more…google “exit granularity”.

      • philippe101 says:

        “First you move your time/money (specific exit)”

        Which you can actually do.

        So your statement that there is an absence of a “specific exit” was factually incorrect.

      • Epiphyte says:

        “So your statement that there is an absence of a “specific exit” was factually incorrect.”

        Total exit would be not paying taxes. Specific exit would be paying the same amount of taxes…but not paying taxes to specific government organizations. Specific exit is a vegetarian not buying meat and a pacifist not buying war. The point is to facilitate more accurate insight into people’s preferences. If we unbundled cable…then we would have more accurate information regarding people’s entertainment preferences. This would allow creativity and talent to be allocated accordingly. In other words…in order for society’s limited resources to be put to their most valuable uses…we have to have accurate information regarding people’s preferences. Unbundling government would be infinitely more valuable than unbundling cable. .


        “Everything that your kind disagree with you simply redefine as being “artificial”.”

        Wow, that was almost as bad as pilkingtonphil’s counter argument. I explained why we disagree with artificial value signals. If I give you a fake treasure map…do you think society benefits when you go on a wild goose chase? Do you think society benefits when you bark up the wrong tree? Do you think society benefits when you tilt at windmills? Do you think society benefits when you leap on the basis of faulty information?

        The efficient allocation of resources depends on accurate information. Distorting value signals decreases the accuracy of information. Therefore, distorting value signals might seem beneficial…but the subsequent detriment is far greater than the initial benefit.

        Artificially low gas prices might seem beneficial to consumers and society as a whole…but this prevents entrepreneurs from accurately gauging the demand for energy. If entrepreneurs don’t know exactly how much society values energy…then they can’t make informed decisions as to whether they should risk the effort to find/improve alternative forms of energy. So in the not so long run…distorting the value signal will result in an inadequate and inferior supply of homogeneous energy.

      • philippe101 says:

        “artificially high wages”

        Everything that your kind disagree with you simply redefine as being “artificial”.

    • philippe101 says:

      “Specific exit would be paying the same amount of taxes…but not paying taxes to specific government organizations.”

      You don’t pay money to specific government organizations. You pay it to the Treasury. It belongs to the government then, not you.

      “Specific exit is a vegetarian not buying meat and a pacifist not buying war”.

      No it isn’t. What you call “specific exit” is more like paying rent to your landlord and then telling them what they can and can’t spend money on.

      “The point is to facilitate more accurate insight into people’s preferences”

      No of course it isn’t. The point of your idea is to try and destroy democracy and undermine the elected government.

      “Unbundling government would be infinitely more valuable than unbundling cable”

      Only for people like you who are opposed to democracy and want to undermine the elected government.

      Why do you feel the need to lie in order to spread your ideology?

      • Epiphyte says:

        “No it isn’t. What you call “specific exit” is more like paying rent to your landlord and then telling them what they can and can’t spend money on.”

        Why dictate how my landlord spends his money when there are dozens of other landlords to choose from in a one mile radius? If switching governments was as easy as switching landlords…then it wouldn’t be so important to be allowed to dictate how the government spends our money.

        “Why do you feel the need to lie in order to spread your ideology?”

        Yeah, because it sure wasn’t a liberal congressperson who sponsored the “Opt Out of Iraq War Act of 2007″…


        If you’re going to critique “my ideology”…then why don’t you do your homework beforehand so you don’t waste both our time…


      • philippe101 says:

        “Why dictate how my landlord spends his money when there are dozens of other landlords to choose from in a one mile radius?”

        There are other countries. Go and live in them.

        “If switching governments was as easy as switching landlords”

        Ah, so it has to be *easy* for you, otherwise you don’t think its fair?

        Is your rule that if something isn’t *easy*, it isn’t fair?

    • philippe101 says:

      “I explained why we disagree with artificial value signals”

      There’s nothing “natural” about a society without minimum wage laws. As I said, you define things that you agree with for ideological reasons as “natural”, and things you disagree with for ideological reasons as “artificial”.

      Either you’re simply confused about this or you are simply dishonest.

  4. philippe101 says:


    a quote from Galbraith’s text:

    “First: one cannot add up the values of capital objects to get a common quantity without a prior rate of interest, which (since it is prior) must come from the financial and not the physical world. Second, if the actual interest rate is a financial variable, varying for financial reasons, the physical interpretation of a dollar-valued capital stock is meaningless.”

    I’m not sure what this implies. If the rate of interest ‘comes from the financial world’, what determines the rate of interest? Perhaps government policy. A government can set a rate of interest using fiat money, or determine the nature of a certain interest rate regime by adopting something like a gold standard. Is this correct?

    But what about in a hypothetical world without a specific ‘government’, like a hypothetical ‘anarcho-capitalist’ world for example?

    • Yeah, central banks set interest rates to a very large extent. And then the market rates of interest fluctuate from the base-rates in line with expectations.

      In a central bank-free world interest rates would fully be set in line with expectations with no one guiding these expectations.

  5. philippe101 says:

    “However, if investors and savers are not perfectly rational and cannot price in risk perfectly because they do not know the future, then the interest rates on everything except the risk-free rate set by the central bank is completely and utterly indeterminate and is subject to the whims of investors.”

    Ok. Great article btw.

    “In order for the overnight interest rate as set by the central bank to line up all interest rates in the economy with the low-inflation, full-employment optimum rate investors and savers would have to set all these rates at their own “natural rates” – this, in turn, would require a Herculean level of rationality amongst investors and savers”.

    I don’t know why they believe that the supposed ‘natural rate of interest’ results in a low-inflation full-employment scenario. Why not deflation for example?

    • Because they think that the natural rate would perfectly balance (real physical) savings, consumption and investment. The assumptions behind this are rather dubious indeed. I’ve submitted an extensive article to the JPKE on this. Hopefully they will publish it…

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