In the Sunday Telegraph former Bank of England Governor, Mervyn King, reviews Thomas Piketty’s book, “Capital in the Twenty-First Century,” and carefully shows where and why it is wrong.
He points out that technology and globalization “have raised the demand for special talent and lowered it for unskilled labour.” The Wimbledon prize money is 33 times what it was (in real terms) forty years ago, whereas manufacturing wages have merely doubled over the same period.
Returns go to the winners of the tournament, whether in tennis, finance, law, computing, advertising or other occupations. The “winner takes all” mentality has invaded many walks of life, although the identity of the winner changes over time.
King takes on Piketty’s central claim that the rate of return on capital (r) exceeds the rate of economic growth (g), and his assumption that this will lead to ever greater concentration of wealth. King questions the idea that “the owners of capital reinvest all their profits and the spendthrift workers consume all their wages.” Where, he asks, are the families that have pensions and own houses? And what about the sovereign wealth funds that are important forms of collective ownership?
A key issue King identifies in Piketty is his failure to take into account risk in investment. “Adjusting for risk,” he says, “average rates of return have historically been much closer to growth rates.” Indeed, King notes that the current risk-adjusted rate of interest is below the growth rate. Where Piketty claims that the period 1910-1970 was exceptional because of major shocks, King suggests that the risk premium “which constitutes a large part of the rate of return on capital,” reflects the possibility that major shocks could happen again.
King tells us that the share owned by the top one percent has fluctuated up and down, but is lower today than it was 200 years ago, and “a similar story can be told for Britain and Sweden. In Europe, the concentration of wealth among the elite remains far below what it was in the 19th century.”
Although Piketty concentrates on capitalism’s alleged failings, King says one should not ignore the achievements of a market economy in creating growth and reducing poverty. Quite so. No-one has found a better way to raise living standards for billions of people. The wealth of a market economy has funded education, healthcare, sanitation, the arts and scientific research as well as raising material prosperity. Piketty’s attack on it is but the latest in a series emanating from the Left, and King has done us all a service by undermining it.