Twelve problems with Piketty's capital

Piketty’s thesis is that the rate of return on capital exceeds the general rate of growth (r > g). So, barring wars, capital owners accumulate a larger and larger share of the world’s wealth. 1. This theory does not fit the facts. In the modern economy, it is not the rich who are getting richer, but the poor. The failure of communism and the spread of trade has lifted perhaps 2 billion people off dollar-a-day- poverty.

2. Capital is not like a tree that drops fruit into the owner’s lap. Capital has to be created, accumulated, applied, managed and safeguarded if it is to produce any income at all. Capital owners can and do fail at any one of those points.

3. Capital is certainly destroyed by war from time to time. But it is destroyed every day by folly, misfortune, miscalculation or being outperformed by competitors. The difficult thing is keeping wealth. Losing it is easy.

4. Capital carries risk, not a word that features much in Piketty. Utility-type capital with more predictable returns produces higher returns, entrepreneurs making risky investments demand higher returns. There is no one ‘r’.

5. Even a small amount of risk undermines Piketty’s belief that capital owners will get richer for ever. Stuff happens: it is hard to predict what returns will be next year, never mind in ten years or a hundred.

6. The risk-adjusted rate of return on capital is modest, and falling, as it has been doing for decades. Adjusted for risk, Piketty’s thesis does not fit the facts.

7. Capital is only one factor of production. You need labour and brains too. If capital took a larger and larger share, wages would soon be bid up. The 19th Century saw huge capital accumulation – but huge rises in living standards too.

8. The most important form of capital in our service economy is human capital. That’s not confined to a few rich people, but owned by all of us. Investing in it delivers a far bigger payback than the returns on financial or physical capital.

9. The success and rapid rise of poor immigrant groups, from Ellis Island to modern Europe, shows that you do not need to own financial or physical capital to generate income and accumulate wealth fast.

10. Capital-owning societies are actually more equal. Pre-tax, not greatly; but post-tax, with their health, education and welfare programmes, they are very much more equal. And it’s better to be poor in a rich capitalist country.

11. Piketty’s savage global redistribution would destroy capital, and sacrifice its productive power for society. Massive capital taxes create instability (Cyprus) or ruin (Zaire). High taxes also cut people’s investment in their own human capital.

12. If you want to make the world more equal, try open immigration. The world’s poorest live where capital is sparse and unprotected by the rule of law. Let them become participants in the productive, capitalist, wealth-creating process.