D. Piketty's model and its faults
1. Piketty's central model is that r>g, where "r" is the rate of return on capital, and "g" is the % growth rate (the % annual rise of output) of the economy. The gloomy forecast is that r>g, the returns on capital (K) are all retained and plowed back, so the fraction of GDP distributed to capital keeps growing. In Marx this became a forecast he projected into the infinite future. Piketty , more realistically, projects it only far enough to create unbearable class conflict and some kind of revolution.
2. None of the terms is carefully defined or analyzed, in either mathematical or accounting terms, so supporters and critics may quibble at length about what it all means.
3. "r" is the AVERAGE return to K, not the marginal, so where capital combines with other inputs, like land or labor, their returns are imputed to K. Piketty conflates land with capital, tempering the distortion, but calculating the rate of return to both durable capital and land entails annualizing costs and returns over periods of time, and there is no clue how Piketty does that. With land the period is infinite; with durable capital it is finite, but as variable as the life of the pyramids vary from a baker's inventory of flour and sugar.
4. Piketty does not deduct depreciation of capital from its net yield, an accounting absurdity that overstates the income imputable to capital by a large and unknown factor.
5. As he does not deduct depreciation it is nearly certain that he does not deduct depletion, or the costs of pollution, thus divorcing his work entirely from modern resource and environmental economics -- even though those concerns go back at least to Jevons, and probably before. In the years before 1913, when the Haber-Bosch Process alleviated the fear of depleting the world's soils of nitrogen, soil conservationists led the charge against farm property taxation. With Mississippi River flooding, and then the Dust Bowl, soil losses remained a top concern, soon to be followed by depletion of oil wells, and now by global warming.
6. He does not seem to include capital gains, which are mostly land appreciation, in either the yields of land, or in Y, his denominator.
7. Piketty defines capital to include all forms of private property, including land. Returns to capital thus include profits, dividends, interest, rents -- everything but wages, it seems; and the denominator of the rate of return, r, must include all forms of private property. This seems to open the door to all kinds of double-counting, both in numerator and denominator, leaving us with a ratio whose meaning is complex and unknowable. As to PUBLIC capital, Piketty says little, presumably because it is not valued in any private market, as required by his definition. Thus infrastructure, and social overhead capital, are missing from his work
8. "g" is the annual rise of NNP, or national income, taken from official national published data derived from tax returns. Reported taxable income varies widely and capriciously from any economists' definition of true economic income, as established by Wm. Vickrey, and Joseph Pechman during their long careers, following the pioneering work of R.M. Haig and Henry Simons. If Piketty tries to reconcile these differences in his 700 page tome, I have seen no signs of it.
9. Piketty includes slaves with capital at one point (pp.160-61), and at another point not.
10. The share of capital in national income is rK/Y -- none of the 3 terms being defined carefully or correctly.
11. Piketty ignores the likelihood of diminishing returns to K, as capital rises faster than Y. That is a by-product of conflating land with K, so as capital grows so do the whole Earth and its resources -- an absurd corollary from his methods.
12. The rent of land is net of a) expenses for O&M, and b) Interest and depreciation on durable capital inputs. A low value of "r", as in Piketty 's doom scenario, would leave more of the cash flow for land rent, and since land is part of K, in Piketty's definition, that would lead to a higher value of "r" -- with the net result unknown. This is just one of several unknowns that Piketty must clear up before having a coherent thesis for us.
13. Having no separate category for land, Piketty cannot deal with settlement sprawl, migration, conservation, depletion, exhaustion, and other matters of scarcity of the finite Earth relative to capital and labor.
14. It's nearly forgotten now, but only a few years ago there was a great fad for Julian Simon's The Ultimate Resource (1991), meaning us, humans. We are so creative we can create more of everything, including natural resources. By conflating land with capital, Piketty in effect seems to side with Simon on this, although I cannot imagine how he reconciles Simon's optimism (or complacency?) with his own pessimism.
15. Attacks on Piketty's data have just begun, and will grow. Chris Giles, economics Editor of The Financial Times, just fired an early shot, accusing Piketty of making up data.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).