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‘Capital’ author identifies problem of income inequality but not its solution

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By James McCusker
Herald Columnist
Published:
In 1988, the distinguished physicist Stephen Hawking published “A Brief History of Time.” The book was an immediate sensation and spent a great deal of time on best-seller lists in the United States and the United Kingdom. Purchasers of the book outnumbered readers.
In 2014, French economist Thomas Piketty published the English translation of his book, titled “Capital in the Twenty-First Century.” In was an immediate sensation, a best-seller. Purchasers emptied the shelves of booksellers, even those of Amazon.com.
Fortunately, unlike Stephen Hawking’s book, you don’t have to read the Piketty book to understand its central theme. His research into the statistical history of income distribution leads him to conclude that over time the return to capital grows faster than the economy. The people who own the capital, then, end up with a disproportionate share of the income and wealth produced by the economy.
There was a receptive audience for this idea, for politicians had been beating the drums about income inequality in an effort to get public support for it as a voter issue. Whether or not the interest in buying the book can be translated into votes or voter interest, though, remains to be seen.
The influence that a book can have, though, does not depend on how many people actually read it. Few people other than economists (and very few of them) have ever read Karl Marx’s “Das Kapital,” for example, but the book had a powerful impact on political and economic thought and its global influence continues to this day. Much the same can be said for John Maynard Keynes’ “General Theory.”
Piketty’s book and its central theorem have come in for some criticism, but that should not detract from the value of his research in shifting the focus of the inequality discussion to a fact-based historical perspective on an economic process. Much of the criticism of the book, in fact, stems from the author’s lack of wisdom in recognizing his own achievement, attaching “The end” at that point and giving his word processor a rest. Instead, he went on.
Much of the power of Marx and Keynes is attributable to the simplicity of their economic models. Anyone could understand the economics in Marx’s “Das Kapital,” an economic model where the innate forces of capitalism — the appropriation of profits and the substitution of capital for labor — made it unstable and unsustainable.
Keynes, who wrote his “General Theory” partly in response to Marxism, also structured his economics so that its simplicity made it accessible to the general public as well as economic policy-makers. In his basic model, the economy was made up of consumption, investment and government. Keynesian economics is rooted in the fundamental idea that recessions and depressions are caused by inadequate total demand for goods and services and government has to step in to give the economy a boost.
Both Marx and Keynes were brilliant economists, but over time the theories that they built on their economic analysis turned out to have serious flaws. In Marx’s case, although his insight into the destructive and disruptive power of technology in market capitalism was prescient, he failed to foresee the totality of its costs and benefits, which, on balance, have generally served our economy well.
Keynes’ theories have been badly battered over the years in the transition from textbook to reality. Government, for example, turned out to be the very last entity that we would want to invest money wisely or even efficiently. Governments, no matter what their political persuasion, simply aren’t very good at that.
Our own government cannot even give away money efficiently, as exemplified by its repeated failures to halt the extensive fraud in the Earned Income Tax Credit program.
Government’s unsuitability for its key role turns out to be a key issue in Piketty’s “Capital in the Twenty-First Century.” It is one thing to illustrate that income and wealth inequalities are a growing problem for our economy; and quite another to leap to the idea that government can solve this by combining the taxation policies of the Sheriff of Nottingham with the microeconomics of Robin Hood.
There is little doubt that income inequality is closely associated with inadequate economic growth, but we know very little about how much of that relationship is cause and how much is effect. We have known for many years that income inequality is an apparent by-product of free market capitalism that, under certain economic and social circumstances, can become painfully unhealthy.
There is no doubt that the books by Marx, Keynes and Stephen Hawking will reward their readers with both knowledge and insights. It is not clear, though, what “Capital in the Twenty-First Century” adds to or changes what we already knew.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.
Story tags » Economy, Business & Finance

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