Thomas Piketty and the money illusion

18 November 2014

In his book “Capital in the Twenty-First Century”, the French economist Thomas Piketty gives a stunning demonstration of how capital has become concentrated in the hands of a few and grown faster than the economy, except during the 30 years of post-war growth. This trend has inevitably made the rich even richer and caused the inequality gap to widen. Labour has thus become a casualty of capital. Piketty is fascinating. I had the occasion to be a modest participant at his side in a discussion at the University of Brussels. Ever since, the conviction that I had met one of the most brilliant political economists of our time has never left me.

Piketty is an applied economist. He has basically made a statistical study from which he draws conclusions without propounding a general theory. Likening Piketty to Marx (1812-1883) betrays a misunderstanding of what economic science represents. The intellectual comparison, never endorsed by Piketty, is made by an Anglo-Saxon press always ready to stoke emotions in quickly subsiding media furores that end up promoting US-style capitalism. The intellectual enchantment with Piketty felt by the likes of Krugman and Stiglitz should therefore be treated with benevolent scepticism. Anglo-Saxon attempts to disqualify Piketty began with suspicions of statistical misrepresentation which, even if proven, do not detract from the high quality of his work.

Viewed from another angle, I still have reservations. Can capital grow faster than the economy itself indefinitely? No it cannot, as the social factor would unavoidably act as a counterweight. If Piketty is right, however, it means that state institutions, which are the political embodiment of the will of the majority, are systematically biased. In the most extreme cases, democracies are in reality plutocracies. However, capital is a symbolic representation of value. The value of a euro, a dollar, a gold coin or a building is fixed purely by constantly changing convention. Its value depends on what others perceive as its value. Capital is therefore a stream of value and not a stock of value. Its value oscillates according to its rate of exchange with goods and services. There can never be more absolute capital than intrinsic value because capital, like money, is the result of a conversion measurement.
The Marxist approach illustrates very well the conversion measurement aspect of capital by equating it to a “quantum of labour”. Broadly speaking, capital is past labour that has been saved. Capital is therefore a repository for past labour enabling the execution of present-day labour. Capital and labour are to a significant extent indissociable. Both output factors draw upon work supplied at different times.

It is somewhat redundant then to view labour and capital as conflicting macroeconomic output factors. They are not naturally antagonistic. Moreover, the longevity of capital is dependent on a stable socio-governmental order, i.e. on a sustainable exchange ratio between past and future labour. Piketty’s reasoning falls short on this point. A stable social order is needed to accumulate power and monopolise authority. Capital only succeeds in dominating labour until it is mobilised, as capital must be invested and “put to work” if it is to retain its value. Capital becomes an illusion when it is concentrated in the hands of a small number of rent seekers and is too oppressive for labour. To cite Marx again, his theory of capital states that the only purpose of capital is its own accumulation. That is impossible without labour creating value from capital.

Thomas Piketty’s work seems to miss this point. The French economist also explores ways of curbing the excessive growth and concentration of capital. He suggests a progressive tax on capital while acknowledging its illusory nature. Marx would have likely anticipated a social implosion. In the capital versus labour debate, my feeling is that a natural solution will emerge in the shape of monetary depreciation and consequential capital depreciation. By virtue of money’s symbolic role, monetary adjustment is easier than social adjustment. It acts as an automatic brake on capital concentration, protecting capital itself from collapse. In my view, social adjustment represents a break in the stability of capital’s purchasing power. During the discussion with Piketty, I shared the thought with him that inflation was a stealth tax and sometimes can be replaced by monetary confiscation, as with the Gutt operation of 1944, which he did not know about.

A further question is how to measure capital correctly. In other words, does the nominal worth of capital, an expression of value but not a store of value (unlike forms of money with intrinsic value like gold or real estate), reflect capital’s long-term purchasing power? Money being a symbolic representation par excellence, there is little prospect of it remaining stable if fast capital growth starts oppressing labour. We always return to the fact that the credibility of capital cannot be dictated in an authoritarian way. Capital has to be backed by a bigger metric than that which is guaranteed. Inevitably, that metric is labour. In an extreme scenario, a rent seeker owning the entire world’s capital could be financially ruined merely if the capital was declared no longer convertible into cash.

This brings to mind a sentence in Jérôme Ferrari’s extraordinary novel “Sermons on the Fall of Rome” which echoes St Augustin’s thought that worlds created by man are destined to collapse under their own weight: “He was like a man who, after unbelievable efforts, has just made a fortune in a currency that was no longer legal tender.” This sentence perhaps highlights the real issue at stake regarding capital, namely money illusion.

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