Abstract
In the nineteenth century, political economists often viewed capital as working against the interests of labor, partly because capital and labor were viewed as substitutes and partly because the interests of the owners of capital often worked against the working class. That changed in the twentieth century as the marginal product theory of wages and human capital theory depicted capital growth as beneficial to labor. In the twenty-first century, Piketty (2014) depicts capital as working against the interests of labor, in much the same way as nineteenth century scholars did. A critical analysis of Piketty’s framework based on capital theory from Hayek and later Austrian school economists indicates that Piketty has oversimplified the nature of capital and the way that income is derived from capital. A more accurate representation of the nature of capital undermines the major policy conclusions Piketty has drawn, and demonstrates that market-based profits from capital are beneficial to everyone, regardless of whether most of their incomes come from capital or labor. However, another recent strand of literature that links the interests of capital with the political elite, enabling cronyism that benefits capital at the expense of labor, has a more solid foundation. Market processes produce a commonality of capital and labor interests whereas political processes do not. Capital and Labor, Past and Present, in the Context of Piketty’s Capital
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Notes
Ricardo (1911) begins his book with a chapter “On Value” and presents his labor theory of value, and also concludes that the natural price of labor is the subsistence wage.
Piketty talks about people receiving income, or taking income, or appropriating income (see, for example, 2014: 263) rather than earning income, and this paper adopts Piketty’s terminology by avoiding saying that people earn the incomes they receive.
One can question Piketty’s argument that there is little intergenerational wealth mobility, and Piketty himself raises a question about its contemporary relevance, noting that upper-income people have increasingly been “supermanagers;” the highly-compensated CEOs and corporate officers whose income comes from labor rather than capital ownership. The analysis that follows sets this issue aside to look at more fundamental issues.
Note that because Piketty states both the amount of capital and the income it receives as a share of income, this interpretation requires multiplying both sides of his equation by income. He scales the variables by income so that the measurement of capital and its income can be compared over time and across countries, so for purposes of discussion, multiplying by income leaves Piketty’s concepts intact, but simplifies the discussion.
Piketty (2014: 162) does state his first fundamental law as β = α/r once, but does not even mention that he has rearranged the terms, or that there may be a question of the direction of causality in the relationship.
The idea that the rent of an apartment is determined by market forces assumes that there are no government rent-control laws that prevent those laws from working, whereas Paris does have some rent controls. The existence of rent controls would further undermine Piketty’s argument, however, if they made it illegal for rents to rise as Piketty suggests they would, so for purposes of analyzing Piketty’s argument, the assumption that rents are set by supply and demand works in his favor.
Piketty objects to their incomes because he says these CEOs and other corporate officers control their boards and thus are able to set their own incomes well above their marginal products.
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Acknowledgment
The author gratefully acknowledges the encouragement of Peter Boettke, which led to the development of this paper, and helpful comments from Christopher Coyne.
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Holcombe, R.G. Capital and labor, Past and present, in the context of Piketty’s Capital . Rev Austrian Econ 28, 195–207 (2015). https://doi.org/10.1007/s11138-014-0279-3
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DOI: https://doi.org/10.1007/s11138-014-0279-3