Memo To Professor Piketty: Its The Central Banks, Stupid!

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Posted on 26th April 2014 by Administrator in Economy |Politics |Social Issues

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Via David Stockman’s Contra Corner

By Hunter Lewis

Thomas Piketty, a 42-year-old economist from French academe has written a hot new book: Capital in the Twenty-First Century. The U.S. edition has been published by Harvard University Press and, remarkably, is leading the best seller list; the first time that a Harvard book has done so. A recent review describes Piketty as the man “who exposed capitalism’s fatal flaw.”

So what is this flaw? Supposedly under capitalism the rich get steadily richer in relation to everyone else; inequality gets worse and worse. It is all baked into the cake, unavoidable.

To support this, Piketty offers some dubious and unsupported financial logic, but also what he calls “a spectacular graph” of historical data. What does the graph actually show?

The amount of U.S. income controlled by the top 10 percent of earners starts at about 40 percent in 1910, rises to about 50 percent before the Crash of 1929, falls thereafter, returns to about 40 percent in 1995, and thereafter again rises to about 50 percent before falling somewhat after the Crash of 2008.

Let’s think about what this really means. Relative income of the top 10 percent did not rise inexorably over this period. Instead it peaked at two times: just before the great crashes of 1929 and 2008. In other words, inequality rose during the great economic bubble eras and fell thereafter.

And what caused and characterized these bubble eras? They were principally caused by the U.S. Federal Reserve and other central banks creating far too much new money and debt. They were characterized by an explosion of crony capitalism as some rich people exploited all the new money, both on Wall Street and through connections with the government in Washington.

We can learn a great deal about crony capitalism by studying the period between the end of WWI and the Great Depression and also the last 20 years, but we won’t learn much about capitalism. Crony capitalism is the opposite of capitalism. It is a perversion of markets, not the result of free prices and free markets.

One can see why the White House likes Piketty. He supports their narrative that government is the cure for inequality when in reality government has been the principal cause of growing inequality…..

In 1936, a dense, difficult-to-read academic book appeared that seemed to tell politicians they could do exactly what they wanted to do. This was Keynes’s General Theory. Piketty’s book serves the same purpose in 2014, and serves the same short-sighted, destructive policies.

If the Obama White House, the IMF, and people like Piketty would just let the economy alone, it could recover. As it is, they keep inventing new ways to destroy it.

 

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This is a syndicated repost courtesy of Mises Daily : Mises Institute on Austrian Economics and Libertarianism. To view original, click here.

4 Comments
  1. Doug says:

    26th April 2014 at 10:41 am

  2. backwardsevolution says:

    Admin – Michael Hudson had this to say re Piketty’s book (which he said was a start, but didn’t go far enough):

    “The problem with Piketty’s statistics are that it vastly understates how unequal the world really is and that’s because…..Rich people in America don’t earn income, they make capital gains and capital gains are not in everybody’s income statistics, they’re not in the statistics basically that are reported. And the IRS, the Internal Revenue Service of the United States, only conducts a study of capital gains once every ten years or so, and countries like England and many European countries don’t even have a tax on capital gains, so they’re not going to appear in the statistics.”

    Hudson also points to tax avoidance and says “they stole the property by fraud and internal bribery, the same way that the great fortunes were made in the United States. The History of Really Great American Fortunes by Gustavus Myers shows how the railroad land grants made fortunes by bribing congressmen and by privatising the land. The great fortunes are made by privatising natural resources, land and the public domain, and since 1980, when the concentration of wealth and income have really taken off, as Piketty shows, this is the age of privatisation, of Margaret Thatcher, of Ronald Reagan, and Boris Yeltsin in Russia. […]

    One of the things that Piketty does not discuss when it comes to making fortunes is the role of debt, that most of these fortunes that have taken off since 1980 have taken off because of the increased debt leverage.”

    And on and on.

    http://www.nakedcapitalism.com/2014/04/piketty-wealth-gap-wakeup.html

    26th April 2014 at 8:46 pm

  3. backwardsevolution says:

    BTW, Michael Hudson also rips Krugman in the above article re his “I’m Easily Bought” Prize:

    “The simple answer is that Krugman is a neoclassical economist. Neoclassical means anti-classical. He does not recognise that there is such a thing as economic rent. He also got in a big argument with your Australian Steve Keen two years ago saying that banks don’t create credit. “All banks do,” Krugman said, “is lend out savings.” He said it’s inconceivable that a bank can actually create credit or inflate asset prices.

    So Krugman is applauded by the right-wing to be their liberal of choice not because he understands the economy, but because he doesn’t understand the economy. If he understood how the economy worked he wouldn’t have won the Nobel Price, because that’s a prize for people pretending that there’s no such thing as economic rent; there’s no such thing as unearned income. And that’s why Krugman’s focus is on, well, the real problem is that these managers of companies are paid so much more and they earn so much more income. But he’s even wrong as to his statistics and, remember, he’s a professional bank lobbyist. He’s paid by the banks.”

    26th April 2014 at 8:53 pm

  4. John Doyle says:

    “just let the economy alone, it could recover” Is unadulterated bullshit.
    The economy can never be left alone, it’s always going to be manipulated, either by governments or by the market or by the extremely wealthy. No one now can save the economy. It’s a runaway train to a sticky end. Cheap oil on which we rely so heavily is a finite resource and so also is tight oil. So also is our soil, our entire food production on a knife edge. The economy left alone will simply arrive at destruction more rapidly, helped along by the debt mountain collapse. Everyone is complicit not just governments.

    27th April 2014 at 12:38 am

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