“Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine democratic societies.”
–Thomas Piketty, “Capital in the 21st Century” (2014)
The Economist magazine rightly calls French professor Thomas Piketty the new Marx, although a watered-down version. Piketty’s bestseller (rated #1 on Amazon) is a thick volume with the same title as Karl Marx’s 1867 magnum opus, “Kapital.” The publisher, Harvard University Press, appropriately designed the book cover in red, the color of the socialist workers party.
Piketty cites Karl Marx more than any other economist, even more than Keynes. The professor barely mentions Adam Smith. Instead of the modern scientific name “economics,” he prefers the old term “political economy,” a favorite of radical professors.
And most importantly, Piketty’s focus is on the distribution of income and capital, not the creation of wealth. He’s not so much concerned with the size of the economic pie, but how it’s cut up.
His main thesis is that inequality grows under capitalism, that unfettered free markets make the rich richer and the poor poorer — a standard Marxist position — and that the only solution is to tax the dirty, filthy, stickin’ rich with highly progressive taxes on their income and wealth.
I don’t want to be picky, but Piketty often ignores data that contradicts his theory of growing inequality. For instance, he selectively chooses members of the Forbes magazine billionaires’ list to show that wealth always grows automatically faster than the average income earner. He repeatedly refers to the growing fortunes of Bill Gates in the United States and Liliane Bettencourt, heiress of L’Oreal, the cosmetics firm. “Once a fortune is established,” he claims, “the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.”
I guess he hasn’t heard of the dozens of millionaires and billionaires who lost their fortunes, like the Vanderbilts, or to use a recent example, Eike Batista, the Brazilian businessman who just two years ago was the seventh-wealthiest man in the world, worth $30 billion, and now is practically bankrupt.
Piketty conveniently ignores the fact that most high-performing mutual funds eventually stop beating the market and even underperform. Take a look at the Forbes “Honor Roll” of outstanding mutual funds. Today’s list is almost entirely different from the list of 15 or 20 years ago. In our business, we call it “reversion to the mean,” and it happens all the time.