Capital in the 21st Century: Chapter 3
Opening Part Two, “The Dynamics of the Capital/Income Ratio,” Piketty’s third chapter, “The Metamorphoses of Capital” tracks the development of the captial/income ratio (previously designated as β) in France and Britain, with particular emphasis upon its “U-shpaped” curve, “net foreign income” (income from foreign investments minus foreign rents, expenditures, etc.), and public vs. private capital.
Whereas both population and output growth, Piketty repeatedly insists, follow the pattern of a bell curve–increasing dramatically throughout the early 20th century, and now in the process of returning to their “natural” rate (.3% and 1-1.5%, respectively)–the capital/income ratio follows precisely the opposite pattern, falling off precipitously after the start of WWI, and only beginning a recovery following the second World War. “In short, what we see over the course of the century just past,” Piketty says, “is an impressive ‘U-shaped’ curve.’ The capital/income ratio fell by nearly two-thirds between 1914 and 1945 and then more than doubled in the period 1945-2012” (118). This data appears to track well with Andrew Kilman’s more traditionally Marxist thesis that profitability requires the destruction or dramatic devaluation of capital stock; “if, on the other hand, capital is not destroyed to a sufficient degree, there is no boost in profitability.” Capital investment can only remain profitable, Kilman suggests, if its rate of profit is managed by periodic destruction of capital (either by war, calamity, or sufficent slump), “in an economic slump, machines and buildings lie idle, rust and deteriorate, so physical capital is destroyed. More importantly, debts go unpaid, asset prices fall, and other prices may also fall, so the value of physical as well as financial capital assets is destroyed. Yet the destruction of capital is also the key mechanism that leads to the next boom” (LINK). This destruction/boom thesis, largely tracks with two key data points of Piketty’s analysis, first, what he calls the “catchup” of growth–the tendency of growth to spike following a trauma (e.g. approx. 4% global growth from 1950-1990)–and the dramatic reduction of national capital’s value (1910-1950).
Next, Piketty examines the role of “net foreign capital,” a source of capital whose effect on total national capital is shockingly low. Certainly, as Piketty notes (solely analyzing Britain and France), the imperialist reach of these two colonial powers resulted in a heyday of foreign capital during the late 19th/early 20th century–“by the eve of World War I, Britain had assembled the world’s preeminent colonial empire and owned foreign assets equivalent to nearly two years of national income, or 6 times the total value of British farmlands” (120)–but this boom was incapable of surviving the fall of colonialism in the 20th century. Rather, what Piketty discovers is that like non-colonial powers, Britain and France’s post-colonial net foreign income was largely neutral: “the net foreign asset holdings of France and Britain varied from slightly positive to slightly negative while remaining quite close to zero, at least when compared with the levels observed previously” (122).
In the second half of the chapter, Piketty shifts his focus to the question of public vs. private capital/debt. Central to this analysis is the recognition that public debt generally manifests as private domestic income. Simply put, when the government owes money, it is generally to its own population (e.g. government bonds). The importance of this fact is twofold. First, it means that government debt does not affect net national capital (the public debt is cancelled by the private income). But, second, that this debt does significantly increase the private share of national capital over and against public capital. In fact, private capital, at least in the two cases that Piketty analyzes (Britain and France) has already dominated public capital throughout their respective histories (since at least the 18th century). “Net public wealth,” Piketty writes, “is quite small and certainly insignificant compared with total private wealth” (125). So great is this difference, that public wealth only marginally affects net national capital at all. “In other words,” he writes,” the history of national capital to national income in France and Britiain since the eighteenth century, summarized earlier, has largely been the history of the relation between private capital and national income (see Figures 3.5 and 3.6)” (126). From the perspective of American politics, this revelation is central, as it challenges the myth often propogated by conservative voices that France and Britain represent socialist (even communist) nightmare regimes, where private wealth is severely penalized. On the contrary, as Piketty shows, “after 1950, France became the promised land of the new private-ownership caplitalism of the twenty-first century” (138). Even prior to the 1980’s “conservative revolutions” and their mass privatisation of public assets, the post-WWII nationalization of various institutions (auto industry, coal mining, etc.) by pro-socialist parties in France, still barely put an dent in private capital’s decisive monopoly on national capital (at that time, net private capital still roughly doubled net public capital).
In the next chapter, Piketty will shift his gaze from the French and British situation, in order to examine the development of capital in Germany and America (US and Canada). In the meantime, I will also hunt down and post a recent article by Kliman which more directly targets Piketty’s work, in order to offer an alternative perspective on capital and labor.