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Piketty says that the primary contradiction in capitalism is the general concept of inequality; the argument being: "Capitalism produces, at a continuous rate, perpetual inequality." He rests this conclusion on his quest to understand the "R" of economic exchange. R represents the "net return on capital" at the end of each year. Piketty finds that there is a natural tendency for net return to *increase* each year, thereby causing *further* inequality.
To many of us this may seem somewhat obvious. But there are some important details to note.
1) To Piketty, "capital" and "wealth" are inter-changeable terms. In his own words, they are "perfectly synonymous." Now, this presents a major challenge. Historically "Capital" has referred not to just "wealth"...which has existed in all societies since exchange began....but rather to a social relationship that is endemic *only* of a Capitalist society. To classical economists like Smith and Marx, and even to radical revolutionary economists like Lenin, "Capital" was a "self-realising value." In other words, Capital is not Capital unless it *advances* itself from one value to the next (a higher one).
2) Because Piketty focuses on R and the "net return" on Capital, he ignores P, or what is known as "the tendency for the rate of profit to fall (TFRP)". He explicitly rejects it as a "historical prediction that has proven false." When he presents his explanation for why it is false, he refers to Marx: "Marx's theory relies on a strict assumption of zero productivity growth over the long-term." Thus, Piketty concludes, it is not the tendency for the rate of profit to decline that is a contradiction of Capitalism; but rather simply that capitalism perpetuates inequality (R).
These two details are monumental in importance. They distinguish Piketty from Marxism in a staunch way, even though Piketty claims to be "more pessimistic than Marx....because [his] data shows that there is no economic principal that necessitates a 'crisis'," and thus capitalism could be around indefinitely.
Because of point (1), Piketty does not care about HOW wealth inequality is generated; to him, what is important is that wealth simply creates inequality. Marx called this approach "vulgar economics" since it observed action but failed to give it causality; it failed to explain how the action was both allowed to occur (the conditions) and what caused it to occur (what sparked the flame).
Because of point (2), Piketty made it clear that he was unfamiliar with Marx's overall theory of realisation and capital. He even admits in his text: "I have never managed to really read [Das Kapital]." Anyone even remotely familiar with Marx's historically-materialist assessment of capitalist production is aware that Marx addressed the expansion of production (which Piketty says Marx didn't) as the counter-weight to P (the tendency for the rate of profit to fall). In other words, the capitalist system fixes the problem of profit decline by simply expanding its market and its ability to accumulate values.
This is something that I even observed as a general conclusion arrived at by Marx after studying the American Civil War; which then caused Marx to amend his manuscripts that became "Das Kapital" 2 years after the war ended. Marx concluded that "P" was such a critical component to understanding capitalism...not necessarily because it doomed it to crises....but rather because it necessitated Capitalism's persistent expansion and acquisition of new markets and resources. Marx arrived at this in the context of the American Civil War by observing the contest between wage-labor in the North and its general desire to expand West, which conflicted with Slavery's desire to expand as well. Thus, the North was forced to wage an economic, political, and military conflict against the South as a means for ensuring the long-term stability of the wage-labor system. For more on this, ask and I will provide a copy of the rough draft of my Marx/Civil War article.
To further explain Piketty's confusion with (2) and how its based in his limited assessment of wealth in (1), let's take a general example.
To Piketty, Marx is wrong because of this: If a company that spends $5 to make an item which it sells for $20, it will eventually run into a "declining rate of profit" as more and more items are produced (eventually exceeding demand). The value of the product will have to drop below $20, despite the cost of it remaining $5. By the time the price of the produce reaches a value nearly identical to the cost, such as $6, the investors would pull out all of their money, and simply re-invest elsewhere. No crisis. No collapse. Just the end of one business.
But this is because Piketty fundamentally misunderstands Marx's inclusion of expansion of the market as a means for combating this problem.
If the same company runs into this problem, they themselves begin to offset investment elsewhere. The company would never allow the price to drop to a dangerously low level without taking steps to expand their market and reduce the cost (two separate operations).
Even Lenin made it clear: "According to Marx's general law of capitalist production, constant capital in articles of consumption has to increase faster than variable capital and surplus-value in articles of consumption. The department of social production--which produces means of production--has, consequently, to grow faster than that producing articles of consumption."
(Lenin, "Marx's Theory of Realisation" in "Development of Capitalism in Russia", Collected Works, Vol. 3, Page 54)
Let's take a different, real example from Marxist historian Louis Boudin:
Brown Sr. went into the business of manufacturing shoes with a starting capital of $500, 400 of which was spent to acquire a plant, land, machines, and other forms of *constant capital*. The remaining 100 he used to buy up labor. For simplicity, let's assume he hired 10 employees. Let us further assume that the level of productivity was such that at the end of the week, one of our laborers produced a product of the value of $20.
Under these conditions the value of the product manufactured will be $200, one hundred of which will be "necessary value" (it must be invested back into the worker's salaries) and one hundred of which is "surplus-value". The ratio of "necessary" to "surplus-value" is the rate of profit, which in this case is 1:1, or 100%.
Brown Sr. does not figure it this way, however. While he is interested in paying his workers for the cheapest amount, whether by foul means or fair, he is not interested at all in the ratio of profit to necessary investment. He merely cares that his $500 investment has netted him $100 in profit.
On such profits, the business can thrive. Let's say he is now resting in peace and his son, Brown Jr., now runs and owns the business. Jr. upholds the traditions of his father, but now entirely new methods of manufacturing are being used by himself as well as everyone else in the market for making shoes. This machinery is "labor-saving" in that it increases the productivity of labor so that one man can do by its aid the work of several men.
This machinery, however, is very costly; and its employment requires a large outlaw for raw materials...since a man employs more raw materials in the same proportion as the productivity of labor goes up. The 'composition' of Jr's Capital--that is, the proportionate shares used as "constant" and "variable" necessary capital--is therefore, different from the composition of his father's Capital. Brown Jr. employs a capital of $20,000, of this $19,000 is "necessary" value. Only $1000 is left to pay for labor. This we will call a higher stage of capitalism, since the process of creating values itself has advanced by a significant amount of technological progress.
Let us look at the rate of profit however. In the short time span of one generation, we can assume that wages have not changed significantly, except with keeping up to inflation rates. Let us also assume that the introduction of advanced machinery into the production process allows for both the cheapening of the final product (the shoes) and the value of the product produced has also increased two-fold by demand.
His variable capital amounts to $1000, as said. But now, to keep up with this advanced production, he employs ten times as many men (100). If the value of the product produced doubled (to $40, because of demand), AND the production was increased by, say, 20%, the business now produces $4,000 worth of shoes at the end of each week. As already said, $1000 of this is "NECESSARY" and is invested back into the business.
Now we have a "necessary" value-to-"surplus-value" ratio of 1:3. The physical amount of profit produced has increased (Piketty's conclusion) to $3000, while the rate at which this profit is realized has reduced by 5%. So, despite the Brown family become richer over time, which is Piketty's overall analysis, they also have seen the rate of their profit accumulation decline (Marx's conclusion).
These two acts dance with one another over time. The limitation on profit return necessitates expansion of production at levels above and beyond the expansion of the production of the product (shoes). The Brown Family makes more money over time by investing in faster, more advanced production...than they do in investing in more labor. As such, while there is further centralization of income inequality (Piketty), there is simultaneously a drop in profit generation (Marx) and, because of this, there is a necessity for all market businesses to operate on a consistently expansive enterprise. (Lenin).
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Piketty clearly did not read Marx very closely, nor did he read subsequent followers of Marxist economics which have confirmed the same mistake made by neoclassical economists over the past 65 years.
One final bit to note, 3) Piketty considers the accumulation of wealth and inequality *ONLY* in the Core nations of the World-System; specifically the United States and Britain. Here's one of the biggest theoretical faults ever: No amount of data, no amount rhetoric or philosophizing, and no amount of support among neoclassical economists will change the reality that the Capitalist world-system is a **WORLD-SYSTEM**. If one is going to go up against the examinations and thorough studies of capitalism on a general and world-scale, one can not refine their analysis to data that comes solely from one sector (particularly its most advanced).
Overall, I will simply agree with fellow Marxist historians and economists that Piketty's overall contribution to the discussion is the amount of data he has assembled and made public for us to study. Now it's time for those with a more effective grasp of capitalist dynamics on an international scale to use this data to help explain the direction and progress of capital accumulation in the early stages of the 21st century.
Sorry Piketty; maybe next time finish the readings?
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