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Piketty has got it wrong

“Capital in the Twenty-First Century” by the French economist Thomas Piketty, is now coming to wider public attention following its publication last year. According to Wikipedia, “The central thesis of the book is that inequality is not an accident, but rather a feature of capitalism and that these excesses of capitalism can only be reversed through state intervention.

The book thus warns that unless capitalism is reformed, the very democratic order will be threatened. The trend towards higher inequality was reversed between 1930 and 1975 due to the two world wars, the Great Depression and a debt-fueled recession, which destroyed much wealth, particularly that owned by the elite. These events prompted the governments to undertake steps towards redistributing income and the fast economic growth meant that inherited wealth had its importance reduced.

Picketty suggests that the world is returning towards ‘patrimonial capitalism’, in which much of the economy is dominated by inherited wealth and that their power is increasing, creating an oligarchy.” To reverse the trend, Piketty proposes a global wealth tax and a top rate of income tax of 80%. From our own perspective, rooted in the ideas of Henry George, we recognise the trend but do not accept either the analysis nor the proposed remedy.

The deficiencies with Piketty’s analysis begin with definitions. What exactly are Capital and Capitalism? Which features of Capitalism are causing the problems that he is concerned about? And if wealth is to be the subject of a tax, how is it even to be defined?


We define wealth as “natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion to fit them for the gratification of human desires.” We also define Capital as “that part of wealth devoted to production of more wealth”. Capital is thus a product of human labour; it is the artisan’s tools, the fisherman’s boat and tackle, the machines in a factory, and so on. If we accept these definitions, all sorts of things that tend to be regarded as Capital are in reality, pieces of paper that are claims on wealth, credit, money or – and this is most important – land. Capital, on our definition, has a limited life. The life of most physical capital is less than 20 years, after which it is out-of-date or worn out or needs an overhaul equivalent in cost the the original cost. Thus, we do not regard land as Capital because it falls outside the definition of “wealth” – things that are the product of human labour. We define land as “The term land does not simply mean the surface of the earth as distinguished from air and water – it includes all natural materials, forces, and opportunities. It is the whole material universe outside of humans themselves”

Why is this distinction important? The supply of Capital can be increased in response to demand. If someone comes up with a novel design of fishing boat, that design will be copied and competition will eventually bring the price down until supply matches demand. But the principles of supply and demand do not apply in the same way to real estate. There is only one site on the north-west corner of Oxford Street and Regent Street, by the exit from the tube station. It is not possible to manufacture another. If you need to be there then you will bid up the price to the point where the surplus from the business will just sustain the rent. If someone else thinks they can do better on that site they will bid up the rent a little bit more. Supply of sites cannot be increased in response to demand. If the one ideal site is not available the business has to operate on an inferior site. The holder of the site therefore has a monopoly advantage.

Futhermore, land does not decay. It holds its value. The great estates of central London, which are still owned by the same aristocratic families as in 1700, will continue to hold their value so long as the supporting infrastructure provided primarily by government remains in operation. A failure in the pumping systems, a prolonged closure of the underground or a dramatic rise in sea level would all result in a collapse in the value but as long as everything keeps running, then the value will persist.

This tells us that the inheritance of wealth is not the cause of the problem that Picketty is concerned about. In fact, wealth as such is hardly worth inheriting. It is the inheritance of land, or rather, or land titles, which are claims on wealth, which is the issue. Most high net worth individuals are holders of claims on revenue streams, which can for the main part be identified as economic rent of land, including natural resources. The rest is monopoly rights to intellectual property.

Thus, a wealth tax would solve nothing, unless the value of inherited land is included in the tax, but as we have argued, land should not even be classed as wealth. The notion of a wealth tax also leads to questions of definition. Does “wealth” include pictures on the wall, jewellery in bedside tables or forgotten treasures in the loft? How does one value, for example, a racehorse? And if racehorses are exempt from the wealth tax because valuation is considered too difficult, then it does not take too much imagination to predict that millionaires will invest in lots of racehorses in order to enjoy the exemption.

As for a wealth tax being international – the mind boggles. Would it include wealth held by dictators in Third World countries or by oligarchs in the former Soviet Union? How would this wealth be assessed and how would the tax be collected? How would the revenue be distributed? It is astonishing that a reputable economist should even come up with such a suggestion, given these obvious practical difficulties which render the whole notion unworkable. As for his suggestion that income tax should be at a top rate of 80%, experience has shown the people who have sufficiently high incomes know how to make them disappear out of sight of the tax authorities.

Any economist who does not define distinguish between that which is the gift of nature and that which is man made is not going to get a handle on the problem of growing inequality.Piketty is saying nothing that Henry George did not say more clearly in 1879. What is more, George came up with a coherent analysis whereas Piketty can not. The failure begins as soon as the word “Capitalism” is used without examining precisely what the term means.