Thomas Piketty's book, Capital in the Twenty-First Century, has been an Amazon top-seller recently, which is remarkable since it's a 700-page economics text. Piketty amasses a mountain of data that he uses to show that inequality in income and wealth has increased greatly in the US and many other countries over recent decades, comparable to what it was before World War I.

RECENT GROWTH OF INCOME INEQUALITY

Wealth and Capital

Piketty focuses on the growth of wealth, which he describes as the same thing as capital: "I define 'national wealth' or 'national capital' as total market value of everything owned by residents and government of a given country at a given point in time, provided that it could be traded on the market." (pg. 48) Piketty doesn't understand capital as a social relationship of capitalists stealing surplus labor from workers.

This misunderstanding of capital produces some weird results. For Piketty a worker's home is capital, even though it doesn't generate surplus value for the owner. Piketty counts an imaginary rent that homeowners supposedly pay themselves as profit for the homeowner, and he includes stocks, bonds and workers' retirement savings and life insurance policies as capital, even though they are not used to make a profit.

Piketty shows that inheritance, a very large source of wealth in the past, is growing again and he predicts it will continue to increase in the future.

The "Rate of Return"

Piketty claims that "capital" (i.e., all wealth) tends to have a constant rate of return throughout history of about 4 or 5 percent, even well before the age of capitalism. He defines the rate of return as "the yield on capital over the course of a year regardless of its legal forms (profits, rents, dividends, interest, royalties, capital gains, etc.) expressed as the percentage of the value of capital invested." (pg. 52) When you count imperialist wars and economic crises, however, you see big departures from 4% - 5% (see graph).

The Falling Rate of Profit

Piketty claims that the central contradiction of capitalism is that the rate of return on wealth is usually higher than the rate of economic growth, so that inequality becomes greater and greater. Marx argued that the real problem is that the rate of profit falls, even if wealth increases.

Piketty claims to prove that Marx was wrong about the tendency of the rate of profit to fall unless exploitation increases. He does admit, however, that Marx would be right unless there is "permanent growth in productivity and population." (pg. 228)

Once capital is properly defined, not as any income from owning something, but as the income from businesses that exploit labor, data from the same sources as Piketty's agree with Marx's ideas, and show that the rate of profit has had a clear tendency to fall for a long time (see graphs).

Piketty's "Solution"

Like Obama and many liberal policy-makers in the US, Piketty sees rising inequality as bad for the capitalist system. He thinks that if workers are forced to accept a smaller and smaller share of national income the eventual result would be "proletarian revolution and general expropriation" of capitalists. Piketty's solution to rising inequality is a world-wide tax on wealth. He admits that it would be practically impossible to do this on a world scale, but proposes starting with a wealth tax in Europe that would tax the largest fortunes by 2% per year.

Inequality, "National Unity" and War

Piketty's book has been praised to the skies by liberal economists. They like it because he argues that rising inequality is a fact and isn't a good thing, and because he holds out hope that capitalism can be fixed. Some US capitalists do understand that rising inequality tends to make workers angrier, less patriotic and more difficult to control. They are particularly worried about getting workers to accept the huge causalities and the financial costs of a future imperialist war with China. 

The ability of the US bosses to keep inequality from rising is very limited, however. Right now they can't even agree on a small increase in the minimum wage, or on limiting Wall Street bonuses, much less putting a big tax on their own wealth.  Imposing big wealth taxes would weaken giant corporations in their competition with foreign rivals and make the fall in the rate of profit worse. So the best they can produce will be a few band-aids, while the opportunities for communist revolution grow.