Tuesday, November 18, 2014

Trans-Pacific Partnership, the trade deal Obama and the GOP both love, explained

Trans-Pacific Partnership, the trade deal Obama and the GOP both love, explained

These protesters in Japan aren't happy with the massive proposed trade deal. Getty Images
You're about to hear a lot about one major trade proposal the Obama administration has been negotiating for years. The Trans-Pacific Partnership has suddenly become one of the hottest topics in Washington, as it appears to be one of the few topics on which President Barack Obama and congressional Republicans might be able to reach any sort of agreement.

Of course, what you're going to read about as a "trade deal" has to do with so much more than trade — like most modern trade agreements, it's really a broad, sweeping economic agreement that deals in everything from patents to labor rights to geopolitics. Supporters say free trade will boost the economy and curb Chinese dominance. But critics say it's a massive corporate giveaway that caters to the interests of huge multinationals while killing US jobs.

The administration has hinted that a deal is close. Before that happens, read our guide to what it's all about.

1) What is the Trans-Pacific Partnership?


The Trans-Pacific Partnership is a proposed free trade agreement between the US and 11 other countries in Asia and on the Pacific. The point of it is to open up trade between the US and these countries by getting rid of tariffs and other trade barriers. It's often compared to NAFTA, the 20-year-old massive free-trade agreement. (See a list of the US's stated objectives in the TPP.)

what you're going to read about as a "trade deal" is about so much more than trade

But sending goods from point A to B (and vice versa) is only one of a vast array of areas it deals in, many of which aren't directly related to the exchange of goods, like labor standards, international investment, telecommunications, and environmental issues. In fact, many of the 29 potential chapters as listed in this Congressional Research Service report deal in issues that are only peripherally trade-related.

And it's big — the US does nearly $2 trillion in trade with these countries each year, according to the US Trade Representative's office, accounting for nearly 40 percent of the US's trade. The 12 countries together also account for around 40 percent of global GDP. It's also a free trade agreement between two of the world's biggest economies, the US and Japan, which is itself a major milestone.

2) So wait. TPP isn't really about trade?


It is about trade, at least in part, but it's really about all sorts of different agendas being worked into one big agreement that's centered around trade agreements. There are chapters on labor rights and environmental practices, as well as financial regulation and government procurement.

So the new agreement could benefit US businesses even before any goods change hands. Leaked chapters on intellectual property have seemed to favor patent and copyright holders like pharmaceutical companies and Hollywood movie studios, as Tim Lee has written.

tpp is also about china, despite the fact that china isn't even involved in it
And this isn't just a feature of the TPP. The Transatlantic Trade and Investment Partnership (TTIP), a trade deal being negotiated with European countries, likewise covers broad swaths of economic policy.

The reason for some of these broad-ranging agendas, according to US Trade Representative Michael Froman, is that there are non-tariff barriers that need to be broken down.

"Through successive rounds of trade negotiations, both bilateral and multilateral tariffs have come down a great deal over the last 50 years," he says. "but over the same period of time other obstacles to trade have emerged," like subsidies and regulations designed to keep out other exports.

TPP is also about China, which isn't even a party to the deal. China is growing in power and economic importance, with a huge and fast-growing consumer base. As it becomes a bigger force to be reckoned with in Asia, the US is in a race to make sure it has a good foothold in the region, according to one expert.

"They would like to lock up the rules on IT and investment before China becomes a bigger economic force. Hence the TPP excludes China, but it will be welcome to join in the future if it adheres to the roles set forth by others," writes Barry Bosworth, senior fellow at the Brookings Institution, in an email. "Naturally, China is not very happy."

In part, TPP may be a way to try to pressure China into adopting more market-based economic policies, as Time's Michael Schuman wrote this week — in addition, of course, to being a way to open up non-Chinese markets in Asia to American companies.

3) Who's involved?


The countries in the TPP include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The below map from the Congressional Research Service shows trade flows between the 12 countries involved.

TPP countries

Of course, one huge Asian economy (China) is not involved. The US has said it's open to China's involvement, and China has said it was open to it as well.

But many people see TPP as a way to check Chinese influence in the region, as well as a way to try to get China to change its economic policies. Indeed, when the US has in the past pushed TPP, it has in the same breath criticized China, telling it to "play by the rules."

China, meanwhile, has its own free trade pact it's working on — the Free Trade Area of Asia and the Pacific. This agreement is seen as a rival to the TPP, with both countries fighting to be the major trading partner to countries in this region. At this week's APEC forum, China succeeded in pushing a study of the FTAAP.

Officially both countries are downplaying talk of a rivalry. US Trade Representative Michael Froman even went so far as to say that China's proposed free trade area is not, in fact, a new free trade area, but instead a "long-term aspiration." At the same time, it's clear the US government fears that if TPP doesn't get off the ground, Asian countries will be more likely to make commitments to China instead.

4) How did the midterms make this into a big deal?


Because trade appears to be one of the few areas on which the White House and a newly Republican-controlled Congress might agree in the coming legislative session.

After the midterm elections Senate Minority Leader Mitch McConnell (now in line to be the majority leader in the next Congress) emphasized trade agreements as one area on which he thought a new majority-Republican Congress and Obama could agree.

"I've got a lot of members who believe that international trade agreements are a winner for America," McConnell said. "And the president and I discussed that right before I came over here, and I think he's interested in moving forward. I said, 'Send us trade agreements. We're anxious to take a look at them.'"
"republicans in Congress ... must vote to voluntarily give [Obama] large swaths of power"

That matters because Congress can give the president something called Trade Promotion Authority, which is often simply called fast-tracking. To help a president to more easily negotiate trade deals, Congress has to periodically grant this authority, which last expired in 2007.

The idea of fast track is that a president needs to be able to negotiate a treaty without the fear that Congress will amend it after he and a whole bunch of other countries come to agreement on a deal. When the president has TPA, he consults with Congress, but once a deal is reached, Congress can only vote it up or down — no amendments. Without that authority, it's not really feasible to reach a credible deal with foreign leaders.

The fact that Republicans seem favorable toward trade deals like the TPP creates something of a dilemma for them, as Public Citizen's Lori Wallach told Al Jazeera. "What would be required is for Republicans in Congress, who have attacked Obama as power-hungry, must vote to voluntarily give him large swaths of power," she said. "This is an interesting problem for them and their own political base."

5) So what exactly in the deal?


That's a great question. And the answer is that not a lot of people know the specifics.

This has upset a lot of people, including many congressional Democrats. This puts them in alignment with some Tea Party Republicans who say they won't grant Obama TPA because they haven't been consulted closely enough on what they call a "secret" deal covering such broad-ranging themes.

"as soon as you reveal your position ... then it's much more difficult to modify it and be flexible later."

TPP critic Elizabeth Warren said, "I actually have had supporters of the deal say to me, ‘They have to be secret, because if the American people knew what was actually in them, they would be opposed.'"

It's not that members of Congress have been kept entirely in the dark. Froman says he has had more than 1,500 meetings with members of Congress. The USTR office also provides Congress members with copies of the working text, though while they have input, members cannot directly change the deal.

While it's true that the average American (or Japanese or Vietnamese person) has no access to the talks, the secrecy surrounding TPP has a purpose. 
Negotiations would be far, far more difficult if undertaken in full public view.
"As soon as you reveal your position and put it in print, then it's much more difficult to modify it and be flexible later," explains Gary Hufbauer, senior fellow at the Peterson Institute for International Economics. "It's a negotiation, and everyone has to compromise to some extent."

Though the deals have been behind closed doors, some bits of the deal have come to light, thanks to WikiLeaks, which has obtained and published draft chapters from the deal on intellectual property and the environment. The Citizens' Trade Commission, which is also opposed to the TPP, has also published a leaked chapter on investment.

Those leaked chapters have upset some advocacy groups. The Electronic Frontier Foundation and ACLU have fought against some of the IP proposals, like longer copyright protections and making internet service providers liable for copyright infringement. Likewise, the Sierra Club objects to weaker language about countries' commitments to environmental agreements. As Mother Jones pointed out, the environmental stipulations in the leaked chapter are voluntary, not binding.

That said, Froman has insisted that there will be tough environmental rules in the deal: "Environmental stewardship is a core American value, and we will insist on a robust, fully enforceable environment chapter in the TPP or we will not come to agreement," he wrote in a January blog post.

6) Will TPP benefit the US economy?


Opening up new free-trade markets could really benefit the US economy. The TPP could particularly benefit American companies by giving US products, like cars and food, more customers — particularly in Japan. The Peterson Institute in 2012 estimated that it could add $78 billion to income for American companies, which is a lot of money, but not a game-changer in a $17 trillion economy.

That said, income for US companies doesn't necessarily mean new income for US workers, says Barry Bosworth, senior fellow at the Brookings Institution.
"There often is a conflict between the objectives of 'American' companies and workers," he writes. "For example, business groups are very interested in the expansion and enforcement of intellectual property and liberalization of access to foreign financial markets, but these create very few US jobs, even though they may create income through their effect on profits and stock values."
One expert says the tpp will lead to higher incomes for US companies but "probably a net loss of jobs"

In other words, a lot of those provisions that have little to do with goods trade could create lots of value for American companies without creating lots of jobs. Altogether, Bosworth says, he expects higher incomes for US companies but "probably a net loss of jobs."

The TPP could also become a political football again, come 2016 — as The Fix's Jaime Fuller noted earlier this year, a win on the TPP would be a belated win for former Secretary of State Hillary Clinton, meaning she'd probably tout it in debates and campaign stops if she ran for the presidency.

Obama TPP leaders
Obama and his fellow world leaders prepare for a long discussion about tariffs. (Getty Images)

7) Why has the TPP taken so long?

The US joined TPP negotiations in 2008, and the first TPP deadline was in 2012. That and others have sailed by since then. And that's because of lots and lots of sticking points. Maybe the biggest one recently is between the US and Japan, regarding Japanese subsidies for its agricultural and auto sectors.

However, agreement is looking closer all the time — in a November 10 statement, the leaders of the 12 countries reported "significant progress in recent months ... that sets the stage to bring these landmark Trans-Pacific Partnership (TPP) negotiations to conclusion."

Yes, statements after TPP talks have claimed "significant progress" before. But this time, the leaders sound unusually optimistic. New Zealand's trade minister proclaimed that "the finish line is in sight" after this week's APEC meeting, and said it could be "a few months" before that line is crossed.

Updated. This post was updated to include comment from the USTR on the US's environmental goals in TPP.

Friday, November 14, 2014

Ideological Foundations of Mainstream Neoclassical Economics: Class Interests as “Economic Theory”


There is now a widespread consensus that mainstream/neoclassical economists failed miserably to either predict the coming of the 2008 financial implosion, or provide a reasonable explanation when it actually arrived. Not surprisingly, many critics have argued that neoclassical economics has created more confusion than clarification, more obfuscation than elucidation. Economic “science” has, indeed, become “an ideological construct which serves to camouflage and justify the New World Order” [1].

Also not surprisingly, an increasing number of students who take classes and/or major in economics are complaining about the abstract and irrelevant nature of the discipline. For example, a group of French graduate students in economics recently wrote an open letter, akin to a manifesto, critical of their academic education in economics as “autistic” and “pathologically distant from the problems of real markets and real people”:
“We wish to escape from imaginary worlds! Most of us have chosen to study economics so as to acquire a deep understanding of the economic phenomena with which the citizens of today are confronted. But the teaching that is offered . . . does not generally answer this expectation. . . . This gap in the teaching, this disregard for concrete realities, poses an enormous problem for those who would like to render themselves useful to economic and social actors” [2].
The word “autistic” may be offensive and politically incorrect, but it certainly provides an apt description of mainstream economics.

Interestingly, most economists do not deny the abstract and irrelevance feature or property of their discipline; but argue that the internal consistency of a theory—in the sense that the findings or conclusions of the theory follow logically from its premises or assumptions—is more important than its relevance (or irrelevance) to the real world. Nobel Laureate economist William Vickery, for example, maintains:
“Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them. . . . The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world. . . . In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made” [3].
Paul Samuelson, another Nobel Laureate in Economics, likewise writes, “In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly as to the relation between reality and these assumptions.”
How or why did economics as a crucially important subject of inquiry into an understanding of social structures evolve in this fashion, that is, as an apparently rigorous and technically elaborate discipline without much usefulness in the way of understanding or solving economic problems?

Perhaps a logical way to answer this question is to look into the origins of the neoclassical economics, and how it supplanted the classical economics that prevailed from the early stages of capitalism until the second half of the 19th century—supplanted not as an extension or elaboration of that earlier school of economic thought but as a deviation from, or antithesis, to it.

Well-known classical economists like Adam Smith, David Ricardo, John Stuart Mill and Karl Marx sought to understand capitalism in fundamental ways: they studied the substance of wages and prices beyond supply and demand; they also examined the foundations of economic growth and accumulation—that is, the sources of the “wealth of nations,” as Smith put it, or “the laws of motion of capitalist production,” as Marx put it. They further sought to understand the basis or logic of the distribution of economic surplus, that is, the origins of the various types of income: wages/salaries, interest income, rental income, and profits.

To this end, they distinguished two major types of work or economic activity: productive and unproductive, that is, productive labor and productive enterprise (manufacturing) versus unproductive labor and unproductive enterprises (buying and selling, or speculation). Accordingly, they saw the capitalist social structure as consisting of different classes of conflicting or antagonistic interests: capitalists, workers, landlords, tenants/renters, and the poor.

These classical economists wrote in an era that could still be considered a time of transition: transition from feudalism to capitalism. Although feudalism was in decline, the powerful interests vested in that older mode of production and social structure still fiercely resisted the rising new mode of production, the modern industrial capitalism, and its champions, called the “bourgeoisie.”

In the second half of the 18th and first half of 19th centuries, the conflicting interests of these two rival factions of the ruling elites served as powerful economic grounds for a fierce political/ideological struggle between the partisans of the two sides. Whereas the elites of the old system viewed the rising bourgeoisie as undermining their traditional rights and privileges, the modern capitalist elites viewed the old establishment as hindering rapid industrialization, “proletarianization” and urbanization.

In the ensuing ideological battle between the champions of the old and new orders, the writings of classical economists such as Smith, Ricardo and Mill proved quite helpful to the proponents or partisans of the new order. As influential intellectuals who were concerned that the hindering influences and extractive businesses of the old establishment may hamper a clean break from pre-capitalist modes of economic activity, they wrote passionately about what created real values and/or “wealth of nations,” and what was wasteful and a drain on economic resources. To this end, their writings included lengthy discussions of the labor theory of value—the theory that human labor constitutes the essence of value—and related notions of productive and unproductive activities.

Accordingly, they characterized the propertied classes that reaped income by virtue of controlling the assets (that the economy needed in order to function) as the “rentier,” “unproductive” or “parasitic” classes. Rentier classes collect their unearned proceeds from ownership “without working, risking, or economizing”, wrote John Stuart Mill of the landlords and money-lenders of his day, arguing that “they grow richer, as it were in their sleep” [4].

Unsurprisingly, during the early stages of industrial revolution, when the old establishment still posed serious challenges to the relatively new and evolving capitalist mode of production, the view of human labor as the source of real values, expounded by Karl Marx and other classical economists, provided a strong theoretical case for industrial expansion and/or capitalist development. “In its earliest formulations, the labor theory of value reflected the perspective of, and was serviceable in the fulfillment of the objective needs of, the industrial capitalist class” [5].

Although the rising capitalist class found the labor theory of value (and its logical implications for class conflicts) potentially “disconcerting,” that concern was temporarily pushed to the backburner, as the main threat at this stage of capitalist development came from the landowning/rentier classes, not the working class. Indeed, history shows that in nearly all the so-called “bourgeois-democratic” revolutions, signifying the historical transition from pre-capitalist to capitalist formations, the burgeoning working class, the newly proletarianized peasants, sided with the bourgeoisie against its pre-capitalist nemesis.

By the mid-19th century, however, this pattern of social structure and/or class alliances was drastically changed. Concentration of capital and the rise of corporation had by the last third of the 19th century gradually overshadowed the role of individual manufacturers as the drivers of the industrial development. In place of owners/managers, more and more “corporate managers were hired to direct and oversee industrial enterprises and to channel profits automatically as part of a perpetual accumulation process. . . . Increasingly, profits and interest came to be the result of passive ownership,” similar to absentee landownership of the feudal days [6].

Along with agricultural production on an increasingly capitalistic basis, these developments meant a radical reconfiguration of social and/or class alliances: the industrial bourgeoisie and the landowners were no longer adversaries, as they were all now capitalists and allies; and the working class, which had earlier supported the bourgeoisie against the landed aristocracy, was their class enemy. What added to the fears of the capitalist class of the growing and relatively militant working class was the spread of Marx’s theory of “labor as the essence of value and economic surplus,” which was by the mid- to late-19th century frequently discussed among the leading circles of industrial workers.

These changes in the actual social and economic developments, in turn, prompted changes in the ruling class’s preferences regarding theories of capitalist production and/or market mechanism. Industrial capitalists who had earlier used the labor theory of value to their advantage in their struggle against the old, pre-capitalist establishment were now quite fearful of and hostile to that theory. Instead, “the theoretical and ideological needs of the owners of industrial capital became identical with those of the landlords and merchant capitalists. They all needed a theory that sanctioned their ownership” [7]; a theory that obfuscated, instead of clarifying, the origins of real values and the sources of wealth and/or income—hence, the shift from classical to neoclassical economics.

The formal theoretical shift from classicism to neoclassicism was pioneered (in the last three decades of the 19th century) by three economists: William Stanley Jevons, Carl Menger and Leon Walras. A detailed discussion of these pioneers of neoclassical economics is beyond the purview of this essay. Suffice it to say that all three categorically shunned the labor theory of value in favor of utility theory of value, that is, “value depends entirely upon utility,” as Jevons put it.

At the heart of the theoretical/philosophical shift was, therefore, the move from labor to utility as the source of value: a commodity’s value no longer came from its labor content, as classical economists had argued, but from its utility to consumers. The new paradigm thus shifted the focus of economic inquiry from the factory and production to the market and circulation, or exchange.
By the same token as the new school of economic thought abandoned the classicals’ labor theory of value in favor of the utility theory of value, it also discarded the concept of value, which comes from human labor, in favor of price, which is formed (in the sphere of circulation or market) by supply and demand interactions. Henceforth, there was no difference between value and price; the two have since been used interchangeably or synonymously in the neoclassical economics.

Once the focus of inquiry was thus shifted from how commodities are produced to how they are bought and sold, the distinction between workers and capitalists, between producers and appropriators, became invisible. In the marketplace all people appear as essentially identical: they are all households, consumers or “economic agents” who derive utility from consuming commodities, and who pay for those commodities “according to the amount of the utility/pleasure they derive from their consumption.” They are also identical in the neoclassical sense that they are all “rational,” “calculating,” and utility “maximizing” market players.

An obvious implication (and a major advantage to the capitalist class) of this new perspective was that in the marketplace social harmony and “brotherhood,” not class conflict, was the prevailing mode of social structure. “The supposed conflict of labor with capital is a delusion,” Jevons asserted, arguing that
“We ought not look at such subjects from a class point of view,” because “in economics at any rate [we] should regard all men as brothers” [8].

It should be pointed out (in passing) that the utility theory of value did not start with Jevons. The theory had already been spelled out in the late 18th and early 19th centuries by earlier economists such as Jeremy Bentham, Jean-Baptiste Say, Thomas Malthus and Claude Frédéric Bastiat. However, Jevons and his utilitarian contemporaries of the second half of the 19th century added a new concept to the received theory: the concept of marginal utility or, more specifically, diminishing marginal utility. According to this concept, the utility derived from the use or consumption of a commodity diminishes with every additional unit consumed.

Despite the fact that Jevons’ addition of the concept of marginal utility to the received utility theory of value was conceptually very simple (indeed, the whole concept of utility and the so-called “law of diminishing marginal utility” are altogether banalities or truisms), it nonetheless proved to be instrumentally a very important notion in the neoclassical economics. For, the term “marginal” was soon extended to other economic categories such as marginal cost, marginal revenue, marginal propensity to consume, and the like; thereby paving the way for the application of differential calculus to economics. “By introducing the notion of marginalism into utilitarian economics, Jevons had found a way in which the utilitarian view of human beings as rational, calculating maximizers could be put into mathematical terms” [9].

Whereas the utilitarian views of the earlier economists had been firmly discredited in the late 18th and early 19th centuries by proponents of the labor theory of value as truisms that did not explain much of the real world economic developments, the math-coded utilitarianism of Jevons (and his fellow neoclassicals since then) has been shielded from such criticisms by a protective cover of mathematical veneer. Despite the fact that, aside from the mathematical mask, the new notion of utility represented no conceptual or theoretical advances over the earlier version, it was celebrated as a “revolution” in economic thought, the so-called “neoclassical revolution.” Presenting a body of largely axiomatic principles, or religious-like normative guidelines (such as how “rational” consumers should behave), by means of elaborate and mesmerizing mathematics is like covering weeds with Astroturf.

Despite its irrelevance and uselessness, neoclassical economics is neither uninteresting nor illogical. Within its own premises and presuppositions it is both logical and mathematically rigorous, which explains why it is packaged as a scientific discipline. But, again, it falls pitifully short of explaining how real world markets or economies work, or how economic crises, as inherent occurrences to a capitalist economy, take place; or what to do to counter such crises that would help not only the capitalist/financial elites but the society at large. Although most mainstream economists proudly characterize their discipline as scientific, adornment of the discipline by a façade of mathematics does not really make it scientific. In reality, the math superstructure simply masks the flawed or unreliable theoretical foundation of the discipline.

It follows from the discussion presented in this essay that a driving force behind the evolution of economics as a dismal and obscuring discipline is the role of influential vested interests and/or the dominant ruling ideology. In a critique of mainstream/neoclassical economists’ blatant disregard for actual developments in the real world, economics Professor Michael Hudson writes:
“Such disdain for empirical verification is not found in the physical sciences. Its popularity in the social sciences is sponsored by vested interests. There is always self-interest behind methodological madness. That is because [professional] success requires heavy subsidies from special interests who benefit from an erroneous, misleading or deceptive economic logic. Why promote unrealistic abstractions, after all, if not to distract attention from reforms aimed at creating rules that oblige people actually to earn their income rather than simply extracting it from the rest of the economy?” [10].
Why or how is it that most economists are either unaware or pretend to be unaware of the specious theoretical foundations of their discipline?
A charitable answer is that perhaps the majority of economists who teach their discipline or otherwise work as economic professionals are not necessarily guilty of obfuscation, or deliberately promoting a faulty paradigm. Many economists sincerely believe in the integrity of their discipline as they carry out highly specialized research or produce scholarly publications. Economists’ confidence or faith in their discipline, however, does not make it any less flawed. They simply teach or carry out elaborate scholarly research work within a faulty paradigm without questioning, or even detecting, some of the submerged defects that makes the discipline not only irrelevant and useless but indeed harmful, as it tends to create more confusion than illumination or understanding.

It can also be argued that since most economists are deeply wedded to their profession, and are dependent on it as the source of both intellectual and financial survival, they would most likely be in denial, and would continue working within the only academic tradition or professional path they know how to navigate, even if they suspected or realized the esoteric and irrelevant nature of their discipline.

Ismael Hossein-zadeh is Professor Emeritus of Economics (Drake University). He is the author of Beyond Mainstream Explanations of the Financial Crisis (Routledge 2014), The Political Economy of U.S. Militarism (Palgrave–Macmillan 2007), and the Soviet Non-capitalist Development: The Case of Nasser’s Egypt (Praeger Publishers 1989). He is also a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press 2012).


[1] Michel Chossudovsky and Marshall, G.A. (eds.) The Great Global Economic Crisis, Montreal, Quebec, Canada: Center for Research on Globalization (2010, p. xviii).
[2] As quoted in Gordon Bigelow, “Let There Be Markets: The Evangelical Roots of Economics,” Harper’s, May issue:
[3] William Vickery, Microeconomics, New York: Harcourt, Brace, and World, 1964, p. 5.
[4] As quoted in Michael Hudson and Dirk Bezemer, “Incorporating the Rentier Sectors into a Financial Model,” World Economic Review,
[5] E. K. Hunt, History of Economic Thought: A Critical Perspective, New York and London, M.E. Sharpe 2002, p. 282.
[6] Ibid., p. 283.
[7] Ibid.
[8] As quoted in ibid., p. 254.
[9] Ibid., p. 252.
[10] Michael Hudson, “Krugman’s Attack on my Review of Samuelson,”

Thursday, November 13, 2014

Low wages & unpredictable schedules: A toxic combination for part time employees



Low wages & unpredictable schedules: A toxic combination for part time employees


By Charlotte Fishman

In a society that blurs the lines between corporations and people, perhaps it was inevitable that some employers would blur the lines between people and inanimate objects.  Even so, it is shocking to learn that in a growing number of low wage industries, employers  treat part time employees as fungible, disposable assets, instead of human beings worthy of  respect.

Part time workers who toil in retail, food service, and janitorial jobs often find that their time is treated like just another production cost to be sacrificed on the altar of “maximizing profitability.”  They may be kept “on-call” with no compensation, assigned shifts with short notice, or burdened with unpredictable, fluctuating hours.  Even if scheduled to work, they may be told “we don’t need you today,” and sent home empty-handed.

When the labor needs of a business increase, a part time employee’s request for increased hours or  full time work is often denied.  Why? It is more “cost effective” to hire an additional part time worker than to pay a current employee the statutorily mandated benefits that come with increased hours.  Job security is illusory.  Nothing stops an employer from firing a part time employee who refuses to come in on short notice, even if the cause is a sick child or inability to rearrange an established childcare schedule at the last moment.

In addition to being inhumane, these insecurity-inducing employment practices take a huge toll on the  nation’s economic and social health. Without a predictable schedule, how can a low skilled worker improve his or her employability through education? How can a working mother arrange for stable childcare? How can a low wage worker take on additional part time employment to raise the family income above poverty level?

Scheduling abuse of low wage part time workers is a serious social issue that is finally getting the attention it deserves.   On July 22, California Representative George Miller and Connecticut Representative Rosa DeLauro introduced  H.S. 5159, “The Schedules that Work Act” in the House of Representatives.   A companion bill sponsored by Senators Elizabeth Warren and Tom Harkin will be taken up by the Senate.

“The Schedules that Work Act” is characterized by its proponents as a conversation starter about the devastating effect of unreasonable scheduling demands – a practice that has become commonplace in industries as diverse as Big Box stores, fast food chains and multi-national banks.  If enacted, it would prevent retaliation against employees who ask for schedule adjustments;  create an interactive process for employees to obtain accommodation for caregiving responsibilities, classes, second jobs, and other needs;  require employers to provide at least two weeks advance notice of work schedules; and provide at least some compensation for last minute schedule changes, split shifts and early dismissals.

Unfortunately, the bill’s provisions, modest as they are, may be too controversial to pass the gridlock in Congress.  While employer-side representatives loudly proclaim the benefit of flexible part time schedules for both employers and employees, the Bureau of Labor Statistics reports  that roughly 7.5 million employees are working part time only because their hours were cut or they were unable to find full time work.

This is not to say that flexible part time scheduling can never be beneficial for employees.  A predictable flexible schedule — one that enables part time employees to take a second job, to enroll in a training course or to provide care for family members – would be highly desirable to many.

There are hopeful signs of change to come at the local level.  In San Francisco,  Supervisor Eric Mar is poised to introduce the aptly named “Retail Workers Bill of Rights” to the Board of Supervisors at its July 29 meeting.   The proposed ordinance targets “formula retail” businesses,  a designation that includes chain stores, fast food restaurants, and multi-national banks.   Among the rights granted to employees are the right to  four hours pay for “on call” time or shift cancellation on short notice and the right to be offered additional hours before  any new part time workers are hired. The bill is supported by Jobs with Justice, a broad coalition of labor, community and small business groups.

The families of part time low wage workers need and deserve help creating a path out of their current predicament.  The toxic combination of low wage employment and unpredictable schedules is a form of involuntary servitude that should have no place in 21st century America.

Charlotte Fishman


About Charlotte Fishman

Charlotte Fishman is a San Francisco attorney with over 30 years of experience handling employment discrimination cases on the plaintiff side. In 2005 she launched Pick Up the Pace, dedicated to overcoming barriers to women’s advancement in the workplace through legal advocacy and public education. She has authored amicus curiae briefs in major cases before the United States and California Supreme Court and writes and speaks to a wide audience on cutting edge employment issues affecting women.

Surrealistic rule in the Silicon Valley

Jim Hightower

Surrealistic rule in the Silicon Valley

Monday, November 10, 2014   |   Posted by Jim Hightower

Silicon Valley, located somewhere between sensational and silly, has long been led by entrepreneurial billionaires with a surreal relationship to people in the normal workaday world.

Thus, the tech "geniuses" who rule the rarefied Silicon stratosphere not only hold some of the most insensitive and stupid beliefs – but occasionally utter them aloud. For example, Satya Nadella, CEO of Microsoft, recently gave an astonishing bit of advice to women working for high-tech firms. It's not "good karma" for women to ask for pay raises, he lectured. Instead, just trust corporate bosses to do the right thing, "knowing and having faith that the system will actually give you the right raises as you go along."

Bizarrely, Nadella chose to cough up this completely clueless comment at a conference of women celebrating their role in the technology industry! Scorched immediately by media and public outrage, he tried to quell the firestorm by apologizing, then announcing that all Microsoft workers would henceforth receive "expanded training on how to foster an inclusive culture" in the workplace. Earth to Satya: It's not your employees who need expanded training – it's you.

Group therapy aside, improving Microsoft's culture requires opening up a closed system, providing real steps to rectify the imbalances women face in an industry that's notoriously unfriendly to them. For starters, note that at present only 29 percent of Microsoft's employees are female and that women hold only 17 percent of its high-paying engineering and executive positions.

By the way, how did CEO Nadella get his $84 million-a-year pay package? I'm guessing he demanded it, "good karma" be damned. For more information on Silicon Valley's embarrassing "female problem," connect with the workplace advocacy group, UltraViolet:

"Microsoft CEO launches training after pay gaffe," Austin American Statesman, October 18, 2014.

"Furor rages over CEO's comments on women's pay," Austin American Statesman, October 11, 2014.
"Karma and the cloud at Microsoft," USA Today, October 20, 2014.
"More Episodes of Clueless in Silicon Valley:  What does the reaction say about us?,", October 28, 2014.

Saturday, November 8, 2014

How JPMorgan Chase Helped Wreck the Economy and Avoid Prosecution

A whistleblower reveals how JPMorgan Chase got away with cratering the economy.

The following is a transcript of a Democracy Now! segment. 

JUAN GONZÁLEZ: A year ago this month, the Justice Department announced the banking giant JPMorgan Chase would avoid criminal charges by agreeing to pay $13 billion to settle claims that it had routinely overstated the quality of mortgages it was selling to investors. When the toxic mortgage securities started turning bad, investors lost faith in the banking system, and a housing crisis turned into the 2008 financial crisis that led to millions of home foreclosures. New York Attorney General Eric Schneiderman unveiled the settlement last November.
ATTORNEY GENERAL ERIC SCHNEIDERMAN:Not only will Chase have to pay the largest settlement ever levied against a financial institution, but it has admitted in our statement of facts that its own employees, employees of Bear Stearns and employees of Washington Mutual made material misrepresentations to the investing public about a large number of residential mortgage-backed securities that they issued prior to the crash in 2008. This settlement is a major victory in the fight to hold accountable those who were responsible for that crash.
AMY GOODMAN: Soon after the JPMorgan Chase deal was reached, U.S. Attorney General Eric Holder discussed the bank’s misdeeds during an interview with NBC News’ Pete Williams.
ATTORNEY GENERAL ERIC HOLDER: It packaged loans that it knew did not pass its own stated due diligence test. We have a whistleblower who indicated that she expressed concerns about what the strength of these mortgage-backed securities were, and they put them out there to the market and said that they were perfectly fine, when in fact they were not.
PETE WILLIAMS: So, to be clear, you’re saying that JPMorgan’s conduct here contributed to the housing collapse?
ATTORNEY GENERAL ERIC HOLDER: Not only the conduct of JPMorgan, it was the conduct of other banks doing similar kinds of things that led directly to the collapse of our economy in 2008 and in 2009.
JUAN GONZÁLEZ: During that interview, Attorney General Eric Holder mentioned the role of an unnamed whistleblower from JPMorgan Chase who aided the Justice Department’s case against the bank. Well, until this week, that whistleblower, Alayne Fleischmann, a securities lawyer who worked for JPMorgan, had never spoken publicly about what she witnessed inside the bank. That changed yesterday when Rolling Stone magazine published a major new piece by Matt Taibbi headlined "The $9 Billion Witness: Meet the woman JPMorgan Chase paid one of the largest fines in American history to keep from talking."

AMY GOODMAN: In the article, Alayne Fleischmann criticizes not only JPMorgan’s banking practices, but how government regulators at the Holder Justice Department responded to the bank’s lawbreaking. Today, in her first televised interview, Alayne Fleischmann joins us here on Democracy Now!, along with Matt Taibbi, who has closely covered the financial crisis for years. His latest book, Divide: American Injustice in the Age of the Wealth Gap, has just come out in paperback.

And we welcome you both to Democracy Now! for the hour.

MATT TAIBBI: Thanks for having us on.

AMY GOODMAN: So, Alayne Fleischmann, start at the beginning. Why did you decide to come forward? And how did you end up at Chase?

ALAYNE FLEISCHMANN: Sure. For a long time, I was expecting it to come out. I’ve been talking to the government for two-and-a-half years now. And first it went through the SEC. Then it went through the Civil Division of the DOJ. And at some stage after watching all of these major banks have deals that actually the facts get wiped away, I started to feel that if I don’t come forward, there’s a real chance of that happening here, too.

In terms of JPMorgan Chase, I started there in March 2006 at sort of the height of the boom. When I started, everything seemed normal. I didn’t really realize some of the things that were happening in the background. And then things started to change in about May, a couple months after I had been there.
JUAN GONZÁLEZ: Well, what—when you went to work there, what specifically was your job? And if you could walk us through how you began to realize the huge problem that the bank was a part of?

ALAYNE FLEISCHMANN: Sure. I started as what they call a deal manager. Basically, we coordinate between all these different groups when we’re bringing in these loans, that are then going to be sold to investors. I first noticed that there was a problem when they brought in a new person to do our diligence, which is just the review of the loans themselves to make sure they’re of good quality. As soon as he came in, we suddenly—this wall sort of came down between myself and the group that was doing this review, and you couldn’t get information that you would normally get. On top of that, there was immediately a sort of a no-email policy. He wouldn’t send emails, and we weren’t allowed to send him emails. He would actually come out and yell at you if you sent him an email.

AMY GOODMAN: What was the reason?

ALAYNE FLEISCHMANN: It was never given, which was extremely worrisome, because normally the reason why you have a compliance and diligence department is to actually have written policies about what you’re doing, to be able to explain to people how you’re making your decisions. So it’s exactly the opposite of what you would normally expect.

JUAN GONZÁLEZ: And when you say to review the quality of the loans, if you could—


JUAN GONZÁLEZ: —for people who are not aware—you were, in essence, certifying that these individual loans could be packaged into a group of securities to then be sold to investors in a huge package, right? But you had to go through every individual loan? Was that—

ALAYNE FLEISCHMANN: Yeah, that’s pretty much what happens. It’s really that you’re taking the actual loan files, that was done between the lender and the borrower, and looking at them to make sure everything looks right. Does this person have enough money to pay off their loan? Do they have the sort of history where we think that they’re going to pay this loan? And if we find that they don’t, then we’re actually not supposed to purchase the loans, and certainly shouldn’t be selling them to other investors without at least telling them there’s something wrong with them.

AMY GOODMAN: And so, what was the smoking gun for you?

ALAYNE FLEISCHMANN: Everything about—what really started happening—in particular, it became apparent in October—was that sometimes we had deals coming in where even though I wasn’t even the person looking at the loans, you could tell from where I was that something was wrong with them. The GreenPoint deal, which is what Matt talks about in his article, even when the loans came in, they were very, very old, which usually you try to actually pull these loans and sell them within two to three months—these loans were going back to close to the beginning of the year. If you work in the industry, you know immediately what that means, is either they couldn’t sell them, because the buyers were telling them they weren’t any good, or, even worse, they’d been sold and then had missed a bunch of payments, so they had actually been sold back to the originator. Any of those loans you wouldn’t normally sell to investors as regular loans.

JUAN GONZÁLEZ: Now, Matt, you’ve referred in your article to these loans as basically selling old, beat-up used cars—


JUAN GONZÁLEZ: —as if they were new. Could you explain that?

MATT TAIBBI: Yeah, that’s exactly what Alayne is talking about. Essentially, what the bank was doing was they—you know, there are companies out there, these mortgage lenders, like a company that might be familiar to people is, like, Countrywide—in this case, it was an originator called GreenPoint—they would go out into neighborhoods, and during this boom period, they were giving mortgages to anybody and everybody with a pulse, essentially. They were especially low-income neighborhoods. They were offering these very advantageous loans to people, whether they could afford the houses or not. They were buying huge masses of these loans. And then they were—

JUAN GONZÁLEZ: They were called like "liar’s loans," or stated income where no one even checked whether the person had the income to actually pay it off.

MATT TAIBBI: That’s exactly right. That’s exactly right. That was the verbiage, "liar’s loans." The FBI warned that there was going to be an epidemic of these liar’s loans way back in 2004. The industry ignored these warnings. The government ignored these warnings. And there was this huge influx of these stated income loans, where people could just say that they made an enormous amount of money, and nobody would check.

So the bank buys all these loans, and then what they were doing is essentially throwing them into big pools, making hamburger out of them, and then selling that hamburger to pension funds, insurance companies, hedge funds, all kinds of investors. Typically ordinary people were the people on the other end buying this stuff. They were investing in these securities, and often they didn’t even know it.
What Alayne was involved with was making sure that these loans were of good quality, so that pension funds, when they bought these securities, weren’t buying something that was going to blow up on them a year later. And what she found was that they were buying loans that were of very dubious quality, that were extremely risky, and that should not have been made into that hamburger.

AMY GOODMAN:  Last November, Attorney General Eric Holder appeared on NBC News just after the JPMorgan Chase settlement was reached. He was questioned by NBC’s Pete Williams.
PETE WILLIAMS: What about those who say, "Well, the message here is, if you do wrong, you just pay for it and move along"?
ATTORNEY GENERAL ERIC HOLDER: This was not simply something that JPMorgan simply signed a check and smilingly said, "This is a good deal for us." This inflicts pain on that institution.
PETE WILLIAMS: But is this, in essence, a sort of template? We can expect to see other settlements now?
ATTORNEY GENERAL ERIC HOLDER: I certainly think that the way in which this case has been settled is a template of what we can expect, both in terms of getting maximum amounts of money and then using that money so that we get it to people who suffer the greatest amount—that is, either investors or homeowners.
AMY GOODMAN: That’s Attorney General Eric Holder. Alayne Fleischmann, let’s take it back a step. When you started to alert your colleagues and your supervisors at JPMorgan Chase, what did they say?

ALAYNE FLEISCHMANN: Well, what happened was the transaction, at one point, just stopped. It turned out that 40 percent of the loans in this deal had problems with them. When we tried raising this issue with our superiors, what actually happened is they just started yelling at the diligence managers who were clearing the loans, sort of yelling, berating them, making them do reports over and over again. And it became clear that, although they wouldn’t say it, it was going to be like that until they would clear the loans. So what actually happened is these loans started being cleared, but basically just by sort of the brute force of what was going on there.

I raised it first with a managing director and an executive director, and couldn’t get any response. After that, I decided the best possibility would be to write a letter to another managing director that actually laid out everything I was seeing. I used the GreenPoint deal as an example, which is why the letter specifically says exactly who was doing what all over this deal. But it also lays out general problems in our diligence that the salespeople were being involved, which isn’t normal, and that there seemed to be a lot of pressure on diligence managers to clear loans that shouldn’t have been purchased or sold.

JUAN GONZÁLEZ: And the importance of putting it down in a—


JUAN GONZÁLEZ: —putting all the facts down in a letter, what that meant inside the company?

ALAYNE FLEISCHMANN: Yeah. Well, what it used to be is that the way that you could stop these things from happening was, if you write a memo that lays out what’s happening, the management won’t go forward, because they realize that if they do, there’s going to be this evidence of what happened.

JUAN GONZÁLEZ: There’s going to be a paper trail of the—mm-hmm.

ALAYNE FLEISCHMANN: Yeah. The big worry with these settlements and the way they’re being done—and I’m not the only whistleblower in these cases—is that you have these emails and these memos, but nothing happens. A fine gets paid, and then all of the facts and who did what gets washed away. So, as a whistleblower, you’re thinking, "I did all of this, and the DOJ has all of this, but for some reason they’re not going forward on it."

AMY GOODMAN: So, what happened when you went outside the company? How did you go outside?

ALAYNE FLEISCHMANN: Well, one issue I had is that although I warned not to securitize the loans, there was no way—I was blocked off, especially after I had raised complaints, from being able to see any of the data or the diligence process, which right there shows that something was wrong. So, after I left JPMorgan, I actually had no idea, for a full four years, that the loans had been securitized. On one hand, I was worried they would, but I really thought no one would ever actually securitize those loans.

MATT TAIBBI: This is an important distinction—


MATT TAIBBI: —because Alayne had no idea that a crime had been committed until she had concrete knowledge that the loans had actually been resold to somebody else. They’re certainly allowed to buy as many bad loans and as many risky mortgages as they want. It’s not until they go to some investor and represent to them that these are, you know, AAA-rated securities or whatever, or highly rated securities, that they’re actually committing fraud. And so, she had no way of knowing that. Even after she was laid off from the company, she had no knowledge of what actually happened. So she couldn’t actually report the crime yet, because she only saw one half of the deal.

JUAN GONZÁLEZ: And you were laid off in—at the beginning of 2008, right?


JUAN GONZÁLEZ: Yeah, actually before the crash. Already there was turmoil—


JUAN GONZÁLEZ: —in the home loan market, but there was not—the crash had not happened.


JUAN GONZÁLEZ: And so that the bank, when Jamie Dimon and other leaders later said that they had no realization that the market was tanking as fast as it could, at least your memos were certainly indicating to them that there were major problems in their portfolios.

MATT TAIBBI: Well, what’s funny is they actually said two completely opposite things. There was an article in Fortune magazine later in 2008 in which they report that Jamie Dimon, the CEO of the company, knew as early as October of 2006 that the industry was rife with underwriting problems, all the things that Alayne is talking about. The company was aware of this, and there are quotes in which the CEO is telling his subordinates, "We’ve got to get out of these investments, because this whole thing can go up in smoke." And then, meanwhile, so Chase is selling its own investments in these kinds of mortgages, but they’re taking these same mortgages and selling them to investors and not telling them that they have these concerns. Later, when they testify in front of the Financial Crisis Inquiry Commission in 2010, Dimon said exactly the opposite. He said, essentially, "Well, we had no idea that these things were happening. We got caught up in the fact that housing prices were just going continually upward."

AMY GOODMAN: So, talk about the settlement. What happened next?

MATT TAIBBI: Well, so, the settlement happened in—I guess, a year ago about this month. And what’s interesting about it is, Alayne, by that point, had already talked to civil investigators in the U.S. Attorney’s Office in Sacramento, and she talked to some very talented lawyers there who seemed very anxious to press this case. And they were about to release a very detailed civil complaint against Chase in September of last year, and just hours before that press conference, when they were going to announce that, reportedly, Jamie Dimon, again, the CEO of Chase, called up the assistant attorney general, asked to renegotiate, and they canceled the press conference, and they went back into negotiations. And a few months later, they had a settlement in which they paid a lot of money, but none of the facts came out in that.

AMY GOODMAN: Just like if you were in trouble, you could make that call.
MATT TAIBBI: Yeah, I could call up—yeah, I could call up the mayor or the president and have a court case go away. I mean, that’s exactly what happened in this case, is they basically put in a phone call to the very top of the criminal justice system.

JUAN GONZÁLEZ: And what happened to your contacts with the Justice Department, if you could talk about that, that process? How detailed did they want to get into the information that you had?

ALAYNE FLEISCHMANN: Well, my first contact, it was actually after four years. I was working in Calgary, and I got a call from the SEC.

AMY GOODMAN: Because you come from Canada.

ALAYNE FLEISCHMANN: Yeah. He introduced himself as an investigator from the Enforcement Division. And as I sort of paused for a minute, jokingly, he then said, "You weren’t expecting to hear from me, were you?" And after that, they set up my first interview with the SEC, which was very short. It was only maybe an hour, hour and a half. They were only interested in one deal. And even though I kept bringing up GreenPoint and they had the letter that I had written, they weren’t actually interested in that. And the SEC settlement was based on that other deal.

And then, it wasn’t until later, about December 2012, that I first met with the DOJ investigators. And it was very clear that this was going to be very different. As soon as they walked in, you could tell they knew these securities up and down, and they were really anxious to go forward with it and felt very comfortable going forward with the case. So, in that meeting, it was a very detailed meeting, sort of hours of going through how the process works and what happened. And then I had an actual deposition in about May of 2013, where they nailed down a lot more of that.

And you could see at that stage—first, I got to find out for the first time ever how many of these loans had actually gone into—had been sold to investors in sort of one pool, and it was hundreds of millions of dollars’ worth of them, with nothing actually disclosed about the problems with the loan. And then, second, I got to really see what their case was, and they clearly realized they had an incredible case there.

AMY GOODMAN: Testifying before the Senate Judiciary Committee in 2013, Attorney General Eric Holder suggested some banks are "too big to jail."
ATTORNEY GENERAL ERIC HOLDER: I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large. Again, I’m not talking about HSBC; this is just a more general comment. I think it has an inhibiting influence—impact on our ability to bring resolutions that I think would be more appropriate.
AMY GOODMAN: Matt Taibbi, respond to what Attorney General Eric Holder has testified.

MATT TAIBBI: Well, again, I mean, it’s a crazy thing when the leading law enforcement official in the nation comes out and says, "Well, some companies are just so big that we can’t prosecute them no matter what they do." In that case, he was speaking—he was testifying in the wake of a settlement the government had entered into with HSBC, which is the biggest bank in Europe and the biggest bank in Great Britain, which had admitted to laundering over $800 million for a pair of Central and South American drug cartels. And if you can’t send someone to jail for laundering $800 million of drug money, you know, because the company is too big, clearly something is very seriously wrong. But yet, this became sort of the unofficial official policy of the Justice Department. And this greatly affected the way they dealt with companies like JPMorgan Chase, like Citigroup, like Bank of America. They tried to find a way to effect some kind of resolution that didn’t involve criminal charges, didn’t involve penalties to individuals, and also didn’t put the facts of any of what they had actually done out into the public.

JUAN GONZÁLEZ: And in that vein, this is—you know, it’s the old Monopoly board game all over again, get out of jail free. Instead of paying $200 to get out of jail, you pay $2 billion to get out of jail. But the amounts of money that these governments are getting as a result of this—I mean, I just checked with the New York state comptroller. New York state alone, this year, is getting out of its bank settlements with Wall Street a windfall of $5 billion. That’s just New York state. Other states are getting their share, and of course the federal government is getting huge infusions. And so, they suddenly have all this cash. And then they also had this other stuff that you’ve talked about, which is consumer relief—


JUAN GONZÁLEZ: —apportions. So, the governments actually get cash settlements, but then they supposedly negotiate additional money for the citizens, a consumer relief. Could you talk about that?

MATT TAIBBI: Well, OK, there’s a couple of things here. First of all, these settlements, they always come up with a big number, but the number is always actually—when you actually look at the accounting, it turns out to be smaller than they announce. In the case of the Chase settlement, the number they announced was $13 billion. But there’s a couple of really important factors here. One is that $7 billion of that—it’s $7 billion, right?—was tax-deductible, which means that all of us, American citizens, anybody who pays taxes, actually picked up the check for about $2.4 billion worth of the settlement. So we paid part of that settlement, which is crazy. I mean, the ordinary person, if we get a speeding ticket, we can’t deduct that when we go to pay our taxes. But these people cratered the world economy, and they get to write a tax deduction for it.

Four billion dollars of the settlement was what they call consumer relief. And what this really boils down to, I mean, there’s some loan forgiveness, where they’re allowing people to pay less principal towards their home loans, but mostly it comes down to letting people have a little extra time to pay off their payments. And it’s not always the bank that is actually doing that; it’s often the investors in those loans who are actually giving the relief. So, it’s not really the bank paying $4 billion. It’s just a number.

AMY GOODMAN: I want to turn to President Obama speaking in September, when Attorney General Eric Holder announced that he would resign.
PRESIDENT BARACK OBAMA: He’s helped safeguard our markets from manipulation and consumers from financial fraud. Since 2009, the Justice Department has brought more than 60 cases against financial institutions and won some of the largest settlements in history for practices related to the financial crisis, recovering $85 billion, much of it returned to ordinary Americans who were badly hurt.
AMY GOODMAN: Matt Taibbi, your response?

MATT TAIBBI: Well, I mean, the first thing I would say is, OK, they brought a bunch of settlements and they collected a bunch of money, but there isn’t a single individual, in this entire tableau, who is actually individually paying any kind of penalty for any of these misdeeds. All of that money came out of the pockets of shareholders. No executives had to pay a fine. No executives had to do a single day in jail. There were not even charges filed against any individuals. And—
AMY GOODMAN: What was the actual crime you feel Jamie Dimon committed that you feel he should be in jail for?

MATT TAIBBI: Well, I can’t stand here and tell you that Jamie Dimon committed a crime. But certainly there are people in these companies, and in cases like Alayne’s case, who would be targets of criminal fraud prosecutions, and probably at a lower level than Jamie Dimon. I think it would be hard to prove, although who knows? Because they didn’t try. In a normal drug case, what you would do is you would take everybody who was guilty, and you would try to roll them up the chain and see how far you could go. And that’s exactly what they did not do in this case. They didn’t aggressively go after everybody. They didn’t follow every lead. Instead, they just sort of went into a back room, decided on a number and made the whole thing go away. And yes, that is a kind of justice, it’s a kind of resolution, but I think it’s insufficient.

JUAN GONZÁLEZ: In fact, as you note in your article, after the settlement agreement with JPMorgan Chase, the stock of the company went up dramatically, the stock price of the company went up dramatically, and Jamie Dimon ended up getting a huge raise from his board of directors.

MATT TAIBBI: Yeah, yeah, in the first weeks after the settlement was announced, the market capitalization of JPMorgan Chase went up 6 percent, which translated into about $12 billion worth of value. So that’s most of your settlement right there. Actually, it’s more than almost—more than the entire settlement, if you look at it as a $9 billion settlement. And yes, Jamie Dimon, just a few weeks after being dinged for the largest regulatory fine in the history of capitalism, got a 74 percent raise by the board of—by the Chase board.
AMY GOODMAN: And we’re going to break. When we come back, we’ll hear Senator Elizabeth Warren asking questions of Jamie Dimon about that raise. Stay with us.

Juan González is the co-host of the nationally syndicated radio news program, Democracy Now!.

Sunday, November 2, 2014

Piketty and the Crisis of Neoclassical Economics

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Piketty and the Crisis of Neoclassical Economics

John Bellamy Foster is the editor of Monthly Review and professor of sociology at the University of Oregon. Michael D. Yates is associate editor of Monthly Review and editorial director of Monthly Review Press.
Not since the Great Depression of the 1930s has it been so apparent that the core capitalist economies are experiencing secular stagnation, characterized by slow growth, rising unemployment and underemployment, and idle productive capacity. Consequently, mainstream economics is finally beginning to recognize the economic stagnation tendency that has long been a focus in these pages, although it has yet to develop a coherent analysis of the phenomenon.1

Accompanying the long-term decline in the growth trend has been an extraordinary increase in economic inequality, which one of us labeled “The Great Inequality,” and which has recently been dramatized by the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century.2 Taken together, these two realities of deepening stagnation and growing inequality have created a severe crisis for orthodox (or neoclassical) economics.

To understand the nature of this crisis of received economics it is necessary to look at the two principal bulwarks of neoclassical theory, which were originally erected in response to socialist critics. The first is the notion that a freely competitive capitalist economy left to itself generates full employment, indicating that unemployment is the product of various frictions, imperfections, or government interference. The second is the related proposition that income and wealth inequality are determined by the “marginal productivity” (or relative contributions to output) of the various factors of production, chiefly capital and labor—a logic that is extended to the contributions of individuals themselves. The renowned post-Second World War national income statistician, Simon Kuznets, in his famous Kuznets Curve, even argued that there was a tendency in developed capitalist economies towards a decrease in inequality, due to the effects of modernization, including enhanced educational opportunities.3

Contrast these propositions to the reality of the mature capitalist economies today. Far from a full-employment equilibrium, what we see rather is a long-term tendency to economic stagnation. Moreover, this reality describes all of the developed capitalist economies and can be seen in a trend going back forty years, or indeed longer.4 Over roughly the same period, income and wealth levels, rather than converging, have diverged sharply—a divergence that cannot be attributed to differences in education and skill, nor to the contributions of capital relative to labor.5 In short, both of the principal justifications for the system provided by neoclassical economics have collapsed before our eyes.6

The first of these fissures in the outlook of neoclassical economics is long-standing and well known. During the Great Depression, unemployment in the United States rose at its height in 1933 to 25 percent. It was in this context that John Maynard Keynes, the intellectual heir to Alfred Marshall at Cambridge University, and hence one of the principal figures in neoclassical economics, broke partially with the economic orthodoxy with the publication of his magnum opus, The General Theory of Employment, Interest and Money in 1936. Keynes sent mainstream economics into a tailspin by attacking (as had Marx earlier) the notion of Say’s Law of classical economics, which postulated that supply creates its own demand.7 He thus engaged in a frontal assault on the notion that full-employment equilibrium was an inherent tendency of the system. Instead Keynes contended, “When effective demand is deficient there is under-employment of labour in the sense that there are men who are unemployed who would be willing to work at less than the existing real wage.”8 Nor was this an unusual circumstance under capitalism; mass underemployment in this sense was the normal condition in rich capitalist economies. As John Kenneth Galbraith summed up Keynes’s heresy in The Age of Uncertainty:

Keynes’s basic conclusion canbe put very directly. Previously it had been held that the economic system, any capitalist system, found its equilibrium at full employment. Left to itself, it was thus that it came to rest. Idle men and idle plant were an aberration, a wholly temporary failing. Keynes showed that the modern economy could as well find its equilibrium with continuing, serious underemployment. Its perfectly normal tendency was to what economists have since come to call an underemployment equilibrium.9

Keynes was convinced that the capitalist economy tended towards stagnation, a phenomenon that he explained in terms of a decline in the marginal efficiency of capital (expected profits on new investment). He did not, however, present a coherent explanation of stagnation in The General Theory but contented himself with pointing to a waning in “the growth of population and of invention, the opening-up of new lands, the state of confidence and the frequency of war”—all of which had constituted historical factors stimulating capitalism in the past.10 These were the factors that Alvin Hansen, Keynes’s leading early follower in the United States, primarily focused on in his Full Recovery or Stagnation? and other works, delineating a theory of “secular stagnation.”11

Later, a more developed analysis of stagnation, focusing in particular on the growth of monopoly capital (but also taking into account other conditions of capitalist maturity) was to emerge in the work of Michał Kalecki, and, in particular, in Josef Steindl’s Maturity and Stagnation in American Capitalism (1952), which built on Kalecki. Paul Baran and Paul Sweezy’s Monopoly Capital (1966) constituted an attempt to extend this analysis to the entire social and economic system of capitalism and to bring out its connection to the Marxian critique. Later Harry Magdoff and Paul Sweezy were to connect stagnation to financialization, most notably in Stagnation and the Financial Explosion (1987).12

Today we see a reemergence of notions of secular stagnation in neoclassical economics, beginning with Lawrence Summers’s resurrection of the idea in a 2013 speech to an IMF forum.13 But it remains divorced from the rich historical tradition that emerged within Marxian theory (and even from Hansen’s historically based analysis, rooted in Keynes)—thus offering little in the way of a real explanation.14 Nevertheless, the notion that the capitalist economy tends towards full employment—or that macroeconomic techniques inherited from Keynes effectively produce the same result, as Paul Samuelson (Summers’s uncle) famously argued in the so-called “neoclassical synthesis”—has no legs left to stand on, owing its continuing presence entirely to the ideological function of neoclassical economics.

The second main justification of the system provided by neoclassical economics—the notion that capitalism promotes a kind of equality, at least in terms of the determination of earnings by the marginal productivity of factors (and individuals)—has shown itself to be just as false. As this has become more apparent neoclassical economists have sought to declare the whole issue out of bounds. Martin Feldstein, chairman of the Council of Economic Advisors under President Reagan, replied to critics of the Robin Hood-in-reverse policies of Reaganomics by stating, “Why there has been increasing inequality in this country is one of the big puzzles in our field and has absorbed a lot of intellectual effort. But if you ask me whether we should worry about the fact that some people on Wall Street and basketball players are making a lot of money, I say no.”15 Likewise Robert Lucas, Jr. of the University of Chicago, the most influential macroeconomist of his day, was merely stating the dominant view of the profession and of the establishment as a whole when he opined in 2004, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of [income] distribution.”16

Feldstein’s and Lucas’s sharp dismissals of any concern over income and wealth distribution reflected the mainstream economic view that inequality is benign precisely because it can be attributed to different levels of marginal productivity and the corresponding different education and skill sets. In this accounting, a person’s income is simply a function of his or her productivity and willingness to work. People are poor because they are not very productive or because they have a weak attachment to the labor force as a result of their own choices. Productivity is driven in the main by the willingness of individuals to invest in their “human capital,” and the most important type of such investment is education. Attachment to the labor force depends on “leisure preferences” of individuals. This refers to the relative weight potential workers place upon the utility they will gain by buying the goods and services that an increase in income makes possible—while factoring in, through a benefit and cost calculus, the happiness they could have by not working, by choosing more free time. Thus those with high incomes are presumed to have invested in their human capital and have low leisure preferences, while for the poor the opposite is true.

Modern technology, in this view, has only made human capital more important. Many people have been left behind in the race to the top of the income distribution because they do not possess the knowledge that modern technology requires. Most mainstream economists do say that appropriate public policies could help reduce inequality, by, for example, making it easier for those without means to attend college. However, it would be dangerous, we are told, to reduce inequality too much—for example, through free higher education for all—because then individuals would not have an incentive to work hard and be productive. This would be to the detriment of the capacity of the economy to grow and thus to provide the extra income needed to distribute to those at the bottom. Equality is therefore self-defeating.

The Mad Hatter logic of neoclassical economics can actually be used to demonstrate that in perfectly competitive markets there can be no wage and salary inequality at all!17 Consider a woman making a career decision. Assume, as does the neoclassical economist, that she has complete knowledge of the wages and benefits associated with every occupation she is considering entering. She also knows the costs of the education and training necessary for employment in each occupation, as well as the income she will lose by not working while she is getting this schooling and training. Any particular negative aspects of an occupation, such as physical danger, are also known, as are their costs. What should she do? She will weigh the benefits against the costs of each occupation and pick the one for which the net benefits are highest.

Implicit in this scenario is a wage for each occupation that at least covers the cost of entering it. Competition in the marketplace will, in fact, make the wage just equal to the entry cost. An occupation with a wage higher than the entry cost will attract new applicants; this will put downward pressure on the wage and upward pressure on the costs (as more people demand schooling and training); and eventually, the above average wage-cost difference will disappear. Remarkably, this theory shows that, while some workers earn higher wages than others, these higher wages simply reflect higher entry costs. A doctor is therefore not really better off than a motel room cleaner; in terms of wages minus costs, they are in exactly the same position. Voilà! At least as far as labor income is concerned, there can be no inequality.

Enter the real world. The Great Financial Crisis of 2007–2009 and the Occupy Wall Street uprising punctured this neoclassical fairy tale. The Occupy movement pinpointed the growing division between the 1% and the 99%—achieving in a very short time a transformation in public consciousness on inequality that radical political economists had sought to effect for decades. The press began to draw more frequently on data showing skyrocketing income and wealth inequality that had long been available but had been relegated to the status of a dirty little secret of the capitalist economy.18 For decades researchers had been compiling sophisticated statistical portraits in this area. Now due to Occupy and the sheer outrage of the population, it all began to come out into the open. Especially notable in this respect were the contributions of New York University economist Edward N. Wolff, a leading authority on wealth distribution; the Economic Policy Institute, which publishes The State of Working America; Branko Milanovic, a heterodox economist employed by the World Bank’s research division; and James K. Galbraith, a prominent institutionalist economist and analyst of inequality in pay.19

Yet, the big change on the data front, making it impossible to deny any longer the extent of the growth of inequality in all of the mature economies was the development, over the last decade and a half, beginning with the early work of Piketty, of the World Top Incomes Database (commonly referred to as the Top Incomes Database). The result of a major international project, involving some thirty researchers, this database primarily uses income tax data, focusing on most of the mature capitalist economies.20 The leading researchers for the U.S. case were Piketty himself, located at the Paris School of Economics, and Emmanuel Saez, a professor of economics at the University of California, Berkeley. The Top Incomes Database is the single largest historical database on long-term inequality currently in existence, covering countries in Europe and North America, but also a sampling of countries in Asia, Africa, and Latin America.

The publication by Harvard University Press in 2014 of Capital in the Twenty-First Century by Piketty, using the Top Incomes Database to explain the dynamics of growing inequality at the center of the capitalist world, was therefore bound to draw extraordinary attention in the economic world. For Piketty is no ordinary economist. He is at one and the same time a dissenter and a representative of the higher circle of the economics establishment. Although he served for a few months in 2007 as the economic adviser to Ségolène Royal in her campaign as the Socialist Party nominee for president of France—she lost to Nicolas Sarkozy—Piketty is no Marxist, or even an institutionalist or post-Keynesian political economist, in whose work one could expect to find an analysis centering on inequality. Rather, he is a highly credentialed member of the neoclassical economics elite. Thus, when he presented a theoretical perspective that challenged the primary approach to questions of income and wealth distribution previously held to by almost all neoclassical economists, the result was explosive. Suddenly there was a work on growing inequality that had the imprimatur of the establishment (backed by prestigious publications in the Quarterly Journal of Economics, American Economic Review and the Journal of Economics Literature), and could not be easily dismissed ad hominem as the work of a “non-scientific” heterodox economist. If not exactly a revolution against neoclassical economics, the contents of his book had all the looks of a palace coup. And remarkably too, Piketty had a gift of expression and breadth of knowledge unusual in economists, allowing him to draw on Jane Austen and Honoré de Balzac as much as Adam Smith and Karl Marx. Within a short time the book reached number one on Amazon, surely an unprecedented achievement for the author of a data-filled economics book of 685 pages.

For most readers it was not the fine details of Piketty’s analysis that were so interesting but rather the overall conclusions dramatically highlighted in the very beginning of the book.21 Here he made it clear he was challenging head-on some of the core assumptions of orthodox economics—though from inside rather than outside of the neoclassical perspective. It was this divorce of his analysis from the main ideological propositions of received economics—the sense of letting the numbers speak for themselves—that gave Piketty’s work the feeling of a disinterested inquiry after the truth rather than what Marx called “the bad conscience and evil intent of apologetics” that has so long dominated orthodox economics.22

Most importantly, Piketty concluded in what will undoubtedly be his single most enduring contribution, that “There is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently” in a capitalist economy. This can be seen as the critical counterpart (within the realm of distribution) to Keynes’s break with Say’s Law, or the notion of a natural tendency in capitalism to a full-employment equilibrium. Not only does Piketty point out that Kuznets’s assumption of growing equality in developed capitalist economies is wrong, but he argues that the standard neoclassical human-capital argument of equality-cum-meritocracy—wherein deviations from equality are simply due to attributes such as greater skill, knowledge, or productivity—is equally false in the real-world economy.23

This is shown by his now famous formula r > g, where r stands for the annual rate of return to wealth—referred to by Piketty as capital—and g for the growth rate of the economy (the rate of increase in national income). Wealth in slow-growing capitalist economies (below 1.5 percent per capita), which Piketty takes as the normal case, expands more rapidly than income—a phenomenon no doubt heightened in our financialized age.24 He argues that the higher rate of per capita growth in the first quarter century after the Second World War, when the per-capita growth rate in the United States was about 1.9 percent, was exceptional, and that we are seeing—for one reason or another—a return to the norm of much lower growth (1.2 percent or even 1 percent per capita), which he calls at one point a “low-growth regime.” (This applies to all of the mature economies on the “technological frontier”—but not to economies now experiencing catch up such as China.)25

Relatively slow growth—what we would term stagnation—thus provides the background condition for Piketty’s r > g, practically ensuring that wealth at the top of society will become ever more concentrated, while the main wealth-holders accrue their wealth not so much because of what they do but because of where they are placed in the social-class hierarchy. Indeed, capitalism in its normal case, Piketty tells us, promotes patrimonial dynasties. “Liliane Bettencourt,” the heiress to the French cosmetic giant L’Oréal, “who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working.”26

Piketty thus drives a critical wedge into the traditional justification of the system, according to which income and wealth shares are determined by the marginal productivity of the various factors of production (thought to be applicable to individual contributions as well). To understand the full significance of this, it is useful to quote from the 2012 book The Price of Inequality by economist Joseph Stiglitz. According to Stiglitz, with the rise of capitalism,

it became imperative to find new justifications for inequality, especially as critics of the system, like Marx, talked about exploitation.

The theory that came to dominate, beginning in the second half the nineteenth century—and still does—was called “marginal productivity theory”; those with higher productivities earned higher incomes that reflected their greater contributions to society. Competitive markets, working through the laws of supply and demand, determine the value of each individual’s contributions.27
Piketty’s argument and his data make a mockery of this core neoclassical economic thesis. But Piketty advances such an argument without breaking completely with the architecture of neoclassical economics. His theory thus suffers from the same kind of internal incoherence and incompleteness as that of Keynes, whose break with neoclassical economics was also partial. Deeply concerned with issues of inequality, just as Keynes was with unemployment, Piketty demonstrates the empirical inapplicability over the course of capitalist development of the main conclusions of neoclassical marginal productivity theory. His work has thus served to highlight the near-complete unraveling of orthodox economics—even while staying analytically within the fold.28

This overall incoherence, as we shall see, ultimately overwhelms Piketty’s argument. He is unable to explain why capitalist economies tend to grow so slowly as to generate such a divergence between wealth and income (and between capital and labor). Hence, while his analysis sees slow growth or relative stagnation as endemic to this system, he neither explains this nor is concerned directly with it. Significantly, he replaces more traditional notions of capital as a social and physical phenomenon with one that equates it with all wealth.29 As a result the accumulation of capital in his analysis means no more than the amassing of wealth of whatever kind, from plant and machinery to financial assets to jewelry, thereby confusing the whole issue of capital accumulation.30 Nor does he address the relations of power—principally class power—that lie behind the inequality that he delineates. His analysis is confined largely to distribution rather than production. He neither follows nor (by his own admission) understands Marx, though at times clearly draws inspiration from him.31 The question of monopoly capital is entirely missing from his study, which, as he says, does not include imperfect competition as a factor in generating inequality.32

But even with these and other deficiencies, Piketty, nevertheless, brings a certain degree of reality—even a sense of “class warfare” (if only implicitly)—back to bourgeois economics. The result is to heighten the crisis of neoclassical theory. Moreover, he argues—even though he dismisses the idea as “utopian”—for the imposition of a tax on wealth.33 Piketty thus represents a partial revolt within the inner chambers of the economics establishment.

Not surprisingly, given the extraordinary attention given to Capital in the Twenty-First Century and the breech in the wall of the neoclassical orthodoxy it represents, the Wall Street Journal sought to counterattack in May 2014, with an op-ed by none other than Feldstein. Reagan’s former economic advisor predictably condemned “the confiscatory taxes on income and wealth that Mr. Piketty recommends,” declaring that “the problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck” but rather that a small minority has fallen below the poverty line.34 However, Feldstein misses the mark completely. Piketty’s point is that skill and training cannot explain the gross inequality that has arisen in U.S. society, which is disproportionately weighted toward inherited wealth and CEO mega-salaries, and that while some do get vastly higher incomes by the “luck” of having been born with silver spoons in their mouths, they can hardly be said to have “earned” them.

Increasing Inequality: A Law of Capitalism

Prior to the publication of Piketty’s book, Piketty and Saez used Internal Revenue Service data to track U.S. income inequality from 1913 to 2010. These data show that the rise in inequality, as measured by the share of income going to the top 1 percent of “tax units” (not exactly comparable to families or households), is much greater in the United States than in any other rich capitalist country, although the United Kingdom is not far behind. Income inequality in the United States has not been this high since the early Roaring Twenties depicted in F. Scott Fitzgerald’s The Great Gatsby. The richest 1 percent now takes home more than 20 percent of the nation’s entire income, up from about 9 percent in the 1970s. In addition, the top 1 percent of income recipients has seized most of the past few decades’ gains in income. Of the increase in total household income from 1977 to 2007, the richest 1 percent got almost 60 percent, and the richest 0.1 percent (the top one-thousandth—in 2010, those earning more than $1.5 million a year) garnered roughly half of that. By comparison, the poorest 90 percent saw their income grow by “less than 0.5 percent per year.”35

Expanding upon these earlier conclusions, Piketty in Capital in the Twenty-First Century elucidates four key findings. First, similar trends, though less marked than in the United States, are found in almost every part of the globe. Second, in the United States, a major factor in this trend is the rise of an elite of “super managers,” top officials of the largest corporations who take home enormous salaries and have so much power that they can literally set their own pay.36

Third, Piketty stresses that the richest 1 percent enjoyed similar distance from the rest of us throughout most of capitalism’s history. The only period in which the capital-income ratio becomes more equal and the dominance of inherited wealth diminishes in the rich countries as a whole is that between the beginning of the First World War in 1914 and the mid-1970s. This was a truly exceptional time, marked by “shocks” to the system: two catastrophic wars, the Bolshevik Revolution, the Great Depression, and the rise of the social welfare state after the Second World War. Heavy taxes were placed on top incomes, fortunes were lost in both the wars and the Depression, and working-class movements arose and forced higher wages, benefits, and social insurance from employers and governments—both of which were willing to make concessions if only to avoid a deeper radicalization of the working class. However, once elites regained their bearings, capitalism began to return to the norm of growing inequality.37

Fourth, during the sixty-odd years of expanding equality, a substantial “middle” class arose—professionals, civil servants, and unionized workers—which, while not wealthy, had enough income to live well above subsistence and to accumulate a certain amount of wealth, mainly in the form of housing. The rise of this intermediate “petty patrimonial” propertied class of home owners, he argues, has had profound effects on the political trajectory of the rich nations, because there is now a sizeable portion of society outside the upper class intent on maintaining the value of their wealth and increasing it if possible.38

Most individuals earn income by working. However, very substantial incomes derive from ownership of wealth. What is more, certain types of wealth, such as stocks, bonds, and other financial instruments, represent control over the commanding heights of the economy and government. If these are divided in an unequal manner, then so is the power that flows from their ownership. The data show with great clarity that the distribution of wealth is extraordinarily unequal and likely to become more so. Edward Wolff has pioneered the study of wealth data in the United States. In his most recent paper, he finds that the average (mean) net worth of the wealthiest 1 percent in 2010 was $16.4 million. By contrast the average for the least wealthy 40 percent was $–10,600 (that is, it was negative!).39 For various asset classes, the share owned by the top 1 percent is even more astonishing:

Asset Class
Share of Top 1% in 2010
Stocks & Mutual Funds
Financial Securities
Business Equity
Non-home Real Estate

Source: Edward N. Wolff, “The Asset Price Meltdown and the Wealth of the Middle Class,” NBER Working Paper Series, Working Paper 18559, 2012, http:/, 57, Table 9.

Indeed, it is in wealth statistics that the real social divide stands out. Thus, as Piketty notes, the Federal Reserve Board in recent estimates, covering the years 2010–2011, indicated that the top 10 percent of wealth holders in the United States own 72 percent of the country’s wealth, while the bottom half own only 2 percent.40 Meanwhile, there is much inequality even within the 1 percent. Sylvia Allegretto of the Economic Policy Institute tells us that in 2009, the mean net worth of the infamous “Forbes 400” (the four hundred wealthiest persons in the United States) was $3.2 billion; but the top wealth holder had a net worth fifteen times greater than the mean for the Forbes 400 as a whole, an increase from 8.6 times larger in 1982.41

Piketty has a great deal to say about wealth, and his data are global in scope. He is interested mainly in the capital-income (wealth-income) ratio. As noted above, he uses capital and wealth interchangeably, which has led to deserved criticism by heterodox economists. His book is about the distribution of societal output and the wealth of everyone, but especially those who own the nonhuman means of production used to produce this output. The title of the book suggests a connection to the most famous book about capital, Marx’s Capital. However, Marx’s conception of capital and Piketty’s conception could not be more unalike. Piketty has no notion of capital as an exploitative social relationship. Instead, for him capital has an existence simply as private wealth (he does write about public capital, but this is an insignificant component of total social wealth). By, in effect, objectifying capital, considering it apart from the social relationship embedded within it, he marks himself well within the economic mainstream.

Wealth, in his view, can generate income whether it is in the form of shares of stock in the largest corporations, a small apartment building, or a government bond. And wealth of any kind can provide enormous benefits to its owners.

Piketty thinks about wealth in terms of the number of years’ worth of income it represents. If for example, you have wealth equal to $100,000 and your annual income is $25,000, then your wealth equals four years of income. Your capital-income (or wealth-income) ratio is four. He does this for countries, using the data that he and his associates have painstakingly accumulated over many years of examining tax and various other public records. He looks at short-term fluctuations in the capital-income ratio (which he designates as β) and notes that these are considerable. For example, the boom in Japanese real estate and stock prices in the 1980s caused the ratio to rise, and the collapse of these bubbles made it fall precipitously.

However, what he is really interested in is the long-run trend in the ratio. He shows that throughout the eighteenth and nineteenth centuries, and right up until the First World War, wealth in most rich nations equaled six to seven years of national income. In the United States it was the equivalent of only about four to five years of income, for reasons that we will look at shortly. Then, over the next thirty years, the shocks of two world wars and the Great Depression caused a marked decline in the wealth-income multiple, to about two to four years.42 The causes were the destruction of physical capital, the loss of foreign holdings, and heavy taxes on the rich. In some nations, notably in Europe, much private enterprise was nationalized after the Second World War and progressive taxation funded social welfare programs, and these factors helped keep the wealth-income ratio low. However, beginning in the mid–1970s, capital made a remarkable comeback, and the ratio began to climb, and is now approaching the level that existed at the start of the First World War. Public capital has been privatized and political regimes throughout the world have been very well disposed toward the interests of wealth-holders.43

If we abstract from the special periods of wars, depression, and the social welfare state, what explains long-term trends in the capital-income ratio? Piketty outlines in Chapter 5 (“The Capital/Income Ratio Over the Long Run”) what he calls a “law of capitalism,” namely that over the long run, the capital-income ratio tends toward the quotient of the rate of saving and the rate of growth of the economy: β = s / g. As he explains in the book (and more clearly in a technical appendix to the book available online), this formula is the “steady-state” condition for a simple neoclassical growth model, such as the one developed by economist Robert Solow.44 It is significant that he chose a neoclassical growth model, one that has embedded in it very definite and not universally accepted assumptions about how the macroeconomy works, and one which assumes, for example, that there are such things as the marginal productivities of labor and of capital, and that capital and labor are reasonable substitutes for each other.45

Still, Piketty’s “law” has a certain intuitive appeal. The “weight” of “capital,” aka wealth (in terms, say, of its owners’ potential power), will be greater, other things equal, the lower an economy’s growth rate and the higher its rate of saving. Piketty finds that in the rich capitalist countries, the trend has been, and will most likely continue to be, toward relatively low growth rates and high savings rates (or, in Marxian terms, a high rate of surplus generation). This tells us that the capital-income (i.e., wealth-income) ratio will continue to rise, perhaps to levels never before seen. Low growth rates, he contends, will be the consequence mainly of low population growth rates, accentuated by low rates of technological change.46

As noted, Piketty takes into account the “catching up” achieved by countries such as China and India. He makes the point that nations with rapidly growing populations and high economic growth will be ones in which wealth accumulated in the past will not have as great an impact on how those societies operate as those in which these two types of growth are low.47 In the United States, for example, immigrants have arrived in very large numbers without much wealth, and they have had to rely upon current labor and income generation to accumulate capital. In dynamic economies, there is a churning within the wealth and income distributions, meaning that the capital-income ratio will be lower than in those where this is not true.

Piketty uses his formula β = s / g, along with an equation that defines capital’s share of national income, α = (where r = the rate of return on capital and, as we have seen, β = the capital-income ratio) to show what will happen to the share of capital over time. A simple substitution yields α = r (s / g). From this, he derives his famous inequality: r > g.48 If the rate of return on capital r is greater than the growth rate of the economy g, then capital’s share of income will rise. Piketty shows that over very long periods of time, r has in fact been greater than g; in fact, this is the normal state of affairs in capitalist economies. Only during the long crisis, brought on by war and depression and the aftermath when social welfare policies helped keep r low and g high, was this not the case. And even as the capital-income ratio has risen, the fact that economies have become more capital intensive has not exerted enough downward pressure on r to push capital’s income share lower. Nor will increasingly “perfect” capital markets, brought on by rapid globalization, force r lower; in fact, the growing sophistication of financial instruments and money managers, along with the desire of poorer nations to attract capital, will keep r high. If, as Piketty thinks likely, g grows very slowly in the future, we are in for a steady rise in capital’s share of income and a steady fall in labor’s share. Increasing polarization of society, in terms of the two main social actors, workers and owners of capital, is a very likely prospect.

To make matters worse, those with the largest amounts of capital (wealth) almost always get a higher rate of return on their wealth than do those with lesser amounts. Piketty gives a telling example of this by looking at the returns garnered by the endowments of U.S. colleges and universities. He finds that there is a direct and significant correlation between the size of the endowment and the rate of return on it. Between 1980 and 2010, institutions with endowments of less than $100 million received a return of 6.2 percent, while those with riches of $1 billion and over got 8.8 percent. At the top of the heap were Harvard, Princeton, and Yale, which “earned” an average return of 10.2 percent.49 Needless to say, when those already extraordinarily rich can obtain a higher return on their money than everyone else, their separation from the rest becomes that much greater.

The research of Piketty, his associates, Wolff, and many others tells us without a doubt that income and wealth have become grotesquely unequal and are on a trajectory to become still more so. The implications of this are dire, exacerbating all manner of economic, social, environmental, and political problems. There is no way, for example, that it is possible now to say that we have anything even remotely resembling democracy in the United States, and for that matter, in any capitalist country. Rather plutocracy is now the dominant political form.

One thing we can say with certainty is that neoclassical economics does not have a viable theory of inequality, any more than it has a viable theory of unemployment. As we have emphasized throughout this article, received economics says that wages depend on worker productivity, meaning that as productivity rises, so will wages. If workers become more productive by, for example, investing in their “human capital” (getting more schooling, training, etc.), they will then add more to the employers’ revenues than existing wage rates add to costs. This increase in employer profits at current wages will supposedly cause employers to raise the demand for employees, pushing wages up .

Reality could not be more different than what neoclassical theory leads one to expect. In the United States, real weekly earnings for all workers have actually declined since the 1970s and are now more than 10 percent below their level of four decades ago. This reflects both the stagnation of wages and the growth of part-time employment.50 Even when considering real median family income that includes many two-earner households there has been a decrease of around 9 percent from 1999 to 2012.51

Indeed, the data show that while output per worker has risen considerably over the past forty years, wages have fallen far behind. Perhaps the most startling comparison is between wage and productivity gains. In a recent paper, Economic Policy Institute economist Elise Gould found that “Between 1979 and 2013, productivity grew 64.9 percent, while hourly compensation of production and nonsupervisory workers, who comprise over 80 percent of the private-sector workforce, grew just 8.0 percent. Productivity thus grew eight times faster than typical worker compensation.” This means that the gains from productivity went to capital and workers at the top of the wage scale. She also discovered that:

Between 1979 and 2007, more than 90 percent of American households saw their incomes grow more slowly than average income growth (which was pulled up by extraordinarily fast growth at the top).

By 2007, the growing wedge between economy-wide average income growth and income growth of the broad middle class (households between the 20th and 80th percentiles [where most production and nonsupervisory workers reside]) reduced middle-class incomes by nearly $18,000 annually. In other words, if inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.52

A 2013 report by the Federal Reserve Board of San Francisco showed that once the top 1 percent of wage and salary recipients are removed from the total, the labor share of overall national income plummets: “by 2010 the labor share of [income of] the bottom 99 percent of taxpayers had fallen to approximately 50 percent from just above 60 percent prior to the 1980s.”53 Neoclassical economics is completely incapable of explaining this sharp decline in the workers’ share of national income.

The Monopoly of Power

Piketty’s work raises the question of growing class inequality in a statistical sense without explicitly addressing either the roots of this or the question of growing class power. His work thus remains within the bounds of establishment discourse—though serving to shake up the ruling ideology with its revelations. He uses the term “upper class” for the top 10 percent of income recipients and the term “dominant class” for the top 1 percent (all those in the upper class who are not in the dominant class are referred to as the “well-to-do”). In the United States, with a total population of some 320 million—of which 260 million are adults—the top 1 percent is of considerable size: 2.6 million adults. The dominant class tends to congregate in a relatively few cities, to be concentrated in given neighborhoods, and to exercise “a prominent place in the social landscape.”54

A dramatic illustration of what Piketty means when he refers to the divergence in the social (and cultural) landscape appeared in the New York Times in August 2014, under the title “In One America, Guns and Diet. In the Other, Cameras and ‘Zoolander’: Inequality and Web Search Trends.” Those geographical locations described as “harder places to live,” associated with the lowest levels of educational attainment, household income, and life expectancy and the highest levels of unemployment, disability, and obesity were strongly correlated with Web searches for things like “free diabetic,” “antichrist,” “.38 revolver,” “ways to lower blood pressure,” “SSI disability,” and “social security checks.” While areas described as “easier places to live,” associated with the well-to-do or with the 1% itself, were strongly correlated with Internet searchers for “Canon Elph,” “baby jogger,” “baby massage,” “Machu Picchu” (and other exotic locales), “ipad applications,” “new nano,” and “dollar conversion.” We are increasingly living in a world so polarized that much of the 99% have nothing in common with the 1%.55

Piketty recognizes that the “dominant class” in the sense of the 1 percent is not really dominant; it is only when you get to the top 0.1 percent, which owns about half of what the 1 percent owns, that you begin to get at the really dominant income/wealth of the society. Thus he notes that Occupy Wall Street was not altogether wrong in contrasting the 1% to the 99% or in declaring that “We are the 99 percent!” He compares this situation to that of the French Revolution arising from the revolt of the Third Estate.56

But how does this relate to issues of class struggle and class power? What are the consequences of these realities in terms of control of corporations, the economy, the state, the culture, and the media? Piketty, though making a few tantalizing allusions, tells us next to nothing about this. Although he does not entirely avoid terms such as “class struggle,” he has very little to say about it. In fact, the nature of his analysis, which concentrates on statistical inequality and the relation between the growth of wealth and the growth of income, is far removed from the direct consideration of capital versus labor. His is an argument primarily about fairness and not social struggle—or even economic crisis/stagnation.

Piketty’s failure to relate inequality to power is not, it should be stressed, a particular failure on his part, but rather a general fault of neoclassical economics, tied to its position of ideological hegemony. “The neglect of power in mainstream economics,” as the heterodox Austrian economist Kurt Rothschild wrote in 2002, “has its main rootsin deliberate strategies to remove power questions to a subordinate position for inner-theoretic reasons,” such as the search for mathematical models with a high degree of mathematical certainty. In this respect, the messy issues dealt with in such fields as sociology and political science (or for that matter political economy) are deliberately excluded, even at the expense of realism of analysis. Moreover, part of the attraction of such pure models and the state of mind that they generate is that they reflect “the ideological preference of powerful socio-economic groups for a neoclassical type of theory,” which justifies the status quo by excluding all questions of power. As Rothschild pointedly put it: “Extremely formulated one could say that societal power promotes the study of models of powerless societies.”57

It goes without saying that Piketty’s acceptability to neoclassical economics is dependent on his avoidance of the question of inequality and power. Hence the contrast between his Capital in the Twenty-First Century and Marx’s Capital, as we observed, could hardly be greater. Moreover, it is precisely because Piketty is discussing inequality divorced from power that his analysis is inevitably disjointed and cannot approach anything like a general theory. It is not the mere recognition of inequality in itself, but the wider perception of its promotion as part of a system of power that raises questions that are dangerous to the system. Hence, the real importance of Piketty’s analysis only comes out when the implications are taken beyond what he himself, as a representative of orthodox economics, is willing or even able to address: issues of class power and monopoly power, and how these relate to overaccumulation, stagnation, and financialization.

Piketty starts with the fact that some individuals and groups of individuals arranged into percentages of the population have more income or wealth than others. He does not explain the origins of this or why, but he makes it clear that it is not simply a product of individual skill or productivity, as neoclassical economics has traditionally argued. In reality the basis of a capitalist society is the private monopoly of the capitalist class over the means of production, whereby the great majority of the population is relegated to a position in which it has nothing to sell but its labor power, i.e., its capacity to work. This sets up an extremely uneven power relationship, allowing the owners of the means of production to appropriate the greater part of the surplus produced. Far from being a description of society that pertained only to the nineteenth century, this, as Piketty helps us to understand, is probably a better description of our society today than at nearly any previous time in history. It is not difficult to discern who these owners of the means of production are: they are not so much the top 1 percent, as the top 0.1 percent of society (or even higher) in terms of income and wealth. In the United States a mere four hundred people, the Forbes 400, own approximately as much wealth as the bottom half of the population, or something like 130 million adults.58

Due to their power to appropriate the society’s surplus, which takes the form of financial wealth, and has a rate of return that, as Piketty tells us, normally grows faster than the income of society as a whole, those in the dominant class become richer both absolutely and relatively, benefitting from the upward flow of value, which seldom trickles down. Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. From 1990 to 2002, for every added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (around 14,000 households in 2006) garnered an additional $18,000.59

Just as class power tends to concentrate, so does the power of the increasingly giant, oligopolistic firms which, in economic parlance, reap monopoly power, associated with barriers to entry into their industries and their ability to impose a greater price markup on prime production costs (primarily labor costs). The bigger firms, as Marx explained, tend to win out in the struggle over the smaller, while the modern credit system facilitates ever-larger mergers and takeovers, leading to the increased centralization of capital and a heightening of monopoly power.60 In 2008, the top 200 U.S. corporations accounted for 30 percent of all gross profits in the economy, up from around 21 percent in 1950. At the same time the revenues of top 500 global corporations were equal to about 40 percent of world income.61 Under these circumstances corporations, nationally and internationally, operate less as competitors than as—to borrow a term from the great conservative economist, Joseph Schumpeter—co-respecters.62 In some sectors, such as Internet Service Providers, and communications in general, we are seeing the reappearance of cartels—with the state, if anything, supporting such developments.63

Writing for the Wall Street Journal, Peter Thiel, co-founder of PayPal, declared that “Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits. Monopoly is the condition for every successful business.” Indeed, this might even stand as the credo of today’s generalized monopoly capital.64

The class power of capital in the widest sense—as powerfully argued by economist Eric Schutz in his 2011 work, Inequality and Power: The Economics of Class—extends to all spheres of society and penetrates increasingly into the state and to civil society in general (including the media, education, all forms of entertainment).65 As Kalecki long ago pointed out, a labor party such as exists in many countries in Europe, even where it gains control of the government through popular election, is hardly likely to be in control of the state as a whole, much less the economy, finance, or media. It therefore remains subservient to those who retain the class power of capital, which controls production and through it the main organs of society.66

For Piketty himself there is no organic relation between the two main tendencies that he draws in Capital in the Twenty-First Century—the tendency for the rate of return on wealth to exceed the growth of income and the tendency toward slow growth. Nor is his analysis historical in a meaningful sense, which requires scrutiny of the changing nature of social-class relations. Increasing income and wealth inequality are not developments that he relates to mature capitalism and monopoly capital, but are simply treated as endemic to the system during most of its history.

In reality, however, capitalism matures as a system over the course of its history, as do its contradictions, which are an inescapable part of its being. Today the existence of inordinate class power coupled with ever-greater monopoly power (at both the national and global levels) are producing a more acute condition of overaccumulation at the top of society. This in turn weakens the inducement to invest, leading to a powerful tendency toward a slowdown in growth or stagnation. Under these conditions, as the system continues to seek outlets for its enormous actual and potential economic surplus, while at the same time enhancing the wealth of those at the top, it inevitably resorts to financial speculation. The result is what Summers has recently called “over-financialization,” associated with massive increases in total (primarily private) debt in relation to national income, leading to financial bubbles, one after the other, which inevitably burst.67 This dialectical relation between stagnation and financialization constitutes the primary reality defining today’s monopoly-finance capital.68

Here it is useful to recall that for Keynes the danger was not only one of secular stagnation but also the domination of the rentier. He thus called for the “euthanasia of the rentier, and consequently the euthanasia of the cumulative oppressive power of the capitalist to exploit the [artificial] scarcity-value of capital.”69 In today’s financialized capitalism, we face, as Piketty recognizes, what Keynes most feared: the triumph of the rentier.70 The “euthanasia of the cumulative oppressive power of the capitalist” is needed now more than ever. This cannot be accomplished by minor reforms, however—hence Piketty’s advocacy of what he calls a “useful utopia,” a massive tax on wealth.71

Yet, today we live in a world of global monopoly-finance capital: a system of class power, monopoly power, imperial power, and financial power. Just how unrealistic Piketty’s “useful utopia” is as a mere reform program becomes immediately apparent once we look at the class dynamics of society. It is even more apparent when we move beyond a national to an international outlook. Piketty’s data and analysis do not take him far beyond the rich countries, and hence he does not look at inequality in global North-South terms, much less recognize the reality of imperialism or a world ruled by global monopolies (multinational corporations). He therefore takes no account of the imperial transfer of value as a historical phenomenon or the consequences of this for the concentration of world capital. As Indian economist Prabhat Patnaik states in “Capitalism, Inequality, and Globalization”:

It is significant that imperialism plays no role in Piketty’s analysis, neither in explaining the growth of wealth and wealth inequalities, nor even in the analysis of past growth, or prognostication of future growth. On the contrary the book is informed by a perception according to which capitalist growth in one regionis never at the expense of the people of another region, and tends to spread from one region to another, bringing about a general improvement in the human condition. What this perception misses is that capitalist growth in the metropolis was associated not just with the perpetuation of the pre-existing state of affairs in the periphery but with a very specific form of development, which we call “underdevelopment,” which squeezed the people in an entirely new way. For instance, over the period spanning the last quarter of the nineteenth century and the first two of the twentieth (until independence), not only was there a decline in per capita real income in “British India,” but also the death of millions of people owing to famines.72

In such an imperial system, carrying down to our day, a tax on capital—Piketty’s one solution—would, as he realizes, have to be international in scope in order meaningfully to address issues of inequality and power. This then takes us inexorably to the question of a revolutionary reconstitution of society on a global level. Indeed, there is no real solution that does not require the worldwide transcendence of capital as a mode of production.

None of this of course is to deny that Piketty’s wealth tax would be a good, strategic place to start in promoting a new radical social project, since it challenges “the divine right of capital.”73 But this would require in turn a reorganization and revitalization of the class/social struggle, and in every corner of the globe. The goal must be a truly “utopian” struggle for a society of all; one that is of, by, and for the people—the 99%. Moreover, the 99% here must be understood as representing the dispossessed of the entire world, while recognizing their varying conditions. Today “members of the top percentile [among global wealth holders] are almost 2000 times richer” than the bottom 50 percent of world population.74 Issues of inequality must be seen as ubiquitous in today’s capitalism, occurring at every level, the product of imperialism as well as class, race, and gender—none of which are addressed directly in Piketty’s analysis.

Yet, despite the numerous gaps in Piketty’s argument from the standpoint of existing power relations, Capital in the Twenty-First Century embodies positive messages for social struggle in our time, which it would be a grave mistake to overlook. Significant in this respect is that he chose as the epigraph of his book a line from the Declaration of the Rights of Man and Citizen from the French Revolution: “Social Distinctions can be based only on common utility.”75 One could hardly pick a statement more opposed to the system in which we live, which seeks not the common but the individual utility. Indeed, Piketty’s saving grace, we believe, is that he cares for “the least well off,” beyond his own class. Although a social-democratic supporter of capitalism, he is also in many ways a critic of what he refers to as “the globalized patrimonial capitalism of the twenty-first century,” calling for its radical “regulation.”76 Coming from a neoclassical economist, this is little short of a revolutionary departure.

  • This is evident in recent mainstream discussions of what is called “secular” or long-term stagnation. For an analysis of this and recent trends see Fred Magdoff and John Bellamy Foster, “Stagnation and Financialization,” Monthly Review 66, no. 1 (May 2014): 1–24.
  • Michael Yates, “The Great Inequality,” Monthly Review 63, no. 10 (March 2012): 1–18; Thomas Piketty, Capital in the Twenty-First Century (Cambridge: Harvard University Press, 2014).
  • Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review 45, no. 1 (1955): 1–28.
  • See John Bellamy Foster and Robert W. McChesney, The Endless Crisis (New York: Monthly Review Press, 2012), 1–21.
  • There has been no trend showing that the growing income and wealth gap has been accompanied by similarly growing education and skills gap. Neoclassical theory tells us that rising income and wealth inequality must be caused by such an increasing differential in schooling and skills. That is, those with relatively low incomes and wealth must be falling more and more behind those with relatively high incomes and wealth in terms of their skill and schooling levels. See Lawrence Mishel, “Education is Not the Cure for High Unemployment or for Income Inequality,” January 12, 2011,
  • Piketty, Capital in the Twenty-First Century, 20–22.
  • An oversupply of aggregate output would lead to falling wages, interest rates and prices, which in turn would give rise to higher employment, capital spending, and increasing consumer demand. On the significance of Keynes’s critique in this area see Paul M. Sweezy, Modern Capitalism and Other Essays (New York: Monthly Review Press, 1972), 79–91.
  • John Maynard Keynes, The General Theory of Employment, Interest, and Money (London: Macmillan, 1936), 289.
  • John Kenneth Galbraith, The Age of Uncertainty (Boston: Houghton Mifflin, 1977), 216.
  • Keynes, The General Theory, 307–8; Sweezy, Modern Capitalism and Other Essays, 80.
  • Keynes, General Theory, 307; Alvin H. Hansen, Full Recovery or Stagnation (New York: W.W. Norton, 1938), 303–18; Sweezy, Modern Capitalism, 79–83.
  • Michał Kalecki, Theory of Economic Dynamics (London: George Allen and Unwin, 1954); Josef Steindl, Maturity and Stagnation in American Capitalism (New York: Monthly Review Press, 1976); Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff and Paul M. Sweezy, Stagnation and the Financial Explosion (New York: Monthly Review Press, 1987). It is worth noting that Hansen took Steindl’s theory seriously, modifying some of his own assumptions. See Alvin H. Hansen, “The Stagnation Thesis,” in American Economic Association, ed., Readings in Fiscal Policy (Homewood, IL: Richard D. Irwin, Inc., 1955), 540–57.
  • Lawrence Summers, “Speech to the IMF Fourteenth Annual Research Conference, November 8, 2013,
  • Magdoff and Foster, “Stagnation and Financialization.”
  • Feldstein quoted in “Grounded by an Income Gap,” New York Times, December 15, 2001,
  • Lucas quoted in Paul Krugman, “Why We’re in a New Gilded Age,” New York Review of Books, May 8, 2014,
  • The example outlined in this and the preceding paragraph are based upon the critique of neoclassical wage theory presented in Eric A. Schutz, Inequality and Power: The Economics of Class (New York: Routledge, 2011). One of the authors presented this example in a slightly different way, in Yates, “The Great Inequality.”
  • A search in the New York Times archives show that between January 1, 2007 and January 1, 2014, there are 4,260 articles listed under the term “income inequality.” Between January 1, 1977 and January 1, 2007, there are only 2,660 articles listed under this term.
  • Edward N. Wolff, Top Heavy (New York: New Press, 2002); Economic Policy Institute, State of Working America,; Branko Milanovic, The Haves and Have-Nots (New York: Basic Books, 2011); James K. Galbraith, Created Unequal (New York: Free Press, 1998), Inequality and Instability (Oxford: Oxford University Press, 2012).
  • See “The World Top Incomes Database,”
  • The Wall Street Journal used Amazon’s “popular highlights” page associated with its Kindle e-book device to get an idea of how much books were being read. For every book, the top five most highlighted passages by Kindle readers are listed. All five pages most highlighted for Capital in the Twenty-First Century, which at that time had been out for three months to wide acclaim, were in the first twenty-six pages, suggesting that the beginning of the book (2.4 percent of the whole) has had the most impact on Kindle readers, and are the most closely read. Although one cannot draw much in the way of conclusions from this, it is undoubtedly here, in the beginning, that Piketty puts his argument and conclusions most clearly and forcefully, minus much of the detailed elaboration that follows. “The Summer’s Most Unread Book Is,” Wall Street Journal, July 3, 2014,
  • Karl Marx, Capital, vol. 1 (London: Penguin, 1976), 97. Two other what we might call “empirical economists” are David Card and Alan Krueger, whose book, Myth and Measurement: The New Economics of the Minimum Wage (Princeton, NJ: Princeton University Press, 1997), demolished the neoclassical “law” that raising the minimum wage leads inevitably to higher unemployment. Their book led to such a severe backlash from their neoclassical brethren that they stopped doing minimum wage research. Piketty’s findings have also been attacked, but he has the great advantage of teaching in France, where economists are not tied as tightly into the establishment—and required to toe the line—as they are in the United States, and where there is still a strong sense of social justice within the part of the working class. He says, “Hence they [economists] must set aside their contempt for other disciplines and their absurd claim to greater scientific objectivity, despite the fact that they know almost nothing about anything”; 32. It is difficult to imagine an orthodox economist in the United States saying this.
  • Piketty, Capital in the Twenty-First Century, 13–16, 20–22.
  • Piketty, Capital in the Twenty-First Century, 25–27.
  • Piketty, Capital in the Twenty-First Century, 72–74, 93–96, 353–58. It should be noted that Piketty likes to work with big data sets encompassing large parts of the world, and often bases his assumptions on data stretching back to the eighteenth century or earlier. Although he sees the Industrial Revolution as a turning point, he often skates over true historical analysis, often arguing as if all the societies covered by his data on all continents were essentially the same, and capitalist in structure from approximately 1700 on. Such crude practices naturally undermine his conclusions on long-term economic growth.
  • Piketty, Capital in the Twenty-First Century, 440.
  • Joseph Stiglitz, The Price of Inequality (New York: W.W. Norton, 2012), 30.
  • Piketty sometimes seems to endorse marginal productivity arguments in his book, as, for example, when he writes about the marginal productivity of capital in Chapter 6 and of labor in Chapter 9. In the latter case, he argues that over the long run education plays a very important role in determining individual worker productivity and income. However, he places so many qualifications on the marginal productivity theory that it is difficult to believe that he thinks it has much merit.
  • For Piketty “capital” is simply wealth, whether land, money, financial assets, or jewelry. Piketty, Capital in the Twenty-First Century, 45–50; James K. Galbraith, “Kapital for the Twenty-First Century?,” Dissent, Spring 2014,
  • The consequences of effacing the concept of capital with the concept of wealth are profound, but space does not allow their detailed treatment here. It took Marx three whole volumes to define the meaning of “capital” and if time had allowed he would undoubtedly have provided even more volumes. Suffice it to say that not only does Piketty eschew a social concept of capital, as in Marx’s Capital, but by confusing capital with wealth he also conflates capital as invested surplus (that is, capital accumulation or investment in new productive capacity as it is usually understood in economics) with financial speculation or what Marx called “fictitious capital.” Hence, while Piketty provides genuine insights by focusing on wealth versus income, his approach to capital as wealth is in many ways objectionable even in terms of standard economics.
  • Piketty indicates in a number of places his understandable difficulty in reading Marx. This is a problem that Sweezy used to argue faced any establishment economist, once inculcated into neoclassical marginal productivity theory, since the Marxian perspective requires a fundamentally different outlook and set of analytical tools. It is therefore not surprising that Piketty demonstrates at times penetrating insights with respect to Marx, such as his comments on “the principle of infinite accumulation,” coupled with such elementary errors as the notion that Marx failed to perceive the growth of productivity under capitalism, or that he saw the economy heading toward zero productivity growth. All of this encourages him to discount Marx’s economic vision as simply “apocalyptic.” Such errors seem to be the result of trying to model Marx in neoclassical terms. Although he has a lot to say about Marx, Piketty clearly has not gotten very far into Marx’s system. See Paul M. Sweezy, “Interview,” Monthly Review 38, no. 11 (April 1987), 3; Piketty, Capital in the Twenty-First Century, 7–11, 27, 227–30, 565; Thomas Piketty, “Interview,” New Republic, May 5, 2014,
  • Piketty, Capital in the Twenty-First Century, 27, 573.
  • Piketty, Capital in the Twenty-First Century, 21, 252–55, 515–18.
  • Martin Feldstein, “Piketty’s Numbers Don’t Add Up,” Wall Street Journal, May 14, 2014,
  • Piketty, Capital in the Twenty-First Century, 292–97, see especially figures 8.5 and 8.6. The original articles and data backing up the book are to be found in the Top Incomes Database,, and in the online “Technical Appendix of the book, Capital in the Twenty-First Century,”
  • Piketty, Capital in the Twenty-First Century, 315–21.
  • Piketty, Capital in the Twenty-First Century, 274–76.
  • Piketty, Capital in the Twenty-First Century, 260–62, 418–21.
  • Edward N. Wolff, “The Asset Price Meltdown and the Wealth of the Middle Class,” NBER Working Paper No. 18559, November 2012, Table 4,
  • Piketty, Capital in the Twenty-First Century, 257.
  • Sylvia A. Allegretto, “The State of Working America’s Wealth, 2011: Through Volatility and Turmoil, the Gap Widens,” Economic Policy Institute, Briefing Paper #292, March 24, 2011, Figure D,
  • Piketty, Capital in the Twenty-First Century, 164–71.
  • Piketty, Capital in the Twenty-First Century, 170–72.
  • Piketty, Capital in the Twenty-First Century, 166–70, 231, “Technical Appendix of the book, Capital in the Twenty-First Century.”
  • For a critique of Solow’s neoclassical growth model and a comparison with the earlier Keynesian growth models of Roy Harrod and Evsey Domar, see E.K. Hunt and Mark Lautzenheiser, History of Economic Thought: A Critical Perspective (Armonk, NY: M.E. Sharpe, 2011), 450–57. For a critique of Piketty’s analysis itself in this respect see Prabhat Patnaik, “Capitalism, Inequality and Globalization: Thomas Piketty’s ‘Capital in the Twenty-First Century,’” International Development Economic Associates (IDEAs), July 18, 2014,
  • Although Piketty does not explain the long-term slow growth (below 1.5 percent per capita) that he says is closer to the norm for a capitalist economy, he does point to demographic factors and to technological innovation as guiding factors—pointing to Robert Gordon’s notion of declining innovation in order partly to explain the present economic slowdown. See Piketty, Capital in the Twenty-First Century, 94–95.
  • Piketty, Capital in the Twenty-First Century, 83–87.
  • Piketty, Capital in the Twenty-First Century, 52–54, 166–67.
  • Piketty, Capital in the Twenty-First Century, 447–52, see especially Table 12.2.
  • Economic Report of the President, 2014, Table B-15.
  • Calculated from the St. Louis FRED database, Real Median Household Income in the United States (MEHOINUSA672N). See also Fred Magdoff and John Bellamy Foster, “The Plight of the U.S Working Class,” Monthly Review 65, no. 8 (January 2014): 15–20.
  • Elise Gould, “Why America’s Workers Need Faster Wage Growth—And What We Can Do About It,” EPI Briefing Paper #382, August 27, 2014,
  • Michael W.L. Elsby, Bart Hobijn, and Aysegul Sahin, “The Decline of the U.S. Labor Share,” Federal Reserve Board of San Francisco, Working Paper, 2013-27, 2013,
  • Piketty, Capital in the Twenty-First Century, 252–55.
  • In One America, Guns and Diet. In the Other, Cameras and ‘Zoolander’: Inequality and Web Search Trends,” New York Times, August 18, 2014,
  • Piketty, Capital in the Twenty-First Century, 254.
  • Kurt W. Rothschild, “The Absence of Power in Contemporary Economic Theory,” Journal of Socio-Economics 31 (2002): 437–40.
  • Arthur B. Kennickell, “Ponds and Streams: Wealth and Income in the U.S. 1989 to 2007,” Federal Reserve Board Working Paper 2009–13, 55, 63,; Matthew Miller and Duncan Greeenberg, ed., “The Richest People in America” (2009), Forbes,
  • Correspondents of the New York Times, Class Matters (New York: New York Times Books, 2005), 186.
  • Marx, Capital, vol. 1, 777–78.
  • For data and analysis see Foster and McChesney, The Endless Crisis, 67–77.
  • Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York: Harper and Row, 1942), 90. Schumpeter referred here to such firms as “corespective.”
  • Robert W. McChesney, Digital Disconnect (New York: New Press, 2013), 113–20, 138–40. It should be noted that in emphasizing the role of monopoly capital in contemporary capitalism, and Piketty’s failure to incorporate this into his analysis, we are not thereby adopting a position like Stiglitz, who in his criticism of Piketty says it is not capitalism that is the problem but imperfect competition. No argument could be more ahistorical or absurd: a product of abstracted compartmentalization of neoclassical theory that thinks that capital and power can be separated. Piketty himself is free of this kind of illogic. See Joseph Stiglitz, “Phony Capitalism,” Harpers, September 2014, 14–16.
  • Peter Thiel, “Competition is for Losers,” Wall Street Journal, September 12, 2014, On generalized monopoly capital see Samir Amin, The Implosion of Contemporary Capitalism (New York: Monthly Review Press, 2013).
  • Eric A. Schutz, Inequality and Power (New York: Routledge, 2011).
  • Michał Kalecki, Selected Essays on Economic Planning (Cambridge: Cambridge University Press, 1986), 19–24.
  • Lawrence H. Summers, “The Inequality Puzzle,” Democracy 33 (Summer 2014), On the sources of financialization, see John Bellamy Foster and Fred Magdoff, The Great Financial Crisis (New York: Monthly Review Press, 2009), Fred Magdoff and Michael D. Yates, The ABCs of the Economic Crisis (New York: Monthly Review Press, 2009), and Costas Lapavitsas, Profiting Without Production (London: Verso, 2013).
  • Foster and Magdoff, The Great Financial Crisis, 63–76; Foster and McChesney, The Endless Crisis, 49–63.
  • Keynes, The General Theory, 376.
  • Piketty, Capital in the Twenty-First Century, 422–24.
  • Piketty, Capital in the Twenty-First Century, 515.
  • Patnaik, “Capitalism, Inequality and Globalization,” 5. In his discussion of forces leading to less inequality Piketty, Capital in the Twenty-First Century, 21, stresses the dissemination of “knowledge and skills.” He says this applies especially to the convergence of incomes between nations. However, even supposing that per capita incomes across nations are becoming more equal, this says nothing about either the transfer of incomes from poor nations to rich ones or the convergence of incomes within any particular country. Incomes have been becoming more unequal in China over the past few decades, but there has been a convergence between per capita income in China and per capita income in the rich countries. He appears to take the per capita income convergence as unalloyed good, but the issue is a great deal more complicated, as one would expect a sophisticated analyst of inequality like Piketty to recognize.
  • Marjorie Kelly, The Divine Right of Capital (San Francisco: Berrett-Koehler, 2003).
  • James B. Davies, Susanna Sandström, Anthony Shorrocks, and Edward N. Wolff, “The World Distribution of Household Wealth,” in James B. Davies, ed., Personal Wealth from a Global Perspective (Oxford: Oxford University Press, 2008), 402.
  • Piketty, Capital in the Twenty-First Century, 1, 479–480. A society in which this is true could not be a capitalist society. In a gathering and hunting society, a superior hunter may have social distinction, but he will not get a larger share of food than anyone else. His social distinction is therefore based on his serving the common good, by increasing the group’s food supply. Nothing comparable exists in capitalism, except in the ideological constructs of its apologists, especially neoclassical economists. Piketty’s notion of how modern capitalist societies function can at times appear painfully naïve. His wealth tax, he says, must be democratically debated, and the data he and his colleagues have amassed will make such debate possible. Yet, the very increase in the social “weight” of those at the top of the wealth distribution corresponds with so much political “weight” that it is reasonable to ask just how democratic debate, much less decision-making, is possible. His support for serious, even radical regulation of “global patrimonial capitalism” is commendable, but his faith in the capitalist version of democracy is not.
  • Piketty, Capital in the Twenty-First Century, 571–77.