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The Moral Dimensions of Capital: Stephen B. Young on Piketty’s Misunderstanding of Capital


Editor’s Note: Today’s entry in our forum on Thomas Piketty’s Capital in the Twenty-First Century is by Stephen B. Young, the executive director of the Caux Round Table. This essay originally appeared in the August 2014 edition of Pegasus, the newsletter of the Caux Round Table. This is the fifth post in our forum, which kicked off with an introductory post, where you’ll find an index of all the posts in the forum.

Last year, French economist Thomas Piketty updated to great acclaim Karl Marx’s moral critique of private wealth accumulation. The ethical issue put by both writers before the leaders of modern civilization is inequality: differences in social power between the rich and the poor. They complain that modern economies systematically and consistently favor the rich over the poor in the allocation of income and the ownership of assets.

Since the publication of Marx’s Capital: A Critique of Political Economy in 1867, this critique has generally been understood—mistakenly, I believe—as narrowly focused on the capitalist system of production.

To be sure, Marx objected with passion and vitriol to the economic system in which he lived, which was early industrial capitalism, and drew attention to all its ethical shortcomings. Piketty, too, presents a critique of today’s global economic practices. So it is fair to conclude that both writers object to capitalism as an economic system.

But their critique applies to more than just capitalism. They indict wealth in general.

Wealth has been a universal expression of humanity’s needs and wants as to which the “memory of man runneth not to the contrary.” St Paul’s famous conclusion that “the love of money is the root of all evil” was written down in a pre-capitalist society.

Wealth has been with us for a long time; in Pharaonic Egypt, in Mayan city-states, in the Hanging Gardens of Babylon, and in the China of Qin Shi Huang. In all of these, there was not only wealth but also inequalities of wealth and income.

Capitalism, properly defined and understood, is not merely “wealthism,” but a special way to create new wealth through self-sustaining economic growth. It is a separately distinguishable system within the field of human economic practices designed to secure material well-being. Henry Sidgwick made this point in his 1883 treatise Principles of Political Economy.

There are other ways distinct from capitalism through which humanity has sought to meet its material needs and to fulfill its diverse wants, both tangible and intangible. There have been hunter/gatherers. There were collaborative farming practices. There is total state ownership as in Pol Pot’s Cambodia and Kim Jong-un’s North Korea. There were feudal aristocracies. There have been landlords and latifundia. There were guilds for artisans. There is mercantilism. There is crony capitalism.

But in all these systems there is wealth along with inequality in its distribution among people. There even was unequal distribution of goods among the graves of ancient peoples. Inequality is some universal function of the human enterprise, not just a sin of capitalism alone.

Unfortunately, in derogation of clear thinking, the word “capital” is used both to indicate wealth in general and, in more specific usage, to signify capitalism as a dynamic system of production and distribution.

Piketty, for example, uses the word “capital” in this mixed way, which conflates economic apples and oranges.

He studies the ratio of income derived from labor to that derived from non-labor. He divides national income into only two categories: labor and capital. He lumps together all forms of income which do not arise from work and calls the aggregate of these forms of income the income from “capital.” These forms of income from capital are:

rent, dividends, interest, profits, capital gains, royalties, and other income derived from the mere fact of owning capital in the form of land, real estate, financial instruments, industrial equipment, etc., again regardless of its precise legal classification. (Capital 18; all subsequent references will be to this work unless noted)

He speaks of capital as earning income from “rents, dividends, interest, royalties, profits, capital gains, etc.” (242). In other words, in his definition of capital he makes no necessary connection to its making investments only in productive enterprise. For Piketty, capital is wealth that can be used anywhere to earn a return. One such example is where he speaks of “a capital which produced an annual rent” (207).

He defines private capital as the difference between the assets and liabilities of private individuals: “whether public or private, capital is always defined as net wealth, that is the difference between the market value of what one owns (assets) and what one owes (liabilities, or debts)” (123).

In speaking of the “nature of wealth” he refers to capital as industrial and financial capital and urban real estate (164). He defines wealth as “land, buildings, machinery, firms, stocks, bonds, patents, livestock, gold, natural resources, etc.” (113). In short, he uses the term “capital” as synonymous with wealth.

He then does not subdivide capital into categories of analysis depending on how it is used. Is it, for example, transformed into productive assets or only invested in status goods or just kept as ready money? But he does speak of capital as “technology” (212), and again as a “factor of production” (213). He distinguishes between nominal assets and real assets (210).

He considers the assets to be counted as domestic capital as both the means of production—land, machines, patents, etc.—and financial instruments, such as stock, that have a market value (119). He comments, “It is always difficult to set a price on capital, in part because it is objectively complex to foresee the future demand for goods and services generated by a firm or by real estate and therefore to predict the future flows of profits, dividends, royalties, rents and so on that the assets in question will yield” (171). Here he mixes together financial assets of all sorts with the wealth that is focused narrowly on firms, which produce goods and services:

Yet what could be more natural to ask of a capital asset than it produce a reliable and steady income: that is in fact the goal of a “perfect” capital market as economists define it. (114)

The advantage of owning things is that one can continue to consume and accumulate without having to work, or at any rate continue to consume and accumulate more than one could produce on one’s own. (121)

This is a classic definition of living off rents rather than wages.

Thus he believes that “Capital is never quiet: it is always risk-oriented and entrepreneurial, at least at its inception, yet it always tends to transform itself into rents as it accumulates in large enough amounts – that is its vocation it logical destination” (116).

Piketty does not include human capital—the present net value of future earnings of a person—as part of the capital he seeks to measure. Thus, in a post-industrial economic order he distorts the relative weights of income from labor and from capital. Many who fall into his category of only earning wages are actually capital assets due to their skills, education, and management capabilities. Their income should be counted as income from capital. While this adds to the amount of capital in society, it broadens the base of those who should be considered as owners of wealth producing assets.

However Piketty feels that “Attributing a monetary value to the stock of human capital makes sense only in societies where it is actually possible to own other individuals fully and entirely – societies that at first sight have definitively ceased to exist” (163). Piketty thus posits as capital only assets that earn rents and can be priced and sold in a market to others who want to acquire the right to those future rents.

Inconsistently, Piketty considers that “knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries” (21). If this is so, why then not consider human capital germane to any analysis of inequalities over time of income and wealth?

Piketty rather simply follows Karl Marx in this definition of “capital” as wealth that can be easily monetized.

First Marx posits that “the wealth of those societies in which the capitalist mode of production prevails presents itself as “an immense accumulation of commodities” (Marx, Capital [Modern Library, 1906] 41). Thus Marx does not focus on the dynamic of capitalism – investment in the division of labor and self-perpetuating increases in productivity which lower costs to society and increase the supply of available goods and services.

Then he posits what he calls “use-value” or the utility of a thing to its owners. “Use-values” constitute the substance of all wealth (Marx 43).

Then Marx moves on to a third concept: “human labor in the abstract can be allocated in units of different magnitudes to commodities” (Marx 45, 46). The amount of this abstract labor constitutes value for Marx value. Marx does admit that there can be ownable items which have use-value but no “value” in his eyes because their utility to owners is not due to use of labor (Marx 47). Use-values arise from social convention; value comes from the material contribution of abstract human labor used to produce a commodity.

Then, commodities also have an exchange value by which one is exchanged for others. The exchange value to be received for a commodity is a rent payment (Marx 95). Commodities only realize their exchange value when their owners bring them forward for sale (Marx 96).

For Marx, the circulation of commodities with their associated values is the starting point of capital (Marx 163). Money is used to broker the exchange of commodities. Commodities can thus be replaced by money in the pocket. Money thus becomes the first form in which capital appears (Marx 163).

Thus for Karl Marx, capital is not specially connected to capitalism; it is generic to the circulation of money, or to wealth in general.

Capital for Marx “appears first as moneyed wealth, as the capital of the merchant and of the usurer” (Marx 163). “All new capital, to commence with, comes on the stage, that is, on the market, whether of commodities, labor or money … in the shape of money that by a definite process has to be transformed into capital” (Marx 164). Money that becomes capital is money that is laid out to make more money. When money is laid out and brings back an increase in money, the increase is “surplus value” (Marx 168).

The possessor of money becomes a capitalist. His person, or rather, his pocket, is the point from which the money starts and to which it returns.… as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that he functions as a capitalist, that is, as capital personified and endowed with consciousness and a will.… The restless, never-ending process of profit-making alone is what he aims at. This boundless greed after riches, the passionate chase after exchange-value is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never-ending augmentation of exchange-value, which the miser strives after by seeking to save his money from circulation, is attained by the more acute capitalist by constantly throwing it afresh into circulation. (Marx 170, 171)

Marx even conflates the unique aspect of true capitalism into money only by saying that “industrial capital too is money, that is changed into commodities, and by the sale of these commodities, is reconverted into money” (Marx 173).

Marx puts as a foundational dynamic of capitalism the extraction of money through base practices, oppression, commercial wars, and the evils of early colonialism—the African slave trade, child slavery in the mills of England, protection of domestic production, monopoly charters to companies, authorization of banks to discount bills and issue their own notes, etc. Marx’s theory of economics thus passes far beyond the confines of capitalism and embraces all use of money and so of wealth. Central to his ethical calculus are rent seeking and financial intermediation.

Marx seems to have missed what is special about capitalism, which is not its use of wealth, or private property, or market transactions, or prices, but rather its capacity for enhancing productive capacity. Unlike all the other modalities of economic endeavor, only capitalism can sustainably increase economic outcome and raise living standards.

Thus, the ethical issue of inequality has to be thought about differently in capitalist systems than in non-capitalist economies. With economic growth in true capitalism comes the opportunity to reduce inequalities, or at least, to improve the lives of those living at every level of distribution.

Piketty admits as much: “Concentration of wealth remains high, although it is noticeable less extreme than it was a century ago. The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a quarter and a third of total wealth and the wealthiest 10 percent now own only two-thirds of what there is to own rather than nine-tenths” (377).

Make no mistake: the growth of a true “patrimonial (or propertied) middle class” was the principal structural transformation of the distribution of wealth in the developed countries in the twentieth century…. The rise of a propertied middle class was accompanied by a very sharp decrease in the wealth share of the upper centile, which fell by more than half, going from more than 50 percent in Europe at the turn of the twentieth century to around 20-25 percent at the end of that century and the beginning of the next. (260, 262)

As noted, the very significant deconcentration of wealth (which has seen the top centile’s share decrease by nearly two-thirds in a century from 60 percent in 1910-1920 to just over 20 percent today) and the emergence of a patrimonial middle class imply that there are far fewer very large estates today than there were in the nineteenth century. (418)

The total amount of wealth and inheritances in France is about the same magnitude to GDP in both periods, but with a century of economic growth, that wealth was spread among many more families. He speculates that as a result of growth “there will probably be more small to medium rentiers and fewer extremely wealthy rentiers” (378): “We have gone from a society of rentiers to a society of managers” (278).

Piketty arranges his assumptions to overlook the dramatic contribution to human well-being of capitalism as a special sub-system of economic activity. He concludes, for example that from the 18th to the 21st century “the nature of capital” in Britain and France was totally transformed but “in the end its total amount relative to income scarcely changed at all” (140). With the achievements of capitalism in lowering costs and providing new technologies—cotton clothing, electricity, flush toilets and running hot water, automobiles, radios and cell phones—the lives of poor people in both countries were objectively much better off by the end of the 20th century than they had been in the 1750s.

Piketty admits that because of growth due to capitalism “today’s societies are very different from the societies of the past, when growth was close to zero or barely 0.1 % per year, as in the 18th century” (96). “A consumer basket initially filled mainly with foodstuffs [in the 18th century] gradually gave way to a much more diversified basket of goods, rich in manufactured products and services” (87); “Material conditions of life have clearly improved dramatically since the Industrial Revolution, allowing people around the world to eat better, dress better, travel, learn, obtain medical care and so on” (89).

In fact, the percentage of people living in extreme poverty has fallen from 36% of humanity in 1990 to 15% in 2011, the World Bank reported in October 2014. Those who earn under US$1.25 a day has fallen from 811 million persons in 1991 to 375 million in 2013, the International Labor Office reported earlier that year (pdf).

Piketty worries about low growth, which can be overcome through the application of capitalism: “Capital-dominated societies … can arise and subsist only in low-growth regimes” (84). The relative ratio of earning income from wealth vis-à-vis earning income from labor has grown in favor of wealth, and Piketty predicts will stay high or get higher in favor of wealth in the coming years of the 21st century, because of slower growth—especially population growth—and higher savings (173): “a country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital (relative to its income) which can in turn have a significant effect on the social structure and the distribution of wealth” (166); “The basic point is that small variations in the rate of growth can have very large effects on the capital/income ratio over the long run” (167).

Inequality of wealth varies with growth rate: with low growth, savings by those with money will lead to higher levels of capital in society; with higher growth, the ratio of wealth to income from labor will be lower (233, 228). Over 30 years, “a growth rate of 1.5% per year corresponds to cumulative growth of more than 35%. In practice, this implies major changes in lifestyle and employment” (95).

Piketty notes that whenever the rate of return on wealth is significantly and durably higher than the growth rate of the economy, it is all but inevitable that wealth will concentrate and inequality increases. (377). Thus, a high growth rate lowers the rise of inequality.

But without capitalism, there is limited growth, much stagnation in productivity, and even stasis in overall gross product. It is under such systems that inequalities of income and wealth are most pernicious and least subject to remediation.

Rent Seeking is not Capitalism

What Marx, followed by Piketty, most objected to was rent, not capitalism per se. They both actually wrongly indict capitalism for promoting rents and so allowing the wealthy to live off rents and grow richer in their wealth to earn even more rents in the future.

Going back to Adam Smith, income from rent has been distinguished from income from labor. Work received a wage. Rents were cash payments for the use of an asset such as land or a house. No work was needed to earn rental income.

Marx and Piketty both find income from work ethically just and admirable. In fact, Marx based his entire critique of the industrial economy on the assumption that it diverted too much of the value created by work away from the workers to those who had not so contributed to the good or service sold. This was the Marxist theory of surplus value, which was taken out of the flow of buying and selling by Marx’s “capitalists.”

Smith’s genius was to realize that in his time a new system of production was underway, something new in human history. This was the adoption of machines and technology along with management skills to production to permit the specialization of function and the division of labor. It was, he argued, only the division of labor that created increased productivity per worker and so more production for the economy, given the size of the work force. Thus the division of labor created the ”wealth of nations”:

Every increase or dimunition of capital, therefore, naturally tends to increase or diminish the real quantity of industry, the number of productive hands, and consequently … the real wealth and revenue of all … inhabitants. (Smith, Wealth of Nations)

Parsimony, by increasing the fund which is destined for the maintenance of productive hands, tends to increase the number of those hands whose labor adds to the value of the subject upon which it is bestowed. (Wealth of Nations)

The annual produce of the land and labor of any nation can be increased in its value by no other means but by increasing either the number of its productive laborers or the productive powers of those laborers who have before been employed. Productivity can never be increased but in consequence of an increase in capital or of the funds destined for maintaining workers and/or in consequence of either some addition and improvement to those machines and instruments which facilitate and abridge labor or of a more proper division and distribution of employment. (Wealth of Nations)

Growth, therefore, does follow naturally on an increase of money or of wealth but only on a proper application of money to production: “Every unnecessary accumulation of money is a dead stock which might [otherwise] be employed in enriching the nation by foreign commerce” (Smith, Lectures on Justice, Police, Revenue, and Arms)

Capitalism is, therefore, very different from wealthism.

The early American sociologist Thorstein Veblen made the distinction the central observation of his book The Theory of the Leisure Class. He concluded that a notable feature of the “wealthism” of his day, copious wealth produced by industrial capitalism, was an aristocratic tendency of those possessing wealth to spend it on “conspicuous consumption.” Such notorious consumption indicated a desire, Veblen thought, to secure social status, not to directly finance more capitalist production. He thus questioned the social utility of that usage of wealth.

Smith rejected the view that money was productive capital: the opulence of a nation did not depend on its coin and money (Lectures). To accumulate money was not to accumulate wealth. Too much money just inflated prices and did not cause growth in production.

The emergence of capitalism as something new in human economic activity was at the center of thinking about modernization after World War II as efforts were made to bring the fruits of industrialization to poor countries around the world. W. W. Rostow in his famous book The Stages of Economic Growth spoke of the advent of capitalism in any country as its “take-off” into self-sustaining new wealth creation. Rostow’s thinking has more recently been expanded by William Easterly.

The challenge since then for global development efforts, in which trillions have been spent by wealthy nations and international bodies such as the World Bank, has been to move societies out of stagnation into robust platforms for production of goods and services which provide for rising living standards and a middle class which, in turn, incubate constructive political reform favoring constitutional democracy and the honoring of human rights.

The objectives of development are encapsulated in the Millennium Development Goals, and in the proposed Sustainable Development Goals to be adopted by the General Assembly of the United Nations in September 2015.

An often-overlooked fact is that capitalism, in the strict sense, is a quantum improvement on traditional private property and free market economic systems. Humanity has enjoyed private property rights and has used free markets since time immemorial without thereby generating self-sustaining growth in productivity and GDP. The sum of total factor production in pre-capitalist and non-capitalist societies is dramatically lower output than is possible under capitalism. Why?

In his anecdote about production of straight pins, Smith reported that under the pre-capitalist artisan mode of manufacture, one person could make but 200 pins a day. But with division of labor in a factory setting, some 10 persons could through accomplishment of 18 different tasks make 48,000 pins a day, for a productivity outcome of 4,800 pins per worker.

Consider for a moment the result for inequality of wealth of a drop in the price of pins when supply grows from 200 a day to 48,000 a day. The price of pins will drop dramatically to the advantage of those with less income and wealth. The new factory system brought them better real standards of living. And poor people in the 18th century had greater need for straight pins for their sewing than did wealthy gentry and aristocratic families.

But how to classify the cash proceeds which would come to the owner of such a pin factory after he had paid for all his machines, his consumable supplies, and wages for his employees? Should the returns to enterprise be allocated to rent or to wages?

Smith advanced a third solution: such special returns should be given their own, separate, category of earnings—a return on investment in enterprise. Money used as capital can be employed “in the maintenance of productive laborers, who reproduce the value with a profit” (Wealth of Nations). Smith was clear that the return from investment and management was not mere rent, as active decision-making and risk-taking was required as a consequence of setting up an enterprise. Nor was this return a wage from labor work. The work of the master of enterprise was not mere hourly labor; it was something new and strange. It demanded different skills in making plans and giving instructions and coordinating the interdependencies of the different specialized functions. It also demanded acquisition of machinery and materials to support the workers in their different assigned tasks. This took effort and calculation not necessary on the part of a landlord who just received income for use of his real property. Smith thus concocted the famous three factors of capitalist production: land, labor and what he called “stock,” which we now call “capital.”

A capital as Smith conceived of it was only used for production—for “maintaining productive hands only” (Wealth of Nations). In this way did that portion of a stock constitute a revenue. He distinguished profits from rents (Wealth of Nations). Land earned rent; labor earned wages; stock earned increase, or profit.

Smith considered that the share of wealth which was lent at interest could also be called a capital, but it earned a rent. “As such capitals are commonly lent out and paid back in money, there constitute what is called the monied interest. It is distinct not only from the landed, but from the trading and the manufacturing interests” (Wealth of Nations).

Wealth assigned to others to employ is a capital “from which owners wish to derive a revenue without being at the trouble of employing them themselves” (Wealth of Nations). As the overall wealth of society (its stock for Smith) grows, the quantity of stock available to be lent at interest—and the power of the monied interest—grows greater and greater.

Today, in a post-industrial world, intangible assets such as human capital, social capital, reputation, brand equity, and intellectual property constitute a large share of the earning capacity of firms. The price of buying their capacity to earn income through their business activity, their market capitalization, reflects the present cash value of their predictable future earnings. The factors that contribute to those future earnings constitute their current “stock,” to use Smith’s terminology. Accumulating an appropriate stock to meet market demand is the foundation for business success. Putting that stock into production through the division of labor generates jobs and increased cash flow in the economy.

Increased liquidity coupled with legal rights to borrow money against future earnings permits accumulation of more stock and so more growth in market activity and liquidity. The accumulation and use of stock was for Smith the secret ingredient for success in expanding the wealth of nations. Without such stock, land and labor combined would not generate new, higher levels of productive output.

Land and labor could earn income in the form of rents and wages, and so give rise to wealth, but they could not create capitalism.

Smith then divided wealth into different categories. Wealth devoted to enterprise became “a capital” which financed the acquisition of “stock” for the business. Wealth not turned into “a capital” was merely wealth, which could be unproductive or even wasted through improvidence.

The distinctive aspect of capitalism as opposed to “wealthism” is how wealth is used. Not every use of wealth a capitalist does make.

Contemporary Marxists make the distinction I am suggesting here when they focus their objections to what they call “Fordism” or “Taylorism” to reflect the factory system of division of labor on production lines.

Sociologists Max Weber, Thorstein Veblen in his study of enterprise, and later Daniel Bell attempted to define the special quality of capitalism as an economic dynamic as a way of thinking, a mentalité, a gestalt, a culture and a way of life.

In Theory of Economic and Social Organization, Weber writes of capitalism as consisting of profit-making enterprises which are systems of action seeking to increase control over goods and services and capable of autonomous orientation to capital accounting, which values and verifies opportunities for profit and of success in activities designed to make profits. Capitalists seek forever-renewing opportunities for profit via rational enterprise. They orient their actions to monetary calculations of an increase in the market value of the enterprise. In another work, Weber asserts that “the impulse to acquisition, pursuit of gain, of money, of the greatest possible amount of money, has in itself nothing to do with capitalism” (The Protestant Ethic and The Spirit of Capitalism xxxi (pdf)). He continues, “This impulse exists and has existed among waiters, physicians, coachmen, artists, prostitutes, dishonest officials, soldiers, nobles, crusaders, gamblers, and beggars.”

Veblen saw the special feature of capitalism as a “machine process” designed as a reasoned procedure grounded on systematic knowledge of natural forces and human aspirations. The mindset of the capitalist, Veblen asserted, was to invest in the machine process as owner and designer in order to realize an increase in wealth. The money to be rationally invested in a business enterprise is an amount calculated with reference to the profit-yielding capacity of the enterprise.

The orientation of capitalism, then, is not inwardly directed toward consumption or hoarding money but outwardly directed toward the accumulation of working capacities that produce what others will buy. Consumption and hoarding tend not toward vocations but risk the onset of sumptuary indulgence at some margin of an individual’s utility preferences.

Daniel Bell, in The Cultural Contradictions of Capitalism, similarly describes the economic principle of capitalism as the “rational calculation of efficiency and return in the choice of means in order to increase production (e.g. the most efficient combinations of labor and capital or the specialization of tasks and functions).”

Capitalism, accordingly, uses wealth and created new wealth, but it is not mere “wealthism.”

If “wealthism” is a cancer to society due to its frivolity in the use of assets and its division of communities into “haves” and “have-nots,” then it is a cancer that degrades the quality of life in capitalist and non-capitalist societies alike.

A gambler, a spendthrift, a collector of fine art, a merchant who buys and sells goods made by others, a landed aristocrat, a lawyer or other professional—none of these were by role and activity Smith-style capitalists, though they could be very wealthy. But if they took some of their wealth and used it as “a capital” to invest in division-of-labor reliant enterprise, then they could be called capitalists.

Now, the analysis of how capitalism works becomes complicated once money is introduced into consideration. Both wealth in general and that sub-category of wealth Smith called “a capital,” which was funds devoted to employment of others seeking a profit, used money.

The master of enterprise needed money to acquire land, plant equipment, and materials, and to advance wages to employees. The money came from his capital, which was a part of his wealth. Thus while every person with a capital to invest had wealth, not every wealthy person was such a capitalist.

As the capitalist form of production grew in scale, sophistication in the use of money also blossomed. Credit was made available to those who sought present funds. Savings of some were transferred by intermediaries to others. Bills of exchange and bank notes were issued and accepted as ready money available to buy “stock” and support production. Firms called factors would advance goods on credit or buy goods for resale for cash or on credit. Financial intermediation became a vital sector of the capitalist economy, represented most of all by stock exchanges and stock trading.

The financial sector mingled generic wealth as contained in money with enterprise capital, which was that part of social wealth devoted to capitalist production.

Hernando De Soto, in his recent study of poverty and slums, The Mystery of Capital, recommends the expansion of legal title to give people more ownership of assets which they can then use to fund small enterprises.

Capitalism and Rent Seeking

So, to analyze the pros and cons of capitalism as a system of wealth creation as Marx and Piketty propose to do in their treatises, it is not enough just to talk about wealth and money in general and its distribution. Something more focused is necessary. What are the results of the specialized system of division of labor and application of “stock” to production? Are they beneficial? What costs come with those benefits?

Just so did Joseph Schumpeter fashion his theory of capitalism. He focused not on wealth but on a process of invention and innovation in technology and productive capacities. He put the entrepreneur at the center of capitalism, not wealth or money. He coined the phrase “creative destruction” as the distinctive feature of capitalism. The system constantly changed the consumption realities of human civilization. New products and services were coming into being as enterprise employed new machines and techniques to production, driving out of use and fashion older products, services and modes of production.

With this system, as even Piketty admits, life got better for everyone in general. What Schumpeter did not discuss were the externalities for society and the environment of this exponentially expanding use of technology for economic gain. Thus, capitalism’s success in growing material goods and services is offset by its failures to provide public goods such as health care and education and its tendency to generate public bads such as pollution and mindless consumerism.

Nor did Schumpeter consider the relative advantages brought by capitalism to those who provided capital and separately to those who provided only personal labor.

With the invention of the corporation, ownership of a capital invested in stock for enterprise assumed more and more characteristics of earning income as rent. Especially when money was lent merely for a return of money. The rise of financial intermediation to oil the wheels of enterprise and permit more and more current investment secured by legal interests in receipt of future income gave to capitalism serious capabilities of rent seeking.

Rents are returns to power, not to work or to entrepreneurship. The primary form of power giving rise to rental income is legal title or some other form of right under law or contract.

Earning rent as a landlord is made possible, first, by a public legal system that grants title of ownership and protects that title against all others, and, second, some contract right to receive money or other consideration in exchange for limited use of the property.

Most financial investments of money depend on contract rights protected by law as well. Purchase of a share of stock in a corporation—or a limited partnership interest, or a bond, or a debenture, a share of preferred stock, an option, a futures contract, a collateral debt obligation, a loan or share thereof—gives no power to manage, direct, or make decisions for a productive enterprise. Such contracts do no more that promise a share of returns under certain conditions as specified in their terms.

Thus, financial investment in businesses run by others is more like using cash wealth to earn future rents than it is to profiting from direct capitalist ownership.

And it was the rent aspects of financing industrial production that most aggrieved Marx and set his ire ablaze. He was angry that the owners of enterprise could take cash wealth, which he thought was surplus value created by workers, and use that monied wealth to buy more contract rights to the receipt of more future rent payments. Those paid only wages for their work, he saw, and had little if any chance to participate in such accumulation of wealth. In this sense, contract rights in financial intermediation are akin to the rent potential of gambling. To win at poker one relies on the rules of the game. Contract rights specify the priority of cards and allocate each pot according to the composition of various hands.

A range of other legal rights create rent in the form of protection of intellectual property. License fees and royalty payments are rents for the use of what belongs to another. Those who live on the rents from wealth contribute less to economic growth than those who seek a return from wealth invested as capital in enterprise.

The proceeds of rent can be saved or spent. When they are saved, they may or may not be transformed into productive capital in the strict sense. They may only be invested as money in the purchase of contract rights to earn more money, thus inflating asset prices but not real domestic output. If they are spent, they contribute to increased demand for goods and services. But if no new production enters the market to meet the demand, the new demand may only lead to inflation in nominal prices.

The bedrock of growth is productivity, not money in circulation. Circulating money must be used in the right way in order for real growth to occur.

Piketty conflates capital in the strict sense with wealth and so considers that the return on capital is a rent, not some special category of return with a qualitatively different ethical character:

Rent is not an imperfection in the market: it is rather the consequence of a ‘pure and perfect’ market for capital, as economists understand it: a capital market in which each owner of capital, including the lease capable of heirs, can obtain the highest possible yield on the most diversified portfolio that can be assembled in the national or global economy. To be sure, there is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working. (423)

One of Piketty’s recommendations for resetting the social outcomes of wealthism is to create a new category of rents. He would give the poor legal rights to enjoyment of “a certain number of good deemed to be fundamental”. (p.479) He justifies this use of government power to redistribute money as a “principle of equal access” to such fundamental goods. Here Piketty merely endorses the practices of the modern entitlement, or welfare, state.

Rents can be charged as a result of holding other forms of power as well. A monopoly or a cartel gains market power to control pricing and extract money for goods or services over and above the price that would be set by competition. The competitive price would be the return on capital while the overage would be a rent.

Money itself is a form of power, therefore it can command returns not necessarily disciplined by competitive market forces of supply and demand. It can generate rent, or income received not due to work or to assuming the risk of capitalist enterprise.

Today’s money in the form of fiat currency gains its power from legal contract. Because fiat currency is made by government authority legal tender for the payment of debts, such money is unconditional economic power. Money in the form of demand deposits, money market funds, and similar custodial arrangements also consists of contractual rights to immediate possession. Money is perhaps society’s most perfect form of unrestricted private discretionary power.

Piketty demonstrates the power of money to make money with analysis of how the fortunes of the most wealthy people earn more than do the assets of the only moderately well-off.

Other forms of power produce rents as well. Mafias and shake-down racketeers extract rents from those subject to their demands, extractions backed by credible threats of punishment for disobedience, rather than earn wages or a profit from productive enterprise.

Cronyism in securing preferential treatment from government, which generates benefits from political or regulatory interference with market demand or pricing to limit competition, also produces rents.

The income received by governments when exercising the power of taxation is a rent paid by society. Thus, government spending on wages for its employees or on transfer payments for health care, education, and welfare, takes the form of passing on rental income to chosen persons. In their recent book Why Nations Fail, Daron Acemoğlu and James A. Robinson argue that a major impediment to the success of capitalist take-off is rent extraction by governments. Rent seeking compromises the dynamic potential of capitalism.

Piketty observes that since 1980 inequality of income and wealth distributions has grown (220, 221). This may well be the result of a tilt in economic activity away from earning returns on capital to increased rent extraction from society. Access to rents from increased use of intellectual property, financial intermediation, and protective regulation is not likely to be widely distributed across a population.

The US financial sector contributed 7.9% to GDP and took out in total compensation 9% of GDP.

Rent seeking, in general, because it is insulated from harsh market dynamics through its reliance on non-marker power, provides higher returns for lower risk. Piketty thus notes that the average wealth of the richest twenty-millionth people in the world grew from $1.5 billion in 1980 to nearly $15 billion in 2013, for an average growth in assets of 6.4% a year above inflation (434).

On average it seems that wealthy families and individuals don’t use all their rental income from ownership of contract rights for consumption. They plow a significant proportion of earnings and gains on the nominal market value of their paper assets into the purchase of more contract rights, thus boosting asset prices from which they benefit far more than do those who live off wages. For example, the average per family or per capita savings of ordinary working Americans are paltry.

Adam Smith noted that in towns where people were maintained by the employment of capital they were industrious, sober and thriving but communities where people were maintained by the spending of revenue (the proceeds of rent) people were idle, dissolute and poor. As rent seeking increases, the competitive advantage of capital investment in enterprise evaporates. Income from rents comes with less risk than investment in businesses.

Smith recognized with concern this advantage to owners of wealth of investing in rents rather than in truly capitalist enterprise subject to the risks of the market: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” (Wealth of Nations. Smith saw how the temptation to fix prices—to extract a rent—had great appeal to those with money to invest.

Smith also commented acerbically on the difficulty of getting freedom of trade and competition put into law to replace rent seeking monopolies in business and commerce:

Like an overgrown standing army, [business people] have become formidable to the government, and upon many occasions intimidate the legislature. The member of parliament who supports every proposal for strengthening … monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public service, can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. (Wealth of Nations)

Piketty agrees with Schumpeter that capitalism in the strict sense is good for society: “No one denies that it is important for society to have entrepreneurs, inventions, and innovations. The problem is simply that the entrepreneurial argument cannot justify all the inequalities of wealth …” He adds that, sadly, “Entrepreneurs … then to turn into rentiers, not only with the passing of generations but even within a single lifetime” (443).

The American Louis Kelso provided an interpretation of capitalism that corresponds to both the emphasis of Schumpeter on creative destruction and the concern of Marx and Piketty over the relative vulnerability of wage labor as against ownership of productive capital assets. Kelso argued that under conditions of division of labor and the introduction of new technologies to increase productivity, labor will always suffer. The need for labor will always be changing and the need for workers will correspondingly change as well. The direction of those changes will be toward fewer and fewer workers having higher and higher skills. In short, the dynamic of capitalism is to replace workers with machines.

In this system workers are price takers and not price makers. They must compete for the jobs available without being able to create jobs for themselves. Only capitalists in the strict sense can create opportunities for employment. Since the beginning of the industrial age, economic growth has been able to provide new sources of employment to absorb the working hours of those whose labor contribution became no longer needed and those new to the work force. But in recent years, unemployment and underemployment has been historically high in the EU and the United States. The evolution of technology into digital communications and miniaturization of computing sophistication has, more and more, led to the replacement of workers with machines on an unprecedented scale.

Kelso’s response to this trend in capital intensive production was to invent contract rights which would give workers access to capital assets, adding to their wages income from firm profits and investment rents. Kelso’s recommendations to intentionally diffuse more widely the ownership of productive capital point to a general ethical consideration about wealthism. With wealth understood as monied power, and with money in and of itself a source of power, the ethical considerations arising about wealthism are those that come into play when power is as work. A sense, on the one hand, of demanding self-restraint and responsibility from those in possession of any power, and, on the other, an intuitive standard of fairness or due balance combine to direct our attention first to those without power, to those most vulnerable. The ethic arises almost as a first principle inductively acknowledged that power should be held as an office in service to some great good than self-indulgence. The American philosopher John Rawls and the economist Amartya Sen both have constructed theoretical approaches to justice that further this equitable objective.

Any economy, then, which turns away from promoting genuine capitalism toward more rent seeking turns itself toward more irremediably inequality of distribution of its generation of wealth and income. Large scale financial intermediation, intense regulation, and generous provision for entitlements are the structures which can turn any modern post-industrial economy away from robust capitalism toward a bifurcated social structure of a very wealthy elite and a large lower class, both dependent on rents for their well-being.


Piketty’s estimate that inequality of income and wealth will increase due to lower economic growth and declining populations does not take proper account of the potential role of capitalism. If the economy remains skewed toward rent seeking, then the trends Piketty highlights will come to sad fruition. But if a more robust capitalism, genuine creative destruction transforming the status quo, can be stimulated, higher growth will result and the severity of inequalities will decline.

The policy guidance recommended by Piketty’s study of inequalities of wealth and income is simple: promote capitalism, minimize rent extraction.

But perfection in human affairs is rarely achieved. Alexander Hamilton, the first Treasury Secretary of the United States was dedicated to the advance of what I am calling capitalism in order that the economy of his new nation grow reliably. But he warned that:

Tis the portion of man assigned to him by the eternal allotment of Providence that every good he enjoys, shall be alloyed with ills, that every source of his bliss shall be a source of his affliction—except virtue alone, the only unmixed good which is permitted to his temporal condition. (Defence of the Funding System)

[The true politician] will favor all those institutions and plans which tend to make men happy according to their natural bent which multiply the sources of individual enjoyment and increase those of national resource and strength—taking care to infuse in each case all the ingredients which can be devised as preventives or correctives of the evil which is the eternal concomitant of temporal blessing.(Defence of the Funding System)

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