Piketty and Marx's Rising Organic Composition of Capital: Review of Capital in the Twenty-First Century by Thomas Piketty

Abstract

Piketty's Capital in the Twenty-First Century is a factual masterpiece, carrying out an extremely important task in establishing beyond doubt the rapid increase in global and national inequality in the last three decades. But Piketty's own theoretical framework cannot adequately explain his factual findings. In fact, Piketty's findings are easily accounted for by Marx's analysis of the rise in the organic composition of capital—that is, the increase in the percentage of the economy devoted to investment. Marx's findings were in line with his predecessors Smith and Ricardo, and later also with Keynes, and are confirmed by modern econometrics. Marx's analysis grounds Piketty's findings on rising inequality in not only economic distribution but also production. Piketty's critique of Marx is based on misrepresentation—although this may be due to insufficient study. Piketty's findings on wealth distribution confirm, from another angle, modern findings on production which similarly correspond to Marx's theoretical framework.

Keywords:

• inequality
• Piketty
• organic composition

Notes on Contributor

John Ross is currently Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China. From 2000 to 2008 he was Director of Economic and Business Policy for the Mayor of London. He was also an adviser to multinational companies. He is the author of numerous articles on the Chinese and international economies including “Why the Economic Reform Succeeded in China and Will Fail in Russia and Eastern Europe,” and “Deng Xiaoping and John Maynard Keynes.”

Notes

¹For example, Piketty (2014a, 206) writes,

It is possible, however, that the pure return on capital has decreased slightly over the very long run: it often exceeded 4–5 percent in the eighteenth and nineteenth centuries, whereas in the early twenty-first century it seems to be approaching 3–4 percent as the capital/income ratio returns to the high levels observed in the past.

In both France and Britain, from the eighteenth century to the twenty-first, the pure return on capital has oscillated around a central value of 4–5 percent a year, or more generally in an interval from 3–6 percent a year. There has been no pronounced long-term trend either upward or downward.

²Piketty (2014a, 357) writes, “The hypothesis that global growth will continue at a rate of 1.5 percent a year over the very long run is regarded as excessively optimistic by many observers.”

³UNCTAD (2013) states,

Driven by fragmentation of production processes and higher intra-industry trade, international trade of intermediate products has also increased greatly, reaching about 7 trillion USD in 2011 (up from 2.5 in 2002). (3)

At more than 7 trillion USD in 2011, intermediate products comprise the most important flow of world trade. During the last decade primary products have seen their share of world trade increase, prompted both by a surge in demand in emerging markets and higher commodity prices. (14)

Intermediate products trade accounted for more than 7 trillion USD in 2011, representing a share of about 40 percent of total trade. Primary, capital and consumer products each account for slightly less than 3 trillion USD. (14)

⁴UNCTAD (2013, 16) states,

Fragmentation of production, as measured by trade in intermediates, has increased dramatically over the last decade. However, this is a phenomenon largely confined to developed countries and the East Asian region. Delocalization of production to other developing country regions, although increasing, is still limited.

⁵Keynes held that as the economy grew richer the population tended to save more of their income—that is, the propensity to save rose. This is a less rigorous analysis than the one rooted in the rising division of labor which was originated by Adam Smith and which Marx took over.

⁶Regarding sources for figure 3, the figure for England for 1688 is that in Maddison (2006). UK figures after 1688 and up to 1947 are calculated from Liesner (1989). Figures from 1948 are calculated from International Monetary Fund (2008). Minor adjustments have been made to chain the earlier statistics to be consistent with the IMF data—in no case does this make any significant difference to the pattern shown. The data for fixed investment for the earlier period used by Liesner (1989) are based on calculations in Feinstein and Pollard (1988). Other commentators have suggested that Feinstein and Pollard's figures are somewhat too high—see for example Crafts (1986, 73). None of these revisions and differences, however, is of sufficient magnitude to alter the fundamental pattern shown here.

US figures prior to 1948 are calculated from Liesner (1989). Figures from 1948 are calculated from International Monetary Fund (2008). Data for the earlier period give only private fixed capital formation whereas that after 1948 is for total fixed capital formation—i.e., including government fixed capital formation. There are no reliable estimates of government fixed capital formation in the earlier period and therefore data for the earlier period have been adjusted upward by the difference between the two in 1948—which is slightly over 2 per cent of GDP. This has the effect of revising upwards slightly the percentage of GDP allocated to fixed investment in the earlier period but the difference is too small to affect the overall pattern.

Figures for Germany prior to 1960 are calculated from Liesner (1989). Figures from 1960 are calculated from International Monetary Fund (2008). There is, however, no significant statistical difference between the two.

Figures for Japan, South Korea, China, India and Vietnam are calculated from International Monetary Fund (2008).

⁷The above data are, of course, in price terms. If the analysis were of individual commodities it would not necessarily be possible to evaluate the value relations established by Marx. However, it follows from Marx's analysis that total constant capital, total variable capital, total surplus value, and total product of the economy must each be equal in both value and price terms. It is therefore legitimate to make these calculations using price data.

However, even for those who do not like the rigorous analysis of Marx that value cannot be created in circulation, but only in production, which is what creates the value and price relations, it need merely be noted that wholly implausible quantitative relations would have to be assumed to conclude from the price data that the organic composition of capital did not rise in value terms. In short, the factual data leave no doubt that the proportion of the economy constituted by capital rises, and therefore Marx's conclusion that there is a rising organic composition of capital is correct.

⁸He therefore logically equally concluded that a high standard of living was due to division of labour: “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people” (Smith [1776] 1981, 22).

⁹Others had previously identified this. For example, Adam Ferguson (1767) wrote:

It is evident, that, however urged by a sense of necessity, and a desire of convenience, or favoured by any advantages of situation and policy, a people can make no great progress in cultivating the arts of life, until they have separated, and committed to different persons, the reveal tasks which require a peculiar skill and attention. The savage, or the barbarian, who must build and plant, and fabricate for himself, prefers, in the interval of great alarms and fatigues, the enjoyments of sloth to the improvement of his fortune: he is, perhaps, by the diversity of his wants, discouraged from industry or, by his divided attention, prevented from acquiring skill in the management of any particular subject.

The enjoyment of peace, however, and the prospect of being able to exchange one commodity for another, turns, by degrees, the hunter and the warrior into a tradesman and a merchant. The accidents which distribute the means of subsistence unequally, inclination, and favourable opportunities, assign the different occupations of men; and a sense of utility leads them, without end, to subdivide their professions.

¹⁰To put the point less formally, an accountant a century ago worked with pens, books and some simple calculating device. Today an accountant works with a computer and complex software. The number of intermediate inputs into the pen and book is far less than into the computer and software.