Question

1. Explain the phrase ”The Bourgeoisie digs its own grave”. What does that mean in the context of growth and capital income shares?

Answer 1

Capitalists or Bourgeoisie accumulate ever increasing quantities of capital, which ultimately leads inexorably to a falling rate of profit (i.e., return on capital) and eventually to their own downfall.

But in this, Piketty merely repeats the mistake of various proponents of the productivity theory of interest. Unlike common belief and as counter-intuitive as it may sound, interest is not the remuneration for capital’s productivity, but merely a reflection of savers’ time preference. As the pure time preference theorists—most notably, American economist Frank Fetter, and Austrian economist Ludwig von Mises—explain, the interest rate in the loan market is merely a manifestation of the discount on future cash flow. Savers (or capitalists) dictate the return on capital, not the other way round. This is no different from how consumer demand alone dictates the price of goods—a proposition cost theorists of value failed to comprehend.

Lastly, much has been made of the split of national income between labour and capital. However, the fundamental functional distribution of income boils down to land and labour—as capital represents but an intermediate product from combining land and labour. And under competitive bidding in markets, the split of income between labour and land depends on the relative scarcity of these factors. Apart from the folly of lump-sum classification of land and labour—given the heterogeneity of these factors—a lower remuneration for labour often sends alarm bells ringing among even otherwise sane economists.

This is unwarranted, for prices signal the relative scarcity of factors, thus spurring decisions of various kinds aimed at mitigating it. British economist John Habakkuk, for instance, pointed out how the US developed labour-saving innovations to counteract the effect of high wages, as labour was scarce relative to land (in a land-abundant country). Japan, on the other hand, chose land-saving innovations as the country represented a case where land was scarce compared to labour. Taxes to offset higher prices (be it on land or labour)—by nullifying the role of price system in reflecting underlying scarcities—would simply serve no useful purpose while killing productivity.

Piketty may have revived interest in the neo-Marxist economic tradition. But, much like his predecessor, he is plainly wrong. Given the favourable reviews the book has received, one can only hope the measures he recommends in the last part of his book—drawing from his own faulty economics—do not see the light of the day.

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