"So, given the trends established during the past three decades,
with savings rates at 10% and growth no more than 1.5%,
[the $IMFS] is pushing us to a situation where wealth will
exceed six times GDP and the proportion of GDP that will be
going to those living off wealth (as opposed to wages) will
be at least one third. This is an unsustainable tendency that
operates like a time bomb in the foundation of [the $IMFS]."
That's from this pdf by Yanis Varoufakis, which is a good read, especially section 2 where he explains the difference between wealth and capital. This difference is the key to Yanis' rather harsh critique of Thomas Piketty's 696-page treatise on global inequality titled Capital in the Twenty-First Century.
Here are a few excerpts from section 2 of the pdf which is titled Conflating wealth with capital:
Collecting stamps is a romantic and, in many ways worthy, pursuit. It can also be quite profitable. Similarly with art collections. Or a garage full of Ferraris. Nevertheless none of these assets can be enlisted as inputs into some production process.
In short, production and growth depends on material or physical capital. And while capital is a form of wealth, a great deal of wealth is not a form of capital; i.e. it is not an input into any production process generating hitherto non-existent commodities. Thus, the growth of an economy cannot rely on wealth. It needs a particular kind of wealth: capital goods. So if we conflate capital with wealth, our theory of production will suffer to the extent that we will have wilfully misspecified a key input, mistaking all increases in wealth as increases in capital’s contribution to the production process.
When a capital good has a physical form, we more or less know its material utility since it is a technical matter to work out, e.g., how much electricity an electricity generator produces per hour per given quantities of diesel. But what is the return to an art collection that the collector is not auctioning off? Or to an owner-occupied home in which a family insists on living? Indeed, what is the rationale of treating (as Professor Piketty must do, to remain consistent with his wealth-capital conflation) the income of a stamp collector from trading in stamps as a return to capital (and not as income from work) while the super-sized bonuses of money market traders are counted not as returns to capital but, instead, as… wage income?
Naturally, Professor Piketty knows this all too well. So, why has he chosen to conflate capital and wealth? One plausible answer is that his primary concern was to present an empirical study that tracked the evolution of Western civilisation’s wealth and income distributions, so as to show that inequality is spreading like a forest fire since the 1970s… Alas, this required a demonstration that his wealth-metric is interchangeable with a reliable capital-metric; a demonstration that is impossible and, therefore, never appears in the book’s many pages.
Summing up, Professor Piketty’s capital is a metric of wealth. A hugely important metric indeed since, in any society, relative wealth determines the relative power between those who have oodles of it and the rest who do not. Adam Smith, one may recall, made his name with a magnificent book that attempted to explain “the nature and causes of the wealth of nations”. So, why did Professor Piketty not attempt to emulate the great Adam Smith, mainstream economics’ patron saint, given that he, in essence, wrote a large volume on the… wealth of nations? Why did he, instead, choose the title of another classic book, Das Kapital, that does not reflect in the slightest the contents of his own book or the method of his approach?
One explanation… is that Smith… had precisely the opposite perspective to that of Professor Piketty on the prospects of wealth inequality. In contrast, Marx’s epic narrative on capitalism’s remarkable capacity to create, simultaneously, untold wealth and unprecedented misery resonates much better with Professor Piketty’s message; namely that capitalism, left unchecked, has a ‘natural’ tendency toward creating vast, destabilising inequality.
Yanis is a complicated and clever Marxist. He deeply agrees with Piketty's radical egalitarianism, or activist opposition to the perceived inequality between the haves and the have-nots as delineated by Marx, but he doesn't like the idea of an authoritarian state taking care of the redistribution of wealth, which is why he sometimes identifies himself as a libertarian Marxist. He also thinks that the standard leftist or "social democrats'" approach to the problem of "capitalism", which he sees typified in Piketty's book, is at best flawed and weak and at worst dangerous.
Here is Yanis explaining his often-seemingly-non-Marxist-rhetoric and his deeply-Marxist roots from a keynote speech he gave at the annual radical left Subversive Festival in Croatia in 2013 (and from whence came the title of this post) titled "Confessions of an Erratic Marxist":
When I chose my PhD thesis, I intentionally concentrated on a method within which Marx was not simply wrong, he was irrelevant. When I landed my first economics lectureship in Britain, the implicit contract between my university and me was that the sort of economics I would teach our students would be as far removed from Marxism as is humanly possible. When I moved to Australia in 1988, unbeknownst to me, I was recruited by the right wing of the Sydney University Economics Department in order to keep out of the Faculty another candidate whose former supervisor was thought of (quite rightly!) as a dangerous Marxist. Later I moved to Greece where I (foolishly) became, quite officially, an advisor of George Papandreou -- the man whose government was to mediate Greece's passage to Hell a few years later. While I resigned that position in 2006, having gotten whiff of the impending disaster, I carried on teaching, at the University of Athens, quaint (and admittedly vulgar bourgeois) subjects like Game Theory and Microeconomics to a large number of Greek students, who remained touchingly oblivious to the catastrophe about to befall them. Back in 2002, well before the Global Crisis erupted, Joseph Halevi and I tried to sound a warning -- but we failed to make an impact. Even though in 2006 I did my best to warn Greek society, and anyone who would listen, of the impending disaster, I shamefully remained part of Athens' and Europe's 'polite society', not once taking to the streets.
When the Global Crisis erupted in 2008, and soon engulfed the Eurozone, I began writing articles and making frantic appearances in established and less mainstream media alike, promoting a fundamentally bourgeois agenda for saving capitalism from itself! When the going got really tough, at a personal level, in Greece, I migrated to the USA and took up an appointment at the University of Texas. To this day, I am struggling to impress the powers-that-be that they must urgently adopt specific bold policy recommendations in order to prevent an inevitable crisis from crushing capitalism. In summary, not one of my academic publications can be thought of as explicitly Marxist, while my energies are channeled into preventing capitalism's collapse. Nonetheless, all along, from my student days in Britain to this very day, the only way I could make sense of the world we live in is through the methodological 'eyes' of Karl Marx. In itself, this 'fact' renders me a theoretical Marxist. Moreover, I feel Marxism in my bones every time I am engaged in any form of intellectual pursuit: from discussing the Arab Spring to debating the intricacies of Art with my artist partner. Furthermore, a democratic, libertarian, socialist future is the only future that I would be willing to fight for. A most peculiar Marxist no doubt, but a Marxist nevertheless.
Piketty's book, more than just being a weighty doorstop, is about the problem of inequality and how capitalism only makes it worse. The haves have way too much and are gaining more each day while the have-nots have less and less as each day passes. It contains an academic and mathematical "proof" of his thesis, plus empirical data to back it up, which is that capitalism leads to the rich getting richer and the poor getting poorer at a rate where the return on wealth (the risk-free income received from savings, investments, wealth and capital without doing any work and without touching the principle) amounts to a third of GDP and the total liquidation value of that wealth grows to six times GDP.
In other words, one third of all of the productive output of the global labor force goes to service the consumption of the non-working capitalists, and the remaining two-thirds goes back to the labor force. Furthermore, since wealth can be inherited and passed on from generation to generation, as long as the wealthy save a portion of their labor-free income at a higher rate than the poor save a portion of their labor wages, the wealth gap grows larger and larger.
Yanis thinks Picketty did a terrible job proving his thesis. From section 5 titled Why, oh why?:
So, why? Why base such a weighty treatise, as Capital in the Twenty-First Century clearly is, on shaky theoretical foundations? If I were allowed to speculate on this question, I would be tempted to outline two reasons. One is expediency. Professor Piketty’s analysis allowed him to come up with some very catchy numbers; e.g. the ‘result’ that when the rate of return to wealth is at its historic average of around 5%, there is a tendency for wealth to grow to more than six times the level of GDP and for income accruing to wealth to converge to one third of GDP (see note 9). This is the stuff that contributes to headlines that journalists and the wider public are eager to consume. But to come up with these numbers, and then argue that they are reflected in the empirical data, the author had to ‘close’ his model; he had somehow to snatch determinacy from the jaws of radical indeterminacy. And if this requires incorrigible assumptions that are ill equipped to sustain the cold light of critical analysis, one may be tempted to assume that the wider public will never know or care. Catchy numbers, in combination with excellent marketing, are bound to over-rule any objections like the ones appearing in this journal in general and in the present paper in particular.
Piketty’s policy recommendation for stemming "inequality’s triumphant march" is a global wealth tax, which Yanis doesn't like. While he agrees with Piketty's thesis in spirit, he's tired of leftists making weak arguments and policy recommentations which are easily defeated by smart people on the right. From the conclusion (sect. 7):
Consider what the implementation of this global wealth tax would mean:
Returning to the long-suffering Eurozone, let us pay a visit to one of the thousands of Irish families whose members remain unemployed, or terribly under-paid and under-employed, but whose house has ‘managed’ to escape the travails of negative equity. According to Professor Piketty, these wretched people should now be paying a new wealth tax on the remaining equity of their homes, in addition to their remaining mortgage repayments. Independently of their income streams!
Taking our leave from these suffering families, whom Professor Piketty’s wealth tax would burden further, let us now turn to a Greek industrialist struggling to survive the twin assaults from non-existent demand and from the severe credit crunch. Let us suppose that her capital stock has not lost all of its value yet. Well, soon after Professor Piketty’s policy is enacted, it most certainly will, as she must now cough up a wealth tax that is to be paid from a non-existent income stream.
How long will it take, dear reader, before committed libertarians, who believe that wealth and income inequality is not only fine but also an inevitable repercussion of liberty-at-work, latch on to the above repercussions of Professor Piketty’s policy proposals? Why would they hesitate before blowing his analysis and recommended policies out of the proverbial water, castigating them as sloppy theorising leading to policies that simultaneously (a) worsen a bad set of socio-economic circumstances and (b) threaten basic liberties and rights?
Moving on to the realm of political philosophy, some years back I expressed the view that well-meaning proponents of distributive justice and equality were perhaps egalitarianism’s greatest threat…
Arguing from the perspective of a radical egalitarian, I conceded that the libertarians had the better tunes. That their focus on the justice of the process generating values and what distributes them (i.e. their dedication to procedural theories of justice) was significantly more interesting, useful and, indeed, progressive than the pseudo-egalitarian dedication to end-state, distributive, theories of justice. That the libertarians’ readiness to separate ‘good’ from ‘bad’ inequality, rather than to treat inequality as a single, uni-dimensional metric, held more promise to those who wished to understand the vagaries, and instability, of capitalism than the social democrats’ protestations that income and wealth outcomes were too unequal. That those interested in reinvigorating a pragmatic, radical egalitarianism should abandon static notions, and simple metrics, of equality.
Reading Capital in the Twenty-First Century reminded me of how the cause of egalitarianism is often undermined by its most famous, mainstream proponents. John Rawls… did untold damage to the egalitarian ‘cause’ by offering a static theory of justice that crumbled the moment a talented libertarian took a shot at it. Professor Piketty’s book will, I am convinced, prove even easier prey for today’s, or tomorrow’s, equivalent of Robert Nozick. And when this happens, the multitude that are now celebrating Capital in the Twenty-First Century as a staunch ally in the war against inequality will run for cover.
Down at the bottom of this post you'll find the video of Yanis' keynote address (with the same title as this post) to a room full of angry Marxists who, you'll learn during the Q&A, are skeptical that Yanis is really one of them. It's long like the last one, and also like the last one the first half is the speech and the last half is the Q&A, but I think you'll really enjoy this video just like the last one.
In it, you'll learn that Yanis despises economics, and he views himself as someone who has used his own personal sacrifice of half of his life spent learning economics and becoming a professor to gain entry into the top level of economic dialogue (e.g., being invited to speak to central bankers, right-wing politicians and MSM news outlets like Bloomberg) in a subversive way, kind of like a Marxist spy who has withheld his true agenda.
He says that, because some of his statements seem so harsh on the surface, he is always getting contacted by right wingers "and Ron Paul types" who think he's like them.
These Marxists hate "capitalism", or actually they hate what they think is capitalism and what they refer to as capitalism which is really just the ridiculous $IMFS which we hate as well, albeit for slightly different ideological reasons. So in a way, "the enemy of my enemy is my friend" thing comes into play here a bit in that Yanis and I both think the same thing about the $IMFS—that it is imploding—only he calls it capitalism.
In the video, he says repeatedly that he wants to save capitalism from itself, and what he means is that he wants to save the world and the international monetary system from falling into a global depression worse than the 1930s, caused by the collapse of the $IMFS/capitalism. As we often say about people like this, he's so close yet so far away.
Here's a line from Yanis in the video below:
"Think about capitalism… it is a metaphorical production line that produces two things simultaneously: immense wealth and unprecedented poverty. "
You see, his complaint about capitalism is the same as my complaint about the $IMFS. When savers save in debt, it leads to not only way too much debt, but also a conflict of interests between the debtors and the savers.
I want to you spend a little bit of time thinking about the many ways in which Yanis' "capitalism" and my "$IMFS" are the same thing. Probably the biggest problem with the $IMFS over the last couple of decades, and a problem which led directly to the financial crisis in 2008 when Yanis says the "surplus recycling mechanism" died, is the securitization of debt by the banks.
They did this because of overwhelming demand for those securities from savers like the PBoC, German pension funds, and just about everyone else for that matter. It was not because the banks wanted to increase their loan books that they drove lending standards into the gutter creating Subprime and all kinds of other problems. It was because they could offload that risk, sell it to someone else, and make a tidy commission in the process.
With that in mind, here's a short anecdote from another presentation Yanis gave in 2013, this one titled The Dirty War for Europe’s Integrity and Soul. Yanis began his presentation like this, "allow me to begin with several ‘true stories’ that will, hopefully, transport you into the Europe that I inhabit. Each of my tales will come with a short title." The tales had titles like "Error", "Denial", "Impotence", "Despotism", "Ignorance", "Wickedness" and "Serpent DNA", which should give you an idea of the tone.
This was one of the shortest, and it was titled "Frenzy":
Franz, not his real name, worked for a major German bank for twenty-five years. In 2011 he confided to me that the Euro’s ‘good’ years, before 2008, had been the worst of his life. From 1999 to 2008 the pressure from his bank’s Frankfurt HQ on executives like him was relentless. Before the Euro, his job entailed flying around European capitals, assessing the credit worthiness of governments, local authorities, utilities, developers, local banks, large businesses; playing hard to get with them, and eventually signing off on loans that made sense to him. However, once the Euro was established the Frenzy began in earnest. HQ was pressurizing him incessantly to lend, lend, lend. When he warned them that increased lending would mean subprime loans to iffy customers, they couldn’t care less. It was all about securing a higher share of the Euro market than other banks – French banks in particular – who were also on a lending spree. And since total lending effected was linked to his and his bosses’ bonuses, Franz and his colleagues were sent to Dublin, to Madrid, to Athens, to every nook and cranny with a hitherto low level of indebtedness. Their mission? To increase it. “I lived the life of a predator lender”, he added.
Notice the correlation/causation fallacy. Because the predatory lending began around the same time as the euro, causation is lumped onto the euro. But this same phenomenon was happening on Wall Street and Main Street USA as well, perhaps even more so. The new single currency in Europe no doubt made it easier for the German banks to jump borders, but it was an $IMFS game nonetheless. Remember it was Goldman Sachs that reportedly taught the Greek government how to really take advantage of the new euro by ramping up its spending and its debt in the early years. Was that caused by the euro, capitalism, or the $IMFS?
This is Yanis' view of capitalism's drive—predatory lending—which, as I argue, is simply the result of extra demand from the Savers (a group distinct from—and much larger than—professional investors, speculators and traders) for more debt to save. Physical assets rise in value as more Savers save in them, but debt must rise in volume in order to accommodate a growth in savings. One increases the debt level while lowering interest rates and lending standards leading to all kinds of problems in the real economy, and the other does not.
Of course professional investors, speculators and traders will always invest, speculate and trade in debt and equity ownership in other people's businesses. But, in the future explored on this blog, they will have to be sharp to pick the winners, and they will be competing against the banks which can always underbid them for the best borrowers, so risk will be ever present for private money that wants to generate a return.
Banks don't care about the occasional socialization which eats away at the currency's real value because their nominal balance sheets don't change with the currency. If the currency devalues, then their assets and liabilities devalue simultaneously and their net position stays the same. And if Savers saved in real physical wealth assets rather than debt and currency, they wouldn't care either.
Just imagine if all debt was held by banks. Now imagine that only the best debt is held by banks, and the more risky debt is held by private money chasing a yield. That's how I imagine the future will be. Just because the Savers stop recycling their surpluses to the Debtors does not necessarily mean a credit crunch. Banks can theoretically issue all debt up to the point at which their CB will no longer monetize that debt which goes bad, and the investors, speculators and traders can tempt fate with the rest.
Here's a simple fact which hasn't been discussed a whole lot. We have been brought up with the premise that if we can somehow obtain a large enough fortune, then we can sit back and live off the interest risk-free without ever touching the principle, pass that principle on to our children and they can do the same into perpetuity. This is a false premise, even if it has worked for the last 40 years.
Yes, you can put your money to work and, if you are successful, live off of only the yield while growing or not touching the principle. But you can't do so risk-free, and that's where millions of Savers have been misled. In reality, you save during your working years, and later live off of those savings by running them down. There's no such thing as a risk free return on capital, an old lesson that old money knows all too well, and the rest of us will learn soon enough.
For savings to work properly like this, over long periods of time, requires a salient focal point physical wealth asset with a long history of being used for that purpose. That is not stamp collecting, fine art, or even a garage full of Ferraris. It is gold, not as part of the monetary system, but as a real, physical wealth asset just like Yanis used stamps, art and Ferraris to explain.
In the speech below, Yanis explains one of his subversive tactics which he learned from Marx. Marx called it immanent criticism, which is where, rather than attacking your enemy's premises, you accept them as a given for the sake of argument, and then show your enemy that he is failing his own principles. I wonder if anyone has tried this tactic on Yanis yet. ;D