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r > g

Got that? It's a publishing and political sensation...!
 
THOMAS PIKETTY is the sort of man history might otherwise forget. And the economics profession might be better off if they'd never met him, writes Bill Bonner in his Diary of a Rogue Economist.
 
He is a French academic...and perhaps the luckiest economist in the world.
 
Picketty has written a book that is probably not worth reading – a book that is apparently wrongheaded and shortsighted...a book with no reported original insights other than the obvious: that accumulating capital is a sensible way to grow wealth.
 
All of this is, admittedly, hearsay. We are still out in the boondocks of Argentina's pampas. There are no bookstores within hundreds of miles. But we are eager to get a copy of Piketty's tome just to see if it is as lunkheaded as we suspect.
 
In the meantime, we turn to our expert on French economists, Simone Wapler in Paris, for an insider's view:
"Piketty sticks with the old Marxist clichés. And the success of his book rests on a stupid little equation: r > g. This makes you sound like you know what you're talking about at dinner parties. It tells us that when the returns to rentiers [the return on capital investments] is greater than economic growth it's a bad thing, and we have to take money away from the rentiers in order to make the world a more beautiful and happy place. Of course, g is not clearly defined...and neither is "capital," which is today mostly debt anyway.
 
"But I only say that because I'm jealous. I'd like to come up with an idiotic equation and get rich, too!"
Looks like there's nothing too surprising about Piketty's book. Au contraire, it's just what you'd expect: a 21st century look at the imaginary struggle between rich capitalists and the working stiffs. What's astonishing is that it is No. 1 on the Amazon.com bestseller list. The L.A.Times reports:
"Move over, Fifty Shades of Grey. Instead of romance, a book by French economist Thomas Piketty on income inequality and capitalism is the No. 1 best-selling book on Amazon.com.
 
"Piketty's Capitalism in the Twenty-First Century is generating so much interest among economists and policymakers that it's temporarily out of stock on Amazon.
 
"At nearly 700 pages, it's not a book for beach reading by casual readers – unless a mix of dense economic data and history is your thing.
 
"Piketty examined decades of historical data from 20 countries to compare income inequality over time and concluded that the US economy has seen the wealth of the 1% grow to dizzying new heights.
 
"Wealth isn't trickling down as some argue, Piketty said. Moreover, he warns that rising inequality will undermine democracy and generate discontent..."
Which makes us wonder. What is wrong with the pornographers...the romancers...the fat-fighters...and the political liars? How could they let a scarcely-readable economist, whose mother tongue isn't even English, get ahead of them?
 
Yes, dear reader, we are jealous, too. Piketty's book offers little new. From what we can tell, he misunderstands the most important lessons of economics. Yet his book gets widely reviewed, widely purchased, and widely praised. Our books rarely get noticed.
 
(That will change with the publication of our next book – out next month! Watch this space.)
 
The gist of Piketty's tome is that capitalists have made a lot of money lately...and that something needs to be done about it. Surprise, surprise – he believes wealth "inequality" is a problem...and that market economies need the wise hands of professional economists, policymakers and central bankers to help even things out.
 
We only have press reports to go on. But none mention any serious effort on the part of Piketty to explain just how the rich got so rich in the first place. Mightn't those same economists and policymakers have had a hand in it? We'll come back to that tomorrow…
 
On the surface of it, his concern that r > g seems absurd. When r is high it means that investments are good ones. That is they produce more wealth than they cost. The higher r goes, the more wealth is created.
 
If you invest in a new technology, for example, the investment only produces positive r if the technology proves successful. The more r you get the more successful it is...and, theoretically, the richer our species becomes.
 
Also, when r is high, people are encouraged to save more money and invest it in newer technology and more productive output. The amount of stuff increases...people are, generally, wealthier.
 
The other thing that happens is that when more people save and invest (motivated by the high r) more and more investments necessarily lower r. The first investments produce high rates of return. This draws more marginal investors into more marginal investments...and the rate of return goes down.
 
Piketty's problem solves itself. If it is allowed to…

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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