Capital has an exorbitant privilege. With capital we are able to undertake productive investments and reap a potentially infinite amount of rewards. However, capital is not the only factor of production: for those investments to succeed, we also need labor. Unfortunately the rewards received by labor are infinitesimal and declining. In the majority of the industrialized world, the share of national income received by labor has been dropping over the past decades as a result of a myriad of factors like globalization, deregulation of labor markets, and the neutering of the power and influence of unions. The root of this privilege goes back to the origins of capital and its historic process of accumulation.
Where does capital come from? One source is from capital itself. Any increase in the value of an asset provides the owner with additional income which can then be reinvested into other capital assets. Similarly, some assets like stocks and bonds provide a regular stream of income in the form of interest payments or dividends. Additionally, physical capital like robots or other types of automated equipment can also produce additional capital without human input. However, the main source of capital is labor. Your work, as an employee of any firm, contributes to the profits of the firm through which the firm is then able to accumulate further capital. No amount of capital will make a firm thrive in the absence of labor which is why the two are not perfect substitutes. But capital’s exorbitant privilege comes from the fact that, unlike labor, it can generate infinite returns. Let’s see how this process takes place in practice. Continue reading
Comment ça se dit, “slap in the face”?
Are you believer in the free market fundamentalist school of economic theory? If you are, then 2014 must have been a crap year. The main reason was the publication in English on what has now turned to be one of the seminal works of economics of our generation: Thomas Piketty’s Capital in the Twenty-First Century. Let’s understand the magnitude of this. A French economist, yes French, wrote a 700-page monolith of a tome in one of the most mind-numbingly boring subjects known to humankind and turned it into a New York Times bestseller. Presumably many of the thousands of people who bought Piketty’s book probably have never bought, much less read, an economics book in their lifetime. Maybe they didn’t even read it from start to finish (this blogger must confess, he has neither bought it nor read it) but, hey, it’s the thought that counts.
L’enfant terrible of economics
I cannot emphasize enough the he’s French bit. If there’s any country whose economic intelligentsia has been vilified by the Ivy League-bred doges of the economics profession, it is France. Yes, there’s a handful of world-renowned French economists like former IMF chief economist Oliver Blanchard and this year’s Nobel Laureate Jean Tirole, but for the most part these have comfortably fit into the “system”, and only challenged it at the margins, if at all. Certainty none of them has launched the kind of broadside that Piketty did in Capital, a book which uncovers free market capitalism’s ugly face: that of a system which naturally gravitates towards the accumulation of wealth by the owners of capital. Rather than see the two most recent periods of massive rises in global inequality (the so-called “guilded ages” before the 1929 and 2008 crashes) as oddities, Piketty has painted them as the baseline: the social-democratic golden age in the post-WW2 decades is in fact, a one-off, in which the trauma of war forced Western governments to redistribute wealth to a degree that had never been done before or since. Continue reading