This time from a hard-left perspective, from Jacobinmag.com:
The bulk of Piketty criticism has focused, rather boringly, on whether the rate of investment return will remain steady when the wealth-to-income ratio soars. But economists like Dean Baker, J. W. Mason, and now Naidu have pioneered a more interesting line of attack. According to them, Piketty has not made some mistake in judging elasticities. Rather, he has the entire order of events backwards. It is not an increase in the wealth-to-income ratio that prompts capital’s share to rise — it’s the exact opposite dynamic.
Piketty’s account of how wealth builds over time centers on savings. In his telling, the capitalist is prudent, dutifully investing large amounts of his income every year into capital goods. As these investments steadily accumulate, so too does the national wealth (which, according to this account, is the sum of all the previous years of savings minus depreciation). When the quantity of total past savings becomes very high in relation to the country’s annual income, the seemingly permanent 5 percent rate of return on wealth drives up the capital share.
The problem with Piketty’s story, which Naidu and his peers get at in various ways, is that it doesn’t match reality. Assets like real estate, equity, and debt are not assessed according to the quantity of savings that go into creating them. They are assessed according to the expectations of how much income those assets will deliver to their owners in the future. Put simply: asset values are forward-looking, not backward-looking.
This has quite startling implications for the way we think about the nature of wealth in a capitalist economy. Ownership of something like a company share does not entail ownership of capital goods in any real sense. It amounts to owning a bundle of legal rights to future flows of income. Thus, the value of assets, and therefore wealth, reflects the value of the rights to future income flows — not the value of accumulated savings.
Once this truth is understood, it becomes easy to see why Piketty may well have everything backwards. If capital increases its ability to extract income from the economy, that would boost the future flow of income that goes to owners of existing assets, and thereby increase the capital share. When a greater portion of the national income is being funneled to owners of assets, the market value of those assets will go up, causing measured wealth to go up as well.
In other words, the capital share drives the wealth-to-income ratio, not the other way around.
Or as I always say, it makes most sense to look at incomes and disposable incomes after housing costs (and other rents), forget about "assets". Let's say a tenant and a home-owner next door, do the same job, have the same gross income, pay the same in tax and live in very similar homes. Clearly, the home-owner is "richer" because he owns an "asset". But that's comparing apples and pears. Far easier to say that the tenant has a much lower income after housing costs.
Superficially, you could say there is income equality between the two. Of course there isn't. Whether somebody is a net collector/enjoyer or net payer of rents makes the biggest difference to real inequality.
Compare that with two home-owners living next door with the same gross incomes, but one has a priceless masterpiece hanging on the wall. The value of that painting has nothing to do with the way society is run, it is not subsidised by the taxpayer, does not generate income and does not place a burden on anybody else. If the painting were destroyed, the owner is poorer but nobody else is better off. Their net disposable income is the same, the fact that the one with the valuable painting is "richer" is of no concern to anybody (and certainly not a suitable subject for taxation).
Debate Magazine
