Piketty and his admirers define “capital” as a homogenous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quantity of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.”
While this analysis is somewhat advanced, suffice it to say that Piketty’s use of the “rate of return on capital” is a cheap shot. It oversimplifies the complexity inherent in the capital structure and, frankly, economists like Piketty should know better. In this vein, Klein continues:
In short, profits are amounts, not rates. The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern day production theory. Solow states: “The key thing about wealth in a capitalist economy is that it reproduces itself and usually earns a positive net return.” This is a nonsensical statement from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.
Again, the “rate of return on capital” is an oversimplification at best and logically incoherent at worst. Comparing it to the general rate of economic growth might yield interesting results, but nothing meaningful toward crafting policy (or toward a sturdy argument for higher taxes, for that matter).
I must say I haven’t read Piketty’s book. I hope to get around to it this summer.
(And in case you have no idea what I’m talking about, Piketty’s book is #1 on Amazon right now. It’s gotten rave reviews from progressives like Paul Krugman and the Obama administration, as it purportedly justifies many of the views about inequality progressives have been preaching for years — namely, that inequality is a serious problem that threatens the health of the economy as a whole and will only get worse without significant state intervention.)