Thursday, July 31, 2014

New Articles on Kingdom Watcher

What is a Person?

Perceiving the Spiritual

Credit Creation

Employers and Wages

Baxter (4) Chaplain

Baxter described a speech by an army chaplain.

I remember one day a padre addressing the troops. As we listened to him I heard the men around me sigh and murmur beneath their breath. The padre seemed to be out of touch with his audience and not very sure of himself. He told us that wonderful things would come out of the war, when it was over we would be free to build a new and better world. Great spiritual blessings would spring from these times of trouble and sacrifice. Rulers were to gain great wisdom and lead us to a condition of wellbeing and security that we had not dreamed of in pre-war days.

I wondered as he went on word- spinning how much of it he believed himself. It was impossible to tell, for the poor man had not the freedom that I had to express himself. Was there a parson at the front who dared to preach ‘Thou shalt not kill', that all men are brothers and God the father of all, irrespective of race, creed or colour, and that, things being so, the combatants on both sides should fraternize with the enemy? Or a parson with socialist views who dared to say to the troops that the fact that the imperialists and financiers had fallen out was no reason why the workers should be led into war to blow the soup out of one another? And what would happen to such a man? He would be brought up with a round turn, adjudged a nerve case or a mental case and so rendered harmless. To run the military machine efficiently everyone must be regimented. Beliefs on war or religion matter little but the expression of them must not be suffered to do harm.

This was the only religious address I remember hearing in France. No padre ever spoke to me personally all the time I was there.

Wednesday, July 30, 2014

Baxter (3) Bombed

Baxter was to be sent to the trenches too.

Finally they decided to send me into the front trenches. A message was sent to the officer in charge there. The messenger returned with the reply that the officer refused to take the responsibility.

On this, Booth asked Stevenson if there were any place, near at hand, that was being heavily shelled. He pointed out an ammunition dump at some distance. The Germans had got the range of it and it was being heavily shelled at intervals of about twenty minutes. He told Booth to take me across to it and leave me there. Booth told me to stay there and not to move from where he had placed me. As he hurried away, leaving me standing by the dump, he called back, "I hope a shell gets you and blows you to your Maker."

I stood waiting. I could see him and he, of course, he could see me, though he was well out of range. Suddenly firing began age and the shells came thick and fast. I was in the midst of a storm of spouting, belching mud and fire and flying fragments. The shells seemed to strike everywhere but where I was. I believe that if had moved at all from where I stood I should inevitably have been killed. If the dump had gone up I should have gone with it. I stood and waited for what seemed inevitable death.

I remember that I had very strange sensations. They were probably due to my over-wrought condition. The normal instinct of self-preservation seemed for the time being to leave me entirely. I felt quite calm and peaceful and and saw everything round about bathed in a bright white radiance. The whole thing felt strange and unusual, but not unpleasant. I never felt the same again when I was, at subsequent times, under heavy shell fire.
When the shelling stopped, he was returned to his tent.

Tuesday, July 29, 2014

Baxter (2) Trenches

The army decided that the conscientious objectors should be sent into the trenches. One of them named Briggs refused to walk up to the trenches. Here is Baxter’s description of how he was treated.

He had refused to walk up to the front trenches when ordered to do so that morning by Captain Stevenson. Booth, who was present, had dragged him outside by the wrists, tied a long piece of cable wire round his body under the arms and, with the aid of three other men, dragged him at the end of the wire for about a mile along the duckwalk. Battens were nailed across the boards of the duckwalk at short intervals and, to make walking easier, netting wire was nailed over them in parts.

Any clothing that protected his back was soon torn off, leaving it naked and exposed to the battens and the wire. They dragged him like this for about a mile until they came to a large shell hole, full of water. Here they stopped and Booth asked Briggs if he would walk now. If not, he'd go into the shell hole. On his saying that wherever he was going he was not going to walk up, he was thrown into the shell hole, pulled through it by the wire, dragged over the ground till they came to the next shell hole and pulled through it in the same way.

When they got him out on the bank at the other side they took him by the shoulders and tipped him head over heels back into the water. Just as he had managed to get his head above water and was trying to get his breath, Booth fired a handful of muck into his mouth.

"Drown yourself, you bastard," he said.

They dragged him out along the ground to another shell hole, through that in the same way, and a short distance further along the ground Then Booth asked him if he would walk up if they took him back to camp and gave him a change over a fire. Briggs said, "Never, as long as I draw breath."

He agreed to walk back to camp. When he came to try he found he was unable to and he was half carried, half dragged back by the two of the men, suffering greatly in the process. Back in the hut they took his clothes away, dressed him in a fresh shirt and trousers and left him lying on the floor of the hut under a pile of blankets. After several hours the doctor had come in and exclaimed, "What a damned shame!" when he saw the state of Briggs' back.

Then the orderlies had been told to get him to the medical hut and try to get some of the dirt out of the wound.
While I was in the hut the doctor came in again. I prepared to leave but he stopped me.
"Don't go. You can watch me dress his back."

I don't know why he wanted me to stay. I concluded that he hoped to frighten me into submission by the sight of Briggs' condition. I may have been wrong. If it was so he was sadly mistaken. My feelings were very far from being those of submission and fear as I looked at the huge flesh wound in Briggs' back and hip, about a foot long and nearly as wide. In spite of the attempts of the orderlies there was still a great deal of dirt in the wound. It ground too far in to be easily taken out.

That a man such injuries should not be sent to hospital was an unheard-of thing. For reasons which, after what Phillips had told me, were fairly obvious, Briggs was never sent to hospital. That he pulled round and recovered up to a point was certainly not due to the necessarily very scanty and inadequate attention he received, but to his own good health and excellent constitution. From the very first day he had to drag himself outside to the latrines, though another shell hole, utterly unfit to do so.
Later in the war, Briggs was declared unfit for service. He was physically broken.

Monday, July 28, 2014

Baxter (1) Conscientious Objector

When I started school, it was less than ten years after the end of the second world war, so feelings about the war were strong. Returned servicemen came and spoke to us about their experiences. The men who had been to the first world war were still in their sixties. I remember a couple coming to tell us about the glories of the first war.

By the time I got to secondary school the story had changed. We studied the cause of the First World War, but it was not clear what the cause was. The war the result of a series of blunders by the leaders of several Christian empires. Their mistakes cost millions of lives. Now a hundred years from the beginning of the war, it is all a bit of a embarrassment. I hope the centenary celebrations will not try to turn it into a glorious event.

Accordingly I was very interested in a book called We Will Not Cease by Archibald Baxter. It is amazing story. Baxter was a conscientious objector during the First World War. The New Zealand government only recognized conscientious objectors, if they belonged to pacifist churches (like the Quakers). Baxter belonged to the Methodist Church, which supported the war, so he could not be listed as a conscientious objector.

The army could not accept his stand, so it did everything it could to break his spirit. He would be forced to fight a war that was supposed to make the world free.

Baxter was arrested, and when he refused to obey military orders, he was thrown in prison. While in prison he was sometimes beaten and often went without food. After he had been prison for a year, he and twelve others were put on a troop ship and sent to the Western Front in Belgium. It was assumed that once they arrived in Europe and were subjected to war they would knuckle down and fight.

Baxter believed that fighting war was contrary to the gospel, so he continued refusing to obey military orders. This led to terrible punishment.

No 1 Field Punishment
The first punishment was called No 1 Filed Punishment. Baxter gives a full description.
"Right-oh," he said. "Come along. I've got my orders." He took me over to the poles which were willow stumps, six to eight inches in diameter and twice the height of a man, and placed me against one of them. It was inclined forward out of perpendicular. Almost always afterwards he picked the same one for me. I stood with my back to it and he tied me to it by the ankles, knees and wrists. He was an expert at the job, and he knew how to pull and strain at the ropes till they cut into the flesh and completely stamp the circulation. When I was taken off my hands were always blue with congested blood. My hands were taken round behind the pole, tied together and pulled well up it, straining and cramping the muscles and forcing them into an unnatural position. Most knots will slacken a little after a time - his never did.

The slope of the post brought me into a hanging position, causing a large part of my weight to come on my arms, and I could get no proper grip with my feet on the ground as it was worn away round the pole and my toes were consequently much lower than my heels. I was strained so tightly up against the post that I was unable to move body or limbs a fraction of an inch. Earlier in the war, men undergoing this form of punishment were tied with their arms outstretched. Hence the name of crucifixion. Later they were more often tied to a single upright, probably to avoid the likeness to a cross. But the name stuck.

A few minutes after the sergeant had left me I began to think of the length of my sentence and it rose up before me like a mountain. The pain grew steadily worse until by the end of half an hour it seemed absolutely unendurable. Between my set teeth I said, "Oh God, this is too much. I can't bear it." But I could not allow myself the relief of groaning, as I did not want to give the guards the satisfaction of hearing me. The mental effect was almost as frightful as the physical. I felt I was going mad. That I should be stuck up on a pole suffering this frightful torture, a human scarecrow for men to stare at and wonder at, seemed part of some impossible nightmare that could not continue. At the very worst, strength came to me and I knew I would not surrender. The battle was won, and though the suffering increased rather than decreased as the days wore on, I never had to fight it again.
After spending all day in this way for many weeks, the army realised that it was not going to beat Baxter and his mates, so they tried a new punishment. They were sent up to the trenches to face the full wrath of war.

Saturday, July 26, 2014

Being Church to Kingdom Community

When the times get tough, many Christians will be unable to go to church.

They will have to start being the church where they live.

When Christians are really being church where they live, the neighbourhood where they live will become a kingdom community.

The gospel will spread from neighbourhood to neighbourhood as people and communities are transformed.

When kingdom communities spread throughout society, the Kingdom of God will have come.

The Kingdom reaches its fullness in an area when the neighbourhood church has transformed into a Kingdom community.

Friday, July 25, 2014

Piketty (23) Inheritance

Piketty is really hostile to inheritance. When writing about it, he says “the past devours the future” (571). This statement is in the conclusion, so it has been widely quoted by those who have not read the entire book.

The statement is wrong. Savings and capital mean that the past enriches the present and the future. Modern prosperity is the result of sacrifices and savings made by people in the past.

Piketty describes the flow of inheritance in France over two centuries. I found this interesting.

Fig 11.1 represents the evolution of the annual inheritance flow in France from 1810 to 2010. Two facts stand out clearly. First, the inheritance flow accounts for 20-25 percent of annual income every year in the nineteenth century, with a slight upward trend towards the end of the century. This is an extremely high flow, and it reflects the fact that nearly all the capital stock came from inheritance. Its importance did not diminish with time, moreover. On the contrary, in 1900-1910, the flow of inheritance was somewhat higher (25 percent of national income compared with barely 20) that it had been in 1820s.
Subsequently, we find a spectacular decrease in the flow in inheritance between 1910 and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s. There were very large upward and downward variations during the twentieth century. The annual flow inheritance and gifts was relatively stable until World War 1 but fell by a factor of 5 or 6 percent between 1910 and 1950 (when inheritance flow was barely 4 or 5 percent of national income) after which it increased by a factor of 3 or 4 percent between 1950 and 2010 (at which time the flow accounted for 15 percent of national income).

The evolution visible in Figure 11.1 reflects deep changes in perception as well as the reality of inheritance... In 1950-1960, bequest and gifts accounted for just a few points of national income, so it was reasonable to think that inheritances had virtually disappeared and that capital, though less important overall than in the past was now wealth that an individual accumulated by effort and saving during his or her lifetime. Several generations grew up under these conditions, in particular the baby boom generation born in the late 1940s and early 1950s, many of whom are still alive today, and it was natural for them to assume that his was the “new normal” (380-381).
I had not realised until I read this what a significant change had taken place. I am a member of the baby boom generation, so I never expected an inheritance. Most of what my parents owned was used up in paying for rest home care.

Yet I remember my parents talking about small inheritances they and their parents received from parents, grandparents, and single aunts or uncles, even though they were not well off, and lived through a great deal of hardship. Reading Piketty made me realise that this was much more common in previous generations. It suggests that they appreciated future generations much more than we do.

The pattern has changed, associated with much greater state involvement in life. My mother’s father died when she was quite young, but she received a small bequest from her grandfather that contributed to her secondary and tertiary education. This really made a big difference in her life. The state paid for my tertiary education. Student loans from the state paid for my children’s education.

Biblical teaching on this topic is interesting.

A good person leaves an inheritance for their children’s children, but a sinner’s wealth is stored up for the righteous (Prov 13:33).
Our grandparents understood this verse, but it seems like this has been forgotten by current generations of Christians.


Thursday, July 24, 2014

Piketty (22) Christian Wealth

An even more interesting question is why so few Christian families have any wealth.

  1. We have a faith for the future, so we should be accumulating capital to make it better.

  2. God promised that those who obey his word would be blessed with wealth.

  3. Christians should be creating a legacy for their children. Most of this will be a spiritual inheritance, but is should be supported by a material inheritance.

  4. Abraham was the father of many nations. Jacob created twelve great tribes.

  5. Sin creates a barrier between generations. This explains why the world cannot create family wealth. The gospel has restored the link between generations

    He will turn the hearts of the parents to their children, and the hearts of the children to their parents (Mal 4:6).
    We should see this working out in Christian families over several generations.

  6. I once read about the achievements of the descendants of George Whitfield the great evangelist. They had a huge impact on America. He left an amazing inheritance. Yet very few Christians think about leaving a spiritual and material inheritance for the future.

  7. Christians should not seek wealth for wealth sake, but they should have sufficient wealth to support their families in their calling.

Given all this, it is odd that so few Christians have any wealth or own any productive capital. We are mostly living hand to mouth like the people of the world.

There are several reasons why Christians lack capital.
  1. We consume most of what we earn. We have been sucked into the materialism of the world and are trapped in consumerism.

  2. Bad eschatology has destroyed faith and hope. Many Christians assume that Jesus will return at any minute. Until he comes, things will get worse, so there is no sense in accumulating capital, if it will be left behind or stolen by the antichrist. Loss of a kingdom vision has destroyed hope for the future.

  3. Surplus income has been sucked up by churches to support expensive ministries and pay for ministries. Investment in costly but ineffective approaches to evangelism and church growth have destroyed capital.

  4. Christians seem to have taken on a distaste for capital that they have picked up from the socialist world we have lived in.

Wednesday, July 23, 2014

Piketty (21) Lack of Wealth

Piketty explains that wealth is unequally distributed. He sees this as a flaw in capitalism, but he does not ask the most important question. Why is wealth so rare? Why do so few families have any wealth?

r>g means that people with capital do better than people without capital. If everyone has some capital, then everyone benefits from r>g. It only creates inequality, if capital is concentrated in the hands of a few people.

The widespread lack of wealth was understandable in a subsistence economy, as it was really hard to escape poverty. However, income has risen amazingly in the last couple of centuries, so it would be expected that the ownership of capital would become more widespread. Yet, income has risen immensely, but wealth and ownership of capital is still rare. There are several reasons”

  1. We consume almost everything we earn.
  2. Our only asset is a residential dwelling, but the shelter produced is all consumed, so nothing is earned.
  3. Very people start real businesses that would produce jobs and wealth for their families.
Most people in the western world have no wealth, because they have chosen to be poor.

While I was reading Piketty, I was also reading Family Fortunes by Bill Bonner. He is a bit obsessed with money, but he makes some important points. He explains how to create a family inheritance. He also explains why so few families do it.

A person on the average wage will earn a million dollars over their lifetime. If they were to save half of what they earned, and get a steady rate of return, they would be a millionaire by the time they retired, but very few people do that.

Paul explains why this is the case for the people of the world. They have no hope.
Let us eat and drink, for tomorrow we die (1 Cor 15:32).
If there is no hope for the future, we might as well consume everything. There is no point saving for a future that is uncertain.

Tuesday, July 22, 2014

Piketty (20) Unrighteous Business

If a person works hard, and saves some of their earnings, their savings are righteous wealth. If they use their saving to buy assets that make them and other people productive, those assets are righteous wealth.

If a person starts a business that supplies goods and services that people need at a market price, without coercion, deception or manipulation, the retained earnings of the business are righteous wealth.

If the business relies on:

  • limited liability laws,
  • monopoly rights,
  • government privilege,
  • debt and inflation,
  • exploitation of workers,
  • cheating,
  • coercion,
  • theft,
it becomes unrighteous wealth.

Unfortunately, much modern wealth is unrighteous wealth. Christians should understand the difference.

Some Christians have inherited unrighteous wealth. It will blight their lives, because inheritance does not change its character.

There are only two ways to transform unrighteous wealth.

One is to give it away (preferably from those from whom it was taken, but that is not always possible.

The second is judgment (which is compulsory giving).

Monday, July 21, 2014

Piketty (19) Unrighteous Wealth

My greatest concern a about Piketty’s approach is that the does not distinguish between righteous wealth. He considers the possibility, but decides that it is too hard, because the wealth usually have mixed motives (445).

Assessing the morality of wealth is beyond the capability of Piketty or of any democratic government. When governments portray wealthy as unrighteous, it is usually and excuse for one group of people to steal wealth from another.

God has a different perspective. Jesus introduced the concept of unrighteous wealth in the parable of the shrewd manager (Luke 16). He described some wealth as righteous, but he expanded on the dangers of unrighteous wealth in the parable of the Rich man and Lazarus. He explained that the soul of the person who owns unrighteous wealth is in serious danger. It is almost impossible to get into the kingdom.

Jesus did not give governments responsibility for confiscating unrighteous wealth. Confiscated wealth remains unrighteous wealth.

Unrighteous wealth that Government transfers to another person remains unrighteous wealth. The only way to escape the clutches of unrighteous wealth is to give it away. Zacchaeus understood Jesus teaching so he gave most of his wealth away.

When a person becomes a Christian, one of the first things that we should expect is that the Holy Spirit will convict them about the unrighteous wealth that they own. They should be encouraged to give it away.

When unrighteous wealth is given away, it is transformed into righteous wealth. In the book of Acts, people sol their property and laid the proceeds at the apostle’s feet. They were most likely getting rid of unrighteous wealth. That fact that Ananias and Saphira had trouble giving up their wealth indicates that it was probably unrighteous wealth.

The nature of unrighteous wealth is described in God's Instructions for Economic Life given in the Torah. If we are not clear about whether our wealth is righteous or unrighteous, the Holy Spirit can show us. Discerning unrighteous wealth was too difficult for Piketty, but it is easy for the Holy Spirit.

Much of the wealth held in the western world is unrighteous wealth. If there is a gospel advance in the next few decades, we should see a massive amount of unrighteous wealth being given away. This would do more to reduce inequality than Piketty’s wealth tax.

Large holdings of unrighteous wealth, and a few people with righteous wealth. are a consequence of gospel failure.


  • Confiscated unrighteous wealth remains unrighteous wealth.
  • Unrighteous wealth must be given away to become righteous wealth.
I will post on Jesus parables and on unrighteous wealth when I am finished with Piketty.

Saturday, July 19, 2014

Nit Piketty (18) Flaw in Capitalism

Piketty thinks that he has found a flaw in capitalism: the fact that the return on capital is greater than the growth rate of the economy. He attributes the increasing inequality to a flaw in capitalism. The key is r>g. He writes,

The overall conclusion of this study is that a market economy based on private property, if left to itself contains... powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based.

The principal destabilising force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g.

The inequality r>g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental local contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future.

The consequences for the long-term dynamics of the wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake and that the divergence in the wealth distribution is occurring on a global scale.
r>g is not a flaw of capitalism. It reflects the nature of the world. Capital makes people more productive. This makes everyone better offer off, including labour.

Therefore increasing the capital income ratio is good. The question is who benefits. It seems reasonable that those who do the saving should benefit most. They should benefit more than those who did not save.

Piketty grudgingly seems to accept this reality, but then moves quickly on to attacking inheritances.

Friday, July 18, 2014

Piketty (17) Capital v Wealth

Piketty uses the terms capital and wealth interchangeably. I think that his is a serious problem with his thinking. For an economist, capital is productive stuff like factories, machinery, and computers. The purpose of capital is production.

Wealth is a broader concept. It includes all assets that give a rate of return. Many of these are financial assets, which represent the ownership of real capital (eg shares). Others are loans that are only loosely linked to assets. The focus of wealth is income, which is Piketty’s concern. He is not interested in production. He focuses on understanding how wealth gives people control of income. This is a legitimate concern, but his interest is in wealth, not in capital. Therefore, his use of the word capital to describe wealth is not helpful.

For example, Piketty says that the Industrial Revolution allowed European nations to claim a huge share of world income (59). He ignores the fact that the accumulation of capital enabled them to expand production extensively, which created enormous wealth.

Viewed in this way, wealth becomes a bad thing. This means that by association capital is a bad thing too. For example, Piketty sees 1914-1945 as a good period, because inequality decreased. It was actually a really bad period, because massive capital destruction occurred all over the world. Immense resources went in the production of armaments, where then blown up. That loss of capital made everyone worse off.

Piketty is wrong. Capital is really important. That reason that so many people in the world have escaped from subsistence is the last few centuries has been the accumulation of capital equipment. Capital makes people more productive. Most of the world needs more capital.

Wealth is a different issue. It may be distributed unfairly and obtained illegally. However, we must be careful that we do not destroy capital in an attempt to eliminate unequal distributions of wealth. That would make everyone worse off.

Thursday, July 17, 2014

Piketty (16) Uncertainty

Piketty shows that r is usually greater than g. This might be true on average, but averages cover a multitude of sins.

People involved in business know how easy it is to get a negative rate of return, and even lose capital. Piketty makes it seem like a 4 percent rate of return is automatic. This is misleading. Getting a good rate of return on assets is extremely difficult. It takes a lot of energy, diligence and wisdom.

Wednesday, July 16, 2014

Piketty (15) Middle Class

Piketty says that the big change in the twentieth century was the emergence of the middle class. In 1910, this group held very little wealth. Their share increased significantly during the century. This was achieved mainly through the ownership of residential housing and superannuation.

The overall importance of capital today, as noted, is not very different from what it was in the eightieth century. Only its form has changed: capital was once mainly land but is now industrial, financial, and real estate. We know that the concentration of wealth remains high, although it is noticeably less extreme than it was a century ago. The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a quarter and a third of total wealth, and the wealthiest 10 percent now own only two-thirds of what there is to own rather than nine tenths (377).

Tuesday, July 15, 2014

Piketty (14) Solution

Piketty admits that his proposed solution, a universal tax on capital is unlikely to be adopted. This means that he does not have a workable to his perceived problem.

He assumes that all solutions must be provided by the state. Unless there is an international organisation with the power to overcome national states, any solution that depends on state power is unworkable, because the wealth can motive their wealth from one state to another to avoid taxes.

Piketty sees inequality as an affront to democracy.

Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in society in which inequality is based on merit an effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrast sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities from rational and universal principles rather than arbitrary contingencies (422).

Today the rents produced by an asset are nothing other than the income on capital, whether in the form of rent, interest, dividends, profits, royalties, or any other legal category of revenue, provided that such income is simply remuneration for ownership of the asset , independent of any labour.(422)
There is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working. There is something in this nation that is an affront commons sense that has in fact perturbed any number of civilisation, which have responded various ways, not always benign (423).
In my view, democracy is not the solution. It can make it possible for the majority to appropriate the wealth of a minority. But in the process it will destroy capital, and in the long run that will destroy wealth.

Monday, July 14, 2014

Piketty (13) Forecast for the Future

Piketty shows that the distribution of wealth is changing. Wealth grew during the 19th century. It collapsed between 1910 and 1945 and was flat until 1974. Wealth is now growing again.

Piketty assumes that inequality will increase. He says that the 20th century was abnormal, because capital/income ratios declined, as two wars and the great depression destroyed capital. Following 1945, shortages of skilled labour shifted the balance towards labour. At the same time, unions and labour laws increased the share going to labour. That trend ended in about 1973, and since then the capital/income ratio has been increasing, and inequality along with it.

Piketty says we are coming back the 19th century situation. The twentieth century was abnormal. The 19th century was more normal, so we are reverting the norm.

This does not make sense. Most the wealth in 1800 was land. The aristocracy were allocated their land holdings by William the Conqueror and the winners of various civil wars. Renting land was mostly money for nothing, but the land has to be developed to get better returns.

The industrial revolution favoured capital. A huge army of labourers moving from the country to the cities kept wages down until the middle of the century. At the same time, the landed aristocracy declined.

By 1900, wealth was dominated by industrial capital. Land was a tiny share of wealth. Some of the industrial wealth like the railways was gained through political privilege. Most was gained through innovation and saving to produce what people wanted.

Piketty says that the situation that prevailed in the 19th century is a more normal situation, and that we are going back to that. This does not make sense to me. The 19th century was a very different. During this century, the wealth of the landed gentry declined, and the industrial revolution produced rapid economic growth. There is no reason why our future should be like that.

The nineteenth century was a period of relative peace. Between the defeat of Napoleon and the First World War, a hundred years later, many wars occurred, but they were relatively minor. The gold standard meant that inflation was almost non-existent for the entire century. Recessions occurred, but they mostly resolved quickly.

There is no reason to expect these conditions will prevail in the twenty-first century. We are more likely to see serious wars and economic disaster.

Saturday, July 12, 2014

Picking on Piketty (12) Robert Rowthorn

One of the best critiques of Piketty’s theoretical explanation has been presented by Robert Rowthorn from the University of Cambridge (UK) in his Note on Thomas Piketty. He explains that Piketty uses the standard neoclassical theory of factor shares.

This theory establishes a link between the capital intensity of production and the share of profits in total output. The nature of this link depends on the elasticity of substitution between capital and labour. When this elasticity is greater than unity, an increase in the capital-output ratio leads to an increase in the share of profits. This, in essence, is Piketty's explanation for the increased share of wealth-owners in national income. Thus, the shift in income distribution is due to the over-accumulation of capital: there has been too much real investment.

The above explanation has two related flaws. Piketty's assumption regarding the elasticity of substitution is not correct. There is considerable evidence that this elasticity is less than unity. Moreover, Piketty's method for measuring changes in the capital-output ratio is misleading. He fails to allow for the disproportionate increase in the market value of certain real assets, especially housing, in recent decades. This leads him to conclude, mistakenly, that the capital-output ratio has risen by a considerable amount. In fact, conventional measures of this ratio indicate that it has been either stationary or has fallen in most advanced economies during the period in question. This would suggest that the basic problem is not the over-accumulation of capital, but just the opposite. There has been too little real investment.
The increase in the capital/income ratio measured by Piketty is the result of price effects.
Piketty documents how α and β have both risen by a considerable amount in recent decades. He argues that this is not mere correlation, but reflects a causal link. It is the rise in β which is responsible for the rise in α. To reach this conclusion, he first assumes that β is equal to the capital-output ratio K/Y, as conventionally understood. From his empirical finding that β has risen, he concludes that K/Y has also risen by a similar amount. According to the neoclassical theory of factor shares, an increase in K/Y will only lead to an increase in α when the elasticity of substitution between capital and labour σ is greater than unity. Piketty asserts that this is the case. Indeed, based on movements α and β, he estimates that σ is between 1.3 and 1.6 (page 221).

Thus, Piketty's argument rests on two crucial assumptions: β = K/Y and σ > 1. Once these assumptions are granted, the neoclassical theory of factor shares ensures that an increase in β will lead to an increase in α. In fact, neither of these assumptions is supported by the empirical evidence which is surveyed briefly in the appendix. This evidence implies that the large observed rise in β in recent decades is not the result of a big rise in K/Y but is primarily a valuation effect.
Rowthorn shows that K/Y has been falling in the United States since 1981 and has been roughly constant in most of Europe. This implies that the income share of wealth owners is rising because of a low rate of real investment and a falling capital–output ratio.
Piketty argues that the higher income share of wealth-owners is due to an increase in the capital-output ratio resulting from a high rate of capital accumulation. The evidence suggests just the contrary. The capital-output ratio, as conventionally measured has either fallen or been constant in recent decades. The apparent increase in the capital-output ratio identified by Piketty is a valuation effect reflecting a disproportionate increase in the market value of certain real assets. A more plausible explanation for the increased income share of wealth-owners is an unduly low rate of investment in real capital.

Broken Windows

Did you hear about the man whose neighbor’s children threw stones through his windows, breaking the glass? They had been throwing stones on the roof of his house for some time, so this was the last straw. The man grabbed the rifle that his Uncle Pat had given him and went next door and shot the parents of the stone-throwing children. The children escaped to the home of another neighbor before he could shoot them.

The man was so angry that he pumped the neighbor’s house full of lead, killing the parents, their three children, and the children they were sheltering. Even a stray dog scavenging in the rubbish bin was wounded.

The news media described the situation as spiraling violence.

The police said they were investigating.

The judge said that the man was entitled to defend his home from attackers.

When Uncle Pat heard abut the shooting, he was delighted.

Friday, July 11, 2014

Piketty (11) Elasticity of Substitution

The biggest debate about Piketty's book has been about the elasticity of substitution between capital and labour. Economists have traditionally believed that as the supply of capital increases, the rate of return will decline, ie there will be diminishing marginal returns to capital. Therefore, even if the capital/income ratio increases, then the rate of return on capital will decline. This will cause share of income going to capital to decline.

Piketty’s formulation implies that over the long term, the elasticity of substitution between capital and labour seems to have been greater than one. This means that an increase in the capital/income ratio seems to have led to a slight increase in α, the capital share of national income (221).

If this elasticity is greater than one, as more capital is added to the productive process, the owners of capital push aside wage demands and claim a increasing share of output as their reward for investing.

Several economists have challenged this result. Matthew Rognlie argues that Piketty has confused gross and net elasticities.

Economists generally talk about gross elasticity in the context of a gross production function. Piketty uses net concepts, so he means elasticity of substitution in a net production function. This a different concept. Net elasticity is always less than gross elascitiy, and almost always less than one.
Lawrence Summers claims in the Inequality Puzzle that,
As the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.
There will be continuing debate on this issue.

Thursday, July 10, 2014

Picking Piketty Apart (11) Push-back

Piketty's analysis has been challenged by various economists.

1. Rate of Return
Some economists have questioned his suggestion that the rate of return on capital is consistently above 4 percent.

Lawrence Summers argues that the largest single component of capital in the United States is owner-occupied housing. The return comes in shelter services which are consumed.

Robert P Murphy says that Piketty confuses the rate of return with the rental price of capital. He bases his critique on Eugen Böhm von Bawerk who wrote Capital and Interest (1881).

2 Savings
There have been debates about whether savings rates are as high as Piketty claims.

Debraj Ray argues that r>g has nothing to do with whether equality goes up or down. The key force driving rising inequality is “the savings propensities of the rich.

The owners of capital income also happen to be richer than average, and richer people can afford to (and do) save more than poorer people. But that has to do with the savings propensities of the rich, and not the form in which they save their income. A poor subsistence farmer with a small plot of land (surely capital too) would consume all the income from that capital asset. It may well be that the return on that land asset exceeds the overall rate of growth, but that farmer’s capital income would not be growing at all.
This is probably correct, and all that is needed to explain the inequality of wealth.

I expect there will be continuing debate about the economic explanation provided by Thomas Piketty.

I do not think we can be too certain about what will happen in the future. As g declines, the rate of return on capital (r) could decline. If the fall n growth is serious, savings rates could decline too. If either of these happened, Piketty’s prediction would fail.

In some ways, the debate about r>g is irrelevant. A variety of economic, social and legal factors affect the share of national income going to the owners of wealth. Attempting to explain this with two equations is overly ambition.

However, there is no doubt that wealth is currently very unequally distributed. Understanding why this has happened will require a great deal more economic, social and legal analysis.

Arguing about r>g will be a distraction from the real work that needs to be done.

Wednesday, July 09, 2014

Picking Piketty Apart (10) Statistical Check

Piketty examines each of his variables and estimates where they change in the future.

First g,
He suggests that economic growth will be slower in the future due to declining population growth. New technology and innovation will not be able to compensate.

Then r,
Piketty says that the over the long run, the rate of return is about 4-5 percent a year.

The principal conclusion that emerges from my estimates is the follow. In both France and Britain, from the eighteenth century to the twenty-first century, the pure return on capital has oscillated around a central value of 4-5 percent a year, or more generally in an interval from 3-6 percent a year. There has been no pronounced long-term trend either upward or downward… it often exceeded 4-5 percent in the eighteenth and nineteenth centuries, whereas in the early twenty-first century it seems to be approaching 3-4 percent as the capital/income ration returns to the high level observed in the past (206).
Then r>g,
Through most of history, r-g has been positive.
Throughout most of human history, the inescapable fact is that the rate of return on capital was always 10 to 20 times greater than the rate of growth (353)
He assumes that r will continue to be greater than g in the future.
Finally s
Piketty investigates the rate of return in many countries. Rates vary between countries and over time, but they have averaged between 7 and 10 percent in western countries between 1970 and 2010 (175).

If these estimates are correct, then the capital income ratio will continue to grow and the share of income that goes to capital will increase too.

Tuesday, July 08, 2014

Piketty (9) r>g

The implication of Piketty's two laws is that if growth (g) is slower than the rate of return (r) ie r>g, and saving rates will remain high, then the capital/income will increase. This leads to increased inequality.

For example, if g=1% and r=5%, saving one-fifth of the income from capital (while consuming the other four fifths) is enough to ensure that capital inherited from the previous generation grows at the same rate as the economy (351).
The basic point of these two laws is that if r>g it is easy for those with existing wealth to grow their wealth faster than the economy is growing. As wealth is unequally distributed, this increases inequality.

When growth is faster, it becomes easier for holders of wealth to save a much greater share of their return on capital and grow their wealth faster than the economy is growing.

β=s/g implies that the capital/income ratio will increase significantly in the twenty-first century, as we return to the equilibrium for a low growth economy with a savings rate of about 12 percent. r>g suggest that most of this new capital will go to the holders of existing wealth.

If the increase in wealth goes to those who already hold wealth, the mass of the population, who own no wealth is left to share out the remainder amongst themselves.

The reason the accumulation of wealth is a problem is that the existing distribution of wealth is so unequal. I will say more on this in future posts, but the fact that wealth begats wealth is not the problem. The problem is that wealth is so unevenly distributed that only a few benefit from the accumulation of capital.

There are two important questions that Piketty does not answer.
  1. Why do so few families own any capital, beyond their residential dwelling, which is not really capital at all?
  2. Existing wealth is distributed unequally. Is this legitimate or not?

Monday, July 07, 2014

Picking on Picketty (8) Explanatory Theories

The weakness of Piketty’s analysis is the lack of explanatory theory. The problem with r>g is that it has more descriptive power than explanatory value. He is very effective at describing how things are. However, he is much less effective in explaining why they are as they are. He makes suggestions, but is unable to give the causal links that show why thing are as they are.

His first law of economics is an accounting that does not explain much.

α = r × β
α= share of national income that comes from capital income.
r= rate of return on capital
β=capital/income ratio
If either or both of the rate of return on capital or the capital/income ratio increase, the share of national income going to capital will increase.

The second law of economics is different. Piketty says it only applies in the long-run, under certain assumptions. There will be debate about where and when it applies.
s=savings rate
g=growth rate of the economy

In the long run, the capital/income ratio adjusts to the structural growth of the economy and the savings rate, ie how much is saved out of the increased income.

According to neoclassical economics, an increase in savings does not necessarily lead to an increase production. Growth in production is constrained by population growth and technical innovation. Piketty suggests that this is limited to about 2 percent a year. If savings increases faster, the capital/labour ratio adjusts accordingly.

This formulation allows Piketty to estimate the long run equilibrium capital/income ratio for a given savings rate. This insight is hidden away in the middle of the book, so it has been missed by many who skimmed the book, but it is his most important theoretical contribution.
The law β=s/g apples in all cases, regardless of the exact reasons for a country’s saving rate. This is due to the fact that β=s/g is the only stable capital/income ratio in a country that saves a fraction s of its income, which grows at a rate g.

The argument is elementary. Let me illustrate it with an example. In concrete terms: if a country is saving 12 percent of its income every year., and if its initial capital stock is equal to six years of income, then the capital stock will grow at 2 percent a year, thus at exactly the same rate as national income, so that the capital/income ratio will remain stable.

By contrast, if the capital stock is less than six years of income, then a saving rate of 12 percent will cause the capital stock to grow at a rate greater than 2 percent a year and therefore faster than income, so that the capital/income ratio will increase until it attains its equilibrium level.

Conversely, if the capital stock is greater than six years of annual income, then a saving rate of 12 percent implies that capital is growing at less than 2 percent a year, so that the capital/income ratio cannot be maintained at that level and will therefore decease until it reaches equilibrium.

In each case the capital/income ratio tends over the long run towards its equilibrium level β=s/g... it allows us to understand the potential equilibrium level toward which the capital/income ratio tends in the long run, when the effects of shocks and crises have dissipated (170).
There is a long run equilibrium ratio between wealth and income which remains stable once established. This equilibrium is the basis for Piketty’s claim that the capital/income ratio will increase to about 600 percent in most Western country’s as the growth rate declines to 2 percent or less (assuming the savings rate continues to be about 12 percent.

The equation β=s/g is indeterminate. There are almost limitless values that can satisfy the equation. Piketty constrains them by assuming that the saving rate is determined independently, and remains about 12 percent of national income.

However, changes into the savings rate can make a significant in a slow growth economy (2 percent). If the savings rate rose to 16 percent, the capital/income ratio would be 8. If the saving rate dropped to 8 percent, the capital income ratio would be 4, less than what it is in many Western countries now. This suggest that the savings rate is quite an important variable.

On the other hand, if the saving rate increases dramatically, and the extract capital is channelled into productive activities, the growth rate can increase without a change in the capital/income ratio, ie g=6, s=24 and β=4. This is more like the Chinese situation.

Saturday, July 05, 2014

Picking Piketty Apart (7) Mobility

When analysing inequality, Thomas Piketty focuses on the share of income and wealth going to three groups, the top decile, the middle forty percent and the bottom fifty percent. He also looks at the share of the top one percent.

A limitation with this approach is that it does not tell us what is happening to individuals, families and groups over time. The people making up Piketty’s groups can change by economic events. People in the bottom half can move up. Others born into the top 10 percent can drop down.

There is always (by definition) a top ten percent in every society, but the membership of that group can change over time. To understand inequality we also need to understand income mobility.

In the beginning the 19th century, most of the top 10 percent were landed aristocracy. By the end of the century, most of the top ten percent were industrialist. A few would have made the transaction from renter to industrialist, but most did not.

By the end of the twentieth century, the landed gentry cannot afford to maintain their stately homes. Industrialists have been hammered by competition from China. The top 10 percent are now bankers and super manager. A place into the top 10 percent is never permanent.

Friday, July 04, 2014

Picking Piketty Apart (6) Statistics

Thomas Piketty deals with four broad themes in his book called Capital.

  1. Statistics
  2. Explanatory theory
  3. Forecast for the future.
  4. Policy recommendations.
Piketty puts considerable effort into proving that wealth is unequally distributed. His statistics show that inequality is increasing. Everyone assumes that this is the case, but it is good to have statistical proof.

Piketty presents a lot of statistics. As someone who has dabbled in statistics a bit, I like the way that he does not just do a data dump, but uses his graphs and tables to tell an economic and social story. Piketty and his colleagues have collected a massive database of statistical information. He presents the information in a way that is east to understand. Statisticians often dull their readers with numbers. Piketty uses statistics to illuminate his story.

I have also done enough with statistics to know that measuring income is hard, and measuring wealth is even more difficult, so I expect there will continue to be arguments about his statistics, but I doubt that these will change the underlying story.

That said, Piketty tends to gets a bit exuberant in some of his interpretations. He consistently see a U pattern, a series declines between 1914 and 1950, but is now returning to the level that prevailed in the 19th century. I see quite a few reverse Js. Many of the measures he describes as a U are a long way from returning to the level of the 19th century.

Thursday, July 03, 2014

Picking Piketty Apart (5) Solution

Part 4 of Capital by Thomas Piketty is called Regulating Capital. That title sums it up. Piketty sees government regulation as the solution to all the problems he has identified.

Piketty has no confidence in progressive income tax to solve inequality. When income taxes are raised too high, wealthy people set about evading them. He notes that top tax rates have declined in the last few decades, because a lower rate captures more tax.

The solution proposed by Piketty is an annual progressive annual tax on global wealth. He suggests that this tax would be 0 percent on wealth less than a million. The tax might rise to 5 to 10 percent per year on fortunes greater than a billion euro.

Piketty acknowledges that a global wealth tax might not produce a lot of revenue, but that is not it purpose. The objective is to eliminate large holdings of wealth. This claims that this would reduce inequality.

Wednesday, July 02, 2014

Picking Piketty Apart (4) Inequality

Part 3 of Capital is called Structures of Inequality. In this part, Piketty analyses the nature of inequality. He says that,

By definition, in all societies, income inequality is the result of adding up these two components: inequality of income from labour and inequality of income from capital. The more unequally distributed each of these two components is, the great the total inequality.

The third decisive fact is the relation between these two dimensions of inequality: to what extent do individuals with high income from labour also enjoy high income from capital.

The distribution of capital ownership (and income from capital) is always more concentrated than the distribution of income from labour.
To analyse inequality, he divides the population of society into three groups.
  • Lowest fifty percent
  • Middle forty percent
  • Top ten percent (top decile)
To understand what is happening in the top ten percent, he sometimes investigates the top one percent (percentile).

Piketty prefers this approach to analysing equality over other measures like Gini coefficients. His approach makes sense, because it describes inequality very graphically.

In the United States, the top decile owns 70 percent of the wealth. The bottom fifty percent owns only 5 percent, and there are five times as many of them. The middle forth percent owns only 25 percent of the wealth, and there are many of them too.

The big change in the twentieth century was the emergence of the middle class. In 1910, this group held very little wealth. Their share increased significantly during the century. This was achieved mainly through the ownership of residential housing and superannuation.

The other big change in last few decades is the emergence of the super salaries in the top decile.
The final and perhaps most important point is the increase in very high incomes and very high salaries of “supermanagers,” that is , top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labour.
This has made the top ten percent more dependent on labour income.

The last chapter of this part looks at inheritances.
We find a spectacular decrease in the flow of inheritances between 1910 and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s.

Tuesday, July 01, 2014

Picking Piketty Apart (3) Caital/Income Ratio

Part 2 of Capital by Thomas Piketty is called The Dynamics of the Capital/Income Ratio.

Piketty measures capital (a stock) in terms of national income (a flow).
In the early 19th century, capital was dominated by land. By 1910, land was unimportant and the capital of firms incredibly important. Public wealth is insignificant, because most assets balanced by debt.

In Europe, the Capital/Income Ratio was 700% from 1700 to 1910. It dropped to 3000% between 1915 and 1950. It has been rising slowly since then to reach 400%.

The United States was more stable. The Capital/Income Ratio was about 450% from 1870 to 1925. It dropped to 350% from 1930 to 1970 It has risen slowly since then to above 400%.

Piketty argues that Capital/Income Ratios will return to the level that prevailed in the 19th Century.

He then goes on to look at the split in income between labour and capital.
Capital’s share of income was on the order of 35-40% in both Britain and France in the late eighteenth century and through the nineteenth, before falling to 20-25 in the middle of the twentieth century and then rising again to 25-30% in the mid-twentieth and early twenty-first centuries.

Piketty is very thorough. He lists numerous factors that may modify the results he is predicting. He provides a clear explanation of most of these issues.
  • Land Value
  • Durable goods
  • Valuables
  • Foreign Assets
  • Tobins Q
  • Cobb Douglass production function
  • Foundations
  • Public wealth
  • Slaves
  • National accounts
  • Retained earnings
  • Mixed income
  • Sovereign Wealth Funds
  • Marginal Production