The Piketty Paradox

gillbilly
By gillbilly on Thu, Feb 12, 2015 - 2:56pm

Has anyone read Piketty’s “Capital, In The 21st Century?” I just finished it and was wondering what others think about it. It has sparked much debate among economists (most currently with Acimoglu).

I found the book to be fairly balanced in respect to the methodology, admitting the inherent vagueness of economics as a social science in general as well as the shortcomings of the data that was available to him.  Many of his findings have been controversial in both the liberal and conservative spheres, which I have to admit wins favor with me. Getting a good debate going is never a bad thing.

I don’t think it is at all shocking that he finds that capital income grows much more rapidly than income (GDP) during periods of slow economic growth, or at any time for that matter.  I do think his capital/income ratio, or inequality r>g, although for some may be too simplistic, to me holds merit and is an interesting starting point for discussion of what is ethically acceptable in regard to wealth accumulation and distribution. I don’t think the book should be dismissed out of hand, or brushed off as fiction. I think it’s an important book and actually complements the Crash Course. If there are real limits in all other economic directions, where is the limit to wealth accumulation and distribution?

The paradox that I see is expressed in his premise that if the total average return on capital is much higher than income and grows larger the purer the capitalism, then the meritocratic principles within the “free-markets” break down. If true, it does beg for action to redistribute wealth to create fairness.  “Let the market decide” has been a mantra for decades, but again if Piketty’s view that the purer the market, the more inequitable it is, where does that leave us? If the freedom of the individual is to be balanced with the good of the collective, where is that balance? And/or does it change with context? Apple has a capitalization of $727B with some saying it should be $1T.  When do we cap capitalization, or should we, and when do we force banks globally to be transparent so we can actually establish who owns what?

Should we even strive for fairness? I would argue yes, because fairness is at the heart of our democratic/ethical ideals (not necessarily our democratic process currently, but our ideals yes) A progressive global tax on wealth and capital as he states is a utopian ideal, but if we all seem to know the obvious fact that the wealthiest (top 10 percent) accumulate wealth faster than those in the lower percentages (a rigged system), how else do we create a more level playing field? By less regulation? We’ve been in a deregulatory environment for decades and inequality has grown worse. Letting the market decide doesn’t appear to be the answer.

Furthermore if public debt is a direct cause of this skewed wealth accumulation, and as Piketty states “public debt is a backhanded redistribution of wealth from the poor to the rich, from people with modest means to those with the means to lend to the government (who as a general rule ought to be paying taxes rather than lending),” then how do we correct it.

Piketty says there are three ways to deal with public debt – 1.a much more progressive marginal tax rate and a tax on capital 2. Create inflation to reduce the debt 3. Austerity. Needless to say these are not popular, but of course one can be more popular than the others depending your personal economic situation.  I do think he makes a good argument for the targeted precision of a more progressive tax, with inflation and austerity being much less effective. I also think he makes a persuasive argument for a tax on capital as a means to force transparency in the global financial markets…something desperately needed.  If we have a financial system that is globally connected through the central banks with finite capital, then a global form of capital taxation isn’t illogical, utopian maybe, but not illogical.

The other problem that lies at the heart of the matter is that the line between government and the private sector doesn’t exist in reality. We like to point fingers at the government, but the reality is the government is inextricably intertwined with the private sector.  We don’t trust our government(s) because there is no division between the elite government and the elite private sector, that to me is logical but unfortunate. Again where does that leave us?

Lastly, I agree with Piketty that we’re all political whether we know it or not. You can pretend you are off the grid and not participating in the system, but the reality is you’re not. That tax bill comes sooner or later… and that doesn’t have to be viewed as a bad thing if you feel you’re being taxed fairly. Even if you have figured a way to not pay any tax it only means others are paying your share of the collective benefit you are receiving. To sit back and commentate without participation leaves too much room for the wealth to accumulate in fewer hands.  I do agree with Picketty’s last lines…”Yet it seems to me that all social scientists, all journalists and commentators, all activists in the unions and in politics of whatever stripe, and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it, and its history. Those who have a lot of it never fail to defend their interests. Refusing to deal with numbers rarely serves the interest of the least well-off.”  

What do you think?

12 Comments

Jim H's picture
Jim H
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FOFOA takes on Yanus' take on Piketty..

I ran across this and recalled your post Gillbilly;

http://fofoa.blogspot.com/2015/02/confessions-of-erratic-marxist.html

.........With that in mind, here's a short anecdote from another presentation Yanis gave in 2013, this one titled The Dirty War for Europe’s Integrity and Soul. Yanis began his presentation like this, "allow me to begin with several ‘true stories’ that will, hopefully, transport you into the Europe that I inhabit. Each of my tales will come with a short title." The tales had titles like "Error", "Denial", "Impotence", "Despotism", "Ignorance", "Wickedness" and "Serpent DNA", which should give you an idea of the tone.

This was one of the shortest, and it was titled "Frenzy":

Franz, not his real name, worked for a major German bank for twenty-five years. In 2011 he confided to me that the Euro’s ‘good’ years, before 2008, had been the worst of his life. From 1999 to 2008 the pressure from his bank’s Frankfurt HQ on executives like him was relentless. Before the Euro, his job entailed flying around European capitals, assessing the credit worthiness of governments, local authorities, utilities, developers, local banks, large businesses; playing hard to get with them, and eventually signing off on loans that made sense to him. However, once the Euro was established the Frenzy began in earnest. HQ was pressurizing him incessantly to lend, lend, lend. When he warned them that increased lending would mean subprime loans to iffy customers, they couldn’t care less. It was all about securing a higher share of the Euro market than other banks – French banks in particular – who were also on a lending spree. And since total lending effected was linked to his and his bosses’ bonuses, Franz and his colleagues were sent to Dublin, to Madrid, to Athens, to every nook and cranny with a hitherto low level of indebtedness. Their mission? To increase it. “I lived the life of a predator lender”, he added.

Notice the correlation/causation fallacy. Because the predatory lending began around the same time as the euro, causation is lumped onto the euro. But this same phenomenon was happening on Wall Street and Main Street USA as well, perhaps even more so. The new single currency in Europe no doubt made it easier for the German banks to jump borders, but it was an $IMFS game nonetheless. Remember it was Goldman Sachs that reportedly taught the Greek government how to really take advantage of the new euro by ramping up its spending and its debt in the early years. Was that caused by the euro, capitalism, or the $IMFS?

This is Yanis' view of capitalism's drive—predatory lending—which, as I argue, is simply the result of extra demand from the Savers (a group distinct from—and much larger than—professional investors, speculators and traders) for more debt to save. Physical assets rise in value as more Savers save in them, but debt must rise in volume in order to accommodate a growth in savings. One increases the debt level while lowering interest rates and lending standards leading to all kinds of problems in the real economy, and the other does not.

I have not read the Piketty book, but I know it has fomented much discussion.  I thought this comment from the above FOFOA piece summed up the POV being presented pretty well (emphasis mine);

  Roacheforque said... He's clearly not an interventionist (which is probably why you like him?) but he certainly won't be the first to "conflate" the the death spiral of a debt-based fiat reserve wealth system with capitalism. It's probably the most common misconception we deal with, conceptually, as we struggle to reach solutions like freegold.

Perhaps we're all erratic Marxists now. Certainly, this more finely tunes the meme that we're all socialists (including the HMS's).

 

 

gillbilly's picture
gillbilly
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Erratic Marxists

Erratic Marxists! The term makes me laugh, it does have a particular irony. Piketty does write about the CBs and their role. I found it interesting that in a section he titles "What do central bankers do?" he begins by refuting any chance of returning to the gold standard. His opinion is that the CB were severely limited under a gold/silver currency in their ability to control the money supply and prices. Prices were at the mercy, or hazard as he calls it, of gold/silver discoveries. He writes:

"In practice this was a source of considerable difficulty. If large deposits of gold or silver were dsuddenly discovered, as in Spanish America in the sixteenth and seventeenth centuries or California in the mid-nineteenth century, prices could sky rocket, which created other kinds of problems and brought undeserved windfalls to some. These drawbacks make it highly unlikely that the world will ever return to the gold standard."

But then he goes on:

" Once currency ceases to be convertible into precious metals, however, the power of central banks to create money is potentially unlimited and must therefore be strictly regulated. This is the crux of the debate about central bank independence as well as the source of numerous misunderstandings."

..." at the beginning of the Great Depression, central banks adopted an extremely conservative policy: having only recently abandoned the gold standard, they refused to create the liquidity necessary to save troubled banks, which led to a wave of bankruptcies that seriously aggravated the crisis and pushed the world to the brink of the abyss. It is important to understand the trauma occasioned by this tragic historical experience. Since then, everyone agrees that the primary function of central banking is to ensure the stability of the financial system, which requires central bands to assume the role of lenders of last resort: in case of absolute panic, they must create the liquidity necessary to avoid a broad collapse of the financial system. ...Indeed, faith in the stabilizing role of central banking at times seems inversely proportional to faith in the social and fiscal policies that grew out of the same period."

I think this gives a good summary of how mainstream economists view the central banks, backed by Milton Friedman's theory of monetary policy. I also think it has some merit, but also has many holes.

He acknowledges later that the events surrounding the depression and the creation of the New Deal:

"can obviously be interpreted in a different light: there is no reason why a properly functioning FED cannot function as a complement to a properly functioning social state and a well-desinged progressive tax policy. These institutions are clearly complements rather than substitutes."

He also acknowledges the dangers of CBs...

"Central banks are powerful because they can redistribute wealth very quickly and, in theory, as extensively as they wish. If necessary, a central bank can create as many billions as it wants in seconds and credit all that cash to the account of a company or government in need."  ...."The weakness of central banks is clearly their limited ability to decide who should receive loans and in what amount and for what duration, as well as the difficulty of managing the resulting financial portfolio. One consequence of this is that the size of a central bank's balance sheet should not exceed certain limits." 

I agree that the chance of returning to a PM currency is very low on a global scale because of the lack of control. (it always comes down to control doesn't it?) and what we are seeing now are all the dangers of a runaway CB system. He ties this all into how this effects wealth inequality. I think if you swallow his book whole, then you're left agreeing with his solutions (raising the highest marginal income tax rates and capital tax), but that just potentially leads us down the same past predictable road. It was also brought to my attention that the way he defines capital in incorrect. He defines it as all physical and financial assets, and not as a process or social relation. I'm still reconciling this concept in my mind.

Thank you for your reply

Jim H's picture
Jim H
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Just to be clear....

I am not an advocate for a return to the Gold std., pre se.  That I am appears to be assumed by you Gillbilly, and often by Dave F as well.. or at least Dave F sets up this straw man often in his retorts back to me.  I am though quite comfortable with the idea that Gold will someday break free of the box bankers keep it in through it's paper futures market electric fencing.. and that it will then become what FOFOA calls, "FreeGold".  FreeGold does NOT mean that Gold constrains the credit system.. it simply means that it acts (is allowed to act finally) as an objective reflector of such.  

Let the CB's stimulate, unconstrained by Gold,  to their little heart's content... just give me a way out of the insanity.

   

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davefairtex
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electric fences

JimH-

...I am though quite comfortable with the idea that Gold will someday break free of the box bankers keep it in through it's paper futures market electric fencing

Is this the same electric fence that so successfully restrained gold that it only was able to barely squeak out a 600% gain from 2000-2011?  [Gain in SPX over the same timeframe: oops, SPX lost money over that same timeframe]

Man, those electric-fencer paper-gold manipulators are fantastically good at their job.  They can do anything with that paper gold.

Well, anything except for keeping gold from rising during the 11 year period 2000-2011.

 

 

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Jim H
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You are right to point that out Dave...

I was actually thinking about that this morning.. oddly enough.  What you say is exactly true.  How to rationalize?   

Here is how far I got in my thinking;  The bankers are not dumb.. they understand their own (debt based fiat money) system quite well, instabilities and all.  They know the trajectory, and only care that they can guide it and keep control over it, or at least keep control over the narrative of who to blame as various parts of the system begin to fall apart (I loved that Stockman mentioned parts flying off due to centripetal  forces in his interview elsewhere on these pages... was exactly what I was getting at with the clothes washer video I linked to in my recent Gold & Silver group piece).  So why was Gold allowed to trade more freely in the 2000's

I posit that it was done in order to get set up for the more turbulent times ahead prior to there being any crisis in the currencies... and of course to allow for more physical to be loosened up in the system.  Allowing price to go up brings scrap in, etc., and the ability to let it go up slowly during the 2000's, prior to any concerns about the currency.. was pretty smart.  They almost lost control when Gold approached $2000 in 2011, and have been using every trick since then to keep Western interest contained via their chart painting, and Eastern physical demand satiated via raiding the GLD, Western central bank vaults, etc. 

I think that the wildcard TPTB didn't anticipate was Chinese demand...  it shows no signs of abating and, for now, is solidly above total new world mine supply (ex-China). Where is the rest of the world supply coming from? 

         https://www.bullionstar.com/blog/koos-jansen/sge-withdrawals-59t-in-week...

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gillbilly
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No assumptions made, but there are assumption

Jim, no assumptions made. Actually I was just responding to your post with what Piketty's views were on the subject of CBs. I thought it was interesting that he starts this section with refuting the gold standard. Kind of makes you wonder why. My opinion of a return to a gold standard is merely me being a realist. I actually don't disagree with you on the madness and having a way out, and I too thought the Stockman interview was excellent.

Piketty has chosen his battle...wealth equality, and it has fueled a lot of good healthy debate. That's what I think is so important about it. The distortions in the markets that Chris and Stockman discuss have created more wealth inequality and there are a whole lot of people mad, anxious, and worried about how the inequality continues. The book makes a lot of very bold statements/laws that I think are a good starting point. I think where the book misses is that what we are seeing now in our distorted markets is inequality intensifying by hitting real resource limits. He writes a considerable amount about demographics, but not limits to growth...he assumes the growth in the economy can just keep growing, albeit slower, but grow nonetheless.

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gold - 11 year rally, 4 year correction, and the next leg higher

Jim, that's quite the convoluted tale you weave.    Now you say that the massive bull market in gold was a deliberate plot by the manipulators, who on the one hand, can't stand competition with their fiat money so much so that they are motivated to spend hundreds of billions to suppress the price of gold, but at the same time you are now saying they "allowed" the price to rise "slowly" (a six-bagger is slowly?  Please Heaven let all my assets appreciate just as "slowly") so as to cause more physical gold to appear.

It's an eleven year master plan!  My gosh, how clever - and patient - they must all be!  (These are, of course, the same people who are almost completely focused on their next quarterly bonus, and who were largely unable to escape big losses from the subprime junk they were peddling.  These are the same idiots who run the suppression-scheme-that-wasn't?)

Like the Texas Sharpshooter, you start out with your conclusion, and you work really, really hard to wrestle and pound and chop away at the evidence until at last it finally fits your conclusion: Gold Price Declines are Always Due to Manipulation.

Here's my thought.  Central bankers have been selling gold ever since Nixon closed the gold window.  They've been trading gold for a lot longer than that.  I think they would prefer gold to stay within a trading range, so they can keep on making money as they sell the peaks and buy the dips.

So given that central bankers prefer that gold not rise, how on earth did gold rally during 2000-2011?  Because the buyers vastly outnumbered the central banker sales.   We had a brisk inflation story all the way through that period, stemming from a whole lot of consumer borrowing/money printing via the housing bubble.  And then after the crash, "everyone knew" that money printing would lead to hyperinflation, so the buying pressure was even stronger.  China's money supply was expanding dramatically, and a big inflationary jump in prices happened, which supported the thesis.  I know, its a boring, simple story, which is why no goldbug ever buys it.  There's no plot, no evil-doers, no nefarious 11-year plan.  For several reasons, buyers just outnumbered sellers, so gold moved dramatically higher.

So then why did the rocket ship stop?  Why did gold correct after 2011?  Well, we could say "the desperate manipulators throw heaven and earth into the struggle and finally suppressed gold" - or, we could acknowledge that the primary goldbug thesis from 2009 where "money printing will lead inexorably to hyperinflation" just didn't pan out, and the evidence started to show up in 2012.  Of course the true believers didn't sell, but all the other people who could read a chart (M2, inflation, commodity prices, etc) weren't so stout-hearted.  They sold when the evidence started not to match the story.

As the years passed and hyperinflation continued not showing up, more and more of these "non-believers" gradually sold off their gold holdings.  Eurozone started moving into outright deflation.  Moving averages were crossed, more selling happened, etc, etc.  As the macro data became more clear (especially in Europe) and deflation became the more likely outcome, and even with all the QE programs around the world, no inflation happened.  So western gold sales increased until finally most of the people in the west who bought in 2009-2011 on the "hyperinflation trade" ended up bailing out of gold.  Just look at the GLD tonnage evidence.  It is back below 2009 levels.

And that's where we are today.  Likely, ever since US money printing started, China has a plan in place - replace a goodly chunk of dollar reserves with gold, preferably as big a chunk as possible.  And India of course just likes gold.  So between them, they've put a floor under the gold price.  (Thanks guys!)  Likely they kept gold from retracing all the way back to 1000, where it started its launch back after the 2008-9 crash.  My guess: asian buying is worth $200-$250.

But the western "hyperinflation" buyers are still not back.  Nor, I fear, will they be coming back.  And with half the world's gold buyers out of the picture, of course the price is still struggling to break out of its downtrend.

I believe the next leg up for gold won't be hyperinflation buyers (largely because we're not going to get hyperinflation) it will be gold-as-currency buyers - people fleeing from their currency into gold as a safe haven.  It will be a different group from the 2009-2011 buyers, and I'm not sure silver will do all that well during this period.  But, once the debt defaults start happening, once sovereign debt proves not to be a great safe haven after all, and once capital controls start to appear and stronger forms of financial repression at put in place, gold (both paper and physical) will suddenly become much more interesting in every place that imagines "gosh, we might be next."

And maybe hyperinflation does appear, but not as the outcome of "money printing" that we expected, but instead as a one-shot overnight currency devaluation.

Ask Russia if they feel hyper-inflated?  Ruble is down 50% vs the dollar.  Inside the country they can't really tell, only those who travel (or buy imported products) notice.  At least today anyway.

That's my story, and I think it hangs together.  No manipulators involved as the primary driver of gold, so my tale here won't impress the goldbugs, but perhaps others might be able to see how things might all tie together without relying on manipulators to explain everything.

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rzc24arcel
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A Collection of Reviews of Piketty's Book

Thinking that you might be interested to see a list of reviews of Piketty's book. I myself am not able to read the book yet. All I've done was to have a peek on these reviews beginning March 2014 until January 2015. I tried my best to listen to both sides, but of course, I have my own bias. Here is the article I wrote last June 2014. In it, I included a list of links to those reviews. 

 

 

http://freedompeaceprosperity.blogspot.kr/2014/06/sound-money-justice-freedom-and.html

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Piketty Review

Thank you for the link. I also think it's important to hear as many perspectives on the book and wealth inequality. I'm not so sure I would agree with the following:

 

Concerning Thomas Piketty, Andreas Marquart identifies the former's biggest error is the conclusion "that under capitalism the rich get richer" and the poor get poorer. For Marquart, such conclusion is nonsense for Piketty took his data "not from a capitalist world," but from an economic system dominated by crony capitalism or "a system of money socialism," and then blamed capitalism for economic inequality. 
 
Thomas Piketty's book caught my attention last April 16. As for me, the appearance of the book, and the responses to it shows that the economic debate between capitalism and socialism has not yet been settled, at least in the latter's more subtle form, state interventionism. In this debate, the explanation to 2008 crisis and understanding how the free market works is vital. And so I want to conclude this article with a suggested reading list:
I'm not sure to which capitalism world Marquart is referring? We have never experienced  free-markets or capitalism, they are just abstract ideals that we collectively work toward if we so choose. I agree with him that what we have now looks a lot like crony capitalism, and therefore, there's a need to move toward something else. I wouldn't call the book a debate about capitalism vs. socialism, but I guess there is the inherent question of fairness to the individual and the collective when discussing the issue of wealth equality. Looking at history, I don't think wealth inequality would go away with sound money or necessarily improve. I think the issue of wealth inequality often lies in how people relate to the fundamental ideal and then begin to manipulate it to their advantage. Sound money could be a new beginning, but it would eventually be manipulated and take on a different form from its ideal, again, as history has shown us. What I do think Piketty is doing is trying to be realistic in proposing solutions that might work in the system we have currently, and to provide a framework for debate. If the debate revolves around scrapping the system we've moved onto another debate, which is fine, but a different one nonetheless. I would be interested in hearing whether what he suggests might improve the current gap in inequality.
 
Anyway, I don't advocate either way when it comes to sound money or fiat, as I see the shortcomings of both. They're both flawed because the people that created them are flawed. Fiat is what we have now, so I try to think in realistic terms under that system.  Thanks for your reply. 
Jim H's picture
Jim H
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You aren't looking hard enough Gillbilly...

I'm not sure to which capitalism world Marquart is referring? We have never experienced  free-markets or capitalism, they are just abstract ideals that we collectively work toward if we so choose.

This is a cop out I think.  Of course, things were never perfect.  But we did used to have Glass-Steagall, and our central banker Paul Volcker lifted the prime rate to 21.5% in 1981, bringing on a recession in order to stem the tide of inflation.... Nowadays they simply change (game) the way inflation is measured... and no recessions are allowed, and of course we all know interest rates will never be allowed to rise to any real extent ever again.  Capitalism has changed for the worse.. the most important rate.. the cost of money itself, will never be freely determined again, at least for this iteration.   One could easily make the case that it is not even capitalism anymore - It is printed money speculativecronyfacism instead.   

RZC24Arcel... I loved your piece - especially this;

Andreas Marquart concluded his first article in identifying the connection between our current monetary system and income inequality. He wrote:
 

"The reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies."

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gillbilly
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Looking hard enough?

Hi Jim,

Well, considering to my knowledge I'm the only one on this thread that has actually read the book, I would hardly say I'm the one that hasn't looked hard enough. wink

Anyway, what you quoted from my post I would say is true. It's not a cop out. On the contrary it's our ideals that drive our belief structures and anchor us in and shape our reality. I appreciate your idealism in sound money and I can see the merits in it, I just don't think in reality it is the saving grace for ourselves and our planet. Neither is fiat currency. The reason is because our currency woes/manipulations/valuing/etc are not "the problem" or even "a problem" but rather they are symptoms of the problems, so changing them will not make the problems go away, they will merely change form. The problems exist in ourselves (greed, selfishness, social power, fraud, etc.) With that said I do think we can make real changes, but we have to be both idealistic and realistic.  I agree that our current "capitalist/free market" are not as fair as they were in the past and that capitalism needs healthy regulation to make it fairer. Removing Glass-Steagall was a bad idea.

Have to run, so that'll have to be my quick answer. I read your post in the Stockman thread about believing the answer lies in a hybrid system. I agree with that... that certain ideals are more appropriate for solving problems depending on the context. Piketty is proposing a solutions to our current system the way it exists.  I'm merely wondering if people think they might work and possibly bring back a fairer system.

Jim H's picture
Jim H
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You are right Gillbilly...

You read the book.. and I was not asking you to look harder at Piketty.. only at the nature of capitalism.. if you can even call it that anymore. We agree on many fronts.  

The core problems don't get fixed unless we find a way to banish sociopaths/psycopaths from the gene pool.  I don't know how to do that.   

Putting my idealist cap on... I think everyone who is born into the world deserves a fraction of the earth's bounty.  In this sense, I am not a redistributionist.. rather I would be a distributionist.  Everybody deserves some kind of base cut of the wealth for just being.. if there are too many of us.. our cuts will get diluted and the situation will self-correct.  The earth is a gift to all of us.  Corporations would not have the rights of people in my idealist world.          

Layered over this in my hybrid idealist system would be a well regulated capitalism based on honest money.  The purpose of this system would be not to let the banks become the system.. since they are merely a service to the true productive economy, but rather to allow the natural human tendencies to build, to invent, to create... to flourish.  

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