Baker on Piketty

Capital in the 21 Century: Still Mired in the 19th (See correction) by Dean Baker

While the book presents this story with the sort of the determinism that many have seen in Marx's theory of the falling rate of profit, there are serious grounds for challenging Piketty's vision of the future. First, there are many aspects to the dynamics that have led to the redistribution to profit and high earners in the last three decades that are likely to change in the not too distant future. 

The top of my list is the loss of China as a source of extremely low cost labor. According to the International Labor Organization, real wages in China tripled in the decade from 2002-2012. While these data are not very accurate, there is little doubt that wages in China are rising rapidly. While Chinese wages still have a long way to go before they are on a par with wages in the United States or Europe, its huge cost advantage is rapidly disappearing. Manufacturers can look for other low-wage havens, but there are no other Chinas out there. The loss of extreme low wage havens is likely to enhance the bargaining power of large segments of the workforce. 

However, perhaps a more fundamental objection to Pikettys' grim future is the fact that a very large share, perhaps a majority, of corporate profit hinges on rules and regulations that could in principle be altered. My favorite example is drug patents. This industry accounts for more than $340 billion a year in sales (@ 2 percent of GDP and 15 percent of all corporate profits). The source of its profits is government granted patent monopolies. 

Suppose the government weakened patent rights or allowed low-cost generics from India to enter the country, profits and presumably the value of corporate stock in the sector would crumble. Is there a fundamental law of capital that prevents this from happening? The same could be said about the patents that provide the basis for enormously profitable tech companies like Apple. Are we pre-destined never to take steps to weaken these laws which lead to enormous corruption and economic waste? 

Another big profit sector is cable and telecommunications where we seem to have unlearned the lesson from intro-econ that monopolies are supposed to be regulated to prevent them from gouging consumers. Obviously the monopolists won't like to see their profits eroded, but allowing near monopolies to operate without regulation does seem like an aspect of capitalism that can be altered in the future as it was in the past. 

The financial sector has gone from accounting for less than 10 percent of corporate profits in the 1960s to over 20 percent in recent years. Is there a law of capitalism preventing us from instituting financial transaction taxes like the UK has had on stock trades for more than three centuries or breaking up too big to fail banks?