Thomas Piketty Book On Inequality Hits #1

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This just in.  Under capitalism the rich just get richer.

Such is the conclusion of the new book that has rocketed to the number one position on Amazon.com, Inc. (NASDAQ:AMZN).

Capitalism leads to control of power by wealthy

In Capital in the 21st Century, author Thomas Piketty documents how capitalism enriches a class of people who then have the means to manipulate the rules to their advantage.

The 700-page tome by the French economist has become a blockbuster hit, outselling Game of Thrones and Disney’s Frozen on Amazon.

But should this come as a surprise?  As $25 tickets to hear Elizabeth Warren sell her upcoming book A Fighting Chance sell out in Chicago, requiring moving the event to a new facility, has the electorate – or at least the reading public – discovered a populist voice?

Tax return data considered

Thomas Piketty’s book considers decades of tax return data to conclude that inequality and crony capitalism is the net result of capitalism. The wealthy are destined to become wealthier while the rest will continue to fall further behind, his statistical analysis of the data shows.

Thomas Piketty had considerable renown in economic circles for his earlier work on inequality, but this book is resonating on a new level. The book’s broad argument has resonated in a country that is more and more viewing its legal system as having a two tiered standard, struggling to claw back from the wreckage of the 2008 mortgage-backed securities crash that lead to a depression.  While the US stock and housing market may have risen – a key measure of wealth for the US Federal Reserve – the most important measure for the majority of citizens is income.  Here is where Piketty notes the key difference and source of inequality.

Statistical documentation shows income declines

Statistically documenting then comparing tax data was a difficult task, one handled with quantitative skill.  This is due to the complexity of measuring wealth in the United States in 1890 relative to France in 2014.  The author bridges this gap with a formula dividing local currency measured wealth by national income, a review of the book in the New Republic says produces a “wealth income ratio that has a dimension of “years.”  Utilizing this formula, Thomas Piketty shows that total wealth in France in 1850 amounted to about seven years worth of income, but only about four years for the United States in 1950.

Then Thomas Piketty made the critical connection, the report noted.

“In France and Great Britain, national capital stood fairly steadily at about seven times national income from 1700 to 1910, then fell sharply from 1910 to 1950, presumably as a result of wars and depression, reaching a low of 2.5 in Britain and a bit less than 3 in France. The capital-income ratio then began to climb in both countries, and reached slightly more than 5 in Britain and slightly less than 6 in France by 2010. The trajectory in the United States was slightly different: it started at just above 3 in 1770, climbed to 5 in 1910, fell slightly in 1920, recovered to a high between 5 and 5.5 in 1930, fell to below 4 in 1950, and was back to 4.5 in 2010.”

Why hadn’t economists explored this issue before?

Thomas Piketty has made many highly provocative statistical discoveries in his book, leaving one to wonder why inequality hasn’t been explored in economics as much as, say, economic studies supporting tax cuts.  When asked why no one had pulled together this data before, and if it was a failing of the economics profession, Piketty said yes, ideology played a part.  Money begets money which begets power.  But couldn’t Piketty have taken the concept a few steps further to explore the links to crony capitalism?  Certainly that’s where it gets interesting, but at 577 pages of hard copy and over 70 pages of footnotes, perhaps that is a Thomas Piketty book for another day.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com