Tuesday, May 13, 2014

Un whuppin'

Up one side of l'academie and down the other, of Thomas Piketty by Louis Woodhill in Forbes;
The key question, of course, is “common utility” in whose opinion? Who gets to be the judge of whether a proposed transaction benefits “common utility?”
Under American capitalism, the ultimate arbiter of “common utility” is the market. A free market is designed to maximize “common utility” by processing the preferences of 317,000,000 people, expressed in the form of voluntary offers to buy and sell, into an optimum allocation of resources and an efficient coordination of efforts.
When Piketty talks about “common utility,” what he means is, “common utility as judged by progressive French intellectuals like me.” 
And that was the gentle part. Woodhill also points out some other poorly thought out arguments by Piketty;
While Social Security and Medicare may not add anything to the physical capital of the economy as a whole, from the point of view of the individuals enrolled in the programs, they represent capital. Specifically, the Social Security and Medicare contributions function as forced savings, and the benefits function as annuities. And, Piketty certainly counts annuities owned by “the rich” as part of their wealth. 
I.e., it isn't only the rich that live off income not produced by (current) labor;
After adjustment for the capitalized value of Social Security and Medicare, in 2010, the “Top 10%” actually owned 52.2% of national wealth, not much more than the 50% observed for this group in 1970s – 1980s Scandinavia, which was the society with the lowest inequality that Piketty has ever found. And, the “Bottom 50%” really held 22.8% of total wealth, close to the 25% that Piketty believes would pertain in an “Ideal Society.”
Nor does Piketty really understand the phenomenon he supposedly is discussing;
Piketty doesn’t seem to realize that a Tobin Q value [a corporation's market value/book value] of less than 100% means that the markets believe that the corporation in question is destroying the economic value of its capital. He also doesn’t seem to get that the owners of such companies would want to hire CEOs that would fix this, and would be happy to reward them handsomely for doing so.
Piketty’s data shows that the supermanagers that took over the leadership of corporations in the U.S., the U.K., and Canada around the time that Ronald Reagan took office managed to raise the Tobin Q of their companies to levels over 100%, while the much-lower-paid executives in Japan, Germany, and France never even came close to accomplishing this feat.
Given that the “exorbitant” compensation of the Anglo-Saxon supermanagers was deducted before computing the profits that determined the market values of their companies, Piketty’s own data says that, in a purely economic sense, the English-speaking supermanagers were worth much more than they were paid. In contrast, the executives in Japan, Germany, and France failed in their most fundamental job, which was to enhance, rather than destroy, the value of the capital entrusted to them.
Which is what happens when governments decide who gets control of capital.

[Thanks to Craig Newmark]

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