Bill Gates Agrees with Me on Piketty

October 14th, 2014

He really likes the book, but expresses frustration that Piketty (emphasis mine):

doesn’t adequately differentiate among different kinds of capital

Imagine three types of wealthy people. One guy is putting his capital into building his business. Then there’s a woman who’s giving most of her wealth to charity. A third person is mostly consuming, spending a lot of money on things like a yacht and plane. While it’s true that the wealth of all three people is contributing to inequality, I would argue that the first two are delivering more value to society than the third. I wish Piketty had made this distinction.

This is not exactly my point (here), but still it cuts right to the crux. There’s a conceptual flaw at the book’s core that makes it hard or impossible to think coherently about the levels, trends, and mechanisms that Piketty portrays:

Piketty defines capital as synonymous with wealth.

Wealth consists of all the tradable claims on real capital (specific ownership claims, generalized claims like dollar bills, and everything in between). The market constantly reprices those claims, resulting in a constantly-adjusted best-guess market estimate of what the underlying assets are worth — ultimately expressed as household net worth (with all firm net worth imputed to household shareholders).

The market reprices the claims, based on its revaluation of what the underlying assets are worth. If it thinks the assets are worth more (will produce more in the future), it bids up the prices on the claims.

Important: that stock of real assets is not just the “fixed capital” tallied (because it can be measured) in the national accounts; that’s actually a small part. Knowledge, skills, and abilities (think: education, training, health), business/organizational systems (this is huge), and similar unmeasurables constitute the bulk of real capital — the stuff that allows us to produce in the future. Most of that stock is not specifically claimed, but it is that whole body of real capital that the market it trying to value properly via pricing of claims — basically, holding up its collective thumb and squinting.

Piketty should have called it Wealth in the 21st Century. That’s what he’s really talking about, because we really have no idea (beyond the market’s best guess expressed in household net worth) what our real capital is worth.

“Financial capital” is an oxymoron.

Cross-posted at Angry Bear.

  1. 3rdMoment
    October 14th, 2014 at 09:37 | #1

    Good point.

    Piketty and Zucman’s recent QJE paper tries to separate out changes in wealth due to price changes vs real accumulation. For example they estimate:

    “New savings explain 72% of the accumulation of national wealth in the U.S. between 1970 and 2010, while residual capital gains explain 28%.”

    I don’t know how reliable their method is, and of course they miss the large capital gains since 2010, still they do not ignore the issue. Strangely it seems to be mostly (entirely?) ignored in Piketty’s book.

  2. October 14th, 2014 at 09:59 | #2


    Thanks! My first question for them from your quotation: “Whaddaya mean by ‘savings,’ buster?”

    Will peruse.

  3. October 14th, 2014 at 10:03 | #3


    Amusingly, my search immediately yielded:

    “Wherever savings come from,…”

    They seem to equate savings (with an s — the stock not the flow) with wealth (household net worth?), which is A Good Thing in my opinion.

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