Why Thomas Piketty is wrong about capital in the 21st century

Economic View: European banks and capital markets abound in what Marx and Jefferson called 'fictitious' capital

Thomas Piketty’s book Capital In The Twenty-First Century has attracted worldwide attention, not because he crusades against inequality – many of us do that– but because of its central thesis, based on his reading of the 19th and 20th centuries, that capital “mechanically produces arbitrary, unsustainable inequalities”, inevitably leading the world to misery, violence and wars and will continue to do so in this century. So far, Piketty’s critics have offered only technical objections to his number-crunching without contesting his apocalyptic political thesis, which is clearly wrong. I know this because over the past few years my teams conducted research in the field, exploring countries where misery, violence and wars are rampant in the 21st century. What we discovered was that most people actually want more. rather than less, capital and they want their capital to be real and not fictitious.

Like many Western academics on a tight budget when faced with poor and nonsensical statistics outside Western nations, Piketty takes European indicators and extrapolates them on to such countries to draw global conclusions. This ignores the fact that 90 per cent of the world population lives in developing countries and former Soviet states, whose inhabitants produce and hold their capital in the informal sector, that is to say, outside of official statistics. This flaw has implications that go far beyond mere accounting: it turns out that the kinds of violence that erupted in places like Cairo’s Tahrir Square in 2011 occur where, according to our field studies, capital plays a decisive if hidden role that Eurocentric analysis cannot perceive.

At the request of the Egyptian Treasury, my team, along with 120 mostly Egyptian researchers, not only studied official documents but also acquired local information on the ground, going door to door, to get data that allows government to test its conventional statistics for truth and completeness. We discovered that 47 per cent of so-called “labour’s” yearly income was “capital”: almost 22.5 million workers of Egypt earned not only a total of $20bn in salaries, but additionally $18bn through returns on their unrecorded capital. Our study showed that Egyptian “workers” owned an estimated $360bn in real estate, eight times more than all of the foreign direct investment in Egypt since Napoleon’s invasion. It is no wonder that Piketty, looking only at official statistics, missed all those facts.

Piketty worries about wars in the future and suggests that they will come about in the form of a rebellion against the inequities of capital. Perhaps he hasn’t noticed that wars over capital have already begun, right under Europe’s nose, in the Middle East and North Africa. Had he not missed these events, he would have seen that these are not uprisings against capital, as his thesis claims, but for capital.

The Arab Spring was triggered by the self-immolation in Tunisia, in December 2010, of Mohamed Bouazizi. Because official Eurocentric statistics classify all people who are not working at formally recognised firms as “unemployed”, it was not surprising that most observers quickly labelled Bouazizi as an “unemployed worker”. But this classification system missed the fact that Bouazizi was not a labourer but a businessman since the age of 12, who very much wanted more capital. A Eurocentric classification system blinded us to the fact that Bouazizi was, in reality, leading an Arab industrial revolution of sorts.

It wasn’t just him. Thereafter, we discovered that within two months, 63 other entrepreneurs, all inspired by Bouazizi, attempted public suicide throughout the region. Over two years, we interviewed about half of the 37 self-immolators who survived and their families: all were driven to suicide for being expropriated of what little capital they had. Some 300 million Arabs live in the same circumstances as the entrepreneurial self-immolators. We can learn several things from them. First, capital is not at the root of misery and violence but, rather, the lack of it. The worst inequality is not to have capital. Second, for most of us outside the West, not prisoners of European categorisations, capital and labour are not natural enemies but intertwined facets of a continuum. Third, most important constraints to development of the poor arise from their inability to build and protect capital. Fourth, the willingness to stand up to power as an individual is not exclusively a Western trait.

I couldn’t agree more with Piketty when he says that lack of transparency lies at the heart of the European crisis since 2008. Where we part ways is at the solution he proposes: assembling a giant ledger – a “financial cadaster”– that includes all financial paper. That makes no sense since the problem is that European banks and capital markets abound in what Marx and Jefferson called “fictitious” capital, or paper that no longer reflects real value. Why would anyone want a cadaster of trillions of dollars and euros of obscurely bundled derivatives, based on untraceable or poorly documented assets that are swirling mindlessly in European markets? Especially considering that a major reason why the European economy is barely growing is that no one trusts the financial institutions that are holding this paper.

So how can we go about creating a cadaster of reality and not fiction? Of all people, the French have supplied the answer with their property record-keeping systems developed before, during and after the French Revolution. In those days, feudal record-keeping systems couldn’t keep up with expanding markets and French reformers responded by creating radically new fact-gathering systems that mirrored reality and not fiction.

Simple and brilliant: property records, as opposed to financial records, are written up in rule-bound and publicly accessible registries and contain all of the knowledge available relevant to the economic situation of people and the assets they control. No one can afford to be incorrect about the amount of capital they own, as they would otherwise lose it. In the French reformer Charles Coquelin’s words, France was able to modernise when throughout the 19th century the country learnt to record property and thus “pick up the thousands of filaments that businesses are creating between themselves, and thereby socialise and re-combine production in a mobile fashion”. Piketty has his heart in the right place but his papers in the wrong archives. The issue in the 21st century in the West is assetless paper and everywhere else it is paperless assets.

Hernando de Soto is president of the Institute for Liberty and Democracy in Lima, Peru. A longer version of this article first appeared in French in ‘Le Point’ magazine

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