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Capitalism, democracy & taxation: McDonnell & Varoufakis January 26, 2016

Posted by larry (Hobbes) in Abuse of power, Bill Mitchell, democracy, economic inequality, economics, Varoufakis.
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I believe the current UK Tory government to be the most dangerous in living memory, at least for its own citizens and residents. This is why.

John McDonnell, the Labour shadow Chancellor, was interviewed on Channel 4 News last night and on Newsnight later on, Monday evening, 25 January. Even though the Channel 4interview raised the same old chestnuts, he showed he really doesn’t “get” the functions of taxation. He made a big point about how taxes are needed in order to pay for schools, hospitals, &c. And he made an even ghastlier mistake at the end of Osborne’s autumn statement last year, sounding like Balls, how the Corbyn Labour Party would bring down the deficit but slower and in a fairer way. Ye gods!!! Don’t just believe me. Have a look at Beardsley Ruml in 1946 – “Taxes for Revenue are Obsolete”: http://home.hiwaay.net/~becraft/RUMLTAXES.html. McDonnell doesn’t “get it”.

McDonnell may have been listening to Varoufakis, possibly on taxation, too much, methinks. The only things V cares about are Greece and his European democracy project, which are good things to care about. But Varoufakis has bad reasons for counting Osborne as one of his “friends”. I think McDonnell has also talked to Wren-Lewis, a neo-Keynesian, which won’t help. V contends that there hasn’t been much austerity in the UK; compared to Greece, I think he means. Well, Osborne I think has applied his austerity mostly in ways that usually do not affect GDP. The people he usually attacks make no appreciable impact on GDP and therefore would not show up in the overall statistics. So, when GDP drops, he realizes that he may have made a mistake and attacked the “wrong people”, and he adjusts. A tad. No reason Varoufakis should know about this, but then to make the statements he does seems to me to be irresponsible.

What this shows is that GDP in itself is insufficient for assessing the degree of austerity being imposed on a citizenry. You need to know where the cuts are being implemented. So, if where they are being implemented will not affect GDP very much, you will not see much change there and could conclude that not much austerity has been implemented. Which would be a grave error. Welfare payments constitute only about 0.7% of the UK’s GDP, which is not much. In addition, if you believe that taxes pay for this, you will undoubtedly think that money that could be used otherwise has been lost. However, once you grasp that taxation, and thereby taxpayers, do not fund government spending, then you can see that there is no Peter-Paul situation at all. And that spending on welfare does not affect anyone else at all.

As for the European project, Varoufakis has some fascinating and possibly controversial things to say about the relationship between capitalism and democracy. It is only the UK’s singular position he seems to be misled about.

When Varoufakis gets to the relationship between capitalism and democracy, he gets into interesting territory. In the early part of the 20th century, it was often felt that democracy was a consequence of capitalism. The evidence for this was that they arose in tandem and seemed to develop together. Bertrand Russell among others put the view forward that it was capitalism that made democracy possible. Max Weber, a little earlier, put forward a somewhat different argument. He contended that capitalism was the inevitable consequence of Calvinism. Both confused correlation with causation.

Varoufakis does not make that mistake. Although Varoufakis develops his argument in the context of Europe, it applies as well to the UK, virtually without modification. To show by example what I mean, let me go by way of a recent work by Nick Davies, an investigative journalist, published in 2014, Hack Attack: How the Truth Caught Up with Rupert Murdoch. It did, and nothing seems to have changed. Murdoch wants to further invade the UK communications network and, I would contend, further destroy it. Cameron has met with Murdoch a number of times. One would have thought this could not or should not have been happening.

The explanation Varoufakis would provide for this is that the political sphere has been swallowed up by the economic sphere, a scenario in which corporations rule the world in a democracy-free zone. Though he doesn’t say this, one could conclude from this perspective that democracy, if not a complete sham, is for the “little people”, while the rich and the multinational corporations can do whatever they want (an example of which is TTIP) with politicians as their servants rather than their regulators. In such an environment, could one be forgiven for wanting to be rich, even thoughtlessly so?

For Varoufakis, there is no inherent connection between capitalism and democracy. They are independent developments. And the evidence for this lies in Singapore and China, which have successful capitalistic economies devoid of democratic elements. For a good discussion of what democracy is, have a look at Robert Dahl’s How Democratic is the American Constitution? (2nd ed. 2003). Or view Varoufakis’s TED talk from last December: http://yanisvaroufakis.eu/2016/01/26/capitalism-vs-democracy-vs-capitalism-my-ted-global-talk/. Varoufakis believes Europe is on the cusp of becoming undemocratic, which would have the most drastic consequences. The ultimate cause of this is the structure of the Eurozone, a currency structure that is completely unworkable. It has only appeared to be workable because it had not faced any volatile stressors until 2008, the GFC, when the world’s banking systems collapsed. Varoufakis’s argument is not very deep but he had only about 20 minutes to put his case, hence my recommendation to look at Dahl’s analysis.

Piketty’s new book, Capital in the 21st Century April 22, 2014

Posted by larry (Hobbes) in economic inequality, economics, Piketty.
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Thomas Piketty’s new book, Capital in the 21st Century, is making more headlines than one might have thought possible for an economics text. Although it is accessible for someone with little economics training, it is data driven in a big way. The book is an historical account of economic inequality in the West over the past few hundred years. The most important period for our current purposes is the latter 19th century in the US. During that period, you had a similar concentration of wealth (i.e., assets) as is taking place now, but without the seemingly more or less complete capture of the political system that appears to be taking place now, at least in the US. This capture is one of the features of extreme wealth inequity that bothers Piketty.

On a biographical note, Piketty was at MIT and left that institution for Paris. He has said that one of the reasons he left was that he didn’t think American economists were that good, in general. UMKC and the University of Texas at Austin are two centers of heterodox economics in the US that are excellent. But Piketty wasn’t there. Then again, the French offer might have been too good to ignore.

Paul Krugman, not the most original or heterodox economist on the planet, was interviewed by Bill Moyers. Krugman makes his usual mistakes on money creation in the economy, but his remarks about Piketty’s results deserve to be heard. Don’t miss Moyers’ remarks following the interview. They are worth listening to as well. In this interview, Krugman admits that he never realized what Piketty has been researching and found out, with Saez and others, for the past 10 years or so. Some Krugman critics will probably not be surprised. But, at least, he has admitted that he didn’t know. As probably most know, Piketty’s book is about economic inequality. And it is a big deal. One could argue that it is the source of all the other inequities to which almost everyone is subject, except for the 1% or the .1% who are getting wealthier all the time, every minute of every day. The disparity between them and the rest is, it could be said, astronomical.

[I have included the hyperlinks in case the embed codes do not work as they are supposed to, which will be the fault of WordPress.]


Moyers refers to this study of US inequality and the emerging oligarchy by Gilens and Page. The study is entitled Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens (April 2014).


Here is Krugman’s review of Piketty from the NY Review of Books.


But here is an interview of Piketty himself by CNN.


A colleague of mine, Julian Wells, reminded me of James Galbraith’s review of Piketty’s book which is eminently worth reading, although it is technical in places. (http://www.dissentmagazine.org/article/kapital-for-the-twenty-first-century) Julian makes the following points, which are worth noting.

Jamie G. marks Piketty down for a number of errors, of which the one that resonated most with me was his complaint that Piketty has what my friend Andrew Kliman has dubbed a “physicalist” perspective — essentially the misconception that capitalist production is at bottom about producing things, whereas what it’s actual objective is is the production of capital.

Worse still, Galbraith says, Piketty’s attempt to measure physical capital is also incoherent (essentially because any one-dimensional measure must be a financial one).

Naturally various further errors in analysis flow from the above, and culminate in utopian policy prescriptions of a social democratic kind.

Unfortunately, I neglected to mention it along with Krugman’s comments. Yes, one must distinguish between Piketty’s data and the various levels of interpretation and explanation that he imputes to it. I don’t know of anyone who rejects the most important implication of his data, that of wealth (i.e., assets) tending to concentrate in the hands of a few. Even Galbraith himself talks of a new class war, although this “war” is not between the classes of industrialists and workers as in Marx’s day but between the 1% and everyone else, though he doesn’t express it quite like that in his The Predator State.

Galbraith’s review of Piketty’s book is the most critical review I have yet to come across and Julian is right to point out its importance to this debate, which has now entered the public arena, at least to some degree. Gilens and Page in their study, whose methodology is not the greatest, has obtained data that also supports this contention of wealth concentration, preferring, however, to calls this phenomenon “economic elite domination” rather than “oligarchy”, which John Cassidy in The New Yorker  (Is America an Oligarchy?) contends is due to the former term being less pejorative in its connotations.

Of course, such wealth concentration is not new. It took place toward the end of the 19th century. When asked by Moyers why that didn’t lead to the result to which it seems to be leading today, Krugman contends that this was because the economy as a whole was growing so fast that the wealthy could not “get a lock” on the system. That is, wealth and its concomitant concentration was not growing as fast as general GDP. Which supports Piketty’s point in this respect, that wealth is currently growing faster than general GDP – i.e., it is outpacing it. Piketty’s remedy for this is progressive taxation, in this case, taxation used for redistributive purposes, as opposed to its other purposes (currency legitimation, influencing the direction and degree of spending, etc.).

However, even J. P. Morgan’s saving of the banking system from itself in the crash of 1907 could not have been achieved without the assistance of Teddy Roosevelt (the “Great Trustbuster”), i.e., the government, something Morgan himself at the time, and bankers since, prefer to forget. But a good, brief discussion of this can be found in Nomi Prins’s All the President’s Bankers.

The upshot seems to me to be, whether one agrees entirely or not with Piketty’s own interpretation of his data, is that he is bringing empirical data on economic inequality and its debate into the public arena and public discourse and forcing even economists like Krugman to face what many now are considering to be a “fact”, that economic inequality is an objective reality and not simply a matter of where one stands ideologically*.

Even Cameron appears to feel he has to respond to the influence of Piketty’s work, although his response, so far, has been extremely weak and vacillating. Rumor has it that the Miliband camp is reading and digesting the book.

Nevertheless, as Galbraith points out, one must be careful about Piketty’s own treatment of his data. Is this a subtlety that might perhaps escape the Cameron and Miliband camps, neither of which has so far conspicuously exhibited this particular trait in any substantial degree?


* I realize that my argument here is enthymematic and thereby incomplete, but to go into it further here would take us too far afield.

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