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Prof. Thomas Piketty’s “Capital in the Twenty-First Century” is all the rage among progressives of all stripes who, like him, presumably wept softly when Leo died after Cal Hockley was so mean to him in the 1997 blockbuster “Titanic,” a movie Piketty references throughout the book as a powerful piece of fictional evidence of how patrimonial capitalism works. Despite all the attention and praise, some sections of the book have received limited attention. A good example is Piketty’s analysis of the world’s wealthiest individuals and how they have fared over the last few decades.
Piketty’s analysis in that section focuses on the wealthiest people on Forbes Magazine’s list of the world’s highest-net-worth individuals, which started in 1987. What he does is the following: He takes the total wealth of the richest people in 1987, compares it to the richest people today, and finds that they have gotten richer, at an annual rate of almost 7 percent net of inflation. “They,” you say. “You mean the wealthiest people in 1987?” No, that is not what he does. He compares people in 1987 who were rich at the time to an almost entirely different group today. In Piketty’s world, of course, the super wealthy only become more super wealthy because the returns on capital are super high and they rule the universe, so you would expect this group not to change much. In the actual world we live in, things are very different.
To show you this, I decided to use the same source Piketty uses: the Forbes ranking. To bias things in favor of his thesis that patrimonial capitalism is back, I decided to look only at the very wealthiest: those who made the top 10 in 1987. Using only that tiny group favors his thesis, because Piketty believes that the largest capitals earn the highest returns. Well, here they are: Yoshiaki Tsutsumi; Taikichiro Mori; Sam Walton; Shigeru Kobayashi; Haruhiko Yoshimoto; Salim Ahmed Bin Mahfouz; Hans and Gad Rausing; Paul, Albert, and Ralph Reichmann; Yohachiro Iwasaki; and Kenneth Roy Thomson, for a combined total of $183 billion (converted into 2014 dollars). You may not recognize too many of these names; quite a few of them do not have Wikipedia articles of their own, and practically none of them made this year’s Forbes list.
What happened to their staggering wealth? In 2014, the combined wealth of these people and those who inherited their fortunes is about $212 billion, for a rate of return net of inflation of about 0.5 percent. That is a very low number, much lower than the 7 percent propagated by Piketty.
What happened? Some of the world’s wealthiest lost much of their fortune when asset bubbles burst or their companies went under (that would be an example of a very low return to capital!), and one of them was accused of bankrolling Osama bin Laden. If it weren’t for Wal-Mart, the wealthiest people in the world would actually have lost about half of their wealth in the last 25 years. That doesn’t sound like patrimonial capitalism to me, and it goes to show how deeply misleading arguments can be that are developed while one is blinded by fury over false accusations of necklace theft.
Prof. Thomas Piketty’s “Capital in the Twenty-First Century” is all the rage among progressives of all stripes. Unfortunately for them, Piketty’s argument is flawed as his calculations heavily overestimate the return on capital that is actually realized.
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