One fault is the misunderstanding how capital income really works. Piketty maintains that the return of capital is consistently higher that the income from labour. This, according to Piketty, inevitably leads to a bad equilibrium, the state of the system, when a handful of capitalists would eventually own practically everything, while the rest of the mankind would remain in the plight of living in permanent poverty.
This natural tendency of capitalism, Piketty says, must be corrected by state interventions, taxation in particular. (As he admits, he was too young to have become a revolutionary communist. What a relief.)
In fact, this intellectual construction is wrong. Imagine you're the owner of all world's capital stock: manufacturing plants, banks, land, all is only yours. You are the owner of the world. Everybody else owns nothing but his or her workforce and lives in a rented home, which is in your ownership. Does it sound great to you?
Not quite. If the whole mankind is moneyless and propertyless, whom would you sell the products of the manufacturing plants you own? Where are the clients of the banks you own? What would be the rental yield of the lands, which you are the freeholder of? To nobody, nowhere, zero, respectively.
The empirically observed fact is that a wealthy capitalist always needs wealthy customers, clients, business partners. Marks & Spencer or Next couldn't prosper without a powerful middle class. Absolute inequality is an unnatural state of society: if ever achieved, it would be good neither for the poor masses nor for the hypothetical Owner of the World. Neither absolute inequality nor absolute equality is desirable. Neither is natural, too. An eq
Piketty cannot see that. In his view, a handful of absolute owners will eventually seize the control over the world, unless the government raises capital gains taxes on time. It will never happen, however, even if the government abolishes the capital gains tax at all. Why?
Capital never works alone. Capital requires labour to produce anything. As a capitalist, you need workers to operate your capital. If you don't pay your workers adequately, they'll run to another capitalist. The better educated and skilled, the better pay the workers can command. In the end, mutually advantageous equilibrium would occur: workers get paid adequately, and your capital or business income is fine, too.
The class struggle world view Piketty inherited from his communist parents simply doesn't hold. It is a pity that he put a lot of intellectual efforts in the research of income in different countries since the 19th century until recently, only to devalue the worth of his findings by a shallow ideological construction that is so obviously wrong.
So much for the first major intellectual fallacy by Piketty. See the next instalment for the second fault.
Income is defined as market income including capital gains (excludes all government transfers).
Salaries include wages and salaries, bonus, exercised stock-options, and pensions.
Business income includes profits from sole proprietorships, partnerships, and S-corporations.
Capital income includes interest income, dividends, rents, royalties, and fiduciary income.
Capital gains includes realized capital gains net of losses.
Source: Thomas Piketty
I'm not saying Piketty's figures are wrong. I say it's impossible that the super-rich share of the income would soar up to 100% if left unchecked and uncontrolled.