George Cooper — The Horrible History of Mr Piketty

[Previously posted on 12th May 2014]

This weekend’s Eurovision Song contest saw Austria romp to victory with 290 points, leaving France languishing in last place with only 2 points. Naturally this got me thinking about how the economic ideas of these two great nations stack up against one another. More specifically how Thomas Piketty’s theory of capital accumulation compares with Joseph Schumpeter’s creative-destruction of capital.

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Whenever it comes to a clash of ideas between the Austrian and orthodox schools of economics you can be sure that methodological differences will figure somewhere in the discussion, so let’s get that out of the way first.... 

This alternative narrative in no way diminishes the inequality problem that Piketty is highlighting but it does throw up an important challenge to his primary mathematical model. The destruction of European agricultural capital in the 19th century was not due to an exogenous World War but to an endogenous process of innovation. European agricultural capital was wiped out by connecting American farmers and cowboys to their European customers with the innovation of steam trains, steam ships and refrigeration.

Capitalism may be better viewed as an innovative, Darwinian, competitive struggle rather than a clockwork process of never ending accumulation. Winners – Apple’s iPhone – often create capital by destroying the capital of the losers – Nokia. This endogenous capital destruction is missing from Piketty’s mathematics but is well captured by Schumpeter’s creative-destruction.

Schumpeter’s model of creative destruction does not lend itself to simple mathematical modelling, none the less it has history on its side. The Austrian narrative approach to understanding economies may be imprecise but, at least until the mathematics catches up with reality, it should not be dismissed.

The Horrible History of Mr Piketty
George Cooper