As complex and difficult as economics can be, I’m always looking for ways to grasp and integrate the principles of the science in simplified and memorable terms. Toward that end, while reading Richard Salsman’s clarifying analysis of Thomas Piketty’s Capital (“Piketty’s Rickety Assault on Capital,” TOS Spring 2015), I began thinking about Piketty’s central argument in terms of a parable. I present the parable below, and I hope it helps you to further integrate the concrete meaning of Piketty’s claims and why they are wrong.
My parable was also substantially inspired by Peter and Andrew Schiff’s illustrative book How an Economy Grows and Why It Crashes (reviewed in TOS Fall 2010).1 However, whereas mine parallels theirs in that it is a story of a man in a fishing community who builds the first fishing net, it differs from theirs in details, and it is nowhere near as elaborate.
Before reading “The Parable of the Fish Capitalist,” it will be helpful to read (or review) Piketty’s own summary of his central claim:
[A] market economy based on private property, if left to itself, . . . contains powerful forces of divergence [increasing inequality], which are potentially threatening to democratic societies and to the values of social justice on which they are based. The principle destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g. The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier [bond holder], more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying. . . . [I]f we are to regain control of capitalism, we must bet everything on democracy . . . [and] develop new forms of governance and shared ownership intermediate between public and private ownership.2
As Salsman shows in great technical detail in his review essay of Capital, it is not true that the “inequality r > g”—even where and when it holds—necessarily leads to ever-increasing inequality, or ever-“reproducing” capital, or the future somehow being “devoured” by the past. Instead, in a market economy, such inequality generally leads to ever-increasing prosperity. Why? Consider the story of Grock.
The Parable of the Fish Capitalist
Once upon a time, on a small island in the middle of a vast ocean, toiled a primitive society of one hundred people who ate only fish. Each person was able, using only his hands, to catch a single fish each day, and each fish provided the catcher with enough nutrition for roughly a day. . . .