Thomas Piketty’s Capital in the 21st Century has attracted worldwide attention not because he crusades against inequality — many of us do that — but because of its central thesis, based on his reading of the 19th and 20th centuries: that capital “mechanically produces arbitrary, unsustainable inequalities” inevitably leading the world to misery, violence and wars and will continue to do so in this century.
So far, Piketty’s critics have offered only technical objections to his number crunching without contesting his apocalyptic political thesis, which is clearly wrong. I know this because over the last years my teams conducted research in the field exploring countries where misery, violence and wars are rampant in the 21st century. What we discovered was that most people actually want more rather than less capital, and they want their capital to be real and not fictitious.
City of Dead Capital
Like many Western academics on a tight budget when faced with poor and nonsensical statistics outside Western nations, Piketty takes European indicators and extrapolates them on to such countries to draw global conclusions. This ignores the fact that 90 percent of the world population lives in developing countries and former Soviet states, whose inhabitants produce and hold their capital in the informal sector, that is to say, outside of official statistics.
Never miss a local story.
This flaw has implications that go far beyond mere accounting: It turns out that the kinds of violence that erupted in places like Tahrir Square, Egypt, in 2011 occur where according to our field studies capital plays a decisive if hidden role that Eurocentric analysis cannot perceive.
At the request of the Egyptian Minister of the Treasury, my team along with 120 mostly Egyptian researchers not only studied official documents but also acquired local information on the ground, going door-to-door, to get data that allows government to test its conventional statistics for truth and completeness. We discovered that 47 percent of so-called “labor’s” yearly income is “capital”: Almost 22.5 million workers of Egypt earned not only a total of US $20 billion in salaries, but additionally $18 billion more through returns on their unrecorded capital. Our study showed that Egyptian “workers” own an estimated US$360 billion in real estate, 8 times more than all the foreign direct investment in Egypt since Napoleon’s invasion. It is no wonder that Piketty, looking only at official statistics, missed all those facts.
Piketty worries about wars in the future and suggests that they will come about in the form of a rebellion against the inequities of capital. Perhaps he hasn’t noticed that the wars over capital have already begun right under Europe’s nose in the Middle East and North Africa. Had he not missed these events, he would have seen that these are not uprisings against capital, as his thesis claims, but for capital.
The Arab spring was triggered by the self-immolation in Tunisia, in December 2010, of Mohamed Bouazizi. Because official Eurocentric statistics classify all people who are not working at formally recognized firms as “unemployed,” it was not surprising that most observers quickly labeled Bouazizi as an “unemployed worker.” But this classification system missed the fact Bouazizi was not a laborer, but a businessman since the age of 12, who very much wanted more capital. A Eurocentric classification system blinded us to the fact that Bouazizi was, in reality, leading an Arab industrial revolution of sorts.
It wasn’t just him. Thereafter, we discovered that within two months, 63 other entrepreneurs, all inspired by Bouazizi, attempted public suicide throughout the region. Over two years, we interviewed about half of the 37 self-immolators who survived and their families: all were driven to suicide for being expropriated of what little capital they have.
Some 300 million Arabs live in the same circumstances as the entrepreneurial self-immolators. We can learn several things from them.
First, capital is not at the root of misery and violence but rather the lack of it. The worst inequality is not to have capital.
Second, for most of us outside the West, not prisoners of European categorizations, capital and labor are not natural enemies but intertwined facets of a continuum.
Third, most important constraints to development of the poor arise from their inability to build and protect capital.
Fourth, the willingness to stand up to power as an individual is not exclusively a Western trait.
I couldn’t agree more with Piketty when he says that lack of transparency lies at the heart of the European crisis, since 2008. Where we part ways is at the solution he proposes: assembling a giant ledger — a “financial cadaster” — that includes all financial paper.
That makes no sense since the problem is that European banks and capital markets abound in what Marx and Jefferson called “fictitious” capital or paper that no longer reflects real value. Why would anyone want a cadaster of trillions of dollars and euros of obscurely bundled derivatives, based on untraceable or poorly documented assets that are swirling mindlessly in European markets? Especially considering that a major reason why the European economy is barely growing is that no one trusts the financial institutions that are holding this paper.
So how can we go about creating a cadaster of reality and not fiction? Of all people, the French have supplied the answer with their property record-keeping systems developed before, during and after the French Revolution. In those days, feudal record-keeping systems couldn’t keep up with expanding markets and French reformers responded by creating radically new fact-gathering systems that mirrored reality and not fiction.
Simple and brilliant: Property records, as opposed to financial records, are written up in rule-bound and publicly accessible registries and contain all the knowledge available relevant to the economic situation of people and the assets they control. No one can afford to be incorrect about the amount of capital they own, as they would otherwise lose it.
In French reformer Charles Coquelin’s words, France was able to modernize when throughout the 19th century, the country learnt to record property and thus “pick up the thousands of filaments that businesses are creating between themselves, and thereby socialize and recombine production in a mobile fashion.”
Piketty has his heart in the right place but his papers in the wrong archives. The issue in the 21st century in the West is assetless paper and everywhere else it is paperless assets.
Hernando de Soto is president of the Institute for Liberty and Democracy in Lima, Peru.
Who is Thomas Piketty
A French economist who works on wealth and income inequality. He is an economics professor at the Paris School of Economics. He has authored numerous articles published in journals such as the Quarterly Journal of Economics, the Journal of Political Economy, the American Economic Review and the Review of Economic Studies.
He is the author of the best-selling book Capital in the Twenty-First Century (2013), which emphasizes the themes of his work on wealth concentrations and distribution over the past 250 years. His works have led to a radical questioning of the optimistic relationship between development and inequality, and to emphasize the role of political, social and fiscal institutions in the historical evolution of income and wealth distribution.