Piketty’s Wealth Gap Wake Up (Part II)

Question: So Piketty’s book Capital in the 21st Century is essentially a retake of Marx’s Das Kapital?

Answer: I don’t believe that one bit. That his public relations at work. This has nothing whatsoever to do with Marx. Marx’s Das Kapital focused on depreciation. It was Marx who coined the term “primitive accumulation” meaning privatisation and fraud. Piketty’s analysis is completely different from Marx, despite the fact that his parents were Trotskyists.

Q: So he talks about a drift towards oligarchy, he’s pointing out this rising inequality. But in Marx’s theory, Michael, I just wanted you to try and clarify things because I like looking at these economic issues from different perspectives. And the one Marxist concept they say is the most important economic law of all is this tendency for the fall in the rate of profit.

A: Oh my God, there’s nothing that is more misunderstood than that. What Marx said was that as capital increases relative to labour in production, as you mechanise production and buy capital, more and more of the return to capital is going to be taken in the form of depreciation that is a return of capital, not as a profit. He was talking about cost accounting. The example he uses is – and he’s criticising the Physiocrats and Quesnay there.

When Quesnay made the Tableau Economique he talked about the circulation of income in the economy and what landlords did with the rent they got, and they spend some of it, they invest some of it. What they left out was the amount of rental income that has to be used as seed grain, to buy the new seed grain. Marx says that in a factory and under industrial capitalism if you’re going to spend $1million building a factory with machinery and you want to make a profit on that, you’ll not only get the profit on the $1million – let’s say at 5%, $50,000 a year – you also get your $1million back. So of the price they charge the price includes not only the $50,000 a year profit, it includes enough money to pay back the $1million they put into the factory in equipment as it wears out or as it becomes obsolescent.

So there’s a misinterpretation of almost all people who have not read Marx or read his theories of surplus value where he explains the falling rate of profit. I explain all of this in my book, The Bubble & Beyond, I go into what Marx meant by this. But when a non-Marxist talks about Marx and talks about the falling rate of profit you should just sort of walk away, because they don’t have a clue as to what they’re talking about.

Q: So it’s part automation, it’s part competition pushing down the price, but also you’re saying it’s a depreciation element that is wound up to hide the profits, in a way, so that these aren’t taxed?

A: In the case of real estate it becomes more bizarre. In the United States you’re able to pretend that while your real estate is going way up in value, the building is actually losing value because it has a lifetime and the landlord is allowed to recapture the capital as if real estate, which in effect means the land, as if real estate somehow wears out, like a machine, or becomes obsolescent, like you buy a computer and after three years you have to upgrade it and buy a new computer. But that’s nonsense.

In New York City, where I live, the older the building, the more valuable it is because it doesn’t wear out, it’s maintained – most landlords spend about 10% of their income on maintenance and repairs. So the pretence is landlords pretend that their building is like a machine, wearing out, they charge depreciation and because of that they say “I didn’t make any profit, this is a return of capital”. And as soon as they’ve depreciated a building in full they then sell it among themselves or they buy it all over again and start the whole process all over, so you can depreciate the same building, say it’s 100 years old, you can keep depreciating it again and again and again and again as if it’s worn out all these times, and it’s the same building. But the owners and the next owners and the next owner and the next owner doesn’t have to pay any tax on this.

Q: Right, so that’s why when this law is critiqued and people say “Look, the falling rate of profit can’t continue for hundreds of years, this is wrong” you’re saying really it is still a valid analysis for the wealth gap?

A: Marx was talking about the composition of EBIT, of cash flow. Cash flow is earnings before interest, taxes, depreciation and amortisation. And Marx said within cash flow, to the extent that industry becomes more capital-intensive with machinery, you will have a rising role of depreciation relative to what’s left as profit. So it’s the relationship between the return of capital and the return to employing labour and other expenses.

Q: Okay, well, let’s switch over to the Ukraine now and since 1991 Russia has suffered this huge capital flight, some $25billion a year leaving the country annually, that’s mounted up to over half-a-trillion dollars. There’s been a huge drain on their economy because this drift to oligarchy has continued and the Ukrainians are now suffering, they can’t afford to maintain the gas payments to Russia, this has escalated tensions there, ethnic tensions. And Michael, I wonder, you’ve done a number of interviews on this topic of recent. It must be so frustrating for you to see what the West has done with the economic policy reform encouraging this sense of reliance by undermining the public finance system?

A: What happened in Ukraine is what happened in Russia and all the other post-Soviet economies. American advisors came in and said “Just give away all the public property to individuals. It doesn’t make any difference who you give it to; property has its own logic”. Well, Ukraine was the most inequitable, the most rapacious country of all, except maybe Moldova. They call it the “Nigeria of the North”. Its income and wealth are almost all in the hands of kleptocrats. This is not the kind of thing that Piketty’s analysis can explain. The kleptocrats have sort of taken everything in the Ukraine and, as a result, there’s no money left to run the government because the kleptocrats, both in the West and the East, have been taking all the money.

So the IMF came in and said “Look, you borrowed money, you’ve got to pay. We’re going to insist you stop subsidising the price of gas to your people, you have to remove the gas subsidy and begin charging them more”. And so they said “Well, if we do that they won’t have enough money to keep stealing at the rate we’re stealing, so we’re going to stop paying for the gas”. So Mr Obama and the Secretary of State of America said Russia must give its gas free to the Ukraine. It must give a half-a-billion dollars a month free and not charge anything so that Ukraine will have enough money to buy military arms and invite NATO in to put hydrogen bombs on our border, so we can bomb you if you don’t do what we say.

This is the most despicable misrepresenting in the public media of anything that I’ve ever seen. Material has been coming out today, the Americans trained a group of neo-Nazis, wearing Nazi symbols, wearing Nazi uniforms, in Poland to be trained for two or three weeks as snipers, brought them in to the Maidan Square and had them begin shooting at the police and their own people and then trying to blame this false flag operation on the Russians, when actually it was all done by the Americans. And all this was caught on the telephone, the Americans said “We want our thug to take over the country”, their thug being Yatsun, the bank lobbyist that they put in. So they put in a thug and they’ve been sending these neo-Nazi assassination groups out to the West to get American sympathy. The neo-Nazi’s published anti-Semitic pamphlets, pretended that they were given by the Russians, even though most of the Russian speakers in the Ukraine are Jewish. That’s where Trotsky came from, from Odessa. Ukraine has huge Jewish communities.

So they pretended that the Russians are threatening the Jews, when actually immediately the Jewish synagogues in the Ukraine said “No, these are the Americans that are doing this. These are false flag. The Russians are not doing this”. They forged the signature of a Russian speaker as if he was doing it and Obama and Secretary of State Kerry come right on and lie blatantly as if they can somehow convince people that these lies are true and trying to get the Americans to build up hate. And people are wondering why on Earth is Obama doing this? Is he trying to start World War III? Why are they sending warships with atomic weapons right off Crimea surrounding Russia? I mean, what is this nonsense? It’s absolutely crazy. It’s as if Obama has decided to reinvigorate class war by taking the side of the Nazis in World War II, by these neo-Nazi groups that said “We’re sorry, the wrong side won World War II. We wished Germany conquered Russia”. Well, you can imagine the effect this has on the Russians.

Q: In the background of course is Ukraine’s prime location as a major throughfare for the Russian gas. And so, again, it seems like pipeline politics, that’s caused so much trouble in the Middle East, is here turning up in Eastern Europe. Michael, what sort of deals have been arranged and are the Ukrainians receiving a realistic payment for the incredible access rights for the Russian gas to go through, remembering that the Russian gas Putin has ensured is still owned by Russian-based companies in the large?

A: Well, Russia has accused the Ukraine of just siphoning off this gas for itself and not paying for it. The American-backed Right Sector has said “We want to blow up the pipelines”. Russia hasn’t come out and said it, but obviously Putin is going I think to China in a week or two to negotiate selling the gas to China instead. So obviously Russia would like to keep the European market, it doesn’t want to be in the hands of just a single customer such as China, but the effect of the American revolution in the Ukraine is to turn Russia towards China as a market for its gas. And the beneficiary, of course, will be China. The loser will be Germany, which is why the Germans have taken the lead in coming out and saying “Wait a minute, this is crazy. You’re hurting us, not Russia”. Russia’s going to get by, one way or another, because it’s largely self-sufficient but this is going to vastly increase the German costs of industry and, in fact, how are they going to do their cooking and how are they going to run many factories if the gas is turned off?

So about a week or two ago the Russian TV station ARD sent an investigative team into Ukraine to find out what was behind all of this Maidan shooting and the sniping. And they found out that Obama and Kerry were lying through their teeth and they talked to the witnesses, they talked to the doctors, they talked to the relatives of the shooters. The shooting came from the Ukraine Hotel which is where the American-backed snipers were shooting from and it was all essentially pushed by what’s called the Right Sector. These are really the Pinochet people. America’s trying to do in Ukraine what it did in Chile. It’s backing a terrorist organisation to come in and just shoot people who oppose American policy, meaning people who believe they should be paid for their gas and so forth.

So you’re seeing a replay of Chile under Pinochet and the military dictatorship in the Ukraine now. And the result, of course, will be to tear Ukraine apart – it’s bankrupt, no matter what, there no doubt will be civil war there. The Americans are hoping to use the civil war as an opportunity to move in NATO and to move H-bombs right onto the Russian border. This is risking a threat of war. This is crazy.

Q: With the added side benefit of undermining Germany’s economic sovereignty with their energy prices. And I find that geopolitical play a very interesting one following on the heels of the very embarrassing NSA phone hacking of Merkel, and it sounds like this is another little side play to undermine another country’s growing importance on the world stage.

A: Well, I guess an American would reply that if you can’t tap their phone, how do you know who to shoot? It’s obvious they’re control freaks by now and to the Germans, especially to Angela Merkel who came out of East Germany with the Stasi tapping everybody’s phones, you can just imagine the effect there. America is losing its cache as a democratic country and people are beginning to think that it’s moving into the position that Russia used to be in, while you’re having Russia act as the reasonable party trying to avoid war in this case. They’re turning the Cold War inside out and the result is that European politics are being torn apart with it.

Q: And so are you saying that out of this that Vladimir Putin really, he’s not the bad guy? Is that what you’re saying? Because it looked very suss as this invasion and all this hoo-ha over Ukraine happened just four days after the Winter Olympics.

A: I would not say that any politician is not a bad guy. The question is his hand is being forced. You can be a bad guy and still have your position forced and you can still be attacked. You know what President Nixon said in our country: paranoids have enemies too. So even if you don’t like Vladimir Putin, you can say Vladimir Putin can also be attacked and maligned and forced into a situation where he has to protect himself and his own position within Russia by responding and by protecting Crimea from the American attempt to pry the naval base in Sevastopol away from Russia. Of course he had to act, he had no choice. That doesn’t mean he’s a good guy or a bad guy; it means that the Americans forced these events on him.


About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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