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Since money is a veil that hides the urge to truck and barter, removing it would not affect production except for some efficiency costs due to the “double coincidence of wants” problem.  Therefore, money is a neutral veil that only obscures the market relationships behind it.  Economists thus ought to conduct a “real”, as opposed to “monetary,” analysis.

What is important for the paper is that the above analysis shows how intrinsically connected are the ideas of barter, money neutrality, “real” economic analysis, “exogenous money,” inflation, money scarcity, and “loanable funds theory.”  These theoretical tools then allow the orthodox economists to conduct “correct” monetary and fiscal policies.  To recapitulate, monetary policy determines price levels while fiscal policy negatively affects private investment.  Hence, the solution is to target a stable money supply and to run balanced government budget as long as possible.  It is therefore that the myth of barter is crucial in the orthodox theorizing. 

First, these research shows that money existed prior to market.  

Second, the nature of money is a credit-debt relationship that can only be understood in institutional and social contexts.

The liability of the central authority becomes the standard unit of account because the central authority has the sufficient power to impose liabilities on its population in the forms of fines and taxes.  This is the essence of Chartalism, “Modern Money,” “Tax-Driven Money,” and “Money as a Creature of the State” (Lerner 1947, Knapp 1973, Keynes 1930, Goodhart 1998, Wray 2001, Forstater 2006).

Third, the role of money was initially an abstract unit of account and means of final payment and later as medium of exchange.  This means that money as unit of account precedes its roles as medium of exchange and store of value. 

Therefore, money originated as a byproduct of social relations based on debt and realized its standard form through the need of the central authority, as opposed to private individuals, to establish a standard unit of account to measure debt obligations or production surplus.  Our analysis also implies a hierarchy of money (debt pyramid), with the liability of the state sits on the top and the liability of individuals sits on the bottom (Bell, 2001).  It should be clear that the entire debt pyramid is effectively money/IOUs.

In short, the endogenous money approach reverses two causalities proposed by orthodoxy: 1) reserve creates deposits; and 2) deposits create loan.  On the contrary, the endogenous money holds that loans create deposits that then create the need for the central bank to accommodate with reserve.  In other words, banks first make loans, and then seek reserves to meet central bank regulations. 

Such debt obligation is ultimately reflected at the central bank’s balance sheet as the private bank enables Henry’s IOUs to be denominated in the state money of account.  Therefore, the central bank is simply a scorekeeper of the economy (Mosler, 2010).  The reserves at the central bank, created by keystrokes, simply serve an accounting purpose for the economy. 

It is important to note that bond sales do not finance government spending.  Reserves and bonds are both the liability of the state.  The only difference is that bonds earn interests while reserves do not.  This also means that the myth of the national debt indebting our future generation should be abolished.  Government liabilities, including reserves and government bonds, are effectively private wealth by accounting identity. 

But the paper argues that before reaching full employment, it is unlikely that deficit spending would necessarily be inflationary.  In essence, involuntary unemployment indicates a permanent loss in production since the federal government could always have hired the unemployed to achieve public purposes.  Hence, the right to employment ought to become a basic human right guaranteed by any sovereign government.

Even with the quantitative easing, the central bank is merely performing asset management as opposed to money creation.  Indeed, the heterodox theory of the nature of money implies that money creation has to be endogenous, which gives support for conducting expansionary fiscal policy till full employment.

The problem is not mathematics as such, but the junk economics and junk statistics used by the mathematicians who have captured the discipline of economics. For contrast, one need only turn to the 19th century’s rich toolbox of economic concepts developed to analyze today’s most pressing problems.

The overburden of public debt prompted Adam Smith to comment that year that no government ever had repaid its debts, and to propose means to keep it in check by freeing the American colonies that were a major source of conflict with France, for instance, and most of all, by paying for wars out of current taxation so that populations would feel their immediate cost rather than running into debt to international bankers such as the Dutch.

The early 19th-century French reformer St. Simon proposed that banks shift from making straight interest-bearing loans to “equity” loans, taking payment in dividends rather than stipulated interest charges so that debt service would be kept within the means to pay. (Islamic law already had banned interest.) This became the inspiration for the industrial banking policies developed in continental Europe later in the century. St. Simon influenced Marx, whose manuscript notes for what became Vol. III of Capital and Theories of Surplus Value collected what he read from Martin Luther to Richard Price on how debts multiplied by purely mathematical laws independently of the “real” economy¹s ability to produce a surplus. The classical concept of productive credit was to provide borrowers with the means to pay. Unproductive debts had to be paid out of revenue obtained elsewhere.

Interest paid by consumers was treated as a psychological choice, while industrial profit was treated as a return for the widening time it presumably took to produce capital-intensive goods and services. The ideas of “time preference” and the “roundabout” cycle of production were substituted for the simpler idea of charging a price for credit without any out-of-pocket cost or real risk undertaken by bankers. The world in which economic theorists operated was becoming increasingly speculative and hypothetical.

After the Napoleonic wars ended in 1815, Britain’s leading bank spokesman, David Ricardo, applied the concept of economic rent to the land in the process of arguing against the agricultural tariffs (the protectionist Corn Laws) in his 1817 Principles of Political Economy and Taxation. His treatment deftly sidestepped what had been the “original” discussion of rentier income squeezed out by the financial sector.

The empirical core of Piketty’s book is about the distribution of income as revealed by tax records in a handful of rich countries—mainly France and Britain but also the United States, Canada, Germany, Japan, Sweden, and some others. Its virtues lie in permitting a long view and in giving detailed attention to the income of elite groups, which other approaches to distribution often miss.

Early on, Piketty makes a claim to be the sole living heir of Simon Kuznets, the great midcentury scholar of inequalities. He writes: Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s land, too historical for economists and too economistic for historians. That is a pity, because the dynamics of income inequality can only be studied in a long-run perspective, which is possible only if one makes use of tax records. The statement is incorrect. Tax records are not the only available source of good inequality data. In research over twenty years, this reviewer has used payroll records to measure the long-run evolution of inequalities; in a paper published back in 1999, Thomas Ferguson and I tracked such measures for the United States to 1920—and we found roughly the same pattern as Piketty finds now.

Under President Reagan, changes to U.S. tax law encouraged higher pay to corporate executives, the use of stock options, and (indirectly) the splitting of new technology firms into separately capitalized enterprises, which would eventually include Intel, Apple, Oracle, Microsoft, and the rest. Now, top incomes are no longer fixed salaries but instead closely track the stock market. This is the simple result of concentrated ownership, the flux in asset prices, and the use of capital funds for executive pay. During the tech boom, the correspondence between changing income inequality and the NASDAQ was exact, as Travis Hale and I show in a paper just published in the World Economic Review.

The lay reader will not be surprised. Academics, though, have to contend with the conventionally dominant work of (among others) Claudia Goldin and Lawrence Katz, who argue that the pattern of changing income inequalities in America is the result of a “race between education and technology” when it comes to wages, with first one in the lead and then the other. (When education leads, inequality supposedly falls, and vice versa.) Piketty pays deference to this claim but he adds no evidence in favor, and his facts contradict it. The reality is that wage structures change far less than profit-based incomes, and most of increasing inequality comes from an increasing flow of profit income to the very rich.

It is a book mainly about the valuation placed on tangible and financial assets, the distribution of those assets through time, and the inheritance of wealth from one generation to the next. Why is this interesting? Adam Smith wrote the definitive one-sentence treatment: “Wealth, as Mr. Hobbes says, is power.” Private financial valuation measures power, including political power, even if the holder plays no active economic role. Absentee landlords and the Koch brothers have power of this type. Piketty calls it “patrimonial capitalism”—in other words, not the real thing.

With this passage he makes a distinction that he previously blurred: between wealth justified by “social utility” and the other kind. It is the old distinction between “profit” and “rent.” But Piketty has removed our ability to use the word “capital” in this normal sense, to refer to the factor input that yields a profit in the “productive” sector, and to distinguish it from the source of income of the “rentier.”

Piketty’s further policy views come in two chapters to which the reader is bound to arrive, after almost five hundred pages, a bit worn out. These reveal him to be neither radical nor neoliberal, nor even distinctively European. Despite having made some disparaging remarks early on about the savagery of the United States, it turns out that Thomas Piketty is a garden-variety social welfare democrat in the mold, largely, of the American New Deal.

But would it work to go back to that system now? Alas, it would not. By the 1960s and ’70s, those top marginal tax rates were loophole-ridden. Corporate chiefs could compensate for low salaries with big perks. The rates were hated most by the small numbers who earned large sums with (mostly) honest work and had to pay them: sports stars, movie actors, performers, marquee authors, and so forth.

If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.

In sum, Capital in the Twenty-First Century is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world’s wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin—or at least include—a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest.