Opinion

Why the U.S. is the wealthiest country on Earth — but not the most prosperous

A lot of money can be too much of a good thing

Thomas Piketty's book Capital in the Twenty-First Century has spawned a lot of commentary, befitting its status as a paradigm-shifting tome that uses two centuries of data to make the case that capital in its natural state accrues in the hands of the wealthy and stays there.

But what exactly do we mean by "capital"?

Many commentators have been frustrated by Piketty's definition of the term, because it doesn't fit with how economists have traditionally defined it. And while this may seem like a pedantic discussion, it actually has broad implications for economic policymaking, explaining how this country can be both phenomenally wealthy and lagging in so many metrics of prosperity.

In plain vanilla terms, capital is any non-financial asset that is used in the production of goods and services. We're talking things like equipment to make shoes, or the building to house that equipment.

That's a decent definition for many purposes, but Piketty rejects it in his sweep-of-history analysis. Instead, he says capital is anything that provides a financial return: Land, buildings, machinery, financial instruments, whatever. That's because he's interested in the historical and political aspects of capital, not just technical modeling.

Capital, in other words, is wealth that is inextricably bound up with our ideas of society and power. As Matt Bruenig says, "At its core, wealth is a social relation of power and control." At a recent event at the Economic Policy Institute, famed economist Robert Solow phrased it slightly differently. It's reasonable to think of capital as "command over economic resources," he said.

And there are reasons to believe that such command has only become more concentrated in the United States.

It is often much more useful to think of capital in this way. For example, does the stupendously high pay of CEOs come from wages or from capital? By traditional definitions, the answer is clearly wages for the vast majority of them. They have a job and they are paid for that job, not for direct ownership of some asset.

However, in the Solow/Bruenig view, this distinction loses all meaning. CEOs have a lot of power, and its easy to see how their command over the company could translate into command over the company's resources, which they can translate into cash that is directed into their own pockets. For example, CEOs routinely pack corporate boards with cronies who will rubber-stamp their salary increases.

And at the extreme, we have people like Angelo Mozilo, the former CEO of mortgage giant Countrywide, who almost certainly knew that the mortgages his company was handing out to subprime borrowers were rotten, but reportedly kept a lid on whistleblowers so the party could keep going as long as possible. When Countrywide finally died, he had cleared hundreds of millions in pay. In effect, he was looting his own company.

It simply beggars belief to say that such a person holds the same category of position — wage laborer — as a McDonald's cashier, no matter how you label their monstrous pay packages.

It is more difficult to get one's analytical teeth into this broader definition of capital, since it is saddled with a lot of history and politics. But it is possible, as economist J.W. Mason showed us with this brilliant post on Germany. Measured in traditional terms, Germany has some of the lowest wealth in Europe, even though it is clearly not poor in buildings or high-tech equipment. Why? Because Germany has gone to great lengths to restrict the rights of private ownership — whether it's in the form of a home or corporate stock — in favor of a more communal model, which means the property value is measured as "lower" in traditional metrics.

The implications of this are still spooling out, but one I'd like to highlight is this: More wealth does not always mean more prosperity. By practically any measure, America is the richest major nation in the world. But insofar as that wealth represents a 1 percenter death grip on the levers of the economy, it results in the stark inequality of power, not more material goods and services.

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