That Piketty tacks back-and-forth between a market value and a physical quantity conception of capital. Yes. He does. He shouldn't. It is a potential source of confusion-and it has, I think, confused some readers. But this seems to me to be a very minor criticism: recognize that he is talking about the market value of wealth understood as capitalized claims on incomes from whatever source--land, location, buildings, machines, organizations, production processes, intellectual-property rights, protected monopolies, and so on--and things become clearer and the argument, I think, becomes stronger.

That Piketty speaks of "tendencies" that can be counteracted when he ought to be doing comparative statics on the steady-state growth path. This is what I think. This is what my model of what Piketty is doing that I summarized here does. But, once again, not a biggie.

That Piketty has no real theory of what determines the rate of profit, and so doesn't have a real theory of wages either. This is what led to Matt Rognlie's complaints and his claims that Piketty ought to be saying that the processes of wealth accumulation he identifies (a) reduce the salience of the rich--that although they own more wealth relative to a year's national income they receive a smaller share of national income--and (b) amplify the real incomes of the not-rich and (c) lead not to less but more income inequality.

This criticism is, I think, in large part a consequence of criticism (1): if you have a physical-factor-of-production definition of "capital" in the forefront of your mind, it is a very natural criticism to make. Piketty seems to need an additional argument here: that control over wealth shapes politics, and that politics will make sure that the rate of profit does not fall too far--that wealth is not allowed to compete with itself and so lower the rate of return and boost wages substantially as the process of wealth accumulation continues. It seems to me that Piketty has a good case here. But I think he needs to make it.

If he were to make it, what would he say? Suresh Naidu, I think, lays out the issues rather well. He speaks of the "'domesticated' version of [Piketty's] argument... a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates.... This is story that is told to academic economists, and it is plausible, at least on the surface..." The problem for Piketty is that it is only plausible. There are the Matt Rognlie's who believe that capital and labor are not (yet) that substitutable (if they ever will be), and consequently that capital accumulation raises the bargaining power of labor by enough to guarantee rapidly-rising real wages and probably a rising labor share and thus a decreased salience of capital ownership in income if not in wealth. They look forward to at least a partial euthanasia of the rentier, and see the process of accumulation that Piketty describes as an equalizing rather than an unequalizing process. Thus, I think, the 'domesticated' version of Piketty--the one that speaks of wealth-as-productive capital, and of the return to wealth as the marginal physical product of that capital times the value of undifferentiated output, is relatively weak.

Suresh, however, does not believe in the 'domesticated' Piketty. He writes: "There is another story... that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand.... I think the production approach is less plausible... housing [with land] plays such a large role... [i the 'domesticated' version] average wages would have increased along with K/Y [if factors are paid marginal products].... The (really great) sections from the book on corporate governance actually suggest something quite different... a gap between cash-flow rights and control rights.... This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view..." And here we have passed out of neoclassical economics entirely. Factors of production are no longer paid their marginal products. Instead, wealth controls government. Government sets barriers to keep those kinds of property that the wealthy control safe from competition and earning their rents. The government is an executive committee for managing the affairs of the ruling class. And, as a bonus, the property rights system acts as a fetter on the process of economic development because it is tuned not toward equalizing private and social values but toward enriching the already-rich.

As Suresh points out, if you adopt the 'domesticated' version of Piketty, then, first of all, nothing can be done save for progressive taxation: "This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies.... If it is just a very high substitutability... labor market reforms are... off the table, as firms just replace workers with machines if you try to raise the wage..." In the 'domesticated' version, the market is working: labor is low-paid because it is not very valuable and capital is high-paid because it is very useful indeed. Plus, I would add, the 'domesticated' version is subject to Matt Rognlie's critique in a way that the wild version is not.

But by now we have arrived at the point that Piketty needs to write another book--a book about control rights and cash flow rights and the political economy of distribution and the state, a book that is (mostly) hidden behind Piketty's assumption that r will not fall by much as W/Y rises...