Thomas Piketty Does Not Understand Capital 
The Asian high-growth Tokyo Consensus economies have grown using central bank credit creation, NOT domestic saving 

In many ways, Thomas Piketty’s book an “Capital in the 21st Century” (Belnap Press of Harvard University Press, Cambridge, Massachusetts and London, 2014) is about the best analysis which can be provided from an eminent individual with a neoclassical mindset. But it utterly fails to see or acknowledge the well-spring of the very high economic growth rate of the Tokyo Consensus economies.

On page 71 of the book, Thomas Picketty says:

“China, for example, still imposes controls on capital: foreigners cannot invest in the country freely, but that has not hindered capital accumulation, for which domestic savings largely suffice.”

But China’s rate of capital accumulation has not much to do with the level of domestic saving, and everything to do with credit creation at the People’s Bank of China and in its provincial subsidiaries. John Maynard Keynes as usual got it right when he said investment came before saving, and it was the investment level that was crucial in determining national income, but few of his readers seem to have realised the significance of that. Nor have they realised the importance of Keynes’ observations that “While there are intrinsic reasons for the shortage of land, there are no intrinsic reasons for the shortage of capital” (J M Keynes, “The General Theory…” Book 6, Chapter 24, Section 2, p.376) and that “Saving can be created in advance of the return on investments which justify it..” and furthermore a Central Bank “may itself purchase assets, i.e. add to its investments, and pay for them, in the first instance at least, by establishing a claim against itself.”
(see J M Keynes, Tract on Monetary Reform, p. 21).

These three things are exactly what ALL the Tokyo Consensus economies do — create investment credit at the central bank, writing down the origin of these credits as “the savings of the people” in order to maintain the double-entry nature of the national accounting system, making a claim against itself, and advancing these credits to all the investing enterprises in the country through a cooperative local banking system. These are not domestic savings, in the way they would be in Western economies, but central bank credit creation earmarked for productive investment.

Take Japan, for instance — there are numerous reports which say that Japan’s personal savings rate is very high, but the published Japanese national accounts have one category for “Individuals and small and medium sized business enterprises.” If Japan’s small businesses acquire extra investment credits from their local bank, how can anyone tell whether these bank credits are previous year saving or bank loans? In the case of individuals, the “saving” may be real and high forced saving due to late-paid bonuses, but much of the supposed “saving” in this category is investment credit for Japanese SMEs.

You have to understand the local financial-industrial system before you can properly read the national income accounts. Piketty assumes a Western, largely neo-classical, mindset which doesn’t apply to the Tokyo Consensus nations. His book would have been better if he had understood that, because the rest of his analysis would have been stronger and his presciptions much better if he had been able to adopt a Shimomuran mindset.

© George Tait Edwards 2014

Note: George Tait Edwards has published a book about “Shimomuran Economics” at http://www.lulu.com/shop/george-tait-edwards/shimomuran-economics/paperback/product-21688864.html and much else elsewhere during the last four decades.