By Bill Barclay
Capital in the Twenty-First Century, by Thomas Piketty
What can you say about a book that has been reviewed dozens of times, was a New York Times best seller for three weeks, led to numerous book discussion groups, and has been a cultural phenomenon? You can say that Thomas Piketty’s Capital in the Twenty-First Century (hereafter Capital) is worth the fuss. It has brought what socialists have known for a long time to the wider public.
Pushing Paradigm Change
In the last 40 years, the dominant paradigm in economics has been that of Friedrich Hayek’s “catallaxy,” defined as “the order brought about by the mutual adjustment of many individual economies in a market.” Translation: unregulated markets will eventually work out to the benefit of all. In support of that paradigm, Nobel Prize winner Robert Lucas has argued that “of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution . . .”
And focusing on distribution is exactly what Piketty does. He analyzes the distribution of income and wealth and their determinants for the past 250 years to show that unregulated capitalism is making the rich richer and the rest of us poorer. This will not come as a surprise to those who have been paying attention. What’s new is that our economic and political elites have taken notice, some favorably (Paul Krugman), others less so (the Wall Street Journal editorial board). Some whose praise we might not expect argue that the book raises important questions (the World Bank’s Branko Milanovic). But none are ignoring it.
A major reason for the recognition, grudging or otherwise, of Capital, is its popular reception. Everywhere in the United States, individuals, discussion groups, and meetups have been reading and talking about the book—or at least part of it. One analysis maintains that most people reading electronic versions of Capital do not get past page 26, but you can learn a lot from those first pages.
A significant part of the cultural phenomenon is a matter of timing, but here luck and hard work reinforce each other. Although Occupy is given the credit for mass popularization of the 1% versus 99% meme, it is Piketty and his colleague Emmanuel Saez who have been doing most of the heavy lifting, with more than a decade of work on income concentration. The combination resulted in what an economist might call a virtuous circle: Piketty and Saez labor in (relative) obscurity to increase focus on the top 1%, Occupy’s architects use their work in a mass mobilization, and Piketty publishes a book that further opens the door for new political thinking and organizing around the problem of inequality.
Marx begins Kapital by inquiring into the nature of a commodity. Piketty begins Capital by asking what determines income and wealth distribution. Marx sought a theory of capitalism as a system and Piketty seeks a theory of (trans-historical) capital.
Capital for Piketty includes real property as well as professional and financial capital. He recognizes, however, that “true wealth consists primarily of financial and business assets.” Here are some of his more interesting and salient conclusions:
First, there is a tendency for capital to increase, because, over the long run, returns (r) on capital (c) are greater than rates of economic growth. Piketty writes it as r>g. The r>g tendency is much like Marx’s falling rate of profit: observable historically but not provable mathematically. Piketty shows that the past devours the future. As capital in private hands increases, so does inequality. Think about the Gilded Age of the late 19th century and the United States today.
This tendency was masked for a time because, after the Second World War, high economic growth rates produced g>r. Piketty argues that this resulted from the widespread destruction of capital during the wars and the increased regulatory jurisdiction over capital that characterized the “social state.” I would argue that the increased regulatory jurisdiction over capital exercised by the state was at least as important as the destruction of capital in the Second World War. For example, although the Nordic countries suffered less destruction of assets than did central Europe, they created the most extensive system of capital regulation by the social state.
The asset price depression and resulting need to rebuild after the Second World War were the impetus for the “golden age” that lasted into the early eighties. Capitalism and democracy, capitalism and the social state, and capitalism and reduced inequality appeared to be linked. Not so, says Piketty, who sees the golden age as the exception rather than the rule.
Piketty’s emphasis on returns and growth highlights the question of the circumstances under which social state regimes can be created and casts a different light on the role of social democratic parties and the mediation of class conflict. If the driver of the creation of the social state was r<g, it implies a reduced significance of class conflict at the point of production, in contrast with solidaristic wage policies, pushing low-road enterprises up the technology curve, and taxing the higher profits of successful firms to fund the social state.
Neither the dominant comforting theory that the growth of capitalist political economies (in say, China) will increase equality or the related assumption about the stability of the income shares of capital and labor (the rising tide lifts all boats theory) appears realistic. The U.S. experience in the past 30 years leads to the same conclusion.
Further, very high-income households spend to ensure for their offspring the same powers and privileges they enjoy. If, as Piketty argues, larger agglomerations of capital are able to achieve higher rates of return, class power becomes more entrenched and inheritance accounts for more and more of one’s fate.
Piketty’s Answer to “What is to be done?”
In the concluding chapters, Piketty makes concrete proposals that socialists can rally around. He does so first by a discussion of the “social state.”
Prior to about 1920, the rich countries had a “night watchman” state that fulfilled the functions of public safety, law enforcement, and foreign defense. This required government revenues in the range of 10% to 12% of national income. Between 1920 and approximately 1980, tax revenues as a share of national income jumped: three-fold in the United States, four-fold in the United Kingdom and France and five-fold or more in the Nordic countries. Since then, tax revenues have plateaued as a share of national income. In Piketty’s overview, about half of the increased revenue has gone to health and education and the other half to pensions and transfer payments. Piketty notes that the United States, an outlier, gives less to these categories and more to military spending. The important point, however, is that this was all possible because of the shift in the r and g relationship. With the return to patrimonial capitalism (that is, enormous wealth in the hands of individuals) in the 21st century, the r>g tendency is reasserting itself.
Piketty argues that significantly higher marginal tax rates will neither discourage people from working nor encourage tax avoidance. A top rate of about 78% is quite reasonable, with little or no negative impact on economic growth.
Piketty’s proposal is much more radical than income tax reform, however. He calls for a progressive global tax on capital—or, failing that, a Europe-wide tax on capital. This proposal has been met with much skepticism, similar, we can assume, to the skepticism toward the proposal for progressive income and high inheritance taxes made by two guys named Karl and Friedrich in 1848.
The goals and benefits of the global wealth tax are important to consider. The tax would not be designed primarily to raise large amounts of revenue but to stop the inequality spiral and to regulate the financial system to prevent future crises such as occurred in 2007 and 2008.
Piketty makes several arguments for his tax. Although raising income is not its main goal, even a very low rate would raise a significant amount of revenue, equal in the European case to about 2% of GDP. Second, this tax would more accurately reflect the capacity of the very wealthy to contribute to the general good. At the top of the income/wealth pyramid, even very high marginal income tax rates are limited in their ability to raise additional revenue because the very wealthy do not take all their potential income as a current flow; much accumulates in trusts and other tax-protected vehicles. A tax on capital is an important complement to a progressive income tax. Third, a global wealth tax would dramatically increase financial transparency. Piketty notes that, according to the best official statistics, the world as a whole has a negative balance of payments. This impossibility is the result of tax havens that hide significant amounts of income and wealth. These havens would be ended by his tax on capital.
Piketty makes less use than he might of another strong argument for a tax on capital. Most wealthy countries already have a wealth tax—but on residential property only. Tax fairness demands that a wealth tax be extended to the forms of capital that are the basis of the huge fortunes that increasingly dominate our politics and our economies.
There is much more that could be said about this remarkable book. The underlying data are impressive, and the focus on distribution opens new vistas and ways of thinking to political economists. Capital will not replace Kapital in my bookcase, but I’ll put it on the same shelf.
Bill Barclay is co-chair of Chicago DSA and a founding member of the Chicago Political Economy Group.
This article originally appeared in the winter 2014 issue of the Democratic Left magazine.
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