Part 1 - Piketty for Activists
This article is based on a talk I gave at the New Haven Free Public Library last August. That talk and this article are not aimed at economists, and do not discuss in any depth the economic arguments in the book, nor the debates surrounding them. Rather, in this article (Part 1 - Piketty for Activists), I summarize some of the most important data presented and conclusions drawn by Piketty as they relate to ordinary people in the labor and other movements for economic justice. In Part 2 - The radicalism of Thomas Piketty, I argue that Piketty's work has implications far more radical than his mainstream economic framework, and is thus an important contribution to those movements.
Throughout this article, numbers in parentheses refer to the relevant page numbers in the 2014 Harvard University Press edition of Capital in the 21st Century, which will be referred to as "Piketty's Capital" (or simply, Capital), as distinguished from the work by Karl Marx, which will be referred to as "Marx's Capital."
Why are we talking about this book?
The title is "Capital in the 21st Century," and it is the rare example of a weighty economics book that spent months on best-seller lists, and has become a cornerstone in the discussion of inequality.
Unlike Karl Marx's Capital (1867), Thomas Piketty's book is not and does not try to be a complete description of the political economy of capitalism. Rather, Piketty's Capital focuses on the concentration of wealth at the top, and the resultant growth of inequality.
Why is it a best seller? Ten years ago, Capital may have received little notice. But as Piketty states in his opening paragraph, "The distribution of wealth is one of today's most widely discussed and controversial issues..."
Start perhaps in 1999 in Seattle, with the massive protests against the way capitalist trade agreements are forcing workers into a global race to the bottom, continuing through the Occupy movement in 2011, the national movement to raise the minimum wage, and the growing movement of fast food and other low-wage workers to organize unions. These developments in the US have been paralleled around the world, and have pushed the issue of inequality onto center stage. That's why Piketty's Capital is a best seller and, in turn, the book has helped to place the issue and solutions on the table, with public figures from the Pope to President Obama speaking out.
The millions of people in the US and billions globally who are fed up, don't need Piketty's book to know that something is rotten - that their own living conditions and prospects have deteriorated while the 1% are richer than ever. And Piketty is hardly the first economist to provide data and analysis to give substance to this gut feeling.
But Piketty's Capital stands out because of its careful compilation of centuries of data from many countries, combined with a theoretical framework to explain the dynamics of inequality and its rise in the last 3 decades. Piketty (at the Paris School of Economics), and his U.S. collaborator Emanuel Saez at UC-Berkely are widely recognized for their work in tracking the distribution of income and wealth. Piketty is well within mainstream economics, so his work is hard to ignore.
What does the book say?
The book says a lot - 600 pages worth, plus extensive notes. Piketty's own summary is given in his 35-page introduction and in his 100-page concluding section.
Page 1 tells us what the book is about. "Do dynamics of private capital accumulation inevitably lead to the concentration of wealth in fewer hands, or do the balancing forces of growth, competition and technological progress lead in later stages of development to reduced concentration and greater class harmony, These are the questions I attempt to answer." (p. 1).
Piketty's research spans several millenia, and focuses on several centuries of data. It covers many countries, but focuses on France, Britain and the U.S. The historical research is impressive, often interesting, exhaustive, and often exhausting.
His conclusion: There is a strong tendency for increasing divergence, i.e., for growing concentration of wealth at the very top. This tendency exists within every country, and also globally. If unchecked, this tendency can lead to a polarization that threatens social and political stability, with potentially catastrophic consequences.
He emphasizes that this is a tendency, not an absolute law. Inequality is shaped by economic, political and social forces and policies. It is a tendency that can be halted and reversed by public policy, although he is not optimistic that this will happen. And he emphasizes that without policy intervention, there is no automatic economic mechanism that will act to stop the growth of destabilizing concentration of wealth in capitalist economies. Picketty develops a mathematical model, but does not rely exclusively or even primarily on abstract models: he constantly goes back and forth between his model and historical data, showing how they interact.
Rentier Society
Piketty shows the growing inequality and concentration of wealth in Europe that peaked just before World War I. In the UK, the most unequal country, the richest 10% owned "almost everything." During this period the very rich could live luxuriously on a portion of the income from their inherited wealth, leaving a substantial amount left over for reinvestment. Thus, the family fortune would grow faster than the national economy. He concludes, "For strictly mathematical reasons, the conditions are ideal for an 'inheritance society'... characterized by both a very high concentration of wealth and a significant persistence of large fortunes from generation to generation." (p. 351).
This was a rentier society in which the incomes of the wealthy were almost entirely derived from property (rent) and investments (as opposed to wages and salaries from working). Piketty enriches and enlivens this discussion with references from 18th and 19th century novels. But outside of these narratives, Piketty's analysis is particularly clinical. The accumulation of great wealth appears as an almost automatic process, governed by natural law.
Contrast this with the origins of wealth as described in Marx's Capital: "The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalised the rosy dawn of the era of capitalist production... capital comes dripping from head to foot, from every pore, with blood and dirt." (Marx, Capital, Vol 1, Chapter 31 - https://www.marxists.org/archive/marx/works/1867-c1/ch31.htm] )
I would add that it was the incredibly brutal plunder, repression and exploitation of their own people, along with the looting of much of the rest of the world, that provided the steady 5%+ return on government bonds and private investments by which the rentiers of British and French society were able to live a genteel life. While Piketty alludes to this - a character he describes in one of Balzac's novel travels to the West Indies to superintend the family's slave-powered plantation - national oppression and class exploitation are incidental to his analysis, while for Marx they are central.
Inequality trends since World War II
In the 20th century, the steady concentration of wealth was upset by the shocks of World War I, the great depression, World War II and its aftermath (p. 368+). But since the 1970s, inequality has been growing again, although it has not reached pre-World War I levels. (p. 294)
It is noteworthy that in 1910, Europe had significantly greater concentration of wealth than the US. Since World War II, the positions are reversed, with the US having greater concentration of wealth at the very top. And the bottom half of the population in the US today, together, owned only 2% of the nation's wealth. (p. 257)
In the U.S., income inequality is even greater today than it was in 1929. Over the last 3 decades the top 1% doubled their share of total income from 10% to 20% (p. 292), and even this is probably an underestimate due to the use of tax havens to hide income. (p. 295).
Piketty explains the increase in income at the top by the rise of what he terms supermanagers - incredibly high salaries of top corporate executives. But his data show that at the very top - the top 0.1% - income from capital - rentier income - still dominates.
Even granted the role of supersalaries, Piketty says, "regardless of whether the wealth a person holds is... inherited or earned... the fact remains that beyond a certain threshold, capital tends to accumulate exponentially... the entrepreneur always tends to turn into a rentier." (p. 395) (emphasis added). As an example, Piketty describes Bill Gates' fortune as entrepreneurial - earned (at least implicitly) through hard work, innovation, and management skill. Piketty compares Gates with cosmetics heiress Liliane Bettencourt, who has never worked and whose fortune is based entirely on inherited wealth. Both fortunes - those of the hard-working Gates and the idle Bettencourt, increased at the same rate. And even after he has officially stopped "working," Gates wealth has continued to grow (p. 440).
(Marxists and other skeptics would say that exploitation and monopoly profiteering, as opposed to productive work, account for most of the Gates billions, but that doesn't affect the point Piketty makes here).
Piketty goes on to show that in France, the only country for which good data are available, inherited wealth is rapidly regaining its pre-World War I importance. (pp. 404,425).
Piketty discusses the unequal returns on wealth: the greater your wealth, the higher the rate of return on your capital. (p. 447+). The 1% enjoy higher average returns than the economy as a whole, and the very top may well have returns double those of other investors. I think Piketty should have emphasized this point more, as it greatly supports his contention that, unchecked, wealth tends to concentrate at the top.
The question is: will wealth concentration continue to grow until it reaches the levels of 1910? (pp. 368+, 375+). Piketty's says, "Nothing is certain; inequality can move in either direction... One conclusion is already quite clear, however: it is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved." If the post-World War II policies, such as taxes on capital and income, continue to be destroyed, he says, inequalities as bad as 1910 or even more extreme could emerge.
Piketty gives extensive attention to the "shocks" which, in the mid-20th century, greatly reduced the concentration of wealth at the top and the inequality of income. The physical destruction of war, and post-war inflation in some countries, wiped out much of the wealth of the upper classes. Social policies enacted in response to these shocks - progressive taxes, wealth taxes, and "welfare state" policies that in the U.S. include programs like Social Security, unemployment insurance and Medicare/Medicaid - were even more important in reducing inequality, according to Piketty. He largely ignores the role of working class struggle in forcing those concessions from a reluctant ruling class, and completely ignores the role of the Soviet Union and allied countries whose example pressured the ruling classes of Western Europe, and even the United States, to grant concessions to their own working classes and those of their dependencies.
Piketty's program
The last section of Piketty's book is subtitled, Regulating capital in the 21st Century,
In chapter 13, he argues that the social democratic practices that developed in Europe (and to a lesser extent in the US) in the 20th century redistribute wealth - not by taking from the rich to give to the poor, but by taking from the rich to finance public policies that are more or less equal for everyone, "especially in the area of health, eduction and pensions" (p. 481). He traces the justification for this approach to the American and French revolutions, which "both affirmed equality of rights as an absolute principle... But in practice, during the nineteenth century, the political systems that grew out of those revolutions concentrated mainly on the protection of property rights."
Progressive taxation was the 20th century innovation, pioneered in America and Britain, which made the social state possible. But since 1980, the progressive income and estate taxes have been undermined by a race to the bottom. The very rich pay a smaller share of their income in total taxes than the moderately rich and the middle class. (Remember Mitt Romney admitting a federal tax rate of 14%, less than many middle class Americans.)
Piketty says the only way to control runaway executive pay and the inequality it produces is returning to confiscatory tax rates of before 1980 (pp. 511-512), and advocates a marginal rate of 80% on incomes above $500,000 or $1 million.
But this is unlikely to happen, he says, and asks, "Has US politics been captured by the 1%?... I am inclined to grant more influence to ideas and intellectual debate." (p. 513). His answer perhaps shows a certain naivete, especially in light of the domination of big money in the 2014 U.S. elections. But on the next page, in apparent self-rebuttal, he says, "...the drift toward oligarchy is real and gives little reason for optimism about where the United states is headed.... no hypocrisy is too great when economic and financial elites are obliged to defend their interests - and that includes economists, who currently occupy an enviable place in the US income hierarchy... the New World may be on the verge of becoming the Old Europe of the 21st century's globalized economy" (p. 514).
Finally, in chapter 15, we get to the main programmatic point. Yes, we need to update 20th century fiscal programs (like progressive taxes) and social state programs (like education and pensions) but in the 21st century "If democracy is to regain control over globalized financial capitalism... it must also invent new tools." (p. 515)
The tool proposed by Piketty is a progressive global tax on capital (GTC) with international financial transparency. The primary purpose is not to finance the state but to regulate capitalism (p. 518), although the revenue generated would not be trivial. A tax on capital stops the indefinite increase of inequality and also imposes effective regulation on the financial sector. It would provide information on the distribution of wealth - information which is necessary (and currently lacking) for democratic public policy.
While unrealistic on a global scale at this time, such a tax would be technically simple to implement on an EU-wide basis (p. 522+). With cooperation amongst the EU countries, it should be possible to have uniform banking rules and force tax havens to comply, so that wealth could no longer be hidden (p. 527+). Tax levels at the top should be set so that rentier wealth does not continually increase.
Of special interest in the U.S., Piketty's very modest tax on all capital would replace the separate property tax, which hits middle class hardest (p. 528). In France, Piketty says, property tax is usually 0.5%-1%. In my city of New Haven, it is probably 3%-5%. Property tax, imposed in the United States on a local level, is our only form of wealth tax. Originally, property was the main form of wealth, and the tax was mildly progressive. Today, financial wealth is not taxed, and the property tax in the U.S. even more than in France hits middle income households hard, and lower income, through their rent, possibly harder. So a tax on all wealth could reduce the property tax in a way that would benefit most of the 99%.
Piketty then makes the case that his tax on capital - wealth - complements a progressive income tax and estate tax, and is essential to stop the uncontrolled growth of inequality.
In my opinion, that of most reviewers, and probably Picketty himself, his proposal for a global tax on capital, or even a regional EU tax, is politically unrealistic today.
But so are the proposals of climate scientists, who warn that it is essential to practically eliminate new carbon emissions right now. That doesn't mean the climate scientists are wrong, or that Picketty is wrong.
Critics from the right.
Of course, Piketty has been attacked from the right. Most of those attacks are laughable, and have been effectively refuted many times. Of course, this does not stop them from being repeated endlessly, and being used by mainstream media. A few representative examples:
Piketty is wrong - The Financial Times (FT) published a front-page exposé by Chris Giles [http://piketty.pse.ens.fr/files/capital21c/en/media/FT23052014c.pdf] alleging that Piketty's data are wrong, a charge picked up and repeated in The Wall Street Journal [http://www.cato.org/publications/commentary/why-pikettys-wealth-data-are-worthless] and elsewhere. The FT article has been refuted widely [ http://equitablegrowth.org/2014/05/30/daily-piketty-may-30-2014/] including by Piketty himself [http://www.voxeu.org/article/factual-response-ft-s-fact-checking]). I find Piketty's response convincing, as did many economists. Most of the "inconsistencies" Giles found were explained by his failure to read the technical appendices and so misinterpreted the data. But few readers, and probably fewer financial reporters, have the time or expertise to delve into the competing claims. The result is that the FT article can produce "he said - she said" reporting, casting doubt on Piketty's data.
A rising tide lifts all boats - A typical example of this argument comes from an article circulated by Bloomberg News [http://www.bloombergview.com/articles/2014-05-13/why-worry-about-inequality] which asks, in effect, what's wrong with growing inequality, as long as "almost everyone is growing richer, and that poverty is disappearing." The author, a Harvard Law professor, apparently has not noticed that the majority of working class Americans are getting poorer, not richer, and that poverty is in no danger of disappearing.
Greed is Good - The New York Times printed an article by Gregory Mankiw, Professor of Economics at Harvard, Chair of George W. Bush's Council of Economic Advisers, and economic adviser to Mitt Romney's presidential bid. [http://www.nytimes.com/2014/06/22/upshot/how-inherited-wealth-helps-the-economy.htm]. He praises inherited wealth (as showing the concern billionaires have for their children) and claims we all benefit, because these great fortunes are invested in new and expanding businesses that provide jobs and wages for the rest of us. Jared Bernstein points out [http://jaredbernsteinblog.com/mankiw-piketty-and-wealth-taxes/] that this is just a restating of the supply-side justification of throwing money at the rich, claiming that some will trickle down to the rest of us. This is, of course, refuted by the experience of the past 40 years, when tax cuts for the 1% and other feed-the-rich policies have contributed to stagnation and actual decline for most working class families, a loss of productive and good-paying jobs, and a rapid growth in low-wage, no-benefit jobs.
Conclusion
I have tried to convey what I think are some of the most important points in Capital, although in 600 pages, Picketty ventures into many areas deserving of an entire review on their own. In part 2 of this article, I will briefly review some aspects of Picketty's work which I view as problematic, and why despite that, Capital can be a significant contribution to building a movement for an economy that works for working people, for building a society that puts people and nature before profits.
Photo: Thomas Piketty commons.wikipedia.org
