Capital, Kapital, and the Continuing Struggle 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,” defi ned 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
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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,
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 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 popularizing the 1% versus 99% meme fi rst articulated by
economist Joseph Stiglitz, 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.
Piketty’s Arguments
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 fi nancial 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 r<g. 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
“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. ”
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 fi nancial
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 refl ect 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 offi cial 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
impressive 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.
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