Those few (and perhaps imaginary) souls who have been wondering why OpEdge has been relatively quiet about Thomas Piketty’s Capitalism in the 21st Century can fret no more. I’ve been holding fire waiting for the publication of my extensive essay in Jewish Currents which analyzes and critiques Piketty, discusses its relationship to Marx’s Capital and dispenses with the book’s right-wing critics. That’s the downside of writing for a quarterly publication: you find that you can’t respond to the hot topic immediately. On the other hand, I have the benefit of being able to put the uproar surrounding the initial appearance of Capital in the 21st Century into some perspective.
I’m going to excerpt the article over the next three OpEdge columns, but I urge readers to delve into the full essay at Jewish Currents. In fact, even non-Jewish readers will find a number of fascinating articles in the latest issue.
Let’s start with review of what Piketty wrote:
The grand outline of Piketty’s narrative is simple: At the beginning of the 19th century, there was a great inequality of wealth in Europe, but not in the U.S. American wealth began to concentrate during the Gilded Age of the late 19th century, when on both sides of the Atlantic Ocean manufacturing assets and financial instruments began to complement and then replace land as the primary types of capital. Unlike Marx, Piketty considers land a type of capital.
Piketty depicts the two World Wars as a kind of suicide of capital that led to the social welfare programs in Europe and the U.S. The height of wealth equality in both came during the high-growth decades after World War II, which the last thirty years of low growth have reversed, until inequality of wealth in the U.S. has now reached historic proportions.
The growth of a middle class that owns property, “the patrimonial middle class,” was the principal structural transformation in the distribution of wealth in developed countries in the 20th century, says Piketty. In 1900-1910, the middle class was almost as poor as the poor, while the top 10 percent owned 90 percent of all wealth (and the top 1 percent owned 50 percent of all wealth). Today, the middle class, which Piketty defines as the middle 40 percent of income and wealth, does much better than the poor, which he defines as the bottom 50 percent.
Piketty seeks to understand this history by reducing it to an equation, r>g, where r is the rate of return on capital and g is the growth rate of economic output. The premise of the equation — and of Piketty’s entire system — is that the rate of return on capital is virtually always greater than the growth in economic output. Over time, owners of capital tend to take more of the pie, leaving less for everyone else.
During high-growth eras, r>g does not matter, since a rising tide tends to lift all boats. But as he demonstrates, most of recorded history has seen very low rates of economic growth. It was almost nonexistent before the 1700s, if we take account of population growth, and was a meager 1 percent from about 1800 to the end of World War II.
Comparison of the upper decile (top 10 percent) and upper centile (top 1 percent) to everyone else reveals many insights about wealth inequality. For example, Piketty finds that one of the main reasons wealth inequality shrank so much in Europe between 1914-1945 was because the top centile continued to live a lifestyle requiring eighty to one hundred times the average income, even though the war, inflation and higher taxes were eating into their income and capital. The result: their heirs inherited smaller fortunes. The concentration of wealth in Europe never recovered from the shocks of 1914-1945, in which the upper decile’s share of wealth fell from 90 percent to 60-70 percent; it’s now 65 percent.
In the U.S., inequality of wealth was small in 1800, increased dramatically during the 19th century, saw a less steep decline in 1914-’45, and has soared since then to 70 percent for the top decile and 35 percent for the top centile.
Piketty finds two worldwide trends driving the slide towards greater wealth inequality since 1970:
- Privatization of government wealth, which accounted for 10-25 percent of the increase in private worth in the eight leading Western economies and created oligarchs in all of the countries once part of the Eastern Bloc.
- The preference of Western countries to borrow from and pay interest to the wealthy rather than funding government programs and war expenditures by raising taxes.
Some have argued that our meritocracy explains much of the growing inequality of income over the past forty-odd years, as those who add more value to the community and economy make significantly more money. While a believer in meritocracy, Piketty nonetheless concludes that “marginal productivity” (by which he means workers who are more highly skilled) explains only some of the growing wage inequality, not most of it. He proposes that “social norms” determine how much people make at various occupations and shape income inequality, and he does not buy into the myth promoted by both liberals and conservatives that the best way to increase workers’ share of wealth is to make them more productive through education. Most wage inequality, he says, results from decisions made by those who control the distribution of wealth and income, and since the Reagan presidency they have tended to give themselves more and their employees less. Piketty traces a transfer since 1970 of 15 percent of national income from the poorest 90 percent to the top decile, with the richest centile getting 60 percent of all income gain between 1977 and 2007 — resulting in a distribution of income in the U.S. today as unequal as at any time in recorded history
He calls the U.S. a “hypermeritocratic society,” but also expresses doubt that the society is truly a meritocracy. Like many progressives, he wonders whether the highest earners — mostly corporate heads, but also investment bankers, hedge fund managers, and elite athletes and entertainers — deserve such a large portion of the booty. As he points out, executive pay did not skyrocket until marginal tax rates came down; the increase had nothing to do with the productivity of the executives.
Piketty further believes that the increase in inequality created the 2008 financial crisis: One consequence of greater inequality of income was a decrease in purchasing power in the middle and lower classes, he observes, which made it more likely that these households would take on debt. Unscrupulous banks took advantage by writing loans that fueled an unsustainable housing debt bubble.
Capital in the Twenty-First Century predicts a grim future if nothing is done to counteract growing inequality. Piketty conceives of a world in a not-too-distant time in which every country is run by an oligarchy of billionaires.
Throughout his book, Piketty entertains and educates us with gee-whiz facts and observations that explode many of the common myths we hear in the mainstream news media about the superiority of the unregulated free market, U.S. exceptionalism, and the nature of economic growth. Here are some of the many pearls of wisdom that Piketty shares:
- Wealth inequality within single generations is much greater than inequality between generations, although older people tend to have more money. In other words, intergenerational warfare has not replaced class warfare, as some pundits have proclaimed.
- The share of income of the highest centile is the same in developing countries as in rich countries. The highest share of income given to the top 1 percent is, of course, in the United States. So much for our bashing of oligarchs in other countries.
- In all known societies of all eras, the least wealthy half of the society has always owned virtually nothing.
- Before the French Revolution, the Catholic Church owned 7-8 percent of wealth of France, compared to the 6-7 percent of American wealth owned by nonprofit organizations today.
In tomorrow’s OpEdge column, we’ll take a look at the criticism aimed at Capitalism in the 21st Century by right-wing economists.