By Marc Jampole
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.
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