I have been waiting for the publication of Thomas Piketty’s Capital in the Twenty-first Century all of my life, although I only realized this as I was reading the book.
I’m not an economist. Over the years small fragments of economics have embedded themselves in my mind as I struggled to make sense of political or social justice issues, always realizing that economics was the dark shadow lurking in the background. “Follow the money,” murmured Deep Throat in All The President’s Men, the docu-drama that probed the Watergate Scandal.
But this pursuit took me down convoluted and contradictory lanes of Keynesian, Marxist, Monetarist, Neo-Ricardian, Austrian, and Anarchist thought pertaining to how economics worked, ought to function, or failed. Theories that were dense in formulae and hypotheses, but thin in data. I could often not resolve contending claims. Enter, Capital in the Twenty-first Century.
What has Piketty done?
Rather then theorizing, Piketty investigates. Setting aside all “isms” and abstract models, he embarks on a historical investigation of how the economy has actually performed. Setting aside speculation and ideological proclivities, how has the economy actually functioned since the beginning of Industrial Revolution (and in some instances, even farther back) based on historical evidence? Piketty has excavated down to data. Data: the bedrock of all natural sciences has now been discerned beneath the enterprise of economics. And not simply short-term data, or information derived from a single sector, or one country, but many centuries of evidence that cover the performance of many states in the developed world, and to the degree that information is available, to as much of the world as it is possible.
It’s hard to overstate the importance of this. While many findings that emerge from Capital in the Twenty-first Century have been known in fragmentary fashion, or have been claimed to be true, or have been speculated to be possible, Piketty’s work demonstrates, on the basis of empirical evidence, that they are actually so.
It’s also hard to overstate the magnitude of this endeavor. Piketty, and some 30 collaborators and colleagues have labored on this task for 15 years, compiling long-term time series on wealth and wealth distribution (the World Top Incomes Database) for twenty-two countries at present, and work on an equal number of additional states is in progress. It is publicly available data that anyone can access and use. The information is sometime incomplete (which Piketty meticulously points out) but this is a wealth of empirical data that has simply never before in been available to historians and economists. It’s also worth noting, that until the recent widespread use of computers, it would have been nigh on impossible to embark on a study of this sort; the technical aspects of processing such vast amounts of data would have been insurmountable.
Piketty’s focus is on what is arguably (or at least should be) one of the central tasks of economics; investigating the distribution of incomes and wealth in society. Not simply summary statistics, or figures for “representative agents” but how income and wealth is distributed amongst all people in society. Who makes what and has how much.
I don’t know if it’s hyperbole to call this a quantum step forward in terms of an economic understanding of the world (and remember, politics and social justice follow in the footsteps of economics), but it surely is close to that.
[Note: At 685 pages, Capital in the Twenty-first Century is not a light and breezy read, although I read much of it in the sunlight and light breezes in my backyard this summer. However, Piketty has done the world an immense kindness by making this tome as accessible and easily understandable as it is possible to imagine. The four sections of the book (I: Income and Capital; II: The Dynamics of the Capital/Income Ratio; III: The Structure of Inequality; and IV: Regulating Capital in the Twenty-First Century) and the sixteen chapters that make up these parts, are a highly comprehensible and methodical exposition, from elementary economic concepts through detailed findings to Piketty’s policy recommendations.
Almost every section and subsection begins with a brief recapitulation of what has preceded and a prospectus of what is to follow. There are only two very simple mathematical formulae presented, and the entire volume is amply illustrated with easily comprehensible figures that illustrate its many findings. It makes for a readily comprehensible exposition of a major study in historical economics. One would wish that Einstein’s General Theory of Relativity or String Theory could be as clearly and easily explained.]
What has Piketty found? I. Capital accumulates.
There is an immense amount of information in Capital in the Twenty-first Century. Almost every section introduces more information on the history of economics. There are, however, a few central findings that reveal profound insights about economics as it has been practiced in the world over the last three centuries.
Unconstrained by other forces, capital accumulates, not indefinitely as Marx posited, but to very high levels, plateauing in the Belle Époque (1870-1914) at six to seven times national income. This is clearly revealed by examining the capital/income ratio (the value of private capital as a percentage of annual national income) as illustrated in Figure 1 below (adapted from Figure 1.2 in Capital in the Twenty-first Century). This shows datasets (averaged by decade) for three countries; Germany, France, and Britain, and the same general pattern (with small, but interesting variations) applies to the rest of the developed world.
[Note: Although this graph illustrates private capital, this can essentially be taken to reflect all capital since public capital currently hovers very close to zero, that is marketable capital assets of all countries in the developed world are almost exactly balanced (within a percentage point or two) by public debt.]
Two things stand out:
1. The decline of capital between 1914-1945
Figure 1 illustrates the enormous declines of capital/income ratios sequentially associated with the First World War (1914-1918), the Great Depression (commencing with the stock market crash of October 29, 1929), and the Second World War (1939-1945). By the end of this period capital/income ratios had fallen from 600-700 per cent to 150-300 per cent. The steepest declines are associated with the First World War.
This, in turn, illustrates two concurrent phenomena:
a) The enormous destruction of actual physical capital (homes, businesses, industrial enterprises, infrastructure, etc.); and
b) What is in effect the end of nineteenth-century imperialism. During the Belle Époque Europe owned much of the rest of the world. The Russian, British, German, Austo-Hungarian, Spanish, Portuguese, Dutch, and Ottoman Empires had more or less subdivided the planet, save for bits like the United States that had managed to revolt to freedom. France was a republic at this time, but it pursued imperialism with equal zeal. By the end of the First World War the Russian, German, Austro-Hungarian, and Ottoman Empires were no more, and all the capital that they had owned throughout the developing world vanished from the asset books of these states.
Additionally, major capital reserves, such as the enormous amounts of Russian government bonds owned by French citizens, simply vanished overnight in the Russian Revolution as the Bolsheviks repudiated the debts of the previous Czarist regime.
It’s worth pointing out that this collapse of capital during the period of 1914-1945 is unique in history. To the extent that we have data (and there are some sources estimating wealth that allow us to go back a couple of millennia to Antiquity) this has never happened before. The triple punch of war, depression, war in the span of three decades created a historically unique set of conditions.
This is fascinating in and of itself, but also of immense significance in interpreting economic trends. Thus, if you examine only a select time span of data in the twentieth century, as was the case with the Russian-American economist Simon Kuznets, whose canonical “Kuznets Curve” (a rising economic tide raises all boats) resulted from the examination of American data between 1914 and 1948, you can come to very different conclusions with respect to how the economy performs. In the case of Kuznets, his excellent, although spatio-temporally limited data, led him to conclude that inequality was decreasing — as it indeed was — but only for a very limited time frame (more on this below).
2. The rebuilding of capital after 1945
Capital has rebuilt itself since 1945 so that by 2010, capital/income ratios in Britain and France are now in excess of 500 per cent and approaching 600 per cent (Germany lags somewhat behind owing to the greater physical destruction on its territory in both WW I and WW II). Moreover, the trend lines show no sign of plateauing. If they continue they may well achieve, or indeed exceed, the levels of accumulated wealth found in the Belle Époque within a couple of decades.
What does this tell us? The world is very rich and getting richer. There are enormous capital reserves on the planet — and they are growing. However, and this is the central question of wealth distribution, who is getting richer and who is getting poorer? Piketty points out that world GDP is approximately 70 trillion Euros (equivalent to $101 trillion CAD). Subtract the standard 10 per cent for annual capital depreciation, then divide by the world’s population (7.243 billion), and then divide by 12 months in the year and, if the world’s income were equally divided amongst all the people of the planet, everyone would be receiving $1,046 CAD/month, or $12,550/year.
Looking around the world, this “ideal” division is obviously very far from what we see in reality. For example, in sub-Saharan Africa the average monthly salary has recently increased slightly to $70.40/month CAD or $845 CAD/year, only 6.7 per cent of what the “ideal” share of global GDP should be. Indeed, if you exclude South Africa and the Seychelles (whose well-performing economies are an exception to the rest of the continent) the average monthly salaries fall to $51.30/month or $617/year — a mere 4.9 per cent of the “ideal” share.
What has Piketty found? II. Inequality grows.
A society of complete economic equality is neither desirable nor possible. People who are industrious, save more, work harder, study longer, are more capable, etc. can and should be able to better themselves through their labour. There need to be incentives for people to forge better lives for themselves and their families. Societies of enforced equality resemble the Khmer Rouge in Cambodia. That said, societies of extreme inequality are also undesirable if we believe in democratic, meritocratic, and egalitarian values. For example, a minimum wage job in the United States currently pays $15,080 USD. Some 30 per cent of the American public lives at or below this threshold. Is an income of ten times this amount, i.e., $150,000, which is what the top decile (10 per cent) of income earners receive, still democratic, meritocratic, and egalitarian? How about one hundred times this amount, i.e., $1,500,000, which is an average income for the top percentile (one per cent)? Does someone, no matter how thrifty, industrious, or talented deserve to make so much more money than others and consequently afford so much better a material lifestyle? These questions have no predetermined economic answers, but are a matter for societies to decide on through social and political processes.
This is the subject of Piketty’s second main area of inquiry. For example, Figure 2 below (from Figure 8.8 in Capital in the Twenty-first Century) shows the share of total income of the top percentile (one per cent) of income earners in the United States between 1910 and 2011.
[Note: the time series of income are generally not much more than a century in length, because such data is only available from income tax records, and throughout most of the world income tax was only introduced around the turn of the twentieth century.]
The three time series illustrate the share of wages (bottom series), total income (top series), and total income excluding capital gains (middle series). For the time being let’s focus only on the total income series, which provides very considerable illumination.
In 1910 the top decile received 18 per cent of all income (income from both labour and capital, i.e., from work and rents, dividends, interest, etc.). This fell slightly to 14 per cent during the First World War, before increasing to the astronomical level of 24 per cent by 1929 — the richest one per cent earned almost a quarter of all income! The Great Depression decreased this share to 16 per cent, and the Second World War dropped it further to 10 per cent where it stayed with little fluctuation until 1980. The post-war period was characterized by significant stimulus spending, an enormous rebuilding effort, and progressive taxation policies guided by Keynesian economic ideas. The result was a significantly more egalitarian society in terms of wealth distribution.
Then came the election of Ronald Regan in 1980 following on the heels of Margaret Thatcher’s election in Great Britain in 1979. Thus began Reaganomics in the U.S.A., a supply-side approach that stressed cutting taxes, reducing inflation, dramatic cuts to government spending, and deregulation of the financial sector and economy. And what was the result? The income share of the wealthiest one per cent immediately began to grow. By 2000 it reached 22 per cent before falling to 17 per cent when the dot-com bubble burst. But, the wealthy quickly rebounded and by 2008 their income share had almost attained 24 per cent — the same level of inequality that existed on the eve of Black Tuesday — before dropping to 18 per cent in the wake of subprime mortgage crisis of 2007-2008. Since then it has again been on the rise.
Comparing the total income series (top) with the wage series (bottom) illustrates the very large proportion of income earned by the wealthy from capital. In the Belle Époque and presently this comprises circa 50 per cent of their income. In the United States (and Canada) income from sources such as dividends and capital gains is taxed at a much lower rate (half in Canada) than is income from labour, providing the wealthy with an additional avenue to increase their worth.
More generally, working our way down the income hierarchy, the top one per cent (the “dominant” class) in the U.S.A., now earn approximately 20 per cent of all income; the next nine per cent (the “well-to-do” class) earn approximately 30 per cent; the middle 40 per cent (the middle class) take home 30 percent, and the bottom 50 per cent (the lower class) earn approximately 20 per cent. So, the income of the top one percent roughly equals that of what the bottom 50 per cent of Americans earn. (See Figure 3 below, adapted from Table 7.3 in Capital in the Twenty-first Century.)
The rich are getting richer and the poor, poorer.
Growing inequality is neither accidental nor incidental
Beyond the particulars of what this historical inquiry reveals, which are extraordinary and dramatic enough, what the many studies, and copious data that Piketty and his colleagues have amassed reveal is that this increasing capital accumulation and increasing inequality are no historical accidents; indeed they are intrinsic features of the way in which capitalism is being practiced in the twenty-first century. Furthermore, that under the deregulated, supply-side, low taxation, neo-liberal policies that currently dominate the world’s economies, such capital accumulation and increasing inequality will continue to grow. The rich will get even richer, and the poor, even poorer. And Piketty incontrovertibly demonstrates this on the basis of mountains of compelling evidence.
The general economic formulation which Piketty establishes is that where the rate of return on capital is greater than the rate of growth (both economic and demographic) — a situation that is now firmly established throughout the world — capital/income ratios will inevitably grow, and hence the proportion of income that comes from capital (as opposed to labour) will inevitably increase. And, as it does so capital (wealth) will become increasingly dominant economically — and consequently, socially and politically. Those who have capital will acquire even more capital. It is a positive feedback cycle that amplifies the economic (and hence political) dominance of the wealthy.
The dramatic effect of this can been seen if we examine the current division of wealth in the United States. (See Figure 4 below adapted from Table 7.2 in Capital in the Twenty-first Century.) In the U.S.A., the dominant class own approximately 35 per cent of all capital (wealth); the “well-to-do” class a further approximately 35 per cent; the middle class approximately 25 per cent; and the lower class — fully half of all Americans — only approximately five per cent of wealth. In an evolving economic universe where wealth matters, the middle class can only hope to tread water and keep their nose above the surface; the lower class have already sunk to the bottom.
What is to be done?
To quote Nikolai Chernyshevsky, “What is to be done?” Since capitalism is responsible for this positive feedback loop, one conclusion might be to abolish it. But, wait a minute; just what would that mean and where might it lead?
Since the dawn of humanity, people have been creating goods and performing services, amassing them to create capital, and trading with one another through market mechanisms. This is intrinsic to the human enterprise and has arisen independently throughout the world and throughout human history. And, it has functioned very effectively as a mechanism of economics. Private property, and the means to do constructive things with it, are marvelous incentives and rewards. However, this isn’t everything. Human civilization distinguishes itself through the simultaneous development of the collective spirit: of common enterprises, tasks, property, and rewards. It brings with it an understanding that we are more than the sum of our individual parts, and that our presence on the planet also entails collective responsibilities.
This is the understanding that is absent in unregulated economics; in the zero-sum game vision of humanity; in neo-liberal and libertarian thinking; in the ethos of corporate capitalism. Laws that govern human conduct provide a framework for a societal vision, and governments help administer its development and implementation.
But economics is the Castor to the Pollux of governance and the dioskouroi must remain together. If the economy does not also have a fulsome avenue for collective expression, then the political pathway will veer off-course. The sine qua non of this is taxation — a mechanism whereby citizens invest in their own society, supporting the collective values that balance the human enterprise. The success of neo-liberalism over the past quarter-century has been in its demonization of taxation as a “burden” on citizens that needs to be lifted. The further it goes the more it hollows out the social enterprise. And corporate capitalism, which is the pinnacle of this ideology, knows no collective responsibility, only profits, shareholder dividends, and executive bonuses. Although corporations may be “persons” under the law, they are not humans: they have no life, they know no fear, they feel no pain.
Eliminating private property, doing away with markets, and abolishing capitalism — the prescription of Karl Marx to cure the disease — was attempted, with disastrous consequences for the citizens of the Soviet Union, Albania, North Korea, and Eastern Europe. Communism rapidly morphed into state capitalism, as politically oppressive and even more economically dysfunctional than the system it sought to replace. In my view, the failures of communism were not historically accidental or incidental. The elimination of private property proposed by Marx and Engels — arguably the most profound economic transformation ever envisioned — while attempting to address the critical issue of income inequality, was flawed in its understanding of both οἰκονόμος (oikonomos) and human nature. Piketty gives Marx full marks for positioning the issue of inequality of wealth squarely at the center of the political stage, however, the Marxist prescription failed to cure the disease; it simply replaced one calamitous illness with another.
What does Piketty propose?
The towering conclusion that emerges from Piketty’s work is that, if we seek to have a society that reflects democratic, meritocratic, and egalitarian values, we must have redistributive mechanisms. Otherwise divergent economic forces will inevitably give rise to large, and eventually extreme, inequalities. Inequalities that arise from capital accumulation. The rich will get richer; the poor poorer. This isn’t accidental, or incidental, it is a function of the way basic economic entities such as income, capital, markets, growth rates, interest rates, and capital accumulation occur. The historical record exhibits it; elementary mathematics prove it.
The regressive changes in individual and corporate income tax that were ushered in by Thatcherism and Reganomics have provided a textbook case over the last 35 years in how rapidly inequality and inegalitarianism can be promulgated. Therefore, progressive taxation must be situated at the heart of any government that wants to create or sustain an egalitarian society, based on meritocratic principles, that functions in a democratic fashion. The economic and political Gemini will walk hand in hand, or not at all.
Piketty goes further than this, however, because it is clear that progressive taxation by itself may curb the inegalitarian juggernaut, but it will not stop it. Society will still diverge. Thus, Piketty proposes a global tax on capital — yes, you heard that right — a tax on wealth itself. For the purposes of starting the discussion, Piketty moots a progressive capital tax scenario: zero per cent for assets less than $1.5 million CAD; one per cent for assets between $1.5 and $7 million CAD; and two per cent for assets greater than $7 million; or perhaps a more steeply progressive one rising to five or even ten per cent for assets greater than $1.5 billion CAD. The key points are that all assets are subject to taxation (if not all, then a tax simply creates an unequal economic playing field and capital shifts to the untaxed sector) and global (again, without widespread agreement at least on a continental or regional basis, a tax in one major jurisdiction but not another simply cause capital flight to tax havens).
It’s a bold proposal, but could it work? There would certainly be stiff resistance on the part of at least some of those with considerable wealth (although some super-capitalists, such as Warren Buffet and his Buffett Rule proposal for a minimum 30 per cent rate of taxation on millionaires, support the proposal that the wealthy should pay more tax). Piketty nonetheless suggests that it would be possible to move incrementally towards this goal. What he proposes is not so much a master plan or fully articulated program, as it is the departure point for a political and societal discussion that would lead to the realization of such a policy. The specifics we can determine; what we need to do is start discussing the idea.
Envisioning a better world
In my view, Capital in the Twenty-first Century is a profoundly revolutionary work. It provides an empirically based historical understanding of the way that economics has actually worked, and does actually work; certainly one of the most significant achievements in economic history. In so doing, it incontrovertibly establishes the centrality of redistributive economic mechanisms in underpinning democratic, meritocratic, and egalitarian societies. It cannot be otherwise. In this, and in its proposals for progressive income and wealth taxation, it lays the groundwork of transforming capitalism into a socially progressive enterprise. This is a dramatic global and historical achievement — earthshaking might not be hyperbole.
The past century and a half has seen the most catastrophic of wars, the most profound economic shocks, dramatic fluctuations in inequality, the death of tens or perhaps hundreds of millions in the course of conflicts, and the destruction of wealth at hitherto unimaginable scales. All this has provided the backdrop to dramatic collisions between Marxist, Monetarist, Libertarian, Keynesian, and other economic theories, often based on little or no empirical evidence. It has often become a sterile debate with opponents bludgeoning one another with their respective analyses, prognostications, and nostrums. It is time to shift the discussion to a sounder, empirically grounded footing. There are better solutions than either deregulated capitalism or big-brother communism.
Indeed, some of these are alive and well, and living in Scandinavia where progressive taxation, wedded to firm social justice beliefs and a sense of environmental responsibility, has produced societies that are markedly more democratic, egalitarian, meritocratic, equal, and happy! (See Figures 3 and 4 adapted from Tables 7.2 and 7.3 in Capital in the Twenty-first Century and look at how Scandinavian countries stack up in relation to the United States and other portions of Europe). There exist other approaches to pursuing commerce beyond the corporate, for example, the cooperative model. I bank at a credit union, belong to a food co-op, admire car-sharing, and am considering joining a tool coop. Useful things can be accomplished and people can earn livings in a context where values beyond profits, shareholder dividends, and executive salaries are held to be true.
Bhutan employs a Gross National Happiness index (GNH) as a metric to guide policy decisions, which more comprehensively integrates the human experience than simple Gross Domestic Product (GDP) that merely measures economic output. Bolivia has enacted a Law on the Rights of Mother Earth, a piece of legislation that imbues nature itself with inalienable rights such as existence (i.e., life), diversity, equilibrium, restoration, existence without contamination (i.e., pollution), and clean air and water. It is a pioneering initiative to acknowledge and establish in law a non-anthropocentric vision of the planet; a place where humans and our civilization have rights, but not to the exclusion of the rights of other living, sentient beings.
If we are to survive as a human race we need to recalibrate key social, political, environmental, and economic elements of our civilization. Thomas Piketty’s Capital in the Twenty-first Century provides an understanding that opens the way for taking some steps in that direction. And as Lau-Tzu reminded us 2,500 years ago, a journey of a thousand miles begins with the first step. Time to get walking.
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