Readings: Thomas Picketty: Capital in the Twenty-First Century

As a book-object, Picketty’s Capital in the Twenty-First Century reminds me of nothing so  much as my Progress Publishers hardcover and onion skin edition of Marx’s Capital, which I picked up for a few dollars when the Communist Party of Canada liquidated its warehouse on Spadina Ave. 25 years ago.   Harvard University Press has produced a handsome tome indeed, and there can be little doubt that the marketers hoped to play on the shared title to help move the product.  On the dust-jacket, “Capital”  is three times the size of “In the Twenty-First Century.”  Stylistically, too, the book, with its expansive historical vistas, its personal digressions, its illustrations drawn from literature, and its rhetorical positioning of itself as the antidote to collapse, reminds one of its namesake.  Picketty the writer lacks the power of Marx’s poetry.  But there is a Marx-like commitment to science for the sake of social action, a disdain for academic hairsplitting and obscurantism, and an honesty about the severity of the problems the world faces.

But capital in the twenty-first century is no Capital:  A Critique of Political Economy.  As Marxist critics like David Harvey and Tomas Tengely-Evans have noted, Picketty is not a critic of capitalist society as a whole, or the basic assumptions about the nature of capital, or the legitimacy of private property in universally required natural resources, or the meaning and value of economic growth in capitalism, or markets as resource distributors, or the exploitation and alienation of labour.   The book is  a very much needed demonstration, against prevailing economic orthodoxy and neo-liberal ideology, that capitalist markets do not produce prosperity for all but ever widening inequality (as Marx also argued, albeit in different terms).  But it does not question the ruling money-value system of the capitalist economy, or focus on the material impossibility of limitless economic growth.  It does not offer, in other words, a comprehensive and systematic alternative to capitalist society.  Still what it does offer is of signal importance to anyone who is theoretically and practically engaged in the task of trying to reconstruct such an alternative.  Socialists of the twenty-first century need to read Capital in the Twenty-First Century and learn from it.

The Argument

This is a large and complex work divided into four Parts.  The first explains the difference between income and capital and the relationship between them.  This section lays the theoretical foundation for the substantive arguments of Parts Two to Four.  Part Two examines the historical evolution of the capital/income ratio.  Understanding the forces that affect this ratio is essential to Picketty’s main aim, elaborated in Part Three, of explaining the patterns of inequality he observes from the late nineteenth to the early twenty-first century.  Finally, in Part Four he makes concrete proposals for reducing the growing inequality he observes.  I will not comment separately on each part but instead construct an overview of the argument as a whole.

To begin, we need to understand what Picketty means by income and capital.  Income is a flow that “corresponds to the quantity of goods produced and distributed in a given period.” (p.51).  Capital he treats as a stock, “the sum total of f nonhuman assets that can be owned and exchanged on some market.”(p. 46)  On first glance, there seems to be an insurmountable difference between what Marx’s and Picketty’s definition.  As both Harvey and Tegely-Evans point out, for Marx, capital is essentially a process.  Firms exploit labour to produce commodities which, when sold at a profit, realise the surplus value labour produced.  This money is then re-invested to expand the cycle of production.  That is why Marx called capital value that creates more value.   For Picketty, profits are not counted as capital, but as income.  That which he calls capital Marx would have viewed as accumulated capital– dead labour, in his terms.  The difference, however, while significant, is not absolute, because Picketty discovers a dynamic at work similar in the most important political respects to what Marx observed.  Unless there is consistent real growth of output, “capitalists do indeed dig their own grave:  either they tear each other apart in a desperate attempt to combat the falling rate of profit … or they force labor to accept a smaller and smaller share of national income, which ultimately leads to a proletarian revolution.”  (pp.228-9) Picketty is talking about the past,  but he does not them as possible futures.

These are futures that he thinks can be avoided because he is hopeful that it is always possible “to find new and useful things to do with capital.” (p.221)  Thus, he believes that constant real growth is in principle economically possible (whether it is materially possible is a question he touches on only in passing, and a problem to which I will return in my conclusion).  So long as there is growth of productivity, capitalism can survive.  “To sum up, modern growth, which is based on the growth of productivity and the diffusion of knowledge, has made it possible to avoid the apocalypse  predicted by Marx and to balance the process of  capital accumulation.”(p.234).   On the other hand, just because the apocalypse has been prevented, it does not follow that it will  be staved off forever, as Picketty reminds the reader.  However, the horseman is more likely to be levels of incompatible with cohesive democratic societies than the falling rate of profit.  The central economic argument of Picketty’s book is to explain why growth of inequality is not an accident but a structural feature essential to capitalism.

The historical evolution of capitalism can be understood according to what Picketty calls two fundamental laws.  The first law describes capital’s share of the national income.(p. 52)  Mathematically, it is expressed as:

α=r X β

where α= the share of  capital in the national income (i.e., the share derived from rent on real estate, stock market or bond market investments, and so on, as opposed to wages or salaries);

 r= the rate of return on capital (for example r=5% means that on a 1 million dollar investment one would earn 50 000$/year);

and β = the capital/income ratio, which is the value of capital expressed as a percentage of the national income (on average in the wealthiest countries capital is  worth around six years of national income.  If the national income were 1 trillion dollars, the accumulated capital would be worth 6 trillion, or 600%.

Capital’s share of national income will grow the higher the rate of return on capital.  The higher the rate of return on capital the more it accumulates and the and the higher the capital income ratio becomes.  Growth of the value of α is an important factor in explaining the reasons why inequality is a structural feature of capitalism, but a complete understanding requires the second fundamental law.   The second fundamental law explains how the capital/income ratio is determined. It is expressed mathematically as

β = s/g

where s= the savings rate and g = the rate of growth (corrected for inflation and demographic growth).  In other words, if the money value of output grew by 10 %, with 5% inflation and 3% population growth, there would be, in real terms, 2% economic growth.  Even after factoring in the fact that there are more people claiming a share and each share is worth less, there would still be 2% more available for consumption, investment, and so on.  One does not need to be a mathematician to see that the lower the rate of growth, the higher  the capital-income ratio will be.  Let us start with Picketty’s example.  Assume that in aggregate terms society saves 12% of the national income each year and  the growth rate is 2%, then β will equal 600%.  If we hold the savings rate constant and decrease the rate of growth to 1%, then the value of β would double over the long term, to 1200%  As Picketty explains, “This formula, which can be regarded as the second fundamental law of capitalism, reflects an obvious but important point.  A country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital.”(p.166).  Were capital divided equally between all citizens, or collectively owned, this accumulation in itself would not pose a problem for social cohesion and justice.  But capital is not equally held.  And in low growth environments (which capitalism has been in for most of the twentieth and all of the twenty-first century, according to Pickety’s statistics), with high rates of savings, β grows.  If most of the capital is held by a small minority, and the capital income ratio is going up, that means that society is becoming more unequal.

While these formulae are not really predictive laws (they do not tell us whether β will grow or not in the future, or even what factors drive growth), they do help explain the structural tendency towards inequality that defines the history of capitalism.  Holdings started out unequal, the more holdings you have the more you can save (where ‘save’ means ‘not spend on consumables’ but invest or otherwise store up).  In low growth environments, the more you can save the more you can earn and the more you earn the more you can reinvest the earnings in more savings.  This dynamic drives inequality.

Picketty’s results contradict what had become the orthodox position on inequality, the work of Stanley Kuznets.  Working in the 1950’s with a more limited data set, but also in the midst of the Cold War (whose politics were more than accidentally connected with his conclusions)  Kuznets argued that the pattern of inequality was an inverted u-shaped curve.  In other words, capital accumulation initially heightened inequalities, but these were gradually reversed as education and higher labour productivity created more wealth. (pp.13-15).  Picketty’s data definitively prove that Kuznets’ inverted U-shaped curve was an anomaly, the effect of the massive destruction of capital in two world wars and redistributive economic policies and investment in public institutions following the war.  In other words, political struggle and public policy can make capitalism more equal, but “it is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures the inequality of wealth will decrease and harmonious stability will be achieved.”  (p.376).   Distributions of wealth are eminently political.

In capitalism, no one gets what they deserve but only what they fight for.  In the aftermath of the Russian Revolution, the unprecedented destruction of wealth and resources during World War Two, strong unions in the West, sometimes in alliance with radical students (as in France, 1968)  were able to win political parties to a politics of wealth redistribution and public investment.  The oil shocks and ‘stagflation’ crisis of the 1970’s discredited these policies and the institutions that made them possible– unions, social movements, public corporations and state-funded social services.   A new politics of privatization, globalization of capital flows, tax-rate competition, and union-busting was launched.  The results are clear.  Taking the United States as my example (Picketty’s statistics cover all the largest European and North American economies) the share of total income taken by the top ten percent of was about 50% in 1930, dropped to about 35%  between 1950 and 1970, and then began a steady and still continuing increase to stand at 50% again in 2010.  This U-shaped curve is found in every major European and North American economy.

The structural cause of this long term trend is, to repeat, a low growth and high savings rate combined with organized political attacks on labour and social services.  The higher the rate of return on capital, the more large fortunes will continue to grow regardless of whether they are invested in enterprises which create employment for those who have only their labour to rely upon.  “When growth is slow, it is almost inevitable that this return on capital is higher than the growth rate, which automatically bestows outsized importance on inequalities of wealth accumulated in the past.”(p. 423).  This structural cause (which explains the long term pattern) is combined with deliberate policies of privatization and lowering the taxes on income derived from capital explains the upswing in inequality since the 1970’s:  “the proportion of public capital in national capital has dropped sharply in recent decades … in all eight leading developed economies… In other words, the revival of private wealth is partly due to the privatization of national wealth.”  (p.184)  Of course, this privatization of public wealth was not evenly distributed.  Those who could afford to buy public assets put up for sale added them to their existing, already massively unequal holdings.  The overall result is the accumulation of more and more capital in fewer hands.

The wealthiest are thus freed from the need to work or contribute anything of any life value to anyone else.  With a large and diverse enough portfolio, the wealthiest one percent can live without doing anything productive at all, and continue to increase their fortunes without building anything, creating anything of use for anyone else, or in any way aiding the the sort of growth of need-satisfying economies require.  They can use their financial power to ensure that political parties continue to adopt policies that allow them to accumulate even more capital, and then pass this wealth on to their children, who become spectacularly wealthy without having to do anything more than be born.  Picketty warns that we are returning to the age of the robber baron and the rentier, the age of “patrimonial capitalism,’ in which workers scramble to find lower and lower paying work while the richest one percent control an ever increasing share of national income, not because they do anything to deserve it, but just because they can expect a predictable rate of return on their capital.  “As global growth slows and international competition for capital heats up, there is every reason to believe that r will be much greater than g in the decades  ahead.  If we add to this the fact that the return on capital increases with the size of the initial endowment, a phenomenon that may well be reinforced by the growing complexity of global financial markets, then clearly all the ingredients are in place for the top centile and thousandth of the global wealth distribution to pull farther and farther ahead of the rest.” (p.463)   If this trend continues (and Picketty is clear it will, unless counteracted by oppositional movements) democracy will become impossible.  “The people”  cannot rule themselves if their “countries are owned by their own billionaires” who use their money to create nothing but more money for themselves in a cancerous spiral to the bottom.(p.463).  (For an explanation of the cancerous nature of this devouring of whole societies by the moneyed elite, see John McMurtry, The Cancer Stage of Capitalism, 2nd edition, 2013).

This is not the news most economists are paid to deliver.  Picketty knows it, and embraces the role of idol smasher enthusiastically, providing the evidence needed to put paid to five key myths of contemporary capitalism.

Five Myths Exposed

1) Perhaps the most commonly heard argument in favour of inequality (and it is not new, but goes back at least to Adam Smith), is that it promotes economic growth from which all classes benefit.  If the more industrious are rewarded with higher incomes, they will be motivated to reinvest that income in productive enterprises, thus creating jobs and public benefits.  While Picketty does not reject this argument out of hand, his statistical analysis reveals that the lower the growth rate, the higher the inequality, proving that there is no positive correlation between inequality and economic efficiency or growth.  “Historical experience shows,”  he concludes, “that such immense inequalities have little to do with the entrepreneurial spirit and are of no use in promoting growth.”(p. 572)  Instead, they represent, as Marx also concluded, the domination of living labour by dead labour.

2) The second myth is that the rich have earned their higher incomes through superior talent and effort.  This is the “meritocratic” argument.  In fact, Picketty accepts the idea of meritocracy, he just demonstrates that the richest people in no way deserve the spectacular fortunes they posses, because the sheer amounts cannot be plausibly explained by proportional superiority of talent.  Picketty (and Marx, for that matter)  do not believe in some mathematical ideal of equality that abstracts from concrete differences of talent and contribution.  What he objects to is the unargued assertion that any degree of inequality is explained by superior merit.  In many cases, the person who currently controls the fortune has contributed nothing to its existence.  As he says of, Liliane Bettencourt, the richest woman in France, “she has never worked a day in her life,” and yet has seen her fortune grow just because other people have invested it for her.  She lives off the labour of others.  Where is the superior talent?

3) The third myth is that education is the royal road to social mobility and greater income inequality.  This myth is the darling especially of the Richard Florida-creative capital crowd, but it is nonsense.  First, the same inequality that characterizes income distributions characterizes the quality of educational  institutions. The richest people go to the richest schools where they learn to organize and govern society so that it is reproduced in ways that preserve their private interests.  “Inequalities of training have largely been translated upward, and there is no evidence that education has really increased intergenerational mobility.”  As for the “creative capital” thesis  there is again no evidence to support it.  In localized contexts, some de-industrialized cities have been able to reinvent themselves (Pittsburgh, for example, or Waterloo, in Ontario), and capital will concentrate in areas where it is already highly concentrated (in the san Francisco bay area in the case of the information technology sector).  These are local phenomenon, however, and do not establish the central claim that we are on the cusp of a new era of spectacular, ‘creativity’ driven growth.  While “skill levels have increased markedly over the past two hundred years”  it is nothing more than “mindless optimism”  to believe that “capital has lost its importance and we have magically gone from a civilization based on capital, inheritance, and kinship to one based on human capital and talent.” (p.224)

4)The fourth myth is that the wave of privatization that has occurred across the globe has contributed to higher economic growth rates.  As I noted above, Picketty demonstrates that it has had negligeable effect on the growth rate and is really a case of redistributing formerly public assets to the ruling class, further enriching them at the expense of the majority of people.(p.184)

5) The final myth that Picketty puts paid to is that the real problem today is not class inequality but intergenerational inequality.   The claim simply abstracts from the observable realities of income inequality, which fall along class lines regardless of the generation.   There are rich young people and rich old people, and their wealth has nothing to do with which “generation” they belong to.  The wealth of the world is not being consumed by the post-World War Two generation; it is, all available evidence suggests, being re-distributed upward to the top centile of the population of the eight wealthiest countries, who will pass it on to their children.  “The concentration of wealth is actually nearly as great within each cohort as it is for the population as a whole.  In other words, and contrary to a widespread belief, intergenerational warfare has not replaced class warfare.”(p. 246)

Cold and unfeeling numbers, clearly presented, are often the most powerful political rhetoric.

The arguments and the evidence are more sophisticated and detailed than I can hope to reproduce in this reading.  They are persuasive, knock-down, as they sometimes say in philosophy.  They destroy the myths of the market and prove beyond any reasonable doubt what the overall goal of neo-liberal policy has been, and what the effects of (more or less) untrammelled market forces are– the concentration of capital and wealth in fewer, richer hands.  Now that we understand the causes of the problem, let us turn in conclusion to Picketty’s solution.

A Tax on Capital?

The boldness of Picketty’s critique of the dynamics of wealth distribution is not matched, unfortunately, by his proposed solution.  After demonstrating in the most convincing fashion that inequality is growing, threatening the social foundations of liberal-democratic society, the only solution Picketty suggests is (by his own admission)  a modest progressive global tax on capital.   His suggested upper rate is 10% on the largest fortunes of one billion or more Euros.  The main purpose of the tax, he argues, “is not to finance the social state, but to regulate capitalism.” (p.518)  It is not clear, however, how such a modest tax could achieve that much grander purpose.  It would not even reduce inequality.   If the largest fortunes increase by  10% per year through wise investment strategies the tax would fix inequality at existing levels.  True, it would stop the growth of inequality, but it would not alter the class structure of capitalism in the least.

But it also does not address the real problems of capitalism, of which inequality of wealth is a symptom.  Capitalism generates inequality of income because it is rooted in inequality of power over life-conditions.  Those who live off of their capital do not need to work; those with no capital do.  This is the fundamental problem of capitalism that underlies all the rest.  Those who live off their capital do so because they own the natural and productive wealth that everyone needs in order to live, develop, and enjoy their lives.  Because they are in a position to determine the life conditions of everyone else, the ruling class can also exercise preponderant control over the institutions of the state.  Since state institutions have the exclusive authority to make law and set public policy, control over the state, rooted in control over life conditions, confers control over law, policy, and the institutions of social life governed by them.  A tax on capital that merely fixes inequalities at existing levels does nothing to address this undemocratic and life destructive structure of power.

Nor does it expose the material irrationality of the ends of a capitalist economy.  Like a shark, capital must move or die.  As we have seen, Picketty agrees with Marx on this point.  However, despite some superficial and unsystematic references to human needs, and a teasing comment about “real democracy and social justice” requiring specific institutions of their own, “not just those of the market”(p.424)  he does not anywhere contest the ruling norm of capitalist society– growth of money value as the supreme end to which life and social institutions must be bent.  What he fails to note is that money-capital growth ultimately depends upon the exploitation of natural and social life-support systems.  When it becomes the sole end of society it threatens and destroys what McMurtry calls the collective life-capital upon which our existence depends.  Collective life capital is “what enables life to reproduce and grow rather than degrade and stagnate through time. We defend it and our health by buying life goods and nothing else. The turning point is as old as physical and cultural evolution. Every human advance is by knowing what enables life from what does not.” (“Winning the War of the World,” p. 10).   Picketty concerns himself with a real problem–  extreme inequality and the undermining of democracy–, but he does not see the deeper material irrationality of capitalism.

Capital in the Twenty-First Century is thus an important, but ultimately unsatisfying book.  Like the “equality of what debate”  that consumed Anglo-American political philosophy in the 1990’s and 2000’s, the book exposes the unjustifiable extent of inequality today, but does not work down to expose the depth normative and social problems of capitalism as a whole.  Picketty mentions “real democracy,” but does not tell us whether the institutions of “real democracy”  are the existing institutions freed from the distorting effects of extreme inequality, or new institutions.  Of economic democracy of the sort envisaged by, for example, Pat Devine, in Democracy and Economic Planning, he has nothing to say.  The impression one gets is that Picketty thinks that existing institutions are sufficient for real democracy, provided that the market forces that threaten them are constrained and regulated.  If so, then he needs to pose the question to himself:  if capitalism can be regulated by existing institutions, why are they currently being used to de-regulate it?  He knows the answer– they have been captured by ruling class interests.  Thus we return to the real issue, not inequality of wealth in the abstract, but class power dominating all of society for the sake of life-destructive increase of its money-value holdings.  Taxes cannot fix that problem, but only an alternative democratic life-economy based on the principle that resources are to be sustainably employed to comprehensively and universally satisfy the fundamental life-requirements of all people.

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