Concentrated Wealth

The publication of Capital in the Twenty-First Century, by French economist Thomas Piketty, has come at a crucial moment. In the US, there have been suggestions from the White House that income inequality is a matter of concern. Europe today has become a sort of mad scientist’s laboratory in which defunct theories from the past (austerity, the gold standard, German hegemony) are redeployed in the hope that they’ll work better this time around. With the eurozone inching ever closer to deflation, the solution of Mario Draghi’s European Central Bank, in line with the vibrations emitting from Frankfurt, is to serve leftovers from meals that no one liked the first time.

Then again, the general consensus among the governing strata is that the current “recovery” of the world economy will once again be of the jobless variety, and that this is likely to become the new normal (at least in the developed economies.) This suggests that there is little chance for serious reform as the crisis continues.

This is especially likely to continue as President Obama’s animadversions on the subject of income inequality have acquired a sort of free pass quality. The control of the House of Representatives by the lunatic fringe of the Republican Party means that the administration cannot be expected to actually do anything about the problem. It is more a matter of positioning the Democrats to grab the votes of voters from the center and left who are looking for the lesser of two evils and an excuse to hold their collective noses and vote for Obama.

In Europe, where the core inflation rate is less than half the anemic level of that in the US, rentier hegemony of the German banks continues. Under the rallying cry of “hyperinflation is just around the corner,” they and the other debt holding segments of the European ruling classes have prevented the ECB from taking any reasonable steps that might head off the threat of deflation. Recent suggestions by Draghi that some sort of quantitative easing, on the model of the program that has allowed the United States to maintain at least a modicum of momentum toward growth, led to the predictable hand-wringing from more “responsible” opinion.

Ewald Nowotny, an Austrian social democrat who is also president of the Oesterreichische Nationalbank and a member of the governing council of the ECB, told journalists at a recent conference that he would prefer that measures to combat low inflation in the eurozone be “close to markets,” thus offering a cautionary note to any plan of Draghi’s to expand the money supply. Indeed, it is one of the ironies of the current situation that while in the US, calls for a return to the gold standard are (mostly) limited to the most extreme factions of the political right, in Europe it is a practical reality.

For the last several years, economists of the Keynesian persuasion (most prominently Paul Krugman) have been warning that the current era of sluggish growth and relatively high levels of unemployment could remain the status quo for the foreseeable future. Piketty, who owes much of his profile in the English-speaking world (at least among people who are not professional economists) to the repeated plugs given to his work on income inequality in Krugman’s op-ed pieces in the New York Times, has published extensively on the topic of the concentration of wealth in the upper end of the income distributions in the United States and Europe.

With the help of his frequent collaborator, Berkeley economist Emmanuel Saez, Piketty has compiled the World Top Incomes Database. It is the most extensive compilation of data on incomes currently in existence. In Capital in the Twenty-First Century, Piketty makes his most extensive attempt so far to draw conclusions from this collection of data about the future of the world economy and the functioning of capitalism.

It is one of the odd quirks of economics that a field that generally, and recently with growing intensity, insists on its commitment to objectivity and data-driven analysis, has very often in its history been driven by the demands (and the subjective demeanor) of its times.

This can clearly be seen in the debates between the great economic schools of the first half of the twentieth century. The Austrians, such as Friedrich Hayek, Ludwig von Mises, and Joseph Schumpeter, had lived through the collapse of the pre-1914 economic and political order and were for the rest of their lives marked by a pessimism towards the capacity of humans to consciously organize their affairs. In the case of Schumpeter, this worldview often caused descents into a kind of darkly humorous cynicism, of which the more extreme passages in Capitalism, Socialism, and Democracy are a clear expression. Keynes, by contrast, was an optimist of a very moderate sort. This worldview colored both his economic work, premised on the idea that human endeavor might be able to forestall economic crises. It was continued by his intellectual progeny, such as Richard Kahn and Austin Robinson.

The economists of the 195os were no less susceptible to writing the implications of the times in their analytical endeavors. Piketty notes this in his examination of the pioneering work of Simon Kuznets on income inequality. In the mid-1950s, Kuznets sought, using the somewhat limited tools at his disposal, to examine income inequality as a historical matter.

The results of his labors presented income inequality as a sort of upside down U, starting relatively low, rising dramatically in the era of rapid economic development, and then receding as the rising tide of the developed economy lifted boats up and down the income distribution.

In an important sense, Kuznets’s work was an expression of the optimism of the nascent postwar boom which, particularly after the added upward momentum caused by the Korean War, seemed like it represented a new and enduring reality. It is one of the great virtues of Piketty’s book that he critically revises Kuznets’s conclusions without faulting him unduly either for the shortcomings of the tools available to him, or for the lack of clairvoyance implicit in the human condition itself.

With access to better tools and more data, Piketty draws a number of intriguing conclusions about the current state of the world economy. In his view, the postwar economic boom was an exception rather than the harbinger of a new era. The rates of growth seen during the three postwar decades were wildly out of line with the standard in the long scope of economic history which, to the extent that we are able to discern, tend to be about .8% per year.

The return to the long term trend line, combined with demographic stagnation (which Piketty argues is likely in the course of the next half century) and the overall convergence of levels of output between developed and less developed economies will lead, in the medium and long terms to an intensification of the pattern of wealth concentration that have been increasingly evident in the last half decade.

Of the many interesting questions raised by Piketty’s work, perhaps the most acute is that as to what the implications of income inequality might be for the world economy. There is a certain species of thought, common in North America and not unheard of in Europe, that views income inequality as a non-problem. Since the outcomes of the market are always by definition rational, the actual distribution of wealth is a precise map of “just” distribution.

More moderate opinions tends to see wide disparities of wealth as a pathology of markets: unfortunate, but likely to be resolved in the long run. Piketty’s conclusion, grounded on the mountains of statistical evidence accumulated in the WTID, is that concentration of wealth is part of the normal function of (relatively) free market capitalism. This was, as Piketty notes, Marx’s conclusion as well. The question then becomes how it is possible to avoid the further consequences of Marx’s prognosis.

It is worth mentioning, as an aside, that although Piketty does take account of much of the critical force of Marx’s work, he does repeat the common misperception that Marx predicted that the rate of profit over the capitalist system at large would inevitable begin to fall. This is false. Marx writes about the law of tendency of the rate of profit to fall. His argument, much of which Piketty does take on board, is that the reduction of the proportion of human beings to technological capital over the system at large would come to decrease the opportunities for profit, since the exploitation of technology was essentially the same for all participants in any given line of production.

But Piketty does succeed in identifying a central dynamic of the system: when the rate of return on capital outpaces the rate of growth from output and income, the consequence is the concentration of wealth.

The greatest virtue of Piketty’s work is the extensiveness of his engagement with available data. Perhaps a close second is his determination to resist the temptations both of excessive pessimism and of pollyannaism. The final sections of his book provide a range of suggested policy measures that might ameliorate the tendency of normally functioning capitalism to throw up consequences that are politically unsupportable.

Piketty is a proponent of progressive taxation, and a firm believer that it has the capacity to retard, if not actually to reverse, processes of wealth concentration. Yet his solutions are all well within the progressive liberal tool kit, a source which has in the past had some successes no doubt, but one which the current disposition of forces and dynamics has left desiring influence.

Photographs courtesy of Joel Schalit.