Piketty’s grandchildren

Inequality matters

Much ink has been spilt in summarising Piketty’s argument, so I will be brief. In a nutshell, he argues that capital tends to accumulate faster than the rate of growth of the economy. This is a tendency grafted onto the capitalist mode of production. Indeed, Piketty calls it the ‘fundamental structural contradiction of capitalism’ (p. 572). What are the relata of this contradiction? Here, Piketty equivocates. On some moods, the contradiction obtains between capitalism and its self-representation: the realities of capital accumulation are at odds with the full gamut of the best justifications for it. For consider: that the tendency of capital returns to outstrip income growth implies that income from mere ownership outstrips income from work. Insofar as capitalism is only justifiable on the basis of effort, talent, ingenuity, or sheer work, the existence of an increasingly affluent class of rentiers (engendered by the said tendency) necessarily fails to appeal to pro-capitalist pieties. But sometimes Piketty offers a stronger interpretation of the object of ‘contradiction’. On that interpretation, the contradiction consists in the capitalist mode of production itself. That is, as ownership outstrips desert, so the share of capital in national income tends to unity. In effect, Piketty maintains (pp. 423, 571) that capitalism has an inherent tendency to undermine itself by systematically increasing the share devoured by the rich, until there is little left for the consumers of what the rich need to sell (in order to remain rich). This leads to cycles of overaccumulation, crisis and recession. Marxists call such combinations of incompatible material tendencies grafted onto the mode of production real contradictions (≠ logical contradictions).

Piketty’s main explanandum is the trajectory of the wealth and income share of the top decile in Britain, France and the USA over the past century. The top decile share in the UK, for example, rose from about 28 per cent of national income in 1970 to 42 per cent in 2010. In the USA, this figure is approaching 50 per cent. More precisely, income inequality has two components: inequality from labour income, and inequality from capital income. In respect of the former, Piketty claims that it is impossible to justify the explosion of manager supersalaries in the 1980s and 1990s on the basis of the neoclassical marginal productivity theory. On that theory, a competitive market remunerates workers on the basis of their marginal contribution to the total product. (It bears noting that this theory is through-and-through ideological, for it makes no room for ownership-generated inequality, or indeed for profit.) Piketty claims that there is no evidence of a statistically significant improvement in firm performance traceable back to higher executive contribution. ‘In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly’ (p. 335). Those who denounce seekers of unemployment benefits as ‘welfare bums’ should denounce, with equal (or greater) force, those ‘corporate bums’ who make the bulk of their money through brute luck, owing to the grace of corporate boards and owners.

In respect of inequality due to capital income, Piketty highlights the recent return to an ‘inheritance society’; that is, ‘a society characterized by both a very high concentration of wealth and a significant persistence of large fortunes from generation to generation’ (p. 351). This is caused by a number of factors. First, the capital share of national income has been increasing since the 1970s in most Western economies. Second, income from capital is more heavily concentrated than income from labour. In the USA 1 per cent of the population owns more than a third of total wealth; in the UK, a little less than a third. The trajectory of the capital share will determine, to a large extent, the future trajectory of income inequality. That trajectory is in turn determined by the difference between the rate of return on capital, on the one hand, and the rate of growth of the economy, on other. This is heuristic for the ‘rate at which capital income diverges from average income’ (p. 364). In the long run, such divergence translates into a growing capital-share in national income, and an increasing concentration of wealth at the top. So, for example, if the rate of growth is 1 per cent and the rate of return on capital is 5 per cent, then ‘the cumulative dynamics of wealth accumulation will automatically give rise to an extremely high concentration of wealth, with typically around 90 percent of capital owned by the top decile, and more than 50 percent by the top centile’ (p. 365).

What’s wrong with inequality of this magnitude? Capital in the Twenty-First Century enlists the full gamut of liberal justifications of inequality, and shows that they all fall far short of justifying contemporary levels of income and wealth concentration. For one, high levels of inequality are incompatible with what Piketty calls ‘meritocratic values’, or desert- and democracy-grounded values. But he also emphasises arguments such as the following:

A person who all his or her life earns 7000 euros a month rather than 4000 … will not spend money on the same things and will have greater power not only over what he or she buys but also over other people: for instance, this person can hire less well-paid individuals to serve his or her needs. If the trend observed in the United States is to continue, then by 2030 the top 10 percent of earners will be making 9000 euros a month (and the top 1 percent 34000 euros) … The top 1 percent could therefore use a small portion of their incomes to hire many of the bottom 50 percent as domestic servants. (p. 257)

The concluding flourish of this passage is misleading: Piketty’s own income data (pp. 248-9) indicates that the 1 per cent in the USA makes roughly 20 per cent of national income. This is exactly equal to what the bottom 50 per cent makes. It follows that the 1 per cent is already capable of hiring the majority of working-class people as domestic servants. In Europe, the situation is only slightly less dramatic: the 1 per cent earns about 10 per cent of national income, and the bottom 50 per cent 25. On Piketty’s data, therefore, about 5 per cent of the population can hire the bottom 50 per cent as domestic servants. The reference to ‘servants’ and cognate concepts is ideologically significant: class domination obtains if, and only if, the power of one class rationally compels the servitude of another. Indeed, here the parallel with Marx is striking: a small minority can live off the work of the vast majority, and is able to do this by dint of mere ownership.

Les Trente Glorieuses

When sufficiently probed about inequality, social-democratic defenders of capitalism tend to proffer nostalgia for the ‘golden age of capitalism’ – the thirty years between 1945 and the mid-1970s. That was an era of low unemployment, a falling capital share in national income, and increasing wages. Piketty musters substantial evidence that the trente glorieuses were an important exception to his main thesis. On the one hand, the rate of growth tended to be quite high, especially in Europe, partly due to catch-up with the USA, and partly due to the near-complete evisceration of its capital stock during the war. On the other hand, political circumstances were quite conducive to taxing the return on capital. Notably, trade unions and workers’ organisations were militant and strong. The conclusion inexorably follows: ‘The reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945’ (p. 372). This admission emasculates Piketty’s later attempts to defend the compatibility of capitalism and democracy. But the description of the trente glorieuses just offered needs a further qualification.

Astute critics of capitalism have noticed that the short-run predicament of any capitalist economy gives rise to a trilemma, in the sense that policymakers are constrained to pick two from the following three: low unemployment, low inflation, social equality. If unemployment is low, for example, then capitalists will either pass increasing wage pressure on to consumers (by raising prices) or start eating into productivity growth (by reducing wages). This will, eventually, raise their share of national income and relieve inflationary pressure. Conversely, if inflation is low, then firms cannot pass significant wage pressures on to prices. They therefore respond either by laying people off (thereby cutting their wage bill), or by eating into productivity. In both cases, their income share rises. Finally, if the capital share of national income is low, then capitalists will tend to either raise prices, or reduce employment (thereby reducing wages). The trente glorieuses were unprecedented in that they combined low unemployment with increasing equality. All this led to inflation. And when inflation became a central policy goal in the 1980s, something else had to give. What did give was both full employment and equality.

How, then, does Piketty propose to remedy the looming disaster(s) wrought by inequality? Answer: by taxing capital. On the assumption that the rate of return on capital for the top centile ranges between 5 and 6 per cent, and that growth is between 1 and 1.5 per cent – which is what he expects after catch-up between rich and poor countries is completed – a progressive tax of between 5 and 10 per cent on total capital can bring the gross rate of return down, and stabilise, or reduce, the capital share of national income. (Note that Piketty is not proposing a tax on the rate of return itself: if that rate is 4 per cent and growth is 1 per cent, then only a 75 per cent tax on capital gains can restore equality between the two rates. Such a rate, says Piketty, would completely choke off accumulation.) But there is more: this tax must have a global, or at least sufficiently transnational, reach. Otherwise capitalists can easily evade it. In light of all this, Piketty envisages a European ‘budgetary parliament’ vested with control over taxation throughout the EU, along with enhanced accountability and spending powers. An important question lingers, however: who is to implement this set of policies, and why?

The agency problem

Piketty’s proposed remedy to capitalism’s ‘fundamental structural contradiction’ sometimes falls prey to the widespread but dangerous illusion that the state is some impartial arbiter of competing economic interests. It is not. The state has some degree of autonomy from the competing interests of civil society – to coin a term – and some interests of its own. But the bulk of its leaders, ideas, and indeed, financial liabilities, are drawn from the top decile of the population. Its policies are therefore likely to reflect the interests of that decile, or of its leading members (the 1 per cent). That is, unless the state is compelled to track the interests of the rest of us. This is precisely what a strong worker movement did in the 1950s and 1960s. In this sense, taxation and welfare can only act as palliatives to inequality. The falling capital share of the 1970s is no counterexample to this generalisation. To think otherwise is to commit the post hoc ergo propter hoc fallacy: high taxes and a low capital share were a consequence of the post-war resurgence of the workers’ movement, not its cause.

Piketty, then, agrees with Marx that capitalism implies centralisation of capital in fewer and fewer hands. Unlike Piketty, Marx has an account as to how this process gives birth to an opposing agency. On Marx’s account, capitalism has an inherent tendency to undermine itself through the twin processes of centralisation of the means of production and socialisation of labour. Centralisation makes it easier to wrest control of the means of production from the capitalists, and socialisation makes it easier to organise and reproduce that control, once obtained. This is the familiar story of capitalism producing its own gravediggers. Piketty, for his part, offers no speculations on the agency question, perhaps because he thinks he does not need to. But an answer to this question is a litmus test for the feasibility of his proposal. In a nutshell: why would Europe’s capitalists and their allies permit EU-wide fiscal harmonisation that stabilises or reduces their slice of the pie, when they have fought tooth and nail to obtain it?

The question becomes especially pertinent if one realises that the capital share of national income cannot be reduced – whether through taxation, or through nationalisation – without a policy of full employment, or something like it. In the absence of such a policy, capitalists can reduce employment through their control over machinery, the rate of technical innovation, etc. Such ‘structural’ unemployment puts downward pressure on wages, causing the wage share to fall.

This is the capitalist trilemma with a vengeance: in the stark choice between full employment, price stability and social equality, neoliberal capitalism has opted for a mixture of layoffs and pay cuts, both nourishing the capital share in national income. This fix has an added benefit: the higher the level of unemployment, the easier it is to play worker against worker. (In the European context, this explosive mix of policies has recently been exacerbated by the introduction of the euro under the auspices of a central bank whose main purpose is price stabilisation. This introduces a further deflationary bias to the crisis of the European periphery, which hits lowest incomes the hardest.)

In short, a capital tax will do little to reduce the share accruing to capital, unless it is supplemented by an E(M)U-wide policy of full employment. I am not saying that this is feasible, or indeed on the horizon of political possibility. But it is the necessary complement of Piketty’s tax scheme, if the latter is to have any reasonable chance of success in reducing inequality. So by now we have, by Piketty’s own lights: a tax on the return on capital (p. 518); a tax on capital (pp. 528-30); a commitment to public services such as health, education, housing (pp. 479-81); a commitment to full employment … Piketty’s list of reforms is beginning to look much more exigent than standard social-democratic remedies. Yet even if the political will to implement such policies existed, why would the majority support them? Recall that the 1 per cent in the US (and 5 per cent in Europe) makes about as much as 50 per cent of the population. This means that the 1 per cent can effectively buy itself the majorities it needs to continue to dominate the rest of us.

In light of all this, what is it realistic to expect, given Piketty’s findings? A safe bet is probably: more, and more violent economic crises, in large part due to the increasing inequality. One mechanism in this direction might be the increasing financialisation of capitalism. The reduction of the labour share in national incomes throughout the world economy since the 1970s created a lacuna in effective demand that was gradually filled by credit and debt. This entrenched the position occupied by financial capital in the demand-side of the economy, and exposed households directly to the vagaries of the financial sector. If the labour share of national income continues to fall, the structural lacuna in effective demand is likely to increase. Banks will eventually be happy to fill it with credit. This will further entrench financialisation. On the (abundantly verified) assumption that financial capital is more volatile and prone to bubbles than industrial capital, it follows that a larger part of the economy will be exposed to crises, which are likely to get deeper as financialisation progresses. Whether this process will give birth to a sufficiently robust counter-agency remains to be seen. Crucially, if forthcoming, such counter-agency would have to be anti-capitalist, in the weak sense of aiming to substantially attenuate capital by strengthening labour.

Had Keynes had any grandchildren, they would have been baby boomers. That is, they would have experienced thirty years of unprecedented prosperity, at a time of emasculated capital and resurgent labour. Piketty’s grandchildren will not experience any such world. The world they are most likely to inhabit, by Piketty’s own lights, will be very different. They will have to work a minimum of 45 hours a week for a private firm directly or indirectly controlled by some banking conglomerate. Their managers will live on four to five times the average income, and the owners on twenty-five to thirty. They will inhabit cities of squalor and decadence, reminiscent of dystopian fiction – Fritz Lang’s Metropolis comes immediately to mind. They will have to buy subscriptions to take the bus, enter the pub, or indeed walk the sidewalk. And they will need to constantly prove their commitment to law and order, in light of an increasingly repressive state apparatus geared towards protecting the property of the 1 per cent. Amidst the age-old crossroads between socialism and barbarism, our grandchildren appear, from afar, well on their way to the latter.