Capital in the Twenty-First Century documents and analyses changes in the distribution of wealth and income in developed economies from the mid 19th century. There are some who claim it to be the update of Marx’s Das Kapital – albeit arguing for radical reform and not revolution and dictatorship. Heavy going for non-economists despite a friendly narrative style with lucid explanations of the simple mathematics.
Thomas Piketty has analysed a complex and enormous set of varying income and wealth data from a wide range of sources over the last few hundred years from developed economies. His massive contribution could not have been done years ago without the information technology of today. Moreover, his influence on changing thinking about income and wealth distribution cannot be overestimated – a tremendous achievement.
His data show how wealth has become concentrated in fewer hands in the advanced capitalist economies since the 1970s – returning to the inequality that existed in the 18th and 19th centuries. Piketty explains the exceptional nature of the greater equality observed after the two World Wars and the Depression and suggests that inequality is likely to worsen in the 21st century. Economists ignored analysing income and wealth distribution for most of the 20th century because it was better than it had been in the past and it was stable, but it can no longer be ignored as the middle-class “hollows out” economically and increasing vents its anger politically.
PIketty explains changes in distribution as resulting from the relationship between population growth, productivity growth and the rate of return on capital. His model boils down to the following:
- if growth of population plus productivity is greater than the rate of return on capital, then the distribution of wealth becomes less concentrated
- if growth of population plus productivity is less than the rate of return on capital, then the distribution of wealth becomes more concentrated.
Piketty argues that the rate of return has stayed constant at about 5% over the long-run across different industrial structures and in different countries – and he assumes that it will continue to do so. This makes population and productivity the key varying factors. He argues that population growth rates were high in most of the 20th century because of advances in medical technology, and that labor productivity growth rates were high because of the destruction followed by the replenishment of capital due to the Wars and Depression. Hence, wealth became less concentrated. This was reinforced by political movements such as trade unions, the welfare state and progressive income taxes – arguably a payoff to the soldiers returning from war.
Piketty argues that since the 1970s, population and productivity growth have levelled off and political thinking has shifted from a progressive Keynesian ideological stance to a conservative trickle-down neo-liberalism – leading to an increasing concentration of wealth. Piketty argues that current policies will lead to increasing concentration of wealth and income and a class system like that which existed in France and Britain in the 19th century and which exists in most of the developed world today. In short, a world in which Marx might still have the last laugh.
Piketty’s opus has its critics – both pedantic and serious. What is without doubt however is that he has made economists take income and wealth distribution seriously.
- Piketty restricts himself to financial capital, land capital and industrial capital, thereby excluding human capital (i.e. education) in his empirical work. I’m not sure how significant this critique is. Firstly, I suspect that the distribution of both the quantity and quality of education correlates closely with the distribution of income and wealth and therefore is not likely to be much of an offsetting factor. Secondly, I suspect that education is as much a screening exercise as it is a productivity-enhancing exercise, thereby reinforcing the correlation of education expenditure with the existing wealth/income distribution than offsetting it. This is all the more so if the productivity-enhancement effect of education depreciates rapidly with advancing artificial intelligence and robotics technology.
- Nor will Piketty’s expectation increasingly concentrated wealth occur if the rate of return on capital falls significantly. Certainly with interest rates at all-time lows which could stay in place for another couple of decades, dividend yields and the return on capital are likely to also fall. The return on capital may also fall as technology increasingly substitutes for labour. These two factors would, by Piketty’s model, lead to less inequality in the short-run. It would not however be good news in the long-run however if the low dividends discourage investment and productivity growth – thereby offsetting the initial equalising tendency of the lower rate-of-return.
- Another criticism of Piketty’s work relates to his focus on the developed economies. At the global level, incomes in the developing world have soared (China/India/Brazil). This has led to less concentration of income and wealth between countries as well as between people across the globe as wealth concentration within countries has become more concentrated. This is certainly not a “bad thing” in terms of fairness. It is well to point out however that the growth rates experienced by emerging economies in the first decade of the century has stalled in this second decade.
- In a world of abundance, lower economic growth could lead to more leisure, a more sustainable natural environment and greater well-being. There is arguably little point to thinking about this utopia so long as our culture values paid work and relative status is based on material ownership.
- It is also worth pointing out that an increase in the machine-robot intensity of the production process which leads to a lower rate of return on capital is a topic that will be further pursued in due course.
Piketty’s solution to the worsening distribution of wealth and income is a comprehensive progressive global wealth tax which accounts for all wealth – shares, banks deposits, the personal home, car and boat, paintings, gold coins, and the Cayman Islands bank account. There would be no tax on the 1st $0.X million wealth, 0.5% on the next $Y million, 1% on the next $Z million etc… and perhaps 3% on wealth greater than $XX Billion. The tax would have to be global since no small nation could go it alone because it can be easily avoided by migration of capital and labour. .
Piketty argues that increasing income tax and making it more progressive would not raise enough revenue to solve budget fiscal problems, but he argues that it would still be a good idea to make it as progressive as it had been in the past because it would discourage overpaid managers from seeking obscene incomes which are not matched by productivity performance. In other words, obscene income and wealth leads to an obscene culture.
A global progressive wealth tax is undoubtedly a pipe-dream in today’s political environment. But tomorrow is not today and the radical ideas of today often come to fruition tomorrow. Moreover, tomorrow could come sooner than later given that crisis begets solutions and given:
- the fiscal crises and parlous balance sheets of nations around the world
- the health budget crises looming with the ageing of populations
- the cost of offsetting and reducing global warming and
- the likely political instability resulting from lower economic growth.
Dowlphin supports a global progressive wealth tax subject to ensuring that there the taxes are spent well i.e. on infrastructure, creative education, sustainable living, health, security, social justice and dignity. If it continues to be spent on moribund national and international institutions supported by vested interests, political lobbyists and corrupt finance and accounting, then we may as well stay where we are and hope for miracles.
A global progressive wealth tax would affect Dowlphin adversely from a material tax perspective, but it would also affect all his friends adversely. This would leave Dowlphin relatively no worse off. The rich would be somewhat poorer, the poor would be somewhat richer, the middle will stay where they are and it it would all be just that little bit fairer.
The London School of Economics held a one-day conference on Piketty’s opus. The podcasts of four 90-minute sessions on policy issues raised by Piketty are downloadable below:
Session 1 (Economics, Political Economy and Democracy)
Session 2 (Gender and Everyday Life)
Session 3 (Accumulation and Timespaces of Class)
Session 4 (The policy implications)