A Poor Rate of Return
Thomas Piketty, trans. Arthur Goldhammer, Capital in the Twenty-First Century
Harvard University Press, 696pp, £29.95, ISBN 9780674430006
reviewed by John P. Merrick
In May 1968, graffiti on the walls of Paris held the now famous declaration ‘BE REALISTIC, DEMAND THE IMPOSSIBLE.’ Fast forward nearly 50 years and a new book has taken the English speaking world by storm (written by a ‘Balzac-loving French intellectual,’ as every major newspaper has yet to tire of declaiming), which seems to have taken the opposite route in offering what seem to be rather timid, liberal, and realistic proposals which, it constantly states, are in fact ‘utopian’ ideals. Amongst the proposals offered are a progressive international tax on wealth (with rates of around 0.5% for fortunes under 1 million Euros, increasing to 5 or 10% for fortunes ranging in the hundreds of millions to billions of Euros), alongside greater transparency of financial institutions and increased international cooperation to facilitate the collection of such a tax, as well as re-introducing higher top rates of income tax and inheritance tax. Yet, why are such modest demands ultimately the most unrealistic?
Perhaps it is better to orientate the relative merits of Thomas Piketty's massive effort (a wealth of economic data, graphs, and statistics piled into a 700-page book), not by the specific policy recommendations that he makes, but by the analysis of rising inequality that is the fundamental object of study. Vital to this is what Piketty states is the ‘central contradiction of capital,’ that, when the rate of return on capital exceeds the growth of incomes and outputs (r>g), inequality not only increases but becomes entrenched. This entrenchment of inequality is furthered by the tendency (through expensive economic management of large fortunes) for larger fortunes to have higher returns than more modest ones. This is particularly bad news for the poorest 50% of the population of the major economic powers who own only 0-5% of capital, most of which is in the form of property, not to say anything about the populations of poorer nations. This, Piketty shows, is not only the historical norm (bar the interwar years and the ‘Trente Glorieuses’, or the thirty glorious years from 1945-1975), but is becoming increasingly the norm again with no apparent sign of slowing down in the future.
It is the tendency towards ‘patrimonial’ forms of inequality in capitalism (i.e. inequality which is based upon inherited rather than earned income) that Piketty finds most disturbing. Patrimonial capitalism is typically assumed to be a product of a different era in most mainstream accounts, typically a specific form of 19th-century ‘Old Europe’ capitalism. In one of the more illuminating literary references in the book, Piketty examines this form of inequality in terms of ‘Rastignac’s Dilemma’, after the protagonist of the Balzac novel Père Goriot. In the book, Rastignac, enamoured with the life of high society, is lectured by the escaped convict Vautrin about the differing fates of Parisian youth. He presents Rastignac with two alternatives: firstly, either to pursue a career in law or medicine and give up all hope of joining the upper echelons of society even after years of compromise and hard work, or to marry Mlle Victorine and immediately claim a fortune of a million francs. This dilemma is typical of a society in which income from capital exceeds income from wages, or in which ‘the past devours the future.’ Rastignac's dilemma neatly encapsulates the central contradiction of patrimonial capitalism. Despite the widespread acceptance of meritocratic values, capitalism in its historical (and increasingly present) form is more favourable to inherited incomes than earned incomes through entrepreneurial endeavours.
It is perhaps the great merit of Piketty's book to demonstrate that this form of inequality is not consigned to the history books but is rather the tendency of all manifestations of capitalism. In fact, if they haven't already, the top decile's share of income from wages is approaching levels comparable with 1910 (once more standing at roughly 45-50% of national income, having declined to less than 35% between 1950-1980). Thus Piketty clears the ideological detritus of the previous 40 years of economic common sense – that ‘the rising tide lifts all boats,’ the ‘trickle down effect’ and ‘don't tax the wealth creators.’ The tendency of markets without strong political intervention is not equality and liberty but rather oligarchy and poverty. This analysis has the admirable conclusion that the supposed science of economics is not divorced from politics but is intrinsically tied to actual political decisions no matter how a-politically they are sold. There are then, conversely, no ‘natural, spontaneous’ processes (such as freer markets, more favourable economic conditions for big business) to prevent inequality and destabilisation.
The optimism of the economic orthodoxy, such as Simon Kuznet's study of inequality, is then seen as a product of a specific political and economic conjunction. The postwar years saw, through the increased bargaining power of labour and the political and economic ‘shocks’ of the two World Wars, a decrease in the ratio of total capital to per annum national income, and a subsequent decrease in the levels of inequality. This was an era (the only one in the history of capitalism) where growth of outputs and incomes exceeded the rate of return on capital. This, alongside the destruction of capital and its value, lead to rather more meritocratic forms of inequality, where it was earned income rather than inherited fortunes that where the key to wealth. However, since the Conservative revolution of Thatcher and Reagan in the 1980s, and the turn to supply-side economics typified by the likes of Milton Friedman, top-rate income taxes have been slashed (reduced from 80-90% to around 35-40% in the US and Britain) and the bargaining power of labour has been reduced. Yet, Piketty shows that this had negligible effect on productivity. What it did do, however, was give incentive and justification for a massive spike in income for the top-earners resulting in the development of what Piketty terms ‘supermanagers’, who earn at historically unprecedented levels. This in turn has allowed high income earners to become rentiers (much like their 19th-century counterparts), and as such increase their returns through capital investment.
This leads to what seems to me to be the fundamental problem with Piketty's account. As he himself states, ‘I have no interest in denouncing inequality or capitalism per se.’ What Piketty denounces is not inequality as such, but rather inequality in its patrimonial form. For all his critiques of the political and economic language of ‘meritocratic extremism’ as an ideological veil for real inequalities, Piketty simply wishes for more meritocracy. What needs denouncing is then the tendency for wealth to ‘grow and perpetuate [itself] beyond all reasonable limits and beyond any rational justification in terms of social utility.’ Top of Piketty's hitlist is France's richest person, the heir of L'Oreal, Liliane Betancourt, whose fortune increased from $2 billion to $25 billion between 1990 and 2010, despite having ‘never worked a day in her life.’ Fortunes of this kind serve, for Piketty, no rational purpose or social utility, and what is needed is political action which curbs the worst excesses of wealth concentration whilst maintaining private property and the entrepreneurial spirit of wealth creation.
Piketty, then, sees inequality as serving a social purpose to an extent and as such never takes the final step in order to critique a form of social organisation which reproduces itself through the poverty, oppression and immiseration of vast swathes of the population. What we are left with is not a critique of inequality but rather a critique of a form of ‘undemocratic’ inequality (democracy here defined in the typical liberal manner as equality of access). Entrenched inequalities of patrimonial capitalism do indeed contradict the supposed equality of all in liberal democratic societies, but so do, surely, those inequalities which will exist in more meritocratic societies?
Another potential error in Piketty's account is his definition of the fundamental contradiction of r>g. Piketty does valuable work in the first few chapters, defining and analysing the capital/income ratio, and the growth rate of national income (g), yet he simply presupposes the per annum return of capital of around 4-5%. Although he acknowledges the internal divergence of this return on capital (from relatively minor returns for small sums such as private wealth stored in a savings account at a high-street bank, to much greater returns on financial assets), the reasons for this are never fully analysed. This can perhaps be seen as a problem of Piketty's expansive definition of capital, which includes financial assets, real estate, business assets and is even extended to durable household goods. For Piketty, capital is then a fixable and definable object (whether material or not) that can be assigned a value, or in other words, it is wealth. This expansive definition is what allows Piketty to place modest household savings and multi-million-Euro financial assets in the same category and then average out the returns to find the overall per annum return on capital. The problem, however, is that this tells us nothing about what determines this rate. And what determines this rate of return is labour, and the correlating rate of exploitation. Or, it is a question of value production (a relation in production), rather than merely remuneration. Yet Piketty's concern is, seemingly, not with questions of production but rather those of distribution, as can be seen in his policy conclusions which centre on the re-distribution of a small portion of income.
Despite his aversion to the apparently ‘apocalyptic’ pronouncements of Marx, Piketty's own analysis itself seems to have rather apocalyptic results. As he states, it was the ‘political and economic shocks’ of the two World Wars that have been ‘the only forces since the Industrial Revolution powerful enough to reduce inequality.’ This is what allows him to make his assertion that even his modest proposals for reform of capitalism are utopian. Ultimately, ‘without a radical shock, it seems fairly likely that the current equilibrium will persist for quite some time.’ Neither of these options seems particularly appealing considering the mass destruction and killing wrought by the World Wars and Piketty's own data on the immiseration of much of the population in Capitalism despite the opulent lifestyles of the 1%. Perhaps from this we can glimpse a modification of Fredric Jameson's famous proclamation; that is, it is easier to imagine the end of the world than the end of capitalism. If the surge in interest in Piketty's book can be seen as an accurate representation of public opinion, it would appear it is easier to accept the killing of millions and the destruction of much of the world than countenance even a modest change to the distribution of global wealth.
Perhaps it is better to orientate the relative merits of Thomas Piketty's massive effort (a wealth of economic data, graphs, and statistics piled into a 700-page book), not by the specific policy recommendations that he makes, but by the analysis of rising inequality that is the fundamental object of study. Vital to this is what Piketty states is the ‘central contradiction of capital,’ that, when the rate of return on capital exceeds the growth of incomes and outputs (r>g), inequality not only increases but becomes entrenched. This entrenchment of inequality is furthered by the tendency (through expensive economic management of large fortunes) for larger fortunes to have higher returns than more modest ones. This is particularly bad news for the poorest 50% of the population of the major economic powers who own only 0-5% of capital, most of which is in the form of property, not to say anything about the populations of poorer nations. This, Piketty shows, is not only the historical norm (bar the interwar years and the ‘Trente Glorieuses’, or the thirty glorious years from 1945-1975), but is becoming increasingly the norm again with no apparent sign of slowing down in the future.
It is the tendency towards ‘patrimonial’ forms of inequality in capitalism (i.e. inequality which is based upon inherited rather than earned income) that Piketty finds most disturbing. Patrimonial capitalism is typically assumed to be a product of a different era in most mainstream accounts, typically a specific form of 19th-century ‘Old Europe’ capitalism. In one of the more illuminating literary references in the book, Piketty examines this form of inequality in terms of ‘Rastignac’s Dilemma’, after the protagonist of the Balzac novel Père Goriot. In the book, Rastignac, enamoured with the life of high society, is lectured by the escaped convict Vautrin about the differing fates of Parisian youth. He presents Rastignac with two alternatives: firstly, either to pursue a career in law or medicine and give up all hope of joining the upper echelons of society even after years of compromise and hard work, or to marry Mlle Victorine and immediately claim a fortune of a million francs. This dilemma is typical of a society in which income from capital exceeds income from wages, or in which ‘the past devours the future.’ Rastignac's dilemma neatly encapsulates the central contradiction of patrimonial capitalism. Despite the widespread acceptance of meritocratic values, capitalism in its historical (and increasingly present) form is more favourable to inherited incomes than earned incomes through entrepreneurial endeavours.
It is perhaps the great merit of Piketty's book to demonstrate that this form of inequality is not consigned to the history books but is rather the tendency of all manifestations of capitalism. In fact, if they haven't already, the top decile's share of income from wages is approaching levels comparable with 1910 (once more standing at roughly 45-50% of national income, having declined to less than 35% between 1950-1980). Thus Piketty clears the ideological detritus of the previous 40 years of economic common sense – that ‘the rising tide lifts all boats,’ the ‘trickle down effect’ and ‘don't tax the wealth creators.’ The tendency of markets without strong political intervention is not equality and liberty but rather oligarchy and poverty. This analysis has the admirable conclusion that the supposed science of economics is not divorced from politics but is intrinsically tied to actual political decisions no matter how a-politically they are sold. There are then, conversely, no ‘natural, spontaneous’ processes (such as freer markets, more favourable economic conditions for big business) to prevent inequality and destabilisation.
The optimism of the economic orthodoxy, such as Simon Kuznet's study of inequality, is then seen as a product of a specific political and economic conjunction. The postwar years saw, through the increased bargaining power of labour and the political and economic ‘shocks’ of the two World Wars, a decrease in the ratio of total capital to per annum national income, and a subsequent decrease in the levels of inequality. This was an era (the only one in the history of capitalism) where growth of outputs and incomes exceeded the rate of return on capital. This, alongside the destruction of capital and its value, lead to rather more meritocratic forms of inequality, where it was earned income rather than inherited fortunes that where the key to wealth. However, since the Conservative revolution of Thatcher and Reagan in the 1980s, and the turn to supply-side economics typified by the likes of Milton Friedman, top-rate income taxes have been slashed (reduced from 80-90% to around 35-40% in the US and Britain) and the bargaining power of labour has been reduced. Yet, Piketty shows that this had negligible effect on productivity. What it did do, however, was give incentive and justification for a massive spike in income for the top-earners resulting in the development of what Piketty terms ‘supermanagers’, who earn at historically unprecedented levels. This in turn has allowed high income earners to become rentiers (much like their 19th-century counterparts), and as such increase their returns through capital investment.
This leads to what seems to me to be the fundamental problem with Piketty's account. As he himself states, ‘I have no interest in denouncing inequality or capitalism per se.’ What Piketty denounces is not inequality as such, but rather inequality in its patrimonial form. For all his critiques of the political and economic language of ‘meritocratic extremism’ as an ideological veil for real inequalities, Piketty simply wishes for more meritocracy. What needs denouncing is then the tendency for wealth to ‘grow and perpetuate [itself] beyond all reasonable limits and beyond any rational justification in terms of social utility.’ Top of Piketty's hitlist is France's richest person, the heir of L'Oreal, Liliane Betancourt, whose fortune increased from $2 billion to $25 billion between 1990 and 2010, despite having ‘never worked a day in her life.’ Fortunes of this kind serve, for Piketty, no rational purpose or social utility, and what is needed is political action which curbs the worst excesses of wealth concentration whilst maintaining private property and the entrepreneurial spirit of wealth creation.
Piketty, then, sees inequality as serving a social purpose to an extent and as such never takes the final step in order to critique a form of social organisation which reproduces itself through the poverty, oppression and immiseration of vast swathes of the population. What we are left with is not a critique of inequality but rather a critique of a form of ‘undemocratic’ inequality (democracy here defined in the typical liberal manner as equality of access). Entrenched inequalities of patrimonial capitalism do indeed contradict the supposed equality of all in liberal democratic societies, but so do, surely, those inequalities which will exist in more meritocratic societies?
Another potential error in Piketty's account is his definition of the fundamental contradiction of r>g. Piketty does valuable work in the first few chapters, defining and analysing the capital/income ratio, and the growth rate of national income (g), yet he simply presupposes the per annum return of capital of around 4-5%. Although he acknowledges the internal divergence of this return on capital (from relatively minor returns for small sums such as private wealth stored in a savings account at a high-street bank, to much greater returns on financial assets), the reasons for this are never fully analysed. This can perhaps be seen as a problem of Piketty's expansive definition of capital, which includes financial assets, real estate, business assets and is even extended to durable household goods. For Piketty, capital is then a fixable and definable object (whether material or not) that can be assigned a value, or in other words, it is wealth. This expansive definition is what allows Piketty to place modest household savings and multi-million-Euro financial assets in the same category and then average out the returns to find the overall per annum return on capital. The problem, however, is that this tells us nothing about what determines this rate. And what determines this rate of return is labour, and the correlating rate of exploitation. Or, it is a question of value production (a relation in production), rather than merely remuneration. Yet Piketty's concern is, seemingly, not with questions of production but rather those of distribution, as can be seen in his policy conclusions which centre on the re-distribution of a small portion of income.
Despite his aversion to the apparently ‘apocalyptic’ pronouncements of Marx, Piketty's own analysis itself seems to have rather apocalyptic results. As he states, it was the ‘political and economic shocks’ of the two World Wars that have been ‘the only forces since the Industrial Revolution powerful enough to reduce inequality.’ This is what allows him to make his assertion that even his modest proposals for reform of capitalism are utopian. Ultimately, ‘without a radical shock, it seems fairly likely that the current equilibrium will persist for quite some time.’ Neither of these options seems particularly appealing considering the mass destruction and killing wrought by the World Wars and Piketty's own data on the immiseration of much of the population in Capitalism despite the opulent lifestyles of the 1%. Perhaps from this we can glimpse a modification of Fredric Jameson's famous proclamation; that is, it is easier to imagine the end of the world than the end of capitalism. If the surge in interest in Piketty's book can be seen as an accurate representation of public opinion, it would appear it is easier to accept the killing of millions and the destruction of much of the world than countenance even a modest change to the distribution of global wealth.