by
is the editor of Monthly Review and
professor of sociology at the University
of Oregon
Not since the Great Depression of the
1930s has it been so apparent that the core capitalist economies are
experiencing secular stagnation, characterized by slow growth, rising
unemployment and underemployment, and idle productive capacity. Consequently,
mainstream economics is finally beginning to recognize the economic stagnation
tendency that has long been a focus in these pages, although it has yet to
develop a coherent analysis of the phenomenon.1Accompanying the long-term decline in the growth trend
has been an extraordinary increase in economic inequality, which one of us
labeled “The Great Inequality,” and which has recently been dramatized by the
publication of French economist Thomas Piketty’s Capital
in the Twenty-First Century.2 Taken together, these two realities of deepening stagnation and growing
inequality have created a severe crisis for orthodox (or neoclassical)
economics.
To understand the nature of this crisis
of received economics it is necessary to look at the two principal bulwarks of
neoclassical theory, which were originally erected in response to socialist
critics. The first is the notion that a freely competitive capitalist economy
left to itself generates full employment, indicating that unemployment is the
product of various frictions, imperfections, or government interference. The
second is the related proposition that income and wealth inequality are
determined by the “marginal productivity” (or relative contributions to output)
of the various factors of production, chiefly capital and labor—a logic that is
extended to the contributions of individuals themselves. The renowned
post-Second World War national income statistician, Simon Kuznets, in his
famous Kuznets Curve, even argued that there was a tendency in developed
capitalist economies towards a decrease in inequality, due to the effects of
modernization, including enhanced educational opportunities.3
Contrast these propositions to the
reality of the mature capitalist economies today. Far from a full-employment
equilibrium, what we see rather is a long-term tendency to economic stagnation.
Moreover, this reality describes all of the developed capitalist economies and
can be seen in a trend going back forty years, or indeed longer.4 Over roughly the same period, income and wealth levels, rather than
converging, have diverged sharply—a divergence that cannot be attributed to
differences in education and skill, nor to the contributions of capital
relative to labor.5 In short, both of the principal justifications for the system provided
by neoclassical economics have collapsed before our eyes.6
The first of these fissures in the
outlook of neoclassical economics is long-standing and well known. During the
Great Depression, unemployment in the United States Cambridge University
Keynes’s
basic conclusion can…be put very
directly. Previously it had been held that the economic system, any capitalist
system, found its equilibrium at full employment. Left to itself, it was thus
that it came to rest. Idle men and idle plant were an aberration, a wholly
temporary failing. Keynes showed that the modern economy could as well find its
equilibrium with continuing, serious underemployment. Its perfectly normal
tendency was to what economists have since come to call an underemployment
equilibrium.9
Keynes was convinced that the capitalist
economy tended towards stagnation, a phenomenon that he explained in terms of a
decline in the marginal efficiency of capital (expected profits on new
investment). He did not, however, present a coherent explanation of stagnation
in The General Theory but contented himself with pointing to a
waning in “the growth of population and of invention, the opening-up of new
lands, the state of confidence and the frequency of war”—all of which had
constituted historical factors stimulating capitalism in the past.10 These were the factors that Alvin Hansen, Keynes’s leading early
follower in the United
States
Later, a more developed analysis of
stagnation, focusing in particular on the growth of monopoly capital (but also
taking into account other conditions of capitalist maturity) was to emerge in
the work of Michał Kalecki, and, in particular, in Josef Steindl’s Maturity
and Stagnation in American Capitalism (1952),
which built on Kalecki. Paul Baran and Paul Sweezy’sMonopoly Capital (1966) constituted an attempt to extend
this analysis to the entire social and economic system of capitalism and to
bring out its connection to the Marxian critique. Later Harry Magdoff and Paul
Sweezy were to connect stagnation to financialization, most notably inStagnation and the Financial
Explosion (1987).12
Today we see a reemergence of notions of
secular stagnation in neoclassical economics, beginning with Lawrence Summers’s
resurrection of the idea in a 2013 speech to an IMF forum.13 But it remains divorced from the rich historical tradition that emerged
within Marxian theory (and even from Hansen’s historically based analysis,
rooted in Keynes)—thus offering little in the way of a real explanation.14 Nevertheless, the notion that the capitalist economy tends towards full
employment—or that macroeconomic techniques inherited from Keynes effectively
produce the same result, as Paul Samuelson (Summers’s uncle) famously argued in
the so-called “neoclassical synthesis”—has no legs left to stand on, owing its
continuing presence entirely to the ideological function of neoclassical
economics.
The second main justification of the
system provided by neoclassical economics—the notion that capitalism promotes a
kind of equality, at least in terms of the determination of earnings by the
marginal productivity of factors (and individuals)—has shown itself to be just
as false. As this has become more apparent neoclassical economists have sought
to declare the whole issue out of bounds. Martin Feldstein, chairman of the
Council of Economic Advisors under President Reagan, replied to critics of the
Robin Hood-in-reverse policies of Reaganomics by stating, “Why there has been
increasing inequality in this country is one of the big puzzles in our field
and has absorbed a lot of intellectual effort. But if you ask me whether we
should worry about the fact that some people on Wall Street and basketball
players are making a lot of money, I say no.”15 Likewise Robert Lucas, Jr. of the University of Chicago, the most
influential macroeconomist of his day, was merely stating the dominant view of
the profession and of the establishment as a whole when he opined in 2004, “Of
the tendencies that are harmful to sound economics, the most seductive, and in
my opinion the most poisonous, is to focus on questions of [income]
distribution.”16
Feldstein’s and Lucas’s sharp dismissals of any concern over income and
wealth distribution reflected the mainstream economic view that inequality is
benign precisely because it can be attributed to different levels of marginal
productivity and the corresponding different education and skill sets. In this
accounting, a person’s income is simply a function of his or her productivity
and willingness to work. People are poor because they are not very productive
or because they have a weak attachment to the labor force as a result of their
own choices. Productivity is driven in the main by the willingness of
individuals to invest in their “human capital,” and the most important type of
such investment is education. Attachment to the labor force depends on “leisure
preferences” of individuals. This refers to the relative weight potential
workers place upon the utility they will gain by buying the goods and services
that an increase in income makes possible—while factoring in, through a benefit
and cost calculus, the happiness they could have by not working, by choosing
more free time. Thus those with high incomes are presumed to have invested in
their human capital and have low leisure preferences, while for the poor the
opposite is true.
Modern technology, in this view, has only made human capital more
important. Many people have been left behind in the race to the top of the
income distribution because they do not possess the knowledge that modern
technology requires. Most mainstream economists do say that appropriate public
policies could help reduce inequality, by, for example, making it easier for
those without means to attend college. However, it would be dangerous, we are
told, to reduce inequality too much—for example, through free higher education
for all—because then individuals would not have an incentive to work hard and
be productive. This would be to the detriment of the capacity of the economy to
grow and thus to provide the extra income needed to distribute to those at the
bottom. Equality is therefore self-defeating.
The Mad Hatter logic of neoclassical
economics can actually be used to demonstrate that in perfectly competitive
markets there can be no wage and salary inequality at all!17 Consider a woman making a career decision. Assume, as does the
neoclassical economist, that she has complete knowledge of the wages and
benefits associated with every occupation she is considering entering. She also
knows the costs of the education and training necessary for employment in each
occupation, as well as the income she will lose by not working while she is
getting this schooling and training. Any particular negative aspects of an
occupation, such as physical danger, are also known, as are their costs. What
should she do? She will weigh the benefits against the costs of each occupation
and pick the one for which the net benefits are highest.
Implicit in this scenario is a wage for each occupation that at least
covers the cost of entering it. Competition in the marketplace will, in fact,
make the wage just equal to the entry cost. An occupation with a wage higher
than the entry cost will attract new applicants; this will put downward
pressure on the wage and upward pressure on the costs (as more people demand
schooling and training); and eventually, the above average wage-cost difference
will disappear. Remarkably, this theory shows that, while some workers earn
higher wages than others, these higher wages simply reflect higher entry costs.
A doctor is therefore not really better off than a motel room cleaner; in terms
of wages minus costs, they are in exactly the same position. Voilà! At least as
far as labor income is concerned, there can be no inequality.
Enter the real world. The Great
Financial Crisis of 2007–2009 and the Occupy Wall Street uprising punctured
this neoclassical fairy tale. The Occupy movement pinpointed the growing
division between the 1% and the 99%—achieving in a very short time a transformation
in public consciousness on inequality that radical political economists had
sought to effect for decades. The press began to draw more frequently on data
showing skyrocketing income and wealth inequality that had long been available
but had been relegated to the status of a dirty little secret of the capitalist
economy.18 For decades researchers had been compiling sophisticated statistical portraits
in this area. Now due to Occupy and the sheer outrage of the population, it all
began to come out into the open. Especially notable in this respect were the
contributions of New York University economist Edward N. Wolff, a leading
authority on wealth distribution; the Economic Policy Institute, which
publishes The State of Working America;
Branko Milanovic, a heterodox economist employed by the World Bank’s research
division; and James K. Galbraith, a prominent institutionalist economist and
analyst of inequality in pay.19
Yet, the big change on the data front,
making it impossible to deny any longer the extent of the growth of inequality
in all of the mature economies was the development, over the last decade and a
half, beginning with the early work of Piketty, of the World Top Incomes
Database (commonly referred to as the Top Incomes Database). The result of a
major international project, involving some thirty researchers, this database
primarily uses income tax data, focusing on most of the mature capitalist
economies.20 The leading researchers for the U.S.
case were Piketty himself, located at the Paris School of Economics, and
Emmanuel Saez, a professor of economics at the University
of California , Berkeley Latin America .
The publication by Harvard University
Press in 2014 of Capital in the Twenty-First
Century by
Piketty, using the Top Incomes Database to explain the dynamics of growing
inequality at the center of the capitalist world, was therefore bound to draw
extraordinary attention in the economic world. For Piketty is no ordinary
economist. He is at one and the same time a dissenter and a representative of
the higher circle of the economics establishment. Although he served for a few
months in 2007 as the economic adviser to Ségolène Royal in her campaign as the
Socialist Party nominee for president of France—she lost to Nicolas
Sarkozy—Piketty is no Marxist, or even an institutionalist or post-Keynesian
political economist, in whose work one could expect to find an analysis
centering on inequality. Rather, he is a highly credentialed member of the
neoclassical economics elite. Thus, when he presented a theoretical perspective
that challenged the primary approach to questions of income and wealth
distribution previously held to by almost all neoclassical economists, the
result was explosive. Suddenly there was a work on growing inequality that had
the imprimatur of the establishment (backed by prestigious publications in the Quarterly
Journal of Economics, American Economic Review and the Journal
of Economics Literature), and could not be easily dismissed ad
hominem as the work
of a “non-scientific” heterodox economist. If not exactly a revolution against
neoclassical economics, the contents of his book had all the looks of a palace
coup. And remarkably too, Piketty had a gift of expression and breadth of
knowledge unusual in economists, allowing him to draw on Jane Austen and Honoré
de Balzac as much as Adam Smith and Karl Marx. Within a short time the book
reached number one on Amazon, surely an unprecedented achievement for the
author of a data-filled economics book of 685 pages.
For most readers it was not the fine
details of Piketty’s analysis that were so interesting but rather the overall
conclusions dramatically highlighted in the very beginning of the book.21Here he made it clear he was challenging head-on some
of the core assumptions of orthodox economics—though from inside rather than
outside of the neoclassical perspective. It was this divorce of his analysis
from the main ideological propositions of received economics—the sense of
letting the numbers speak for themselves—that gave Piketty’s work the feeling
of a disinterested inquiry after the truth rather than what Marx called “the
bad conscience and evil intent of apologetics” that has so long dominated
orthodox economics.22
Most importantly, Piketty concluded in
what will undoubtedly be his single most enduring contribution, that “There is
no natural, spontaneous process to prevent destabilizing, inegalitarian forces
from prevailing permanently” in a capitalist economy. This can be seen as the
critical counterpart (within the realm of distribution) to Keynes’s break with
Say’s Law, or the notion of a natural tendency in capitalism to a
full-employment equilibrium. Not only does Piketty point out that Kuznets’s
assumption of growing equality in developed capitalist economies is wrong, but
he argues that the standard neoclassical human-capital argument of
equality-cum-meritocracy—wherein deviations from equality are simply due to
attributes such as greater skill, knowledge, or productivity—is equally false
in the real-world economy.23
This is shown by his now famous formula r >
g, where r stands for the annual rate of return to wealth—referred to by Piketty as
capital—and g for the
growth rate of the economy (the rate of increase in national income). Wealth in
slow-growing capitalist economies (below 1.5 percent per capita), which Piketty
takes as the normal case, expands more rapidly than income—a phenomenon no
doubt heightened in our financialized age.24 He argues that the higher rate of per capita growth in the first quarter
century after the Second World War, when the per-capita growth rate in the
United States was about 1.9 percent, was exceptional, and that we are
seeing—for one reason or another—a return to the norm of much lower growth (1.2
percent or even 1 percent per capita), which he calls at one point a “low-growth
regime.” (This applies to all of the mature economies on the “technological
frontier”—but not to economies now experiencing catch up such as China
Relatively slow growth—what we would
term stagnation—thus provides the background condition for Piketty’s r > g,
practically ensuring that wealth at the top of society will become ever more
concentrated, while the main wealth-holders accrue their wealth not so much
because of what they do but because of where
they are placed in the social-class hierarchy. Indeed,
capitalism in its normal case, Piketty tells us, promotes patrimonial
dynasties. “Liliane Bettencourt,” the heiress to the French cosmetic giant
L’Oréal, “who never worked a day in her life, saw her fortune grow exactly as
fast as that of Bill Gates, the high-tech pioneer, whose wealth has
incidentally continued to grow just as rapidly since he stopped working.”26
Piketty thus drives a critical wedge
into the traditional justification of the system, according to which income and
wealth shares are determined by the marginal productivity of the various
factors of production (thought to be applicable to individual contributions as
well). To understand the full significance of this, it is useful to quote from
the 2012 book The Price of Inequality by economist Joseph Stiglitz. According
to Stiglitz, with the rise of capitalism,
it became imperative to find new
justifications for inequality, especially as critics of the system, like Marx,
talked about exploitation.
The theory
that came to dominate, beginning in the second half the nineteenth century—and
still does—was called “marginal productivity theory”; those with higher
productivities earned higher incomes that reflected their greater contributions
to society. Competitive markets, working through the laws of supply and demand,
determine the value of each individual’s contributions.27
Piketty’s argument and his data make a
mockery of this core neoclassical economic thesis. But Piketty advances such an
argument without breaking completely with the architecture of neoclassical
economics. His theory thus suffers from the same kind of internal incoherence
and incompleteness as that of Keynes, whose break with neoclassical economics
was also partial. Deeply concerned with issues of inequality, just as Keynes
was with unemployment, Piketty demonstrates the empirical inapplicability over
the course of capitalist development of the main conclusions of neoclassical
marginal productivity theory. His work has thus served to highlight the
near-complete unraveling of orthodox economics—even while staying analytically
within the fold.28
This overall incoherence, as we shall
see, ultimately overwhelms Piketty’s argument. He is unable to explain why
capitalist economies tend to grow so slowly as to generate such a divergence
between wealth and income (and between capital and labor). Hence, while his
analysis sees slow growth or relative stagnation as endemic to this system, he
neither explains this nor is concerned directly with it. Significantly, he
replaces more traditional notions of capital as a social and physical
phenomenon with one that equates it with all wealth.29 As a result the accumulation of capital in his analysis means no more
than the amassing of wealth of whatever kind, from plant and machinery to
financial assets to jewelry, thereby confusing the whole issue of capital
accumulation.30 Nor does he address the relations of power—principally class power—that
lie behind the inequality that he delineates. His analysis is confined largely
to distribution rather than production. He neither follows nor (by his own
admission) understands Marx, though at times clearly draws inspiration from
him.31 The question of monopoly capital is entirely missing from his study,
which, as he says, does not include imperfect competition as a factor in
generating inequality.32
But even with these and other
deficiencies, Piketty, nevertheless, brings a certain degree of reality—even a
sense of “class warfare” (if only implicitly)—back to bourgeois economics. The
result is to heighten the crisis of neoclassical theory. Moreover, he
argues—even though he dismisses the idea as “utopian”—for the imposition of a tax
on wealth.33 Piketty thus represents a partial revolt within the inner chambers of
the economics establishment.
Not surprisingly, given the extraordinary
attention given to Capital in the Twenty-First
Centuryand the breech in the wall of the neoclassical orthodoxy it
represents, the Wall Street Journalsought
to counterattack in May 2014, with an op-ed by none other than Feldstein.
Reagan’s former economic advisor predictably condemned “the confiscatory taxes
on income and wealth that Mr. Piketty recommends,” declaring that “the problem
with the distribution of income in this country is not that some people earn
high incomes because of skill, training or luck” but rather that a small
minority has fallen below the poverty line.34 However, Feldstein misses the mark completely. Piketty’s point is that
skill and training cannot explain
the gross inequality that has arisen in U.S. society, which is
disproportionately weighted toward inherited wealth and CEO mega-salaries, and
that while some do get vastly higher incomes by the “luck” of having been born
with silver spoons in their mouths, they can hardly be said to have “earned”
them.
Increasing Inequality: A Law of
Capitalism
Prior to the publication of Piketty’s
book, Piketty and Saez used Internal Revenue Service data to track U.S. United States
Expanding upon these earlier
conclusions, Piketty in Capital in the Twenty-First
Centuryelucidates four key findings. First, similar trends, though
less marked than in the United
States United
States
Third, Piketty stresses that the richest
1 percent enjoyed similar distance from the rest of us throughout most of
capitalism’s history. The only period in which the capital-income ratio becomes
more equal and the dominance of inherited wealth diminishes in the rich
countries as a whole is that between the beginning of the First World War in
1914 and the mid-1970s. This was a truly exceptional time, marked by “shocks”
to the system: two catastrophic wars, the Bolshevik Revolution, the Great
Depression, and the rise of the social welfare state after the Second World
War. Heavy taxes were placed on top incomes, fortunes were lost in both the
wars and the Depression, and working-class movements arose and forced higher
wages, benefits, and social insurance from employers and governments—both of which
were willing to make concessions if only to avoid a deeper radicalization of
the working class. However, once elites regained their bearings, capitalism
began to return to the norm of growing inequality.37
Fourth, during the sixty-odd years of
expanding equality, a substantial “middle” class arose—professionals, civil
servants, and unionized workers—which, while not wealthy, had enough income to
live well above subsistence and to accumulate a certain amount of wealth,
mainly in the form of housing. The rise of this intermediate “petty
patrimonial” propertied class of home owners, he argues, has had profound
effects on the political trajectory of the rich nations, because there is now a
sizeable portion of society outside the upper class intent on maintaining the
value of their wealth and increasing it if possible.38
Most individuals earn income by working.
However, very substantial incomes derive from ownership of wealth. What is
more, certain types of wealth, such as stocks, bonds, and other financial
instruments, represent control over the commanding heights of the economy and
government. If these are divided in an unequal manner, then so is the power
that flows from their ownership. The data show with great clarity that the
distribution of wealth is extraordinarily unequal and likely to become more so.
Edward Wolff has pioneered the study of wealth data in the United States
Asset Class
|
Share of Top 1% in 2010
|
Stocks & Mutual Funds
|
48.8%
|
Financial Securities
|
64.4%
|
Trusts
|
38.0%
|
Business Equity
|
61.4%
|
Non-home Real Estate
|
35.5%
|
Source: Edward N. Wolff, “The Asset Price Meltdown and the
Wealth of the Middle Class,” NBER Working Paper Series, Working Paper 18559, 2012,
http:/nber.org/papers/w18559.pdf, 57, Table 9.
Indeed, it is in wealth statistics that
the real social divide stands out. Thus, as Piketty notes, the Federal Reserve
Board in recent estimates, covering the years 2010–2011, indicated that the top
10 percent of wealth holders in the United States own 72 percent of the
country’s wealth, while the bottom half own only 2 percent.40 Meanwhile, there is much inequality even within the 1 percent. Sylvia
Allegretto of the Economic Policy Institute tells us that in 2009, the mean net
worth of the infamous “Forbes 400”
(the four hundred wealthiest persons in the United States) was $3.2 billion;
but the top wealth holder had a net worth fifteen times greater than the mean
for the Forbes 400 as a whole, an increase from 8.6 times larger in 1982.41
Piketty has a great deal to say about
wealth, and his data are global in scope. He is interested mainly in the
capital-income (wealth-income) ratio. As noted above, he uses capital and
wealth interchangeably, which has led to deserved criticism by heterodox
economists. His book is about the distribution of societal output and the
wealth of everyone, but especially those who own the nonhuman means of
production used to produce this output. The title of the book suggests a
connection to the most famous book about capital, Marx’s Capital.
However, Marx’s conception of capital and Piketty’s conception could not be
more unalike. Piketty has no notion of capital as an exploitative social
relationship. Instead, for him capital has an existence simply as private
wealth (he does write about public capital, but this is an insignificant
component of total social wealth). By, in effect, objectifying capital, considering
it apart from the social relationship embedded within it, he marks himself well
within the economic mainstream. Wealth, in his view, can generate income
whether it is in the form of shares of stock in the largest corporations, a
small apartment building, or a government bond. And wealth of any kind can
provide enormous benefits to its owners.
Piketty thinks about wealth in terms of
the number of years’ worth of income it represents. If for example, you have
wealth equal to $100,000 and your annual income is $25,000, then your wealth
equals four years of income. Your capital-income (or wealth-income) ratio is
four. He does this for countries, using the data that he and his associates
have painstakingly accumulated over many years of examining tax and various
other public records. He looks at short-term fluctuations in the capital-income
ratio (which he designates as β) and notes that these are considerable.
For example, the boom in Japanese real estate and stock prices in the 1980s
caused the ratio to rise, and the collapse of these bubbles made it fall
precipitously.
However, what he is really interested in
is the long-run trend in the ratio. He shows that throughout the eighteenth and
nineteenth centuries, and right up until the First World War, wealth in most
rich nations equaled six to seven years of national income. In the United States Europe , much private enterprise was nationalized after
the Second World War and progressive taxation funded social welfare programs,
and these factors helped keep the wealth-income ratio low. However, beginning
in the mid–1970s, capital made a remarkable comeback, and the ratio began to
climb, and is now approaching the level that existed at the start of the First
World War. Public capital has been privatized and political regimes throughout
the world have been very well disposed toward the interests of wealth-holders.43
If we abstract from the special periods
of wars, depression, and the social welfare state, what explains long-term
trends in the capital-income ratio? Piketty outlines in Chapter 5 (“The
Capital/Income Ratio Over the Long Run”) what he calls a “law of capitalism,”
namely that over the long run, the capital-income ratio tends toward the
quotient of the rate of saving and the rate of growth of the economy: β = s / g. As he explains in the book (and more clearly in a
technical appendix to the book available online), this formula is the
“steady-state” condition for a simple neoclassical growth model, such as the
one developed by economist Robert Solow.44 It is significant that he chose a neoclassical growth model, one that
has embedded in it very definite and not universally accepted assumptions about
how the macroeconomy works, and one which assumes, for example, that there are
such things as the marginal productivities of labor and of capital, and that
capital and labor are reasonable substitutes for each other.45
Still, Piketty’s “law” has a certain
intuitive appeal. The “weight” of “capital,” aka wealth (in terms, say, of its
owners’ potential power), will be greater, other things equal, the lower an
economy’s growth rate and the higher its rate of saving. Piketty finds that in
the rich capitalist countries, the trend has been, and will most likely
continue to be, toward relatively low growth rates and high savings rates (or,
in Marxian terms, a high rate of surplus generation). This tells us that the
capital-income (i.e., wealth-income) ratio will continue to rise, perhaps to
levels never before seen. Low growth rates, he contends, will be the
consequence mainly of low population growth rates, accentuated by low rates of
technological change.46
As noted, Piketty takes into account the
“catching up” achieved by countries such as China
and India United States
Piketty uses his formula β = s / g, along with an equation that defines capital’s share
of national income, α = rβ (where r = the rate of return on capital and, as we have seen, β =the
capital-income ratio) to show what will happen to the share of capital over
time. A simple substitution yields α = r (s / g). From this, he derives his famous inequality: r > g.48 If the rate of return on capital r is greater
than the growth rate of the economy g, then
capital’s share of income will rise. Piketty shows that over very long periods
of time, r has in fact
been greater than g; in fact, this is the normal state of affairs in capitalist
economies. Only during the long crisis, brought on by war and depression and
the aftermath when social welfare policies helped keep r low and g high, was
this not the case. And even as the capital-income ratio has risen, the fact
that economies have become more capital intensive has not exerted enough
downward pressure on r to push
capital’s income share lower. Nor will increasingly “perfect” capital markets,
brought on by rapid globalization, force r lower; in fact, the growing sophistication of
financial instruments and money managers, along with the desire of poorer
nations to attract capital, will keep r high. If, as
Piketty thinks likely, g grows very
slowly in the future, we are in for a steady rise in capital’s share of income
and a steady fall in labor’s share. Increasing polarization of society, in
terms of the two main social actors, workers and owners of capital, is a very
likely prospect.
To make matters worse, those with the
largest amounts of capital (wealth) almost always get a higher rate of return
on their wealth than do those with lesser amounts. Piketty gives a telling
example of this by looking at the returns garnered by the endowments of U.S. Princeton ,
and Yale, which “earned” an average return of 10.2 percent.49 Needless to say, when those already extraordinarily rich can obtain a
higher return on their money than everyone else, their separation from the rest
becomes that much greater.
The research of Piketty, his associates, Wolff, and many others tells us
without a doubt that income and wealth have become grotesquely unequal and are
on a trajectory to become still more so. The implications of this are dire,
exacerbating all manner of economic, social, environmental, and political
problems. There is no way, for example, that it is possible now to say that we
have anything even remotely resembling democracy in the United States, and for
that matter, in any capitalist country. Rather plutocracy is now the dominant
political form.
One thing we can say with certainty is that neoclassical economics does
not have a viable theory of inequality, any more than it has a viable theory of
unemployment. As we have emphasized throughout this article, received economics
says that wages depend on worker productivity, meaning that as productivity
rises, so will wages. If workers become more productive by, for example,
investing in their “human capital” (getting more schooling, training, etc.),
they will then add more to the employers’ revenues than existing wage rates add
to costs. This increase in employer profits at current wages will supposedly
cause employers to raise the demand for employees, pushing wages up .
Reality could not be more different than
what neoclassical theory leads one to expect. In the United States
Indeed, the data show that while output per worker has risen
considerably over the past forty years, wages have fallen far behind. Perhaps
the most startling comparison is between wage and productivity gains. In a
recent paper, Economic Policy Institute economist Elise Gould found that
“Between 1979 and 2013, productivity grew 64.9 percent, while hourly
compensation of production and nonsupervisory workers, who comprise over 80
percent of the private-sector workforce, grew just 8.0 percent. Productivity
thus grew eight times faster than typical worker compensation.” This means that
the gains from productivity went to capital and workers at the top of the wage
scale. She also discovered that:
Between 1979 and 2007, more than 90
percent of American households saw their incomes grow more slowly than average
income growth (which was pulled up by extraordinarily fast growth at the top).
By 2007, the
growing wedge between economy-wide average income growth and income growth of
the broad middle class (households between the 20th and 80th percentiles [where
most production and nonsupervisory workers reside]) reduced middle-class
incomes by nearly $18,000 annually. In other words, if inequality had not risen
between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher
in 2007.52
A 2013 report by the Federal Reserve
Board of San Francisco showed that once the top 1 percent of wage and salary
recipients are removed from the total, the labor share of overall national
income plummets: “by 2010 the labor share of [income of] the bottom 99 percent
of taxpayers had fallen to approximately 50 percent from just above 60 percent
prior to the 1980s.”53 Neoclassical economics is completely incapable of explaining this sharp
decline in the workers’ share of national income.
The Monopoly of Power
Piketty’s work raises the question of
growing class inequality in a statistical sense without explicitly addressing
either the roots of this or the question of growing class power. His work thus
remains within the bounds of establishment discourse—though serving to shake up
the ruling ideology with its revelations. He uses the term “upper class” for
the top 10 percent of income recipients and the term “dominant class” for the
top 1 percent (all those in the upper class who are not in the dominant class
are referred to as the “well-to-do”). In the United States
A dramatic illustration of what Piketty
means when he refers to the divergence in the social (and cultural) landscape
appeared in the New York Times in
August 2014, under the title “In One America, Guns and Diet. In the Other,
Cameras and ‘Zoolander’: Inequality and Web Search Trends.” Those geographical
locations described as “harder places to live,” associated with the lowest
levels of educational attainment, household income, and life expectancy and the
highest levels of unemployment, disability, and obesity were strongly
correlated with Web searches for things like “free diabetic,” “antichrist,”
“.38 revolver,” “ways to lower blood pressure,” “SSI disability,” and “social
security checks.” While areas described as “easier places to live,” associated
with the well-to-do or with the 1% itself, were strongly correlated with
Internet searchers for “Canon Elph,” “baby jogger,” “baby massage,” “Machu
Picchu” (and other exotic locales), “ipad applications,” “new nano,” and
“dollar conversion.” We are increasingly living in a world so polarized that
much of the 99% have nothing in common with the 1%.55
Piketty recognizes that the “dominant
class” in the sense of the 1 percent is not really dominant; it is only when
you get to the top 0.1 percent, which owns about half of what the 1 percent
owns, that you begin to get at the really dominant income/wealth of the
society. Thus he notes that Occupy Wall Street was not altogether wrong in
contrasting the 1% to the 99% or in declaring that “We are the 99 percent!” He
compares this situation to that of the French Revolution arising from the
revolt of the Third Estate.56
But how does this relate to issues of class struggle and class power?
What are the consequences of these realities in terms of control of
corporations, the economy, the state, the culture, and the media? Piketty,
though making a few tantalizing allusions, tells us next to nothing about this.
Although he does not entirely avoid terms such as “class struggle,” he has very
little to say about it. In fact, the nature of his analysis, which concentrates
on statistical inequality and the relation between the growth of wealth and the
growth of income, is far removed from the direct consideration of capital
versus labor. His is an argument primarily about fairness and not social
struggle—or even economic crisis/stagnation.
Piketty’s failure to relate inequality
to power is not, it should be stressed, a particular failure on his part, but
rather a general fault of neoclassical economics, tied to its position of
ideological hegemony. “The neglect of power in mainstream economics,” as the
heterodox Austrian economist Kurt Rothschild wrote in 2002, “has its main roots…in deliberate strategies
to remove power questions to a subordinate position for inner-theoretic
reasons,” such as the search for mathematical models with a high degree of
mathematical certainty. In this respect, the messy issues dealt with in such
fields as sociology and political science (or for that matter political
economy) are deliberately excluded, even at the expense of realism of analysis.
Moreover, part of the attraction of such pure models and the state of mind that
they generate is that they reflect “the ideological preference of powerful
socio-economic groups for a neoclassical type of theory,” which justifies the
status quo by excluding all questions of power. As Rothschild pointedly put it:
“Extremely formulated one could say that societal power promotes the study of
models of powerless societies.”57
It goes without saying that Piketty’s
acceptability to neoclassical economics is dependent on his avoidance of the
question of inequality and power.
Hence the contrast between his Capital in the Twenty-First
Century and
Marx’s Capital, as we
observed, could hardly be greater. Moreover, it is precisely because Piketty is
discussing inequality divorced from power that his analysis is inevitably
disjointed and cannot approach anything like a general theory. It is not the
mere recognition of inequality in itself, but the wider perception of its
promotion as part of a system of power that raises questions that are dangerous
to the system. Hence, the real importance of Piketty’s analysis only comes out
when the implications are taken beyond what he himself, as a representative of
orthodox economics, is willing or even able to address: issues of class power
and monopoly power, and how these relate to overaccumulation, stagnation, and
financialization.
Piketty starts with the fact that some
individuals and groups of individuals arranged into percentages of the
population have more income or wealth than others. He does not explain the
origins of this or why, but he makes it clear that it is not simply a product
of individual skill or productivity, as neoclassical economics has traditionally
argued. In reality the basis of a capitalist society is the private monopoly of
the capitalist class over the means of production, whereby the great majority
of the population is relegated to a position in which it has nothing to sell
but its labor power, i.e., its capacity to work. This sets up an extremely
uneven power relationship, allowing the owners of the means of production to
appropriate the greater part of the surplus produced. Far from being a
description of society that pertained only to the nineteenth century, this, as
Piketty helps us to understand, is probably a better description of our society
today than at nearly any previous time in history. It is not difficult to
discern who these owners of the means of production are: they are not so much
the top 1 percent, as the top 0.1 percent of society (or even higher) in terms
of income and wealth. In the United
States
Due to their power to appropriate the
society’s surplus, which takes the form of financial wealth, and has a rate of
return that, as Piketty tells us, normally grows faster than the income of
society as a whole, those in the dominant class become richer both absolutely
and relatively, benefitting from the upward flow of value, which seldom
trickles down. Over the years 1950 to 1970, for each additional dollar made by
those in the bottom 90 percent of income earners, those in the top 0.01 percent
received an additional $162. From 1990 to 2002, for every added dollar made by
those in the bottom 90 percent, those in the uppermost 0.01 percent (around
14,000 households in 2006) garnered an additional $18,000.59
Just as class power tends to
concentrate, so does the power of the increasingly giant, oligopolistic firms
which, in economic parlance, reap monopoly power, associated with barriers to
entry into their industries and their ability to impose a greater price markup
on prime production costs (primarily labor costs). The bigger firms, as Marx
explained, tend to win out in the struggle over the smaller, while the modern
credit system facilitates ever-larger mergers and takeovers, leading to the
increased centralization of capital and a heightening of monopoly power.60 In 2008, the top 200 U.S.
Writing for the Wall
Street Journal, Peter Thiel, co-founder of PayPal, declared that
“Capitalism is premised on the accumulation of capital, but under perfect
competition, all profits get competed away…. Only
one thing can allow a business to transcend the daily brute struggle for
survival: monopoly profits…. Monopoly is the condition for every
successful business.” Indeed, this might even stand as the credo of today’s
generalized monopoly capital.64
The class power of capital in the widest
sense—as powerfully argued by economist Eric Schutz in his 2011 work, Inequality
and Power: The Economics of Class—extends to all spheres of society
and penetrates increasingly into the state and to civil society in general
(including the media, education, all forms of entertainment).65 As Kalecki long ago pointed out, a labor party such as exists in many
countries in Europe, even where it gains control of the government through
popular election, is hardly likely to be in control of the state as a whole,
much less the economy, finance, or media. It therefore remains subservient to
those who retain the class power of capital, which controls production and
through it the main organs of society.66
For Piketty himself there is no organic
relation between the two main tendencies that he draws in Capital
in the Twenty-First Century—the tendency for the rate of return on
wealth to exceed the growth of income and the tendency toward slow growth. Nor
is his analysis historical in a meaningful sense, which requires scrutiny of
the changing nature of social-class relations. Increasing income and wealth
inequality are not developments that he relates to mature capitalism and
monopoly capital, but are simply treated as endemic to the system during most
of its history.
In reality, however, capitalism matures
as a system over the course of its history, as do its contradictions, which are
an inescapable part of its being. Today the existence of inordinate class power
coupled with ever-greater monopoly power (at both the national and global
levels) are producing a more acute condition of overaccumulation at the top of
society. This in turn weakens the inducement to invest, leading to a powerful
tendency toward a slowdown in growth or stagnation. Under these conditions, as
the system continues to seek outlets for its enormous actual and potential
economic surplus, while at the same time enhancing the wealth of those at the
top, it inevitably resorts to financial speculation. The result is what Summers
has recently called “over-financialization,” associated with massive increases
in total (primarily private) debt in relation to national income, leading to financial
bubbles, one after the other, which inevitably burst.67 This dialectical relation between stagnation and financialization
constitutes the primary reality defining today’s monopoly-finance capital.68
Here it is useful to recall that for
Keynes the danger was not only one of secular stagnation but also the
domination of the rentier. He thus called for the “euthanasia of the rentier,
and consequently the euthanasia of the cumulative oppressive power of the
capitalist to exploit the [artificial] scarcity-value of capital.”69 In today’s financialized capitalism, we face, as Piketty recognizes,
what Keynes most feared: the triumph of the rentier.70 The “euthanasia of the cumulative oppressive power of the capitalist” is
needed now more than ever. This cannot be accomplished by minor reforms,
however—hence Piketty’s advocacy of what he calls a “useful utopia,” a massive
tax on wealth.71
Yet, today we live in a world of global
monopoly-finance capital: a system of class power, monopoly power,
imperial power, and financial power. Just how unrealistic Piketty’s “useful
utopia” is as a mere reform program becomes immediately apparent once we look
at the class dynamics of society. It is even more apparent when we move beyond
a national to an international outlook. Piketty’s data and analysis do not take
him far beyond the rich countries, and hence he does not look at inequality in
global North-South terms, much less recognize the reality of imperialism or a
world ruled by global monopolies (multinational corporations). He therefore
takes no account of the imperial transfer of value as a historical phenomenon
or the consequences of this for the concentration of world capital. As Indian
economist Prabhat Patnaik states in “Capitalism, Inequality, and
Globalization”:
It is
significant that imperialism plays no role in Piketty’s analysis, neither in
explaining the growth of wealth and wealth inequalities, nor even in the
analysis of past growth, or prognostication of future growth. On the contrary
the book is informed by a perception according to which capitalist growth in
one region…is never at the
expense of the people of another region, and tends to spread from one region to
another, bringing about a general improvement in the human condition. What this
perception misses is that capitalist growth in the metropolis was associated
not just with the perpetuation of the pre-existing state of affairs in the
periphery but with a very specific form of development, which we call “underdevelopment,”
which squeezed the people in an entirely new way. For instance, over the period
spanning the last quarter of the nineteenth century and the first two of the
twentieth (until independence), not only was there a decline in per capita real
income in “British India,” but also the death of millions of people owing to
famines.72
In such an imperial system, carrying down to our day, a tax on
capital—Piketty’s one solution—would, as he realizes, have to be international
in scope in order meaningfully to address issues of inequality and power. This
then takes us inexorably to the question of a revolutionary reconstitution of
society on a global level. Indeed, there is no real solution that does not
require the worldwide transcendence of capital as a mode of production.
None of this of course is to deny that
Piketty’s wealth tax would be a good, strategic place to start in promoting a
new radical social project, since it challenges “the divine right of capital.”73 But this would require in turn a reorganization and revitalization of
the class/social struggle, and in every corner of the globe. The goal must be a
truly “utopian” struggle for asociety
of all; one that is of, by, and for the people—the 99%. Moreover,
the 99% here must be understood as representing the dispossessed of the entire
world, while recognizing their varying conditions. Today “members of the top
percentile [among global wealth holders] are almost 2000 times richer” than the
bottom 50 percent of world population.74 Issues of inequality must be seen as ubiquitous in today’s capitalism,
occurring at every level, the product of imperialism as well as class, race,
and gender—none of which are addressed directly in Piketty’s analysis.
Yet, despite the numerous gaps in
Piketty’s argument from the standpoint of existing power relations, Capital
in the Twenty-First Century embodies positive messages for social
struggle in our time, which it would be a grave mistake to overlook.
Significant in this respect is that he chose as the epigraph of his book a line
from the Declaration of the Rights of
Man and Citizenfrom the French Revolution: “Social Distinctions can
be based only on common utility.”75 One could hardly pick a statement more opposed to the system in which we
live, which seeks not the common but the individual utility.
Indeed, Piketty’s saving grace, we believe, is that he cares for “the least
well off,” beyond his own class. Although a social-democratic supporter of
capitalism, he is also in many ways a critic of what he refers to as “the
globalized patrimonial capitalism of the twenty-first century,” calling for its
radical “regulation.”76 Coming from a neoclassical economist, this is little short of a
revolutionary departure.
Notes
1.
↩This is evident in recent mainstream discussions of
what is called “secular” or long-term stagnation. For an analysis of this and
recent trends see Fred Magdoff and John Bellamy Foster, “Stagnation
and Financialization,” Monthly
Review 66, no. 1 (May 2014): 1–24.
2.
↩Michael Yates, “The Great Inequality,” Monthly Review 63, no.
10 (March 2012): 1–18; Thomas Piketty, Capital in the Twenty-First Century (Cambridge : Harvard
University
3.
↩Simon Kuznets, “Economic Growth and Income
Inequality,” American Economic Review 45, no.
1 (1955): 1–28.
4.
↩See John Bellamy Foster and Robert W. McChesney, The Endless Crisis (New York
5.
↩There has been no trend showing that the growing
income and wealth gap has been accompanied by similarly growing education and
skills gap. Neoclassical theory tells us that rising income and wealth
inequality must be caused by such an increasing differential in schooling and
skills. That is, those with relatively low incomes and wealth must be falling
more and more behind those with relatively high incomes and wealth in terms of
their skill and schooling levels. See Lawrence Mishel, “Education is
Not the Cure for High Unemployment or for Income Inequality,” January 12, 2011, http://epi.org.
7.
↩An oversupply of aggregate output would lead to
falling wages, interest rates and prices, which in turn would give rise to
higher employment, capital spending, and increasing consumer demand. On the
significance of Keynes’s critique in this area see Paul M. Sweezy, Modern Capitalism and Other Essays (New York: Monthly Review Press, 1972), 79–91.
8.
↩John Maynard Keynes, The General Theory of Employment, Interest,
and Money (London: Macmillan, 1936), 289.
11.
↩Keynes, General Theory, 307; Alvin H.
Hansen, Full Recovery or Stagnation (New
York: W.W. Norton, 1938), 303–18; Sweezy, Modern Capitalism, 79–83.
12.
↩Michał Kalecki, Theory of Economic Dynamics (London: George Allen and Unwin,
1954); Josef Steindl, Maturity and Stagnation in American
Capitalism (New
York: Monthly Review Press, 1976); Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff
and Paul M. Sweezy, Stagnation and the Financial
Explosion (New
York: Monthly Review Press, 1987). It is worth noting that Hansen took
Steindl’s theory seriously, modifying some of his own assumptions. See Alvin H.
Hansen, “The Stagnation Thesis,” in American Economic Association, ed., Readings
13.
↩Lawrence Summers, “Speech to the
IMF Fourteenth Annual Research Conference,”November 8, 2013, http://larrysummers.com.
15.
↩Feldstein quoted in “Grounded by
an Income Gap,” New York
16.
↩Lucas quoted in Paul Krugman, “Why We’re in
a New Gilded Age,” New
York Review of Books, May 8, 2014, http://nybooks.com.
17.
↩The example outlined in this and the preceding
paragraph are based upon the critique of neoclassical wage theory presented in
Eric A. Schutz, Inequality and Power: The Economics of Class (New York
18.
↩A search in the New York Times archives show that between January 1,
2007 and January 1, 2014, there are 4,260 articles listed under the term
“income inequality.” Between January 1, 1977 and January 1, 2007, there are
only 2,660 articles listed under this term.
19.
↩Edward N. Wolff, Top Heavy (New
York: New Press, 2002); Economic Policy Institute,State of Working America, http://stateofworkingamerica.org; Branko Milanovic, The
Haves and Have-Nots (New York: Basic Books, 2011); James K.
Galbraith, Created Unequal (New
York: Free Press, 1998), Inequality and Instability (Oxford:
Oxford University Press, 2012).
21.
↩The Wall Street Journal used
Amazon’s “popular highlights” page associated with its Kindle e-book device to
get an idea of how much books were being read. For every book, the top five
most highlighted passages by Kindle readers are listed. All five pages most
highlighted for Capital in the Twenty-First Century,
which at that time had been out for three months to wide acclaim, were in the
first twenty-six pages, suggesting that the beginning of the book (2.4 percent
of the whole) has had the most impact on Kindle readers, and are the most
closely read. Although one cannot draw much in the way of conclusions from
this, it is undoubtedly here, in the beginning, that Piketty puts his argument
and conclusions most clearly and forcefully, minus much of the detailed
elaboration that follows. “The Summer’s
Most Unread Book Is…,” Wall
Street Journal, July 3, 2014,http://online.wsj.com.
22. ↩Karl Marx, Capital, vol. 1 (London:
Penguin, 1976), 97. Two other what we might call “empirical economists” are
David Card and Alan Krueger, whose book, Myth and Measurement: The New Economics of the
Minimum Wage (Princeton,
NJ: Princeton University Press, 1997), demolished the neoclassical “law” that
raising the minimum wage leads inevitably to higher unemployment. Their book
led to such a severe backlash from their neoclassical brethren that they
stopped doing minimum wage research. Piketty’s findings have also been
attacked, but he has the great advantage of teaching in France, where
economists are not tied as tightly into the establishment—and required to toe
the line—as they are in the United States, and where there is still a strong
sense of social justice within the part of the working class. He says, “Hence
they [economists] must set aside their contempt for other disciplines and their
absurd claim to greater scientific objectivity, despite the fact that they know
almost nothing about anything”; 32. It is difficult to imagine an orthodox
economist in the United
States
25.
↩Piketty, Capital in the Twenty-First Century,
72–74, 93–96, 353–58. It should be noted that Piketty likes to work with big
data sets encompassing large parts of the world, and often bases his
assumptions on data stretching back to the eighteenth century or earlier.
Although he sees the Industrial Revolution as a turning point, he often skates
over true historical analysis, often arguing as if all the societies covered by
his data on all continents were essentially the same, and capitalist in
structure from approximately 1700 on. Such crude practices naturally undermine
his conclusions on long-term economic growth.
28. ↩Piketty sometimes seems to endorse marginal
productivity arguments in his book, as, for example, when he writes about the
marginal productivity of capital in Chapter 6 and of labor in Chapter 9. In the latter case, he
argues that over the long run education plays a very important role in
determining individual worker productivity and income. However, he places so
many qualifications on the marginal productivity theory that it is difficult to
believe that he thinks it has much merit.
29. ↩For Piketty “capital” is simply wealth, whether land,
money, financial assets, or jewelry. Piketty, Capital in the Twenty-First Century,
45–50; James K. Galbraith, “Kapital for
the Twenty-First Century?,” Dissent, Spring 2014, http://dissentmagazine.org.
30. ↩The consequences of effacing the concept of capital
with the concept of wealth are profound, but space does not allow their
detailed treatment here. It took Marx three whole volumes to define the meaning
of “capital” and if time had allowed he would undoubtedly have provided even
more volumes. Suffice it to say that not only does Piketty eschew a social
concept of capital, as in Marx’sCapital,
but by confusing capital with wealth he also conflates capital
as invested surplus (that
is, capital accumulation or investment in new productive capacity as it is
usually understood in economics) with financial speculation or what Marx called “fictitious
capital.” Hence, while Piketty provides genuine insights by focusing on wealth
versus income, his approach to capital as wealth is in many ways objectionable
even in terms of standard economics.
31.
↩Piketty indicates in a number of places his
understandable difficulty in reading Marx. This is a problem that Sweezy used
to argue faced any establishment economist, once inculcated into neoclassical
marginal productivity theory, since the Marxian perspective requires a
fundamentally different outlook and set of analytical tools. It is therefore
not surprising that Piketty demonstrates at times penetrating insights with
respect to Marx, such as his comments on “the principle of infinite
accumulation,” coupled with such elementary errors as the notion that Marx
failed to perceive the growth of productivity under capitalism, or that he saw
the economy heading toward zero productivity growth. All of this encourages him
to discount Marx’s economic vision as simply “apocalyptic.” Such errors seem to
be the result of trying to model Marx in neoclassical terms. Although he has a
lot to say about Marx, Piketty clearly has not gotten very far into Marx’s
system. See Paul M. Sweezy, “Interview,” Monthly Review 38, no. 11 (April 1987), 3; Piketty, Capital
in the Twenty-First Century, 7–11, 27, 227–30, 565; Thomas
Piketty, “Interview,” New Republic, May 5, 2014, http://newrepublic.com.
34. ↩Martin Feldstein, “Piketty’s
Numbers Don’t Add Up,” Wall
Street Journal, May 14, 2014,http://online.wsj.com.
35.
↩Piketty, Capital in the Twenty-First Century,
292–97, see especially figures 8.5 and 8.6. The original articles and data
backing up the book are to be found in the Top Incomes Database,http://topincomes.parisschoolofeconomics.eu,
and in the online “Technical
Appendix of the book, Capital in the Twenty-First Century,” http://piketty.pse.ens.fr.
39. ↩Edward N. Wolff, “The Asset Price Meltdown and the Wealth of the Middle
Class,” NBER
Working Paper No. 18559, November 2012, Table 4, http://ecineq.org.
41.
↩Sylvia A. Allegretto, “The State of
Working America’s Wealth, 2011: Through Volatility and Turmoil, the Gap Widens,” Economic Policy Institute, Briefing Paper #292,
March 24, 2011, Figure D, http://epi.org.
44. ↩Piketty, Capital in the Twenty-First Century,
166–70, 231, “Technical Appendix of the book, Capital in the Twenty-First Century.”
45.
↩For a critique of Solow’s neoclassical growth model
and a comparison with the earlier Keynesian growth models of Roy Harrod and
Evsey Domar, see E.K. Hunt and Mark Lautzenheiser,History of Economic Thought: A Critical Perspective (Armonk,
NY: M.E. Sharpe, 2011), 450–57. For a critique of Piketty’s analysis itself in
this respect see Prabhat Patnaik, “Capitalism, Inequality and
Globalization: Thomas Piketty’s ‘Capital in the Twenty-First Century,’” International Development Economic Associates (IDEAs), July 18, 2014, http://ideaswebsite.org.
46. ↩Although Piketty does not explain the long-term slow
growth (below 1.5 percent per capita) that he says is closer to the norm for a
capitalist economy, he does point to demographic factors and to technological
innovation as guiding factors—pointing to Robert Gordon’s notion of declining
innovation in order partly to explain the present economic slowdown. See
Piketty, Capital in the Twenty-First Century,
94–95.
51.
↩Calculated from the St. Louis FRED database, Real
Median Household Income in the United States (MEHOINUSA672N). See also Fred
Magdoff and John Bellamy Foster, “The Plight of the U.S Working Class,” Monthly Review 65, no.
8 (January 2014): 15–20.
52.
↩Elise Gould, “Why America’s
Workers Need Faster Wage Growth—And What We Can Do About It,” EPI Briefing Paper #382, August 27, 2014, http://epi.org.
53.
↩Michael W.L. Elsby, Bart Hobijn, and Aysegul Sahin, “The Decline
of the U.S. Labor Share,” Federal Reserve Board of San Francisco, Working Paper, 2013-27, 2013, http://frbsf.org.
55.
↩“In One
America, Guns and Diet. In the Other, Cameras and ‘Zoolander’: Inequality and
Web Search Trends,” New
York Times, August 18, 2014, http://nytimes.com.
57.
↩Kurt W. Rothschild, “The Absence of Power in
Contemporary Economic Theory,” Journal of Socio-Economics 31
(2002): 437–40.
58.
↩Arthur B. Kennickell, “Ponds and
Streams: Wealth and Income in the U.S. 1989 to 2007,” Federal Reserve Board Working Paper 2009–13, 55,
63, http://federalreserve.gov; Matthew Miller and Duncan
Greeenberg, ed., “The Richest
People in America”
(2009), Forbes, http://forbes.com.
59.
↩Correspondents of the New
York Times, Class Matters (New York
60. ↩Marx, Capital,
vol. 1, 777–78.
62. ↩Joseph A. Schumpeter, Capitalism,
Socialism and Democracy (New York: Harper and Row, 1942), 90. Schumpeter
referred here to such firms as “corespective.”
63. ↩Robert W. McChesney, Digital Disconnect (New York
64. ↩Peter Thiel, “Competition
is for Losers,” Wall
Street Journal, September 12, 2014,http://online.wsj.com. On generalized monopoly
capital see Samir Amin, The Implosion of Contemporary
Capitalism (New York
66. ↩Michał Kalecki, Selected Essays on Economic Planning (Cambridge:
Cambridge University Press, 1986), 19–24.
67.
↩Lawrence New York : Monthly
Review Press, 2009), Fred Magdoff and Michael D. Yates, The ABCs of the Economic Crisis (New York : Monthly
Review Press, 2009), and Costas Lapavitsas, Profiting Without Production (London
68. ↩Foster and Magdoff, The Great Financial Crisis,
63–76; Foster and McChesney, The Endless Crisis, 49–63.
69. ↩Keynes, The
General Theory, 376.
72.
↩Patnaik, “Capitalism, Inequality and Globalization,” 5. In his discussion of
forces leading to less inequality Piketty, Capital in the Twenty-First Century,
21, stresses the dissemination of “knowledge and skills.” He says this applies
especially to the convergence of incomes between nations. However, even
supposing that per capita incomes across nations are becoming more equal, this
says nothing about either the transfer of incomes from poor nations to rich
ones or the convergence of incomes within any particular country. Incomes have
been becoming more unequal in China
over the past few decades, but there has been a convergence between per capita
income in China
74.
↩James B. Davies, Susanna Sandström, Anthony Shorrocks,
and Edward N. Wolff, “The World Distribution of Household Wealth,” in James B.
Davies, ed., Personal Wealth from a Global Perspective (Oxford:
Oxford University Press, 2008), 402.
75.
↩Piketty, Capital in the Twenty-First Century,
1, 479–480. A society in which this is true could not be a capitalist society.
In a gathering and hunting society, a superior hunter may have social
distinction, but he will not get a larger share of food than anyone else. His
social distinction is therefore based on his serving the common good, by
increasing the group’s food supply. Nothing comparable exists in capitalism,
except in the ideological constructs of its apologists, especially neoclassical
economists. Piketty’s notion of how modern capitalist societies function can at
times appear painfully naïve. His wealth tax, he says, must be democratically
debated, and the data he and his colleagues have amassed will make such debate
possible. Yet, the very increase in the social “weight” of those at the top of
the wealth distribution corresponds with so much political “weight” that it is
reasonable to ask just how democratic debate, much less decision-making, is
possible. His support for serious, even radical regulation of “global
patrimonial capitalism” is commendable, but his faith in the capitalist version
of democracy is not.
Thursday December 11th, 2014, 10:25 am
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Browse: Home / 2014, Volume 66, Issue 06 (November) / Piketty and the Crisis of Neoclassical
Economics
Dear Reader,
We place these articles at no charge on
our website to serve all the people who cannot affordMonthly Review, or
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States
by
is the editor of Monthly Review and
professor of sociology at the University
of Oregon
Not since the Great Depression of the
1930s has it been so apparent that the core capitalist economies are
experiencing secular stagnation, characterized by slow growth, rising
unemployment and underemployment, and idle productive capacity. Consequently,
mainstream economics is finally beginning to recognize the economic stagnation
tendency that has long been a focus in these pages, although it has yet to
develop a coherent analysis of the phenomenon.1Accompanying the long-term decline in the growth trend
has been an extraordinary increase in economic inequality, which one of us
labeled “The Great Inequality,” and which has recently been dramatized by the
publication of French economist Thomas Piketty’s Capital
in the Twenty-First Century.2 Taken together, these two realities of deepening stagnation and growing
inequality have created a severe crisis for orthodox (or neoclassical)
economics.
To understand the nature of this crisis
of received economics it is necessary to look at the two principal bulwarks of
neoclassical theory, which were originally erected in response to socialist
critics. The first is the notion that a freely competitive capitalist economy
left to itself generates full employment, indicating that unemployment is the
product of various frictions, imperfections, or government interference. The
second is the related proposition that income and wealth inequality are
determined by the “marginal productivity” (or relative contributions to output)
of the various factors of production, chiefly capital and labor—a logic that is
extended to the contributions of individuals themselves. The renowned
post-Second World War national income statistician, Simon Kuznets, in his
famous Kuznets Curve, even argued that there was a tendency in developed
capitalist economies towards a decrease in inequality, due to the effects of
modernization, including enhanced educational opportunities.3
Contrast these propositions to the
reality of the mature capitalist economies today. Far from a full-employment
equilibrium, what we see rather is a long-term tendency to economic stagnation.
Moreover, this reality describes all of the developed capitalist economies and
can be seen in a trend going back forty years, or indeed longer.4 Over roughly the same period, income and wealth levels, rather than
converging, have diverged sharply—a divergence that cannot be attributed to
differences in education and skill, nor to the contributions of capital
relative to labor.5 In short, both of the principal justifications for the system provided
by neoclassical economics have collapsed before our eyes.6
The first of these fissures in the
outlook of neoclassical economics is long-standing and well known. During the
Great Depression, unemployment in the United States Cambridge University
Keynes’s
basic conclusion can…be put very
directly. Previously it had been held that the economic system, any capitalist
system, found its equilibrium at full employment. Left to itself, it was thus
that it came to rest. Idle men and idle plant were an aberration, a wholly
temporary failing. Keynes showed that the modern economy could as well find its
equilibrium with continuing, serious underemployment. Its perfectly normal
tendency was to what economists have since come to call an underemployment
equilibrium.9
Keynes was convinced that the capitalist
economy tended towards stagnation, a phenomenon that he explained in terms of a
decline in the marginal efficiency of capital (expected profits on new
investment). He did not, however, present a coherent explanation of stagnation
in The General Theory but contented himself with pointing to a
waning in “the growth of population and of invention, the opening-up of new
lands, the state of confidence and the frequency of war”—all of which had
constituted historical factors stimulating capitalism in the past.10 These were the factors that Alvin Hansen, Keynes’s leading early
follower in the United
States
Later, a more developed analysis of
stagnation, focusing in particular on the growth of monopoly capital (but also
taking into account other conditions of capitalist maturity) was to emerge in
the work of Michał Kalecki, and, in particular, in Josef Steindl’s Maturity
and Stagnation in American Capitalism (1952),
which built on Kalecki. Paul Baran and Paul Sweezy’sMonopoly Capital (1966) constituted an attempt to extend
this analysis to the entire social and economic system of capitalism and to
bring out its connection to the Marxian critique. Later Harry Magdoff and Paul
Sweezy were to connect stagnation to financialization, most notably inStagnation and the Financial
Explosion (1987).12
Today we see a reemergence of notions of
secular stagnation in neoclassical economics, beginning with Lawrence Summers’s
resurrection of the idea in a 2013 speech to an IMF forum.13 But it remains divorced from the rich historical tradition that emerged
within Marxian theory (and even from Hansen’s historically based analysis,
rooted in Keynes)—thus offering little in the way of a real explanation.14 Nevertheless, the notion that the capitalist economy tends towards full
employment—or that macroeconomic techniques inherited from Keynes effectively
produce the same result, as Paul Samuelson (Summers’s uncle) famously argued in
the so-called “neoclassical synthesis”—has no legs left to stand on, owing its
continuing presence entirely to the ideological function of neoclassical
economics.
The second main justification of the
system provided by neoclassical economics—the notion that capitalism promotes a
kind of equality, at least in terms of the determination of earnings by the
marginal productivity of factors (and individuals)—has shown itself to be just
as false. As this has become more apparent neoclassical economists have sought
to declare the whole issue out of bounds. Martin Feldstein, chairman of the
Council of Economic Advisors under President Reagan, replied to critics of the
Robin Hood-in-reverse policies of Reaganomics by stating, “Why there has been
increasing inequality in this country is one of the big puzzles in our field
and has absorbed a lot of intellectual effort. But if you ask me whether we
should worry about the fact that some people on Wall Street and basketball
players are making a lot of money, I say no.”15 Likewise Robert Lucas, Jr. of the University of Chicago, the most
influential macroeconomist of his day, was merely stating the dominant view of
the profession and of the establishment as a whole when he opined in 2004, “Of
the tendencies that are harmful to sound economics, the most seductive, and in
my opinion the most poisonous, is to focus on questions of [income]
distribution.”16
Feldstein’s and Lucas’s sharp dismissals of any concern over income and
wealth distribution reflected the mainstream economic view that inequality is
benign precisely because it can be attributed to different levels of marginal
productivity and the corresponding different education and skill sets. In this
accounting, a person’s income is simply a function of his or her productivity
and willingness to work. People are poor because they are not very productive
or because they have a weak attachment to the labor force as a result of their
own choices. Productivity is driven in the main by the willingness of
individuals to invest in their “human capital,” and the most important type of
such investment is education. Attachment to the labor force depends on “leisure
preferences” of individuals. This refers to the relative weight potential
workers place upon the utility they will gain by buying the goods and services
that an increase in income makes possible—while factoring in, through a benefit
and cost calculus, the happiness they could have by not working, by choosing
more free time. Thus those with high incomes are presumed to have invested in
their human capital and have low leisure preferences, while for the poor the
opposite is true.
Modern technology, in this view, has only made human capital more
important. Many people have been left behind in the race to the top of the
income distribution because they do not possess the knowledge that modern
technology requires. Most mainstream economists do say that appropriate public
policies could help reduce inequality, by, for example, making it easier for
those without means to attend college. However, it would be dangerous, we are
told, to reduce inequality too much—for example, through free higher education
for all—because then individuals would not have an incentive to work hard and
be productive. This would be to the detriment of the capacity of the economy to
grow and thus to provide the extra income needed to distribute to those at the
bottom. Equality is therefore self-defeating.
The Mad Hatter logic of neoclassical
economics can actually be used to demonstrate that in perfectly competitive
markets there can be no wage and salary inequality at all!17 Consider a woman making a career decision. Assume, as does the
neoclassical economist, that she has complete knowledge of the wages and
benefits associated with every occupation she is considering entering. She also
knows the costs of the education and training necessary for employment in each
occupation, as well as the income she will lose by not working while she is
getting this schooling and training. Any particular negative aspects of an
occupation, such as physical danger, are also known, as are their costs. What
should she do? She will weigh the benefits against the costs of each occupation
and pick the one for which the net benefits are highest.
Implicit in this scenario is a wage for each occupation that at least
covers the cost of entering it. Competition in the marketplace will, in fact,
make the wage just equal to the entry cost. An occupation with a wage higher
than the entry cost will attract new applicants; this will put downward
pressure on the wage and upward pressure on the costs (as more people demand
schooling and training); and eventually, the above average wage-cost difference
will disappear. Remarkably, this theory shows that, while some workers earn
higher wages than others, these higher wages simply reflect higher entry costs.
A doctor is therefore not really better off than a motel room cleaner; in terms
of wages minus costs, they are in exactly the same position. Voilà! At least as
far as labor income is concerned, there can be no inequality.
Enter the real world. The Great
Financial Crisis of 2007–2009 and the Occupy Wall Street uprising punctured
this neoclassical fairy tale. The Occupy movement pinpointed the growing
division between the 1% and the 99%—achieving in a very short time a transformation
in public consciousness on inequality that radical political economists had
sought to effect for decades. The press began to draw more frequently on data
showing skyrocketing income and wealth inequality that had long been available
but had been relegated to the status of a dirty little secret of the capitalist
economy.18 For decades researchers had been compiling sophisticated statistical portraits
in this area. Now due to Occupy and the sheer outrage of the population, it all
began to come out into the open. Especially notable in this respect were the
contributions of New York University economist Edward N. Wolff, a leading
authority on wealth distribution; the Economic Policy Institute, which
publishes The State of Working America;
Branko Milanovic, a heterodox economist employed by the World Bank’s research
division; and James K. Galbraith, a prominent institutionalist economist and
analyst of inequality in pay.19
Yet, the big change on the data front,
making it impossible to deny any longer the extent of the growth of inequality
in all of the mature economies was the development, over the last decade and a
half, beginning with the early work of Piketty, of the World Top Incomes
Database (commonly referred to as the Top Incomes Database). The result of a
major international project, involving some thirty researchers, this database
primarily uses income tax data, focusing on most of the mature capitalist
economies.20 The leading researchers for the U.S.
case were Piketty himself, located at the Paris School of Economics, and
Emmanuel Saez, a professor of economics at the University
of California , Berkeley Latin America .
The publication by Harvard University
Press in 2014 of Capital in the Twenty-First
Century by
Piketty, using the Top Incomes Database to explain the dynamics of growing
inequality at the center of the capitalist world, was therefore bound to draw
extraordinary attention in the economic world. For Piketty is no ordinary
economist. He is at one and the same time a dissenter and a representative of
the higher circle of the economics establishment. Although he served for a few
months in 2007 as the economic adviser to Ségolène Royal in her campaign as the
Socialist Party nominee for president of France—she lost to Nicolas
Sarkozy—Piketty is no Marxist, or even an institutionalist or post-Keynesian
political economist, in whose work one could expect to find an analysis
centering on inequality. Rather, he is a highly credentialed member of the
neoclassical economics elite. Thus, when he presented a theoretical perspective
that challenged the primary approach to questions of income and wealth
distribution previously held to by almost all neoclassical economists, the
result was explosive. Suddenly there was a work on growing inequality that had
the imprimatur of the establishment (backed by prestigious publications in the Quarterly
Journal of Economics, American Economic Review and the Journal
of Economics Literature), and could not be easily dismissed ad
hominem as the work
of a “non-scientific” heterodox economist. If not exactly a revolution against
neoclassical economics, the contents of his book had all the looks of a palace
coup. And remarkably too, Piketty had a gift of expression and breadth of
knowledge unusual in economists, allowing him to draw on Jane Austen and Honoré
de Balzac as much as Adam Smith and Karl Marx. Within a short time the book
reached number one on Amazon, surely an unprecedented achievement for the
author of a data-filled economics book of 685 pages.
For most readers it was not the fine
details of Piketty’s analysis that were so interesting but rather the overall
conclusions dramatically highlighted in the very beginning of the book.21Here he made it clear he was challenging head-on some
of the core assumptions of orthodox economics—though from inside rather than
outside of the neoclassical perspective. It was this divorce of his analysis
from the main ideological propositions of received economics—the sense of
letting the numbers speak for themselves—that gave Piketty’s work the feeling
of a disinterested inquiry after the truth rather than what Marx called “the
bad conscience and evil intent of apologetics” that has so long dominated
orthodox economics.22
Most importantly, Piketty concluded in
what will undoubtedly be his single most enduring contribution, that “There is
no natural, spontaneous process to prevent destabilizing, inegalitarian forces
from prevailing permanently” in a capitalist economy. This can be seen as the
critical counterpart (within the realm of distribution) to Keynes’s break with
Say’s Law, or the notion of a natural tendency in capitalism to a
full-employment equilibrium. Not only does Piketty point out that Kuznets’s
assumption of growing equality in developed capitalist economies is wrong, but
he argues that the standard neoclassical human-capital argument of
equality-cum-meritocracy—wherein deviations from equality are simply due to
attributes such as greater skill, knowledge, or productivity—is equally false
in the real-world economy.23
This is shown by his now famous formula r >
g, where r stands for the annual rate of return to wealth—referred to by Piketty as
capital—and g for the
growth rate of the economy (the rate of increase in national income). Wealth in
slow-growing capitalist economies (below 1.5 percent per capita), which Piketty
takes as the normal case, expands more rapidly than income—a phenomenon no
doubt heightened in our financialized age.24 He argues that the higher rate of per capita growth in the first quarter
century after the Second World War, when the per-capita growth rate in the
United States was about 1.9 percent, was exceptional, and that we are
seeing—for one reason or another—a return to the norm of much lower growth (1.2
percent or even 1 percent per capita), which he calls at one point a “low-growth
regime.” (This applies to all of the mature economies on the “technological
frontier”—but not to economies now experiencing catch up such as China
Relatively slow growth—what we would
term stagnation—thus provides the background condition for Piketty’s r > g,
practically ensuring that wealth at the top of society will become ever more
concentrated, while the main wealth-holders accrue their wealth not so much
because of what they do but because of where
they are placed in the social-class hierarchy. Indeed,
capitalism in its normal case, Piketty tells us, promotes patrimonial
dynasties. “Liliane Bettencourt,” the heiress to the French cosmetic giant
L’Oréal, “who never worked a day in her life, saw her fortune grow exactly as
fast as that of Bill Gates, the high-tech pioneer, whose wealth has
incidentally continued to grow just as rapidly since he stopped working.”26
Piketty thus drives a critical wedge
into the traditional justification of the system, according to which income and
wealth shares are determined by the marginal productivity of the various
factors of production (thought to be applicable to individual contributions as
well). To understand the full significance of this, it is useful to quote from
the 2012 book The Price of Inequality by economist Joseph Stiglitz. According
to Stiglitz, with the rise of capitalism,
it became imperative to find new
justifications for inequality, especially as critics of the system, like Marx,
talked about exploitation.
The theory
that came to dominate, beginning in the second half the nineteenth century—and
still does—was called “marginal productivity theory”; those with higher
productivities earned higher incomes that reflected their greater contributions
to society. Competitive markets, working through the laws of supply and demand,
determine the value of each individual’s contributions.27
Piketty’s argument and his data make a
mockery of this core neoclassical economic thesis. But Piketty advances such an
argument without breaking completely with the architecture of neoclassical
economics. His theory thus suffers from the same kind of internal incoherence
and incompleteness as that of Keynes, whose break with neoclassical economics
was also partial. Deeply concerned with issues of inequality, just as Keynes
was with unemployment, Piketty demonstrates the empirical inapplicability over
the course of capitalist development of the main conclusions of neoclassical
marginal productivity theory. His work has thus served to highlight the
near-complete unraveling of orthodox economics—even while staying analytically
within the fold.28
This overall incoherence, as we shall
see, ultimately overwhelms Piketty’s argument. He is unable to explain why
capitalist economies tend to grow so slowly as to generate such a divergence
between wealth and income (and between capital and labor). Hence, while his
analysis sees slow growth or relative stagnation as endemic to this system, he
neither explains this nor is concerned directly with it. Significantly, he
replaces more traditional notions of capital as a social and physical
phenomenon with one that equates it with all wealth.29 As a result the accumulation of capital in his analysis means no more
than the amassing of wealth of whatever kind, from plant and machinery to
financial assets to jewelry, thereby confusing the whole issue of capital
accumulation.30 Nor does he address the relations of power—principally class power—that
lie behind the inequality that he delineates. His analysis is confined largely
to distribution rather than production. He neither follows nor (by his own
admission) understands Marx, though at times clearly draws inspiration from
him.31 The question of monopoly capital is entirely missing from his study,
which, as he says, does not include imperfect competition as a factor in
generating inequality.32
But even with these and other
deficiencies, Piketty, nevertheless, brings a certain degree of reality—even a
sense of “class warfare” (if only implicitly)—back to bourgeois economics. The
result is to heighten the crisis of neoclassical theory. Moreover, he
argues—even though he dismisses the idea as “utopian”—for the imposition of a tax
on wealth.33 Piketty thus represents a partial revolt within the inner chambers of
the economics establishment.
Not surprisingly, given the extraordinary
attention given to Capital in the Twenty-First
Centuryand the breech in the wall of the neoclassical orthodoxy it
represents, the Wall Street Journalsought
to counterattack in May 2014, with an op-ed by none other than Feldstein.
Reagan’s former economic advisor predictably condemned “the confiscatory taxes
on income and wealth that Mr. Piketty recommends,” declaring that “the problem
with the distribution of income in this country is not that some people earn
high incomes because of skill, training or luck” but rather that a small
minority has fallen below the poverty line.34 However, Feldstein misses the mark completely. Piketty’s point is that
skill and training cannot explain
the gross inequality that has arisen in U.S. society, which is
disproportionately weighted toward inherited wealth and CEO mega-salaries, and
that while some do get vastly higher incomes by the “luck” of having been born
with silver spoons in their mouths, they can hardly be said to have “earned”
them.
Increasing Inequality: A Law of
Capitalism
Prior to the publication of Piketty’s
book, Piketty and Saez used Internal Revenue Service data to track U.S. United States
Expanding upon these earlier
conclusions, Piketty in Capital in the Twenty-First
Centuryelucidates four key findings. First, similar trends, though
less marked than in the United
States United
States
Third, Piketty stresses that the richest
1 percent enjoyed similar distance from the rest of us throughout most of
capitalism’s history. The only period in which the capital-income ratio becomes
more equal and the dominance of inherited wealth diminishes in the rich
countries as a whole is that between the beginning of the First World War in
1914 and the mid-1970s. This was a truly exceptional time, marked by “shocks”
to the system: two catastrophic wars, the Bolshevik Revolution, the Great
Depression, and the rise of the social welfare state after the Second World
War. Heavy taxes were placed on top incomes, fortunes were lost in both the
wars and the Depression, and working-class movements arose and forced higher
wages, benefits, and social insurance from employers and governments—both of which
were willing to make concessions if only to avoid a deeper radicalization of
the working class. However, once elites regained their bearings, capitalism
began to return to the norm of growing inequality.37
Fourth, during the sixty-odd years of
expanding equality, a substantial “middle” class arose—professionals, civil
servants, and unionized workers—which, while not wealthy, had enough income to
live well above subsistence and to accumulate a certain amount of wealth,
mainly in the form of housing. The rise of this intermediate “petty
patrimonial” propertied class of home owners, he argues, has had profound
effects on the political trajectory of the rich nations, because there is now a
sizeable portion of society outside the upper class intent on maintaining the
value of their wealth and increasing it if possible.38
Most individuals earn income by working.
However, very substantial incomes derive from ownership of wealth. What is
more, certain types of wealth, such as stocks, bonds, and other financial
instruments, represent control over the commanding heights of the economy and
government. If these are divided in an unequal manner, then so is the power
that flows from their ownership. The data show with great clarity that the
distribution of wealth is extraordinarily unequal and likely to become more so.
Edward Wolff has pioneered the study of wealth data in the United States
Asset Class
|
Share of Top 1% in 2010
|
Stocks & Mutual Funds
|
48.8%
|
Financial Securities
|
64.4%
|
Trusts
|
38.0%
|
Business Equity
|
61.4%
|
Non-home Real Estate
|
35.5%
|
Source: Edward N. Wolff, “The Asset Price Meltdown and the
Wealth of the Middle Class,” NBER Working Paper Series, Working Paper 18559, 2012,
http:/nber.org/papers/w18559.pdf, 57, Table 9.
Indeed, it is in wealth statistics that
the real social divide stands out. Thus, as Piketty notes, the Federal Reserve
Board in recent estimates, covering the years 2010–2011, indicated that the top
10 percent of wealth holders in the United States own 72 percent of the
country’s wealth, while the bottom half own only 2 percent.40 Meanwhile, there is much inequality even within the 1 percent. Sylvia
Allegretto of the Economic Policy Institute tells us that in 2009, the mean net
worth of the infamous “Forbes 400”
(the four hundred wealthiest persons in the United States) was $3.2 billion;
but the top wealth holder had a net worth fifteen times greater than the mean
for the Forbes 400 as a whole, an increase from 8.6 times larger in 1982.41
Piketty has a great deal to say about
wealth, and his data are global in scope. He is interested mainly in the
capital-income (wealth-income) ratio. As noted above, he uses capital and
wealth interchangeably, which has led to deserved criticism by heterodox
economists. His book is about the distribution of societal output and the
wealth of everyone, but especially those who own the nonhuman means of
production used to produce this output. The title of the book suggests a
connection to the most famous book about capital, Marx’s Capital.
However, Marx’s conception of capital and Piketty’s conception could not be
more unalike. Piketty has no notion of capital as an exploitative social
relationship. Instead, for him capital has an existence simply as private
wealth (he does write about public capital, but this is an insignificant
component of total social wealth). By, in effect, objectifying capital, considering
it apart from the social relationship embedded within it, he marks himself well
within the economic mainstream. Wealth, in his view, can generate income
whether it is in the form of shares of stock in the largest corporations, a
small apartment building, or a government bond. And wealth of any kind can
provide enormous benefits to its owners.
Piketty thinks about wealth in terms of
the number of years’ worth of income it represents. If for example, you have
wealth equal to $100,000 and your annual income is $25,000, then your wealth
equals four years of income. Your capital-income (or wealth-income) ratio is
four. He does this for countries, using the data that he and his associates
have painstakingly accumulated over many years of examining tax and various
other public records. He looks at short-term fluctuations in the capital-income
ratio (which he designates as β) and notes that these are considerable.
For example, the boom in Japanese real estate and stock prices in the 1980s
caused the ratio to rise, and the collapse of these bubbles made it fall
precipitously.
However, what he is really interested in
is the long-run trend in the ratio. He shows that throughout the eighteenth and
nineteenth centuries, and right up until the First World War, wealth in most
rich nations equaled six to seven years of national income. In the United States Europe , much private enterprise was nationalized after
the Second World War and progressive taxation funded social welfare programs,
and these factors helped keep the wealth-income ratio low. However, beginning
in the mid–1970s, capital made a remarkable comeback, and the ratio began to
climb, and is now approaching the level that existed at the start of the First
World War. Public capital has been privatized and political regimes throughout
the world have been very well disposed toward the interests of wealth-holders.43
If we abstract from the special periods
of wars, depression, and the social welfare state, what explains long-term
trends in the capital-income ratio? Piketty outlines in Chapter 5 (“The
Capital/Income Ratio Over the Long Run”) what he calls a “law of capitalism,”
namely that over the long run, the capital-income ratio tends toward the
quotient of the rate of saving and the rate of growth of the economy: β = s / g. As he explains in the book (and more clearly in a
technical appendix to the book available online), this formula is the
“steady-state” condition for a simple neoclassical growth model, such as the
one developed by economist Robert Solow.44 It is significant that he chose a neoclassical growth model, one that
has embedded in it very definite and not universally accepted assumptions about
how the macroeconomy works, and one which assumes, for example, that there are
such things as the marginal productivities of labor and of capital, and that
capital and labor are reasonable substitutes for each other.45
Still, Piketty’s “law” has a certain
intuitive appeal. The “weight” of “capital,” aka wealth (in terms, say, of its
owners’ potential power), will be greater, other things equal, the lower an
economy’s growth rate and the higher its rate of saving. Piketty finds that in
the rich capitalist countries, the trend has been, and will most likely
continue to be, toward relatively low growth rates and high savings rates (or,
in Marxian terms, a high rate of surplus generation). This tells us that the
capital-income (i.e., wealth-income) ratio will continue to rise, perhaps to
levels never before seen. Low growth rates, he contends, will be the
consequence mainly of low population growth rates, accentuated by low rates of
technological change.46
As noted, Piketty takes into account the
“catching up” achieved by countries such as China
and India United States
Piketty uses his formula β = s / g, along with an equation that defines capital’s share
of national income, α = rβ (where r = the rate of return on capital and, as we have seen, β =the
capital-income ratio) to show what will happen to the share of capital over
time. A simple substitution yields α = r (s / g). From this, he derives his famous inequality: r > g.48 If the rate of return on capital r is greater
than the growth rate of the economy g, then
capital’s share of income will rise. Piketty shows that over very long periods
of time, r has in fact
been greater than g; in fact, this is the normal state of affairs in capitalist
economies. Only during the long crisis, brought on by war and depression and
the aftermath when social welfare policies helped keep r low and g high, was
this not the case. And even as the capital-income ratio has risen, the fact
that economies have become more capital intensive has not exerted enough
downward pressure on r to push
capital’s income share lower. Nor will increasingly “perfect” capital markets,
brought on by rapid globalization, force r lower; in fact, the growing sophistication of
financial instruments and money managers, along with the desire of poorer
nations to attract capital, will keep r high. If, as
Piketty thinks likely, g grows very
slowly in the future, we are in for a steady rise in capital’s share of income
and a steady fall in labor’s share. Increasing polarization of society, in
terms of the two main social actors, workers and owners of capital, is a very
likely prospect.
To make matters worse, those with the
largest amounts of capital (wealth) almost always get a higher rate of return
on their wealth than do those with lesser amounts. Piketty gives a telling
example of this by looking at the returns garnered by the endowments of U.S. Princeton ,
and Yale, which “earned” an average return of 10.2 percent.49 Needless to say, when those already extraordinarily rich can obtain a
higher return on their money than everyone else, their separation from the rest
becomes that much greater.
The research of Piketty, his associates, Wolff, and many others tells us
without a doubt that income and wealth have become grotesquely unequal and are
on a trajectory to become still more so. The implications of this are dire,
exacerbating all manner of economic, social, environmental, and political
problems. There is no way, for example, that it is possible now to say that we
have anything even remotely resembling democracy in the United States, and for
that matter, in any capitalist country. Rather plutocracy is now the dominant
political form.
One thing we can say with certainty is that neoclassical economics does
not have a viable theory of inequality, any more than it has a viable theory of
unemployment. As we have emphasized throughout this article, received economics
says that wages depend on worker productivity, meaning that as productivity
rises, so will wages. If workers become more productive by, for example,
investing in their “human capital” (getting more schooling, training, etc.),
they will then add more to the employers’ revenues than existing wage rates add
to costs. This increase in employer profits at current wages will supposedly
cause employers to raise the demand for employees, pushing wages up .
Reality could not be more different than
what neoclassical theory leads one to expect. In the United States
Indeed, the data show that while output per worker has risen
considerably over the past forty years, wages have fallen far behind. Perhaps
the most startling comparison is between wage and productivity gains. In a
recent paper, Economic Policy Institute economist Elise Gould found that
“Between 1979 and 2013, productivity grew 64.9 percent, while hourly
compensation of production and nonsupervisory workers, who comprise over 80
percent of the private-sector workforce, grew just 8.0 percent. Productivity
thus grew eight times faster than typical worker compensation.” This means that
the gains from productivity went to capital and workers at the top of the wage
scale. She also discovered that:
Between 1979 and 2007, more than 90
percent of American households saw their incomes grow more slowly than average
income growth (which was pulled up by extraordinarily fast growth at the top).
By 2007, the
growing wedge between economy-wide average income growth and income growth of
the broad middle class (households between the 20th and 80th percentiles [where
most production and nonsupervisory workers reside]) reduced middle-class
incomes by nearly $18,000 annually. In other words, if inequality had not risen
between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher
in 2007.52
A 2013 report by the Federal Reserve
Board of San Francisco showed that once the top 1 percent of wage and salary
recipients are removed from the total, the labor share of overall national
income plummets: “by 2010 the labor share of [income of] the bottom 99 percent
of taxpayers had fallen to approximately 50 percent from just above 60 percent
prior to the 1980s.”53 Neoclassical economics is completely incapable of explaining this sharp
decline in the workers’ share of national income.
The Monopoly of Power
Piketty’s work raises the question of
growing class inequality in a statistical sense without explicitly addressing
either the roots of this or the question of growing class power. His work thus
remains within the bounds of establishment discourse—though serving to shake up
the ruling ideology with its revelations. He uses the term “upper class” for
the top 10 percent of income recipients and the term “dominant class” for the
top 1 percent (all those in the upper class who are not in the dominant class
are referred to as the “well-to-do”). In the United States
A dramatic illustration of what Piketty
means when he refers to the divergence in the social (and cultural) landscape
appeared in the New York Times in
August 2014, under the title “In One America, Guns and Diet. In the Other,
Cameras and ‘Zoolander’: Inequality and Web Search Trends.” Those geographical
locations described as “harder places to live,” associated with the lowest
levels of educational attainment, household income, and life expectancy and the
highest levels of unemployment, disability, and obesity were strongly
correlated with Web searches for things like “free diabetic,” “antichrist,”
“.38 revolver,” “ways to lower blood pressure,” “SSI disability,” and “social
security checks.” While areas described as “easier places to live,” associated
with the well-to-do or with the 1% itself, were strongly correlated with
Internet searchers for “Canon Elph,” “baby jogger,” “baby massage,” “Machu
Picchu” (and other exotic locales), “ipad applications,” “new nano,” and
“dollar conversion.” We are increasingly living in a world so polarized that
much of the 99% have nothing in common with the 1%.55
Piketty recognizes that the “dominant
class” in the sense of the 1 percent is not really dominant; it is only when
you get to the top 0.1 percent, which owns about half of what the 1 percent
owns, that you begin to get at the really dominant income/wealth of the
society. Thus he notes that Occupy Wall Street was not altogether wrong in
contrasting the 1% to the 99% or in declaring that “We are the 99 percent!” He
compares this situation to that of the French Revolution arising from the
revolt of the Third Estate.56
But how does this relate to issues of class struggle and class power?
What are the consequences of these realities in terms of control of
corporations, the economy, the state, the culture, and the media? Piketty,
though making a few tantalizing allusions, tells us next to nothing about this.
Although he does not entirely avoid terms such as “class struggle,” he has very
little to say about it. In fact, the nature of his analysis, which concentrates
on statistical inequality and the relation between the growth of wealth and the
growth of income, is far removed from the direct consideration of capital
versus labor. His is an argument primarily about fairness and not social
struggle—or even economic crisis/stagnation.
Piketty’s failure to relate inequality
to power is not, it should be stressed, a particular failure on his part, but
rather a general fault of neoclassical economics, tied to its position of
ideological hegemony. “The neglect of power in mainstream economics,” as the
heterodox Austrian economist Kurt Rothschild wrote in 2002, “has its main roots…in deliberate strategies
to remove power questions to a subordinate position for inner-theoretic
reasons,” such as the search for mathematical models with a high degree of
mathematical certainty. In this respect, the messy issues dealt with in such
fields as sociology and political science (or for that matter political
economy) are deliberately excluded, even at the expense of realism of analysis.
Moreover, part of the attraction of such pure models and the state of mind that
they generate is that they reflect “the ideological preference of powerful
socio-economic groups for a neoclassical type of theory,” which justifies the
status quo by excluding all questions of power. As Rothschild pointedly put it:
“Extremely formulated one could say that societal power promotes the study of
models of powerless societies.”57
It goes without saying that Piketty’s
acceptability to neoclassical economics is dependent on his avoidance of the
question of inequality and power.
Hence the contrast between his Capital in the Twenty-First
Century and
Marx’s Capital, as we
observed, could hardly be greater. Moreover, it is precisely because Piketty is
discussing inequality divorced from power that his analysis is inevitably
disjointed and cannot approach anything like a general theory. It is not the
mere recognition of inequality in itself, but the wider perception of its
promotion as part of a system of power that raises questions that are dangerous
to the system. Hence, the real importance of Piketty’s analysis only comes out
when the implications are taken beyond what he himself, as a representative of
orthodox economics, is willing or even able to address: issues of class power
and monopoly power, and how these relate to overaccumulation, stagnation, and
financialization.
Piketty starts with the fact that some
individuals and groups of individuals arranged into percentages of the
population have more income or wealth than others. He does not explain the
origins of this or why, but he makes it clear that it is not simply a product
of individual skill or productivity, as neoclassical economics has traditionally
argued. In reality the basis of a capitalist society is the private monopoly of
the capitalist class over the means of production, whereby the great majority
of the population is relegated to a position in which it has nothing to sell
but its labor power, i.e., its capacity to work. This sets up an extremely
uneven power relationship, allowing the owners of the means of production to
appropriate the greater part of the surplus produced. Far from being a
description of society that pertained only to the nineteenth century, this, as
Piketty helps us to understand, is probably a better description of our society
today than at nearly any previous time in history. It is not difficult to
discern who these owners of the means of production are: they are not so much
the top 1 percent, as the top 0.1 percent of society (or even higher) in terms
of income and wealth. In the United
States
Due to their power to appropriate the
society’s surplus, which takes the form of financial wealth, and has a rate of
return that, as Piketty tells us, normally grows faster than the income of
society as a whole, those in the dominant class become richer both absolutely
and relatively, benefitting from the upward flow of value, which seldom
trickles down. Over the years 1950 to 1970, for each additional dollar made by
those in the bottom 90 percent of income earners, those in the top 0.01 percent
received an additional $162. From 1990 to 2002, for every added dollar made by
those in the bottom 90 percent, those in the uppermost 0.01 percent (around
14,000 households in 2006) garnered an additional $18,000.59
Just as class power tends to
concentrate, so does the power of the increasingly giant, oligopolistic firms
which, in economic parlance, reap monopoly power, associated with barriers to
entry into their industries and their ability to impose a greater price markup
on prime production costs (primarily labor costs). The bigger firms, as Marx
explained, tend to win out in the struggle over the smaller, while the modern
credit system facilitates ever-larger mergers and takeovers, leading to the
increased centralization of capital and a heightening of monopoly power.60 In 2008, the top 200 U.S.
Writing for the Wall
Street Journal, Peter Thiel, co-founder of PayPal, declared that
“Capitalism is premised on the accumulation of capital, but under perfect
competition, all profits get competed away…. Only
one thing can allow a business to transcend the daily brute struggle for
survival: monopoly profits…. Monopoly is the condition for every
successful business.” Indeed, this might even stand as the credo of today’s
generalized monopoly capital.64
The class power of capital in the widest
sense—as powerfully argued by economist Eric Schutz in his 2011 work, Inequality
and Power: The Economics of Class—extends to all spheres of society
and penetrates increasingly into the state and to civil society in general
(including the media, education, all forms of entertainment).65 As Kalecki long ago pointed out, a labor party such as exists in many
countries in Europe, even where it gains control of the government through
popular election, is hardly likely to be in control of the state as a whole,
much less the economy, finance, or media. It therefore remains subservient to
those who retain the class power of capital, which controls production and
through it the main organs of society.66
For Piketty himself there is no organic
relation between the two main tendencies that he draws in Capital
in the Twenty-First Century—the tendency for the rate of return on
wealth to exceed the growth of income and the tendency toward slow growth. Nor
is his analysis historical in a meaningful sense, which requires scrutiny of
the changing nature of social-class relations. Increasing income and wealth
inequality are not developments that he relates to mature capitalism and
monopoly capital, but are simply treated as endemic to the system during most
of its history.
In reality, however, capitalism matures
as a system over the course of its history, as do its contradictions, which are
an inescapable part of its being. Today the existence of inordinate class power
coupled with ever-greater monopoly power (at both the national and global
levels) are producing a more acute condition of overaccumulation at the top of
society. This in turn weakens the inducement to invest, leading to a powerful
tendency toward a slowdown in growth or stagnation. Under these conditions, as
the system continues to seek outlets for its enormous actual and potential
economic surplus, while at the same time enhancing the wealth of those at the
top, it inevitably resorts to financial speculation. The result is what Summers
has recently called “over-financialization,” associated with massive increases
in total (primarily private) debt in relation to national income, leading to financial
bubbles, one after the other, which inevitably burst.67 This dialectical relation between stagnation and financialization
constitutes the primary reality defining today’s monopoly-finance capital.68
Here it is useful to recall that for
Keynes the danger was not only one of secular stagnation but also the
domination of the rentier. He thus called for the “euthanasia of the rentier,
and consequently the euthanasia of the cumulative oppressive power of the
capitalist to exploit the [artificial] scarcity-value of capital.”69 In today’s financialized capitalism, we face, as Piketty recognizes,
what Keynes most feared: the triumph of the rentier.70 The “euthanasia of the cumulative oppressive power of the capitalist” is
needed now more than ever. This cannot be accomplished by minor reforms,
however—hence Piketty’s advocacy of what he calls a “useful utopia,” a massive
tax on wealth.71
Yet, today we live in a world of global
monopoly-finance capital: a system of class power, monopoly power,
imperial power, and financial power. Just how unrealistic Piketty’s “useful
utopia” is as a mere reform program becomes immediately apparent once we look
at the class dynamics of society. It is even more apparent when we move beyond
a national to an international outlook. Piketty’s data and analysis do not take
him far beyond the rich countries, and hence he does not look at inequality in
global North-South terms, much less recognize the reality of imperialism or a
world ruled by global monopolies (multinational corporations). He therefore
takes no account of the imperial transfer of value as a historical phenomenon
or the consequences of this for the concentration of world capital. As Indian
economist Prabhat Patnaik states in “Capitalism, Inequality, and
Globalization”:
It is
significant that imperialism plays no role in Piketty’s analysis, neither in
explaining the growth of wealth and wealth inequalities, nor even in the
analysis of past growth, or prognostication of future growth. On the contrary
the book is informed by a perception according to which capitalist growth in
one region…is never at the
expense of the people of another region, and tends to spread from one region to
another, bringing about a general improvement in the human condition. What this
perception misses is that capitalist growth in the metropolis was associated
not just with the perpetuation of the pre-existing state of affairs in the
periphery but with a very specific form of development, which we call “underdevelopment,”
which squeezed the people in an entirely new way. For instance, over the period
spanning the last quarter of the nineteenth century and the first two of the
twentieth (until independence), not only was there a decline in per capita real
income in “British India,” but also the death of millions of people owing to
famines.72
In such an imperial system, carrying down to our day, a tax on
capital—Piketty’s one solution—would, as he realizes, have to be international
in scope in order meaningfully to address issues of inequality and power. This
then takes us inexorably to the question of a revolutionary reconstitution of
society on a global level. Indeed, there is no real solution that does not
require the worldwide transcendence of capital as a mode of production.
None of this of course is to deny that
Piketty’s wealth tax would be a good, strategic place to start in promoting a
new radical social project, since it challenges “the divine right of capital.”73 But this would require in turn a reorganization and revitalization of
the class/social struggle, and in every corner of the globe. The goal must be a
truly “utopian” struggle for asociety
of all; one that is of, by, and for the people—the 99%. Moreover,
the 99% here must be understood as representing the dispossessed of the entire
world, while recognizing their varying conditions. Today “members of the top
percentile [among global wealth holders] are almost 2000 times richer” than the
bottom 50 percent of world population.74 Issues of inequality must be seen as ubiquitous in today’s capitalism,
occurring at every level, the product of imperialism as well as class, race,
and gender—none of which are addressed directly in Piketty’s analysis.
Yet, despite the numerous gaps in
Piketty’s argument from the standpoint of existing power relations, Capital
in the Twenty-First Century embodies positive messages for social
struggle in our time, which it would be a grave mistake to overlook.
Significant in this respect is that he chose as the epigraph of his book a line
from the Declaration of the Rights of
Man and Citizenfrom the French Revolution: “Social Distinctions can
be based only on common utility.”75 One could hardly pick a statement more opposed to the system in which we
live, which seeks not the common but the individual utility.
Indeed, Piketty’s saving grace, we believe, is that he cares for “the least
well off,” beyond his own class. Although a social-democratic supporter of
capitalism, he is also in many ways a critic of what he refers to as “the
globalized patrimonial capitalism of the twenty-first century,” calling for its
radical “regulation.”76 Coming from a neoclassical economist, this is little short of a
revolutionary departure.
Notes
1.
↩This is evident in recent mainstream discussions of
what is called “secular” or long-term stagnation. For an analysis of this and
recent trends see Fred Magdoff and John Bellamy Foster, “Stagnation
and Financialization,” Monthly
Review 66, no. 1 (May 2014): 1–24.
2.
↩Michael Yates, “The Great Inequality,” Monthly Review 63, no.
10 (March 2012): 1–18; Thomas Piketty, Capital in the Twenty-First Century (Cambridge : Harvard
University
3.
↩Simon Kuznets, “Economic Growth and Income
Inequality,” American Economic Review 45, no.
1 (1955): 1–28.
4.
↩See John Bellamy Foster and Robert W. McChesney, The Endless Crisis (New York
5.
↩There has been no trend showing that the growing
income and wealth gap has been accompanied by similarly growing education and
skills gap. Neoclassical theory tells us that rising income and wealth
inequality must be caused by such an increasing differential in schooling and
skills. That is, those with relatively low incomes and wealth must be falling
more and more behind those with relatively high incomes and wealth in terms of
their skill and schooling levels. See Lawrence Mishel, “Education is
Not the Cure for High Unemployment or for Income Inequality,” January 12, 2011, http://epi.org.
7.
↩An oversupply of aggregate output would lead to
falling wages, interest rates and prices, which in turn would give rise to
higher employment, capital spending, and increasing consumer demand. On the
significance of Keynes’s critique in this area see Paul M. Sweezy, Modern Capitalism and Other Essays (New York: Monthly Review Press, 1972), 79–91.
8.
↩John Maynard Keynes, The General Theory of Employment, Interest,
and Money (London: Macmillan, 1936), 289.
11.
↩Keynes, General Theory, 307; Alvin H.
Hansen, Full Recovery or Stagnation (New
York: W.W. Norton, 1938), 303–18; Sweezy, Modern Capitalism, 79–83.
12.
↩Michał Kalecki, Theory of Economic Dynamics (London: George Allen and Unwin,
1954); Josef Steindl, Maturity and Stagnation in American
Capitalism (New
York: Monthly Review Press, 1976); Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff
and Paul M. Sweezy, Stagnation and the Financial
Explosion (New
York: Monthly Review Press, 1987). It is worth noting that Hansen took
Steindl’s theory seriously, modifying some of his own assumptions. See Alvin H.
Hansen, “The Stagnation Thesis,” in American Economic Association, ed., Readings
13.
↩Lawrence Summers, “Speech to the
IMF Fourteenth Annual Research Conference,”November 8, 2013, http://larrysummers.com.
15.
↩Feldstein quoted in “Grounded by
an Income Gap,” New York
16.
↩Lucas quoted in Paul Krugman, “Why We’re in
a New Gilded Age,” New
York Review of Books, May 8, 2014, http://nybooks.com.
17.
↩The example outlined in this and the preceding
paragraph are based upon the critique of neoclassical wage theory presented in
Eric A. Schutz, Inequality and Power: The Economics of Class (New York
18.
↩A search in the New York Times archives show that between January 1,
2007 and January 1, 2014, there are 4,260 articles listed under the term
“income inequality.” Between January 1, 1977 and January 1, 2007, there are
only 2,660 articles listed under this term.
19.
↩Edward N. Wolff, Top Heavy (New
York: New Press, 2002); Economic Policy Institute,State of Working America, http://stateofworkingamerica.org; Branko Milanovic, The
Haves and Have-Nots (New York: Basic Books, 2011); James K.
Galbraith, Created Unequal (New
York: Free Press, 1998), Inequality and Instability (Oxford:
Oxford University Press, 2012).
21.
↩The Wall Street Journal used
Amazon’s “popular highlights” page associated with its Kindle e-book device to
get an idea of how much books were being read. For every book, the top five
most highlighted passages by Kindle readers are listed. All five pages most
highlighted for Capital in the Twenty-First Century,
which at that time had been out for three months to wide acclaim, were in the
first twenty-six pages, suggesting that the beginning of the book (2.4 percent
of the whole) has had the most impact on Kindle readers, and are the most
closely read. Although one cannot draw much in the way of conclusions from
this, it is undoubtedly here, in the beginning, that Piketty puts his argument
and conclusions most clearly and forcefully, minus much of the detailed
elaboration that follows. “The Summer’s
Most Unread Book Is…,” Wall
Street Journal, July 3, 2014,http://online.wsj.com.
22. ↩Karl Marx, Capital, vol. 1 (London:
Penguin, 1976), 97. Two other what we might call “empirical economists” are
David Card and Alan Krueger, whose book, Myth and Measurement: The New Economics of the
Minimum Wage (Princeton,
NJ: Princeton University Press, 1997), demolished the neoclassical “law” that
raising the minimum wage leads inevitably to higher unemployment. Their book
led to such a severe backlash from their neoclassical brethren that they
stopped doing minimum wage research. Piketty’s findings have also been
attacked, but he has the great advantage of teaching in France, where
economists are not tied as tightly into the establishment—and required to toe
the line—as they are in the United States, and where there is still a strong
sense of social justice within the part of the working class. He says, “Hence
they [economists] must set aside their contempt for other disciplines and their
absurd claim to greater scientific objectivity, despite the fact that they know
almost nothing about anything”; 32. It is difficult to imagine an orthodox
economist in the United
States
25.
↩Piketty, Capital in the Twenty-First Century,
72–74, 93–96, 353–58. It should be noted that Piketty likes to work with big
data sets encompassing large parts of the world, and often bases his
assumptions on data stretching back to the eighteenth century or earlier.
Although he sees the Industrial Revolution as a turning point, he often skates
over true historical analysis, often arguing as if all the societies covered by
his data on all continents were essentially the same, and capitalist in
structure from approximately 1700 on. Such crude practices naturally undermine
his conclusions on long-term economic growth.
28. ↩Piketty sometimes seems to endorse marginal
productivity arguments in his book, as, for example, when he writes about the
marginal productivity of capital in Chapter 6 and of labor in Chapter 9. In the latter case, he
argues that over the long run education plays a very important role in
determining individual worker productivity and income. However, he places so
many qualifications on the marginal productivity theory that it is difficult to
believe that he thinks it has much merit.
29. ↩For Piketty “capital” is simply wealth, whether land,
money, financial assets, or jewelry. Piketty, Capital in the Twenty-First Century,
45–50; James K. Galbraith, “Kapital for
the Twenty-First Century?,” Dissent, Spring 2014, http://dissentmagazine.org.
30. ↩The consequences of effacing the concept of capital
with the concept of wealth are profound, but space does not allow their
detailed treatment here. It took Marx three whole volumes to define the meaning
of “capital” and if time had allowed he would undoubtedly have provided even
more volumes. Suffice it to say that not only does Piketty eschew a social
concept of capital, as in Marx’sCapital,
but by confusing capital with wealth he also conflates capital
as invested surplus (that
is, capital accumulation or investment in new productive capacity as it is
usually understood in economics) with financial speculation or what Marx called “fictitious
capital.” Hence, while Piketty provides genuine insights by focusing on wealth
versus income, his approach to capital as wealth is in many ways objectionable
even in terms of standard economics.
31.
↩Piketty indicates in a number of places his
understandable difficulty in reading Marx. This is a problem that Sweezy used
to argue faced any establishment economist, once inculcated into neoclassical
marginal productivity theory, since the Marxian perspective requires a
fundamentally different outlook and set of analytical tools. It is therefore
not surprising that Piketty demonstrates at times penetrating insights with
respect to Marx, such as his comments on “the principle of infinite
accumulation,” coupled with such elementary errors as the notion that Marx
failed to perceive the growth of productivity under capitalism, or that he saw
the economy heading toward zero productivity growth. All of this encourages him
to discount Marx’s economic vision as simply “apocalyptic.” Such errors seem to
be the result of trying to model Marx in neoclassical terms. Although he has a
lot to say about Marx, Piketty clearly has not gotten very far into Marx’s
system. See Paul M. Sweezy, “Interview,” Monthly Review 38, no. 11 (April 1987), 3; Piketty, Capital
in the Twenty-First Century, 7–11, 27, 227–30, 565; Thomas
Piketty, “Interview,” New Republic, May 5, 2014, http://newrepublic.com.
34. ↩Martin Feldstein, “Piketty’s
Numbers Don’t Add Up,” Wall
Street Journal, May 14, 2014,http://online.wsj.com.
35.
↩Piketty, Capital in the Twenty-First Century,
292–97, see especially figures 8.5 and 8.6. The original articles and data
backing up the book are to be found in the Top Incomes Database,http://topincomes.parisschoolofeconomics.eu,
and in the online “Technical
Appendix of the book, Capital in the Twenty-First Century,” http://piketty.pse.ens.fr.
39. ↩Edward N. Wolff, “The Asset Price Meltdown and the Wealth of the Middle
Class,” NBER
Working Paper No. 18559, November 2012, Table 4, http://ecineq.org.
41.
↩Sylvia A. Allegretto, “The State of
Working America’s Wealth, 2011: Through Volatility and Turmoil, the Gap Widens,” Economic Policy Institute, Briefing Paper #292,
March 24, 2011, Figure D, http://epi.org.
44. ↩Piketty, Capital in the Twenty-First Century,
166–70, 231, “Technical Appendix of the book, Capital in the Twenty-First Century.”
45.
↩For a critique of Solow’s neoclassical growth model
and a comparison with the earlier Keynesian growth models of Roy Harrod and
Evsey Domar, see E.K. Hunt and Mark Lautzenheiser,History of Economic Thought: A Critical Perspective (Armonk,
NY: M.E. Sharpe, 2011), 450–57. For a critique of Piketty’s analysis itself in
this respect see Prabhat Patnaik, “Capitalism, Inequality and
Globalization: Thomas Piketty’s ‘Capital in the Twenty-First Century,’” International Development Economic Associates (IDEAs), July 18, 2014, http://ideaswebsite.org.
46. ↩Although Piketty does not explain the long-term slow
growth (below 1.5 percent per capita) that he says is closer to the norm for a
capitalist economy, he does point to demographic factors and to technological
innovation as guiding factors—pointing to Robert Gordon’s notion of declining
innovation in order partly to explain the present economic slowdown. See
Piketty, Capital in the Twenty-First Century,
94–95.
51.
↩Calculated from the St. Louis FRED database, Real
Median Household Income in the United States (MEHOINUSA672N). See also Fred
Magdoff and John Bellamy Foster, “The Plight of the U.S Working Class,” Monthly Review 65, no.
8 (January 2014): 15–20.
52.
↩Elise Gould, “Why America’s
Workers Need Faster Wage Growth—And What We Can Do About It,” EPI Briefing Paper #382, August 27, 2014, http://epi.org.
53.
↩Michael W.L. Elsby, Bart Hobijn, and Aysegul Sahin, “The Decline
of the U.S. Labor Share,” Federal Reserve Board of San Francisco, Working Paper, 2013-27, 2013, http://frbsf.org.
55.
↩“In One
America, Guns and Diet. In the Other, Cameras and ‘Zoolander’: Inequality and
Web Search Trends,” New
York Times, August 18, 2014, http://nytimes.com.
57.
↩Kurt W. Rothschild, “The Absence of Power in
Contemporary Economic Theory,” Journal of Socio-Economics 31
(2002): 437–40.
58.
↩Arthur B. Kennickell, “Ponds and
Streams: Wealth and Income in the U.S. 1989 to 2007,” Federal Reserve Board Working Paper 2009–13, 55,
63, http://federalreserve.gov; Matthew Miller and Duncan
Greeenberg, ed., “The Richest
People in America”
(2009), Forbes, http://forbes.com.
59.
↩Correspondents of the New
York Times, Class Matters (New York
60. ↩Marx, Capital,
vol. 1, 777–78.
62. ↩Joseph A. Schumpeter, Capitalism,
Socialism and Democracy (New York: Harper and Row, 1942), 90. Schumpeter
referred here to such firms as “corespective.”
63. ↩Robert W. McChesney, Digital Disconnect (New York
64. ↩Peter Thiel, “Competition
is for Losers,” Wall
Street Journal, September 12, 2014,http://online.wsj.com. On generalized monopoly
capital see Samir Amin, The Implosion of Contemporary
Capitalism (New York
66. ↩Michał Kalecki, Selected Essays on Economic Planning (Cambridge:
Cambridge University Press, 1986), 19–24.
67.
↩Lawrence New York : Monthly
Review Press, 2009), Fred Magdoff and Michael D. Yates, The ABCs of the Economic Crisis (New York : Monthly
Review Press, 2009), and Costas Lapavitsas, Profiting Without Production (London
68. ↩Foster and Magdoff, The Great Financial Crisis,
63–76; Foster and McChesney, The Endless Crisis, 49–63.
69. ↩Keynes, The
General Theory, 376.
72.
↩Patnaik, “Capitalism, Inequality and Globalization,” 5. In his discussion of
forces leading to less inequality Piketty, Capital in the Twenty-First Century,
21, stresses the dissemination of “knowledge and skills.” He says this applies
especially to the convergence of incomes between nations. However, even
supposing that per capita incomes across nations are becoming more equal, this
says nothing about either the transfer of incomes from poor nations to rich
ones or the convergence of incomes within any particular country. Incomes have
been becoming more unequal in China
over the past few decades, but there has been a convergence between per capita
income in China
74.
↩James B. Davies, Susanna Sandström, Anthony Shorrocks,
and Edward N. Wolff, “The World Distribution of Household Wealth,” in James B.
Davies, ed., Personal Wealth from a Global Perspective (Oxford:
Oxford University Press, 2008), 402.
75.
↩Piketty, Capital in the Twenty-First Century,
1, 479–480. A society in which this is true could not be a capitalist society.
In a gathering and hunting society, a superior hunter may have social
distinction, but he will not get a larger share of food than anyone else. His
social distinction is therefore based on his serving the common good, by
increasing the group’s food supply. Nothing comparable exists in capitalism,
except in the ideological constructs of its apologists, especially neoclassical
economists. Piketty’s notion of how modern capitalist societies function can at
times appear painfully naïve. His wealth tax, he says, must be democratically
debated, and the data he and his colleagues have amassed will make such debate
possible. Yet, the very increase in the social “weight” of those at the top of
the wealth distribution corresponds with so much political “weight” that it is
reasonable to ask just how democratic debate, much less decision-making, is
possible. His support for serious, even radical regulation of “global
patrimonial capitalism” is commendable, but his faith in the capitalist version
of democracy is not.
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