<nettime> Doug Henwood: Review of Thomas Piketty's Capital of the Twenty-First Century

[nettime's avid review reader <nettime@kein.org>]

(See also, James K. Galbraith's review of the same book:
http://www.dissentmagazine.org/article/kapital-for-the-twenty-first-century)


The Top of the World
An ambitious study documents the long-term reign of the 1 percent

Doug Henwood

http://www.bookforum.com/inprint/021_01/12987

The core message of this enormous and enormously important book can be
delivered in a few lines: Left to its own devices, wealth inevitably
tends to concentrate in capitalist economies. There is no “natural”
mechanism inherent in the structure of such economies for inhibiting,
much less reversing, that tendency. Only crises like war and depression,
or political interventions like taxation (which, to the upper classes,
would be a crisis), can do the trick. And Thomas Piketty has two
centuries of data to prove his point.

In more technical terms, the central argument of Capital in the
Twenty-First Century is that as long as the rate of return on capital,
r, exceeds the rate of broad growth in national income, g—that is, r >
g—capital will concentrate. It is an empirical fact that the rate of
return on capital—income in the form of profits, dividends, rents, and
the like, divided by the value of the assets that produce the income—has
averaged 4–5 percent over the last two centuries or so. It is also an
empirical fact that the growth rate in GDP per capita has averaged 1–2
percent. There are periods and places where growth is faster, of course:
the United States in younger days, Japan from the 1950s through the
1980s, China over the last thirty years. But these are exceptions—and
the two earlier examples have reverted to the mean. So if that 4–5
percent return is largely saved rather than being bombed, taxed, or
dissipated away, it will accumulate into an ever-greater mass relative
to average incomes. That may seem like common sense to anyone who’s
lived through the last few decades, but it’s always nice to have
evidence back up common sense, which isn’t always reliable.

There’s another trend that intensifies the upward concentration of
wealth: Fortunes themselves are ratcheting upward; within the proverbial
1 percent, the 0.1 percent are doing better than the remaining 0.9
percent, and the 0.01 percent are doing better than the remaining 0.09
percent, and so on. The bigger the fortune, the higher the return.
Piketty makes this point by looking not only at individual portfolios
but also (and ingeniously) at US university endowments, for which
decades of good data exist. The average American university endowment
enjoyed an average real return—after accounting for management costs—of
8.2 percent a year between 1980 and 2010. Harvard, Yale, and Princeton,
in a class by themselves (with endowments in the $15–$30 billion range),
got a return of 10.2 percent a year. From that lofty peak, the average
return descends with every size class, from 8.8 percent for endowments
of more than $1 billion down to 6.2 percent for those under $100
million. In short: Money breeds money, and the more money there is, the
more prolific the breeding.

It was once believed, during the decades immediately following the Great
Depression and World War II, that vast disparities in wealth were
features of youthful capitalism that had been left behind now that the
thing was reaching maturity. This theory was first enunciated formally
in a 1955 paper by the economist Simon Kuznets, who plotted a curve
representing the historical course of inequality that looked like an
upside-down U: Kuznets’s chart showed that disparities in wealth rose
dramatically during the early years of growth and then reversed once a
mature capitalist economy reached a certain (though none-too-specific)
stage of development.

Kuznets’s curve fit nicely with the actual experiences of the rich
economies in what the French call the Trente Glorieuses, the “thirty
glorious years” between 1945 and 1975, when economic growth was broadly
shared and income differentials narrowed. In the United States,
according to the Census Bureau’s numbers (which have their problems—more
on that in a moment), the share of income claimed by the top 20
percent—and within that group, the top 5 percent—declined during the
glorious years. At the same time, the income of the remaining 80 percent
gained.

But in the United States, the thirty glorious years were actually
twenty-odd years; depending on how you measure it, the equalization
process ended sometime between 1968 and 1974, again according to the
census figures. Still, quibbles aside, the process of relative
equalization went on for long enough that it felt like Kuznets was on to
something with his curve. I say “relative” because these are still not
small numbers: The richest 5 percent of families had incomes about
eleven times those of the poorest 20 percent in 1974, the most equal
year by this measure since the census figures started in 1947. But that
number looks small now compared with the most recent ratio, almost
twenty-three times in 2012.

While those census numbers—and similar statistical efforts based on
surveys of households elsewhere in the world—are useful in outlining
broad trends, they have a few serious problems. Most important, they
don’t account for the very rich, a topic of extreme voyeuristic and
political interest. Plutocrats do not answer surveys. The Federal
Reserve does a triennial Survey of Consumer Finances that makes special
efforts to cover the rich, but by design the members of the Forbes 400
are excluded—for reasons of privacy, according to the survey’s
documentation. For serious analysis of the seriously rich, one needs to
look at tax data, which is what Piketty (and his sometime collaborator
Emmanuel Saez) has done.

Piketty’s study is largely confined to a handful of rich countries—the
United States, Britain, France, Germany, and Japan. These economies have
the best data over the longest period of time—and besides, if you’re
studying wealth, these are the countries where the moneyed have
disproportionately lived. The French data is particularly detailed,
because the French Revolution instituted an elaborate registry of
property. The French didn’t do much to redistribute wealth—it was, after
all, a bourgeois revolution—but they did a lot to catalogue it.

Most rich countries introduced income taxes in the early twentieth
century, which made it possible to study the volume and structure of
incomes with some precision and detail. But it’s possible to journey
further into the past for estimates of aggregate incomes and of the
value of the capital stock. And indeed, much of Capital in the
Twenty-First Century is devoted to outlining the contours of the value
of that capital stock relative to incomes—an effective way of analyzing
capital’s relative heft over time. For Britain and France, the total
value of the capital stock—owned, as is almost always the case, largely
by the 1 percent (whether aristocrats or members of the bourgeoisie,
whether it’s France in 1780 or the United States in 2014)—was about
seven times national income from 1700 until around 1910. (National
income, roughly speaking, is the sum of all forms of income in a given
economy—wages, profits, interest, dividends, and so on.) With two world
wars and a depression, the capital stock fell to about three times
national income. (Curiously, Piketty notes that the monetary destruction
of paying for war through taxes and inflation did more damage to the
capital stock than the physical destruction of combat itself.) It began
to recover around 1950, but was inhibited by extremely high tax rates in
the first postwar decades. As of 2010, the capital stock had recovered
to between five and six times national income in Britain and France.
Data begins later for Germany, but the pattern isn’t dissimilar: a stock
of capital about seven times national income in 1870, hammered down to
just over two times in 1950, and a recovery to four times in 2010. The
trajectory for the United States is much less dramatic: A capital stock
of around three times national income in 1770 rose steadily to five
times on the eve of the Great Depression, fell to about four times in
1940, but began recovering quickly, rising back steadily toward five
times in 2010. The Second World War did little damage to the American
rich, who largely inherited Britain’s empire with the coming of peace
and the Yalta accords in 1945.

Many interesting details emerge in Piketty’s treatment of US economic
history. Despite our distinction as the most unequal of the major
economies today, America was a relatively egalitarian place (for white
people) in the nineteenth and early twentieth centuries. But, speaking
of white people, the liberation of the slaves after the Civil War was
probably the greatest expropriation of capital in history. If one counts
slaves as wealth—which, grotesquely, was how American society defined
them from the country’s founding through 1865—their value was about 150
percent of national income throughout the slavery era. And practically
overnight, with Lincoln’s 1863 Emancipation Proclamation, they were no
longer someone’s property.

After that, though, America largely lost its expropriating nerve. Not
entirely so, however: Piketty reports that it was politically easier for
America to institute the income tax in 1913 than it would be in European
economies, given residual populist resentment of the rich. That, and
endless waves of immigration, which continuously upset the economic
hierarchy, kept the United States more egalitarian than Europe into the
1970s. From that point on, although the rich got richer nearly
everywhere, the United States became the affluent world’s undisputed
inequality champ. It’s also more unequal than lots of “emerging”
countries, such as China and India.

Remarkably, despite those broad gyrations over the last two centuries,
many continuities stand out in Piketty’s historical narrative. One is
the stability in the rate of return on capital—the same 4–5 annual
percentage, decade in and decade out. Another is the preponderance of
that magic 1 percent figure, which seemed like a polemical
simplification in the Occupy days, but clearly has an actual historical
basis.

But something has changed within that 1 percent: While it was once
dominated by a population of rentiers, coupon clippers who barely worked
if at all, it is now dominated, especially in the United States, by a
group of star CEOs and financiers who flatter themselves that they’re
being paid for their extraordinary talents.

Economics as a discipline loves stories about equilibrium and
convergence. Vast inequities should, in theory, be “competed away,” as
neoclassical economics likes to say. But mostly they’re not. Globally,
poorer countries should gain on richer ones as technology and education
spread and mobile capital’s search for higher returns makes the poor
less poor. That has happened to some degree, but rapidly developing
economies such as India and many African nations remain much poorer than
the United States or Western Europe. In the case of personal wealth, old
fortunes should decline and be replaced by new ones, just as manual
typewriters were replaced by electric ones, and electric typewriters
were superseded by computers. But in fact old money is remarkably
persistent. Yes, we’ve seen the creation of a large number of new
fortunes over the last few decades, a change from wealth’s dark days of
the mid-twentieth century. Bill Gates is the son of a well-off lawyer
who was nowhere near a billionaire; Mark Zuckerberg sprang from the
loins of a dentist and a psychiatrist. They are the very picture of
modern new wealth. But despite those new fortunes, inheritance remains
very important. David Rockefeller, worth $2.8 billion at the age of
ninety-eight, is number 193 on the Forbes 400. Overall, Piketty
concludes, it’s likely that half or more of the wealth of the upper
orders originates in inheritance.

And though Piketty doesn’t explore this, I’ve long suspected that a
major force for the repeal of the estate tax in the United States has
been that the billionaires of the neoliberal age—the tech and finance
moguls, some famous, some barely known—have been thinking about their
legacy. The scions of the second Gilded Age want to see their
grandchildren on the Forbes 400, just like David Rockefeller is a ghost
of the first Gilded Age. I’m less sure whether they want to see their
names on traditional foundations—maybe more the entrepreneurial kind.
But it’s clear that the political salience of the “death tax” is a
reflection of a cadre of fortunes of a sort that was long out of fashion.

Piketty’s book could have done with a pruning. It is original and very
important, and deserves a wide audience. But even a connoisseur gets
winded after four hundred pages, much less six hundred plus. It’s often
wordy and repetitive. But it is not in any sense heavy going. The prose
is clear, and there’s a minimum of math—Piketty, a professor at the
Paris School of Economics, has little taste for conventional (meaning
mostly American) economics. Early on, he is critical of his discipline’s
“childish passion for mathematics” and its lack of interest in other
social sciences or culture. He often refers to novels, particularly
those by the likes of Austen and Balzac, that illuminate the world of
wealth—something you’d never find in the latest number of the American
Economic Review. And he takes passing swipes at prestigious US academic
economists, who generally find themselves near the top of the income
distribution and who, not coincidentally, believe that that distribution
of income is just and efficient.

But the major frustration of the book is political. Piketty clearly
shows that short of depression and war, the only possible way to tame
the beast of endless concentration is concerted political action. The
high upper-bracket tax rates of the immediate postwar decades couldn’t
have happened without serious fears among elites—fresh memories of the
Depression, threats from strong domestic unions, competition on a global
scale with the USSR, which, for all its problems, was living proof that
an alternative economic system was possible. As those things waned,
upper-bracket taxes were lowered, wages and benefits were cut, and
capital’s increased mobility led to increased competition among
jurisdictions to offer a “favorable investment climate”—meaning weak
regulations, low wages, and minimal taxes. All these trends have
contributed to the concentration of capital over the last thirty years,
as wealth and power have shifted upward on an enormous scale. None of
these features will be reversed spontaneously. Nor will they be altered
through “democratic deliberation”—several times Piketty notes the hefty
political power of the owning class—or improved educational access, as
Piketty actually urges at one unfortunate point. Brushing up the working
class’s skill set is no match for the power of r > g.

Starting with the title, the eternally recurrent specter of Marx hangs
over this book. Early into the first page of the introduction, Piketty
asks, “Do the dynamics of private capital accumulation inevitably lead
to the concentration of wealth in ever fewer hands, as Karl Marx
believed in the nineteenth century?” Phrasing the question as something
grounded in the past is a nice distancing technique, as the
psychoanalysts say, but the answer is clearly yes. Several times,
Piketty disavows Marx—just a few lines later he credits “economic growth
and the diffusion of knowledge” for allowing us to avoid “the Marxist
apocalypse”—but he also concedes that those prophylactics have not
changed capitalism’s deep structures and the tendency for wealth to
concentrate. It seems, in other words, that Piketty’s own research shows
that the old nineteenth-century gloomster had a point.

Unlike most modern economists, Piketty at least credits Marx’s ambition
and profundity. But for Piketty, the main problem with Marx is his
unequivocal call for political confrontation. Having described a process
of inexorable material polarization—and with it, increasing plutocratic
power over the state—Piketty remains distressingly moderate as he sounds
out some of the political implications of his analysis. A major reason
for his posture of socialist skepticism, he declares, is that he came of
age as Soviet-style Communism was falling apart, which left him
“vaccinated for life against the conventional but lazy rhetoric of
anticapitalism.”

Anticapitalist rhetoric need not be lazy—and for all the empirical
sophistication of Piketty’s work, his political thinking is hardly a
model of complexity or effort. He mostly aspires to contribute to
rational democratic deliberation about “the best way to organize society.”

Still, while such deliberation is clearly necessary, political action
cannot be factored out of that process just because we happen to have
lived through the Cold War’s unmourned collapse. It’s energizing to see
that a younger generation of political intellectuals, who were in grade
school when the Berlin Wall came down, missed the anticapitalist
vaccination. They might be able to take Piketty’s data and cause some
genuine trouble with it. Because serious trouble—demonstrations,
strikes, insurgent political movements—is what it will take to derail
capitalism’s inevitable tendency toward concentration. Short of that, it
looks like we’ll be continuing our journey along the road to a new serfdom.

Doug Henwood is editor of the Left Business Observer and host of Behind
the News, a weekly radio show originating on KPFA, Berkeley. He is
working on a study of the American ruling class.


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