Thomas Piketty makes some bold claims about the future of capitalism. In Capital in the Twenty-First Century, he observes that, in capitalist economies, the rate of return on capital (r) tends to be higher than the growth rate of the economy (g). Provided capital owners save a high proportion of capital income, the power of compounding means the wealth of capitalists increases faster than other earnings – leading to more inequality.
With population growth declining and worries about slow technological progress (lowering g), Piketty forecasts that the future is likely to see wealth inequality explode – leading to a return to the nineteenth century importance of transmitting wealth by inheritance. What we need, he concludes, such that ‘democracy can regain control over capitalism’, are punitive income and estate taxes, complemented by a utopian global tax on capital.
It’s easy to see why socialists have embraced Piketty’s rallying cry. Distribution, rather than absolute living standards, is front and centre of what he cares about. That’s why he can write lines like ‘the poorer half of the population are as poor today as they were in the past’ with a straight face.
But this means his book downplays extraordinary improvements in living standards for all, and the widespread eradication of absolute poverty under capitalism in the past 250 years. The huge decline in consumption inequality – that the poor today enjoy access to goods and services once open only to the rich – is simply not mentioned. Nor that some of the dividend of economic growth has transmitted itself in an increase in leisure time.
No, for Piketty what really matters is inequality and capital ownership. At times, he is almost celebratory of how the Great Depression and the World Wars (and financing them) destroyed capital for a generation.
But this pessimistic thesis is already being challenged in three ways. First, it says little about the role of risk-taking in returns on investment. Returns are largely taken as given. Second, his prediction that r exceeding g will lead to exploding wealth is countered by his own data – which shows a relatively stable capital to income share in Britain in the eighteenth and nineteenth centuries, when g was lower. Third, for some countries – and a glance through his charts and framework suggests Britain fits this story – a key reason for an increasing capital-income ratio since 1980 is housing wealth. Given the role of planning laws here, observing this as a problem would have very different implications than the sorts of policy prescriptions Piketty advocates.
And while the data accomplishment of Piketty’s work is truly awesome, the most frustrating thing about the book is its failure to ever properly address why, even if his thesis is correct, increasing inequality matters.
Piketty alludes to ‘problems of democracy’. But the idea ‘the rich’ run government policy is strongly countered by the expansion of the franchise, the 1909 People’s Budget and – as Piketty shows – the size of government being larger now than ever before, with vast transfer systems. While the power of lobbyists can be problematic, this is often due to the structure of government rather than the wealth of the lobbyists involved.
And while the cafés of Dalston may ring with generalised denouncements of inequality, it’s unclear that the public shares either the egalitarian or pure meritocratic views that drive Piketty. In fact, most seem concerned with instances when inequality has arisen ‘unfairly’. This is necessarily vague, yet can be seen in anger about bank bailouts and high bonuses in semi-nationalised banks. Bill Gates and even most footballers fail to elicit such emotion. Even on inherited privilege, over 70 per cent of the public object to inheritance tax on principle – which proves a point Piketty almost acknowledges: people work and accumulate in part to improve the life chances and opportunities of their heirs and family.
This somewhat conservative outlook is rejected in Piketty’s socialistic policy recommendations: marginal tax rates on income above 80 per cent, not to raise revenue, but simply to eliminate high incomes entirely; a totally infeasible global capital tax; large taxes on estates. These policies would surely undermine saving and our long-term growth prospects. Indeed, there is much academic work to suggest so. But I also believe they go against the conception of fairness held by most people.
As Margaret Thatcher understood, most people don’t resent wealth, but aspire to it. So to the extent that capital is not evenly spread, why not revive the idea of a capital and property owning democracy? This might include moving to a funded pension system, significant liberalisation of planning laws, widening share ownership and taking as many steps as possible to raise the economy’s growth rate. That Piketty rejects these options owes more to his own priors than fundamental political feasibility.
This article was originally published by City AM.