The free to access journal of the World Economics Association, the Real World Economics Review (RWER), has a very useful special issue on Thomas Piketty’s Capital in the Twenty-First Century, published in October 2014. It can be found here.
The issue contains a variety of papers, broadly supportive of the attention Piketty’s work has given to inequality across the world, but also critical of the theory and evidence contained in the book, as well as the policy implications.
A number of papers in the RWER draw attention to something already noted on this blog: that asset-price inflation in the rich world, particularly of real estate, has increased wealth inequality in recent decades. At the same time, growth in GDP has slowed since the 1970s when compared with performance in the 1950s and 60s, the so-called ‘Golden Age of Capitalism’.
Some point to the role of financialisation, the increasing importance of finance in the economy, encouraged by deregulation, and which has led to dramatically higher levels of private debt across households and firms. Although economic performance has been uneven in the rich world, much of this increase in debt has fuelled speculative rather than productive activity, leading to relatively slower growth in investment and output.
Another factor contributing to higher inequality may have been the rise of ‘managerial capitalism’, and the increasing power of the managerial class in large companies to drive up their own salaries, while wages for ordinary workers have grown more slowly. This trend could certainly be altered through appropriate changes to company law.
One paper discusses the different views on the determination of wages of the classical political economists John Stuart Mill and David Ricardo. Ricardo held that wages were entirely determined by technical factors, and this view has been taken up by neo-classical theory. By contrast, Mill suggested that, alongside these factors, wages are also influenced by institutional, political and social forces. If Mill is closer to the truth, wage inequality can be altered through changes in policy and in the relevant institutions. This is more likely to be accepted by the members of a society, and would alter distribution prior to policies on tax and spending. If used to redistribute income, the latter may be resented and resisted more strongly by individuals if they are seen as unfair, and can be politically more difficult to enact and sustain.
This ties in with the policy conclusions of a number of the papers in the RWER. In contrast to Piketty’s suggestion of more progressive income taxes and a global wealth tax, which he admits would be politically impossible, they emphasise that political and institutional factors affect distributional outcomes and can thus be changed, as they were in the post-World War II period. While there are clearly limits to this, if we accept the views of Mill above, then inequality is not purely economic, but also political, social and institutional, and causation runs between all these factors. Company law, the role of trade unions, financial regulation and the national consciousness can all be changed with the appropriate political vision and the right policies.
For progressives, the realisation that the distribution of income and wealth is only partially technically determined and is also dependant upon power relations, cultural norms and history is empowering. It should encourage all those who wish for greater social justice, while preserving economic advance and the promotion of individual liberty. The balance between these three elements in society was outlined by Keynes long ago as the defining issue in the management and development of the liberal capitalist order. Piketty has tapped into prevailing concerns about inequality, but these sorts of critiques are required to fuel a successful response.