The French economist Thomas Piketty is well-known for his best-selling work on inequality, Capital in the 21st Century (hereafter Capital), which has sold over two million copies worldwide. It also ranks highly for the book which people buy and don’t get very far with. Nevertheless, its theme struck a chord with the zeitgeist.
Capital is a tremendous achievement and its popularity has reset the agenda on inequality in economics. In some ways it is a return to the considerations of the classical political economists and Marx, in that it examines major categories in economics such as growth and distribution, and tries to find theoretical and empirical links between them, and draw implications for policy.
Its central conclusion is that in the absence of major wars and depressions and the associated policies, capitalism tends to produce inequalities of income and, far moreso, of wealth. In the 20th century, two World Wars and the Great Depression in between, as well as social democratic politics and policies which followed, produced a ‘Great Compression’ of wealth which lasted until the 1970s in the developed world.
Since then, inequality within rich countries has risen again, producing a U-shaped pattern during the 20th Century and into the 21st, describing a fall and subsequent rise.
According to Piketty, the Great Compression was historically an aberration, and capitalism tends to produce rising inequality. This is because what he calls r, the rate of return on capital, or wealth, tends to be greater than g, the rate of economic growth. Put another way, the growth of income from property exceeds that of income from work, and thus the rich get richer faster than the rest of us.
For Piketty, excessive inequality will undermine the foundations of democracy. To mitigate this, he proposes a (utopian) global wealth tax and much higher marginal rates of income tax on the wealthiest.
There is plenty more of interest in Capital and the author discusses a wealth of ideas relating to his main theme. But it does consist of a mass of data, alongside a relative poverty of theory. Elsewhere, Piketty has admitted that it is really a work of economic history, with a limited number of economic models attempting to explain the patterns of data.
He has also praised interdisciplinarity in economics, while conceding that he neglects it in the book. Social and political analysis are therefore important in economics, but are scarcely covered.
But should we be concerned about inequality? Piketty’s claim is that it undermines democracy, concentrating power in the hands of the wealthy, many of whom can then lobby for policies which promote and sustain their interests, in a form of rent-seeking. Of course, this is only a problem if their interests are not aligned with those of the less wealthy.
The political right, particularly in the US, continue to make the case for ‘trickle-down’ economics: making the rich richer will make all of us richer. The Golden Age of the 1950s and 60s, which saw record economic growth and low unemployment in the developed world alongside strongly progressive taxation, all resulting in a relatively egalitarian distribution of income and wealth, would seem to disprove this.
Since the end of the Golden Age, investment shares and growth have been lower, and unemployment and inequality higher. While there is a more complex story to be told about this period and its aftermath, it certainly does not support the case for trickle-down.
There is substantial evidence that high inequality has negative social consequences. In their book The Spirit Level, Richard Wilkinson and Kate Pickett demonstrate that income inequality within a number of rich countries and also within states in the US is correlated with a range of social problems which affect the whole population and not simply the poorest. So, within limits, greater equality is good for all.
For a range of countries, they examine mental illness, life expectancy, obesity, children’s educational performance, teenage births, homicides, imprisonment, social mobility, and measures of trust and community.
They suggest that in more unequal societies, steeper hierarchy and competition for status increases levels of stress which in turn contributes to all these problems.
They also find that members of more equal societies seem to have a greater faith in collective action by the state and other institutions, and are more willing to support and implement policies that improve the environment and sustainability, and legislate for shorter working hours and higher foreign aid.
What seems to matter here is the outcome of reduced inequality rather than how it is achieved. For example, Japan has a relatively equal pre-tax income distribution and relatively low tax rates, while Scandinavian countries use higher tax rates and public spending to achieve greater equality.
The Spirit Level was published before Piketty’s Capital, but the popularity of the latter has given rise to a wealth of analysis on both the book itself, and inequality in general.
After Piketty is another weighty tome that contains contributions from many economists critiquing the ideas in Capital. In particular they examine factors which Piketty neglects as causes and effects of rising inequality.
Potential causes include skill-biased and capital-biased technical change, a lack of human capital among poorer groups, labour market structures including an increase in outsourcing among firms, and the ‘geography of space’, in which industrial development zones and tax havens create and sustain increasing concentrations of income and wealth.
The economic effects of inequality are also examined. Higher levels are found to slightly reduce long term growth rates, but may also make the economy more unstable, typically hitting the poor hardest.
Other chapters highlight the interaction of the above factors with rent-seeking processes such as lobbying, so that high levels of inequality tend to be perpetuated in the absence of countervailing policies.
The Contradictions of Capital in the Twenty-First Century also critiques and extends Piketty’s work, generally from a more heterodox angle. In particular, one chapter puts rising inequality down to the increasing influence of the financial sector and the ‘economics of the rentier’.
The privatization and outsourcing of the public realm in recent decades has produced a recycling of tax revenue into the pockets of the wealthiest. This is a theme which has been taken up by Michael Hudson in a 2014 issue of the Real World Economics Review. Hudson argues that credit-driven financial inflation tends to benefit the top 1%, while ultimately leading to debt-deflation and economic stagnation as this proves unsustainable, hitting those at the bottom via unemployment and slowing wage growth.
Vital reforms to counter the trends benefiting rentiers, which Hudson suggests were the aims of the classical political economists such as Adam Smith, include the re-regulation of finance, redistribution via taxation and public spending, and stronger trade unions acting as a countervailing power on behalf of poorer groups.
Politically, Piketty is on the centre-left, and remains a reformist social democrat. His economics is something of a mixed bag. While he is essentially a neo-classical economist, he muses, as already mentioned, on the importance of interdisciplinarity and the influence of political and social forces and institutions, but in Capital at least, he does not take these ideas very far.
In stark contrast, Michael Roberts, a Marxist economist, argues in his short collection Essays on Inequality that inequality and injustice under capitalism cannot be countered through reform, however well-meaning. For Roberts, only common ownership of the means of production under socialism and planning for need rather than profit can sustainably reduce inequality.
While the historical record does not support the efficacy of this version of socialism, Roberts more usefully critiques Piketty’s key argument that the return on capital, broadly conceived, has been rising and tends to be greater than the rate of growth, thus producing rising inequality. If one strips out housing and financial assets, the value of which has been booming in recent decades, the return on capital is much lower, so that, once again, the case is made that financial inflation has been a key source of growing inequality.
Apart from Piketty himself, many other economists concerned with the growth of inequality have made the case for the political and institutional reform of capitalism to counter these trends.
These might include changes to corporate governance and labour markets, more influential trade unions and other countervailing powers, policies to promote higher investment, some redistribution of wealth as capital assets (if indeed maldistribution of the latter is a key factor in inequality), and other policies which improve the ‘predistribution’ of income and wealth before tax.
Improving predistribution is important since higher taxation is often resisted and difficult to sustain, while institutional changes may be less so. The improved provision of public goods including lifelong education are also offered as ways to reduce inequality.
However, in a more dramatic and pessimistic study, historian Walter Scheidel, in his The Great Leveler, charts the rise and fall of inequality over a much longer sweep of human history. He argues that only major war between states, revolution, state collapse and pandemics have been able to substantially reduce inequality within countries. All such events are necessarily violent and destructive.
For example, in Japan during World War II, mass mobilization militarily and economically led to a ‘great leveling’. This was followed in the post-war period by rapid economic transformation, initially under US direction, which sustained relative equality during the country’s economic miracle.
The stresses of global conflict, such as the destruction of physical capital, much greater state intervention and high inflation all contributed to the Great Compression of incomes and wealth, which Piketty documented as a historical aberration.
During this period, mass mobilization, along with the post-war fear of a return to conflict, helped promote democracy and progressive, often social democratic policies, redistributive taxation, and in some cases a stronger role for trade unions.
Scheidel shows that historically civil wars have not had the same impact on inequality.
State failure and even collapse have also decimated the wealth of the elite and compressed incomes at the top of the distribution. In such cases, the richest have had more to lose than the poor. Wealthy rent-seekers depending on state support can find their wealth and incomes collapse along with the state.
Pandemics have their leveling effect through the resultant demographic change, labour markets and institutions and policy responses by the state. Falling numbers of the poorest reduce their labour supply, boosting wages at the bottom of society and reducing inequality. But even in such cases, eventual demographic recovery tends to restore rising inequality once more.
For Scheidel, other non-violent factors such as debt relief, economic crises and the introduction of democracy, have no clear or consistent relationship with the reduction of inequality throughout history. Only his ‘Four Horsemen’ seem to have a major impact, sometimes in combination! This is certainly a pessimistic conclusion for those concerned with social justice.
In sum then, Piketty’s policy proposals are probably unachievable in the absence of world government. Non-violent alternatives for a nation state require institutional changes which improve what has been called predistribution, which alters the pre-tax distribution of income and wealth, rather than substantially higher taxes and spending, at least in today’s political climate.
Any such interventions, whether under democracy or not, require political legitimacy to be sustainable. The problem of inequality is therefore as much political as economic and social. The grand sweep of history illustrates the violent and destructive nature of events that have significantly reduced it. We must hope that this time will be different.
Boushey, Heather, J. Bradford Delong and Marshall Steinbaum (eds.) (2017), After Piketty: The Agenda for Economics and Inequality, Harvard University Press
Fullbrook, Edward and Jamie Morgan (eds.) (2014), Piketty’s Capital in the Twenty-First Century, College Publications
Hudson, Pat and Keith Tribe (eds.) (2016), The Contradictions of Capital in the Twenty-First Century, Agenda Publishing
Pikett, Kate and Richard Wilkinson (2010), The Spirit Level: Why Equality is Better for Everyone, Penguin
Piketty, Thomas (2014), Capital in the Twenty-First Century (trans. Arthur Goldhammer), Harvard University Press
Roberts, Michael (2014), Essays on Inequality, CreateSpace Independent Publishing Platform
Scheidel, Walter (2017), The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, Princeton University Press