Saturday, March 21, 2015

Thomas Piketty: We Are Heading Into a World Where We Do Not Want to Be

I review Piketty's Capital in the 21st Century. Part 1

The tome of the (new) century turned out to be a surprisingly easy read. Perhaps Piketty pulls his punches, and dumbed the subject down a bit. He certainly has tried hard to make his arguments accessible, never tiring of citing Balzac and Jane Austin. His book is pleasantly clear and rewarding to attentive reading.

The Wall Street Journal sneers at the "redistributionists" among us, who are ready to steal the hard-earned wealth of the gifted and talented, pissing it to the wind of the poor who will always be with us. But that obviously assumes a few things about both the rich and the poor. Piketty's project is to map the evolution of wealth (and, to a lesser extent, income) over the last few centuries and across as much of the world as provides decipherable data. He makes many points, but perhaps the most significant is that over the vast majority of time, (which includes the past and future), wealth tends to be extremely unequally held, and is gained through inheritance and passive investment, not through boot-strap pulling, stick-to-it-tiveness, disruptive innovation, or other bromides of the comfortable set.

No, feudalism is the norm, and if we don't want a feudal society, (means of production being, in good Marxian terms, the template of social relations), we will have to do something positive about it. The mid-twentieth century was, in Piketty's analysis, an extremely rare time- something we look back on as a golden age that escaped this default feudalism, for several reasons. First was war and pillage, which obviously destroyed much of the wealth that had been built up over the guilded age, Belle Époch, and prior generations. Second was rapid population growth, which naturally increased the economic pie and diluted fortunes. Third is economic growth via technological advancement, which was truly astonishing through this time, and had the same effect of diluting old money with new. And last was war and rapine again, by way of the communal spirit it instilled, which inspired and justified remarkably progressive rates of taxation.

Piketty shows that during this unusual period, work was strongly rewarded, since even at the highest levels of wealth, (1%, 0.1%), it was labor income that was the principal source of income, rather than capital income. It takes generations for levels of wealth to rise from such a catastrophe back to the amount (of about eight times annual national income) that characterizes most societies, and is starting to characterize ours once again. Now, in these leading demographics of the 1% and above, which used to be termed the aristocracy, inheritance is becoming once again a more important source of income than labor. Incidentally, one might note the perspective this casts on the minority and especially black experience in America, which is one of perpetual oppression, especially economic, also generations in the making, which will take generations to remedy.

The structural reasons that Piketty supplies are relentless. Since capital tends to earn very regular returns, of about 5%, and still does, even with the vast amounts of capital floating around, thanks to the great elasticity of capital / labor subsitution in our age; and since economic and demographic growth are returning to more normal levels of about 1-2%, capital will always grow during normal periods.

There has always been some perplexity about what to do about this structural dominance of capital. Indeed, this book gave me a clearer understanding of the ancient antipathy towards usury:
Rent is not an imperfection in the  market: it is rather the consequence of a "pure and perfect" market for capital, as economists understand it: a capital market in which each owner of capital, including the least capable of heirs, can obtain the highest possible yield on the more diversified portfolio that can be assembled in the national or global economy. To be sure, there is something astonishing about the notion that capital fields rent, or income that the owner of capital obtains without working. there is something in this notion that is an affront to common sense and that had in fact perturbed many number of civilizations, which have responded in various ways, not always benign, ranging from the prohibition of usury to Soviet-style communism.

He also notes that in Victorian times, the rich at least didn't hide behind the fig leaf of meritocracy as they do now in a blame-the-victim ideology (job creators!, Steve Jobs!). No, they scrambled for good marriages and rich inheritances with hardly a look back at the immiserated masses or any "duty" to economic or social utility. But I would counter that the ideology of nobility and blood was even more pernicious than that of capitalist meritocracy.

Secondly, there are strong economies of scale to capital which Piketty illustrates using American university endowments. The biggest endowments like Harvard use professional managers and complex strategies for hedging, diversification, and finding unusually lucrative investments. And they make roughly double the return (~10%) as the smallest endowments, which afford virtually no money for management and make do with typical mutual fund returns of 5-6%. Thus inequality grows over time, as the bigger fortunes lose significantly less both to investment mediocrity as well as to consumption.

In addition to the purely structural reasons why, barring catastrophe or specific policy, capital tends to grow and inequality tends to grow along with it, the social pattern follows the pattern of production (or non-production in this case) to also favor capital. The Reagan revolution dramatically lowered rates of taxation, which are now, over most of the country in comprehensive terms, not progressive at all. Estate taxes have been lowered, and managers and financiers been unleashed to prey on working people who thought, for instance, that they were actually buying houses.

But what is the problem with all this anyhow? If some people save while others spend their way to the poor house, shouldn't each get her just reward? One problem is that these rewards take many generations to fully accrue, and it is simply impossible to justify the wealth of those who had no role in building it, even granting for the sake of argument that it was accrued in some virtuous fashion originally. A second problem is about the value of work in the society. If we have a class of essentially parasites who live off of capital, who are in addition the leading demographic of the whole society, that leads to the devaluation of labor and effort. It is not just that the talents of these people (whatever those might be) are lost to the common weal, but that their pinacle position, infects the society generally with an ethic of class over utility.

Returning to the mid-twentieth century, growth rates were extremely high, the social ethos was egalitarian and public-spirited, an historically unique middle class took hold, and the top tax bracket in the US was near 90%. Were companies managed better then, or now? I think they were managed better then, with a more balanced sense of stakeholders, and less intense focus on the short-term stock price. Certainly, US companies did very well in those days, without paying their managers obscenely. And this was a conscious social policy borne of the Depression, war, and slightly left-tinged social consciousness of the day- that extremely high pay to managers was obscene and economically counter-productive, thus should be strongly discouraged by way of confiscatory taxes. High tax rates also applied to estates, with no obvious detriment to our way of life. Equality turns out to be good economic as well as social policy.

But the causes, other than progressivism, were highly unusual conditions, (Depression, war), not ones that we want to see again. And sure enough, we are headed into what Piketty shows are historically normal conditions, where the top 10% own 70% of all wealth, the top 1% own 35 to 50%, and the bottom 50% own nothing. Someone like Bill Gates can't possibly spend his fortune, and seems to be unable to give it away fast enough. It just grows and grows, gobbling up more shares of global income and wealth. Were he interested in politics, we would have a very serious problem on our hands.

Next week, we will continue, considering Piketty's recommendations of what to do about it.


  • More ways to blame the victim, and avoid the real work of redistribution.
  • Most (good) governments do more redistribution than we do.
  • Rent and position in the corporation.
  • Inequality is corrosive, even morally obnoxious.
  • Monetary ideology and class war, continued. Continued...
  • ... Mixed with southern revanchism, continued.
  • Active government is the key to development.
  • But should regulators be for sale?
  • Not only is governance a significant void (or free-for-all) in Islam, so is any definitive interpretation of Sharia more generally, for fear of supplanting Muhammed.
  • Economic image of the week: The art formerly called currency in Zimbabwe.


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