Shattered Consensus. James Piereson
the indictment of free-market capitalism they have been waiting decades to hear. The market revolutions of the last three decades have placed them on defense in public debates over taxation, regulation, and inequality, and Piketty’s book provides them with intellectual ammunition to fight back. It documents their belief that inequalities of income and wealth have grown rapidly in recent decades in the United States and across the industrial world, and it portrays our own time as a new “gilded age” of concentrated wealth and out-of-control capitalism. It suggests that things are getting worse for nearly everyone, save for a narrow slice of the population that lives off exploding returns to capital. It pointedly supports the progressive agenda of redistributive taxation.
Some reviewers have compared Capital in the Twenty-First Century to Karl Marx’s Das Kapital, both for its similarity in title and for its updated analysis of the historical dynamics of the capitalist system. Though Piketty deliberately chose his title to promote the association with Marx’s tome, he is not a Marxist or a socialist, as he reminds the reader throughout the book. He does not endorse collective ownership of the means of production, historical materialism, class struggle, the labor theory of value, or the inevitability of revolution. He readily acknowledges that communism and socialism are failed systems. He wants to reform capitalism, not destroy it.
At the same time, he shares Marx’s assumption that returns to capital are the dynamic force in modern economies, and like Marx he claims that such returns lead ineluctably to concentrations of wealth in fewer and fewer hands. For Piketty, as for Marx, capitalism is all about “capital,” and not much more. Along the same lines, he also argues that there is an intrinsic conflict between capital and labor in market systems so that higher returns to capital must come at the expense of wages and salaries. This, in his view, is the central problem of the capitalist process: returns to capital grow more rapidly than returns to labor. Rather like Marx in this respect, he advances an interpretation of market systems that revolves around just a few factors: the differential returns to capital and labor, and the distribution of wealth and income through the population.
Though he borrows some ideas from Marx, Piketty writes more from the perspective of a modern progressive or social democrat. His book, written in French but translated into English, bears many features of that ideological perspective, particularly in its focus on the distribution rather than the creation of wealth, in its emphasis on progressive taxation as the solution to the inequality problem, and in the confidence it expresses that governments can manage modern economies in the interests of a more equal distribution of incomes. Piketty is worried mainly about equality and economic security, much less so about freedom, innovation, and economic growth.
The popularity of his book is another sign that established ideas never really die but go in and out of fashion with changing circumstances. Liberals, progressives, and social democrats were shocked by the comeback of free-market ideas in the 1980s after they assumed those ideas had been buried once and for all by the Great Depression. In a similar vein, free-market and “small government” advocates are now surprised by the return of social-democratic doctrines that they assumed had been refuted by the “stagflation” of the 1970s and the success of low-tax policies in the 1980s and 1990s. Piketty’s book has garnered so much attention because it is the best statement we have had in some time of the redistributionist point of view.
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For all the attention and praise it has received, the book is a flawed production in at least three important respects. First, it mischaracterizes the past three or four decades as a time of false rather than real prosperity, and it distorts the overall history of American and European capitalism by judging it in terms of the single criterion of equality versus inequality. Second, it misunderstands the sources of the “new inequality.” Third, the solutions it proposes will make matters worse for everyone—the wealthy, the middle class, and the poor alike. The broader problem with the book is that it advances a narrow understanding of the market system, singling out returns to capital as its central feature and ignoring the really important factors that account for its success over a period of two and a half centuries.
Piketty addresses an old question dating back to the nineteenth century: Does the capitalist process tend over time to produce more equality or more inequality in incomes and wealth?
The consensus view throughout the nineteenth century was that rising inequality was an inevitable byproduct of the capitalist system. In the United States, Thomas Jefferson tried to preserve an agricultural society for as long as possible in the belief that the industrial system would destroy the promise of equality upon which the new nation was based. In Great Britain early in the nineteenth century, David Ricardo argued that because agricultural land was scarce and finite, landowners would inevitably claim larger shares of national wealth at the expense of laborers and factory owners. Later, as the industrial process gained steam, Marx argued that competition among capitalists would lead to ownership of capital in the form of factories and machinery becoming concentrated in fewer and fewer hands, while workers continued to be paid subsistence wages. Marx did not foresee that productivity-enhancing innovations, perhaps together with the unionization of workers, would cause wages to rise and thereby allow workers to enjoy more of the fruits of capitalism.
Perspectives on the inequality issue changed in the twentieth century due to rising incomes for workers, continued improvements in worker productivity, the expansion of the service sector and the welfare state, and the general prosperity of the postwar era. In addition, the Great Depression and two world wars tended to wipe out the accumulated capital that had sustained the lifestyles of the upper classes. In the 1950s, Simon Kuznets, a prominent American economist, showed that wealth and income disparities leveled out in the United States between 1913 and 1952. On the basis of his research, he proposed the so-called “Kuznets Curve” to illustrate his conclusion that inequalities naturally increased in the early phases of the industrial process but then declined as the process matured, as workers relocated from farms to cities, and as “human capital” replaced physical capital as a source of income and wealth. His thesis suggested that modern capitalism would gradually produce a middle-class society in which incomes did not vary greatly from the mean. This optimistic outlook was nicely expressed in John F. Kennedy’s oft-quoted remark that “a rising tide lifts all boats.”
From the perspective of 2014, Piketty makes the case that Marx was far closer to being right than Kuznets. In his view, Kuznets was simply looking at data from a short period of history and made the error of extrapolating his findings into the future. Piketty argues that capitalism, left to its own devices, creates a situation in which returns to capital grow more rapidly than returns to labor and the overall growth in the economy.
This is Piketty’s central point, which he takes to be a basic descriptive theorem of the capitalist order. He tries to show that when returns to capital exceed growth in the economy for many decades or generations, wealth and income accrue disproportionately to owners of capital, and capital assets gradually claim larger shares of national wealth, generally at the expense of labor. This, he maintains, is something close to an “iron law” of the capitalist order.
He estimates on the basis of his research that since 1970 the market value of capital assets has grown steadily in relation to national income in all major European and North American economies. In the United States, for example, the ratio increased from almost 4:1 in 1970 to nearly 5:1 today, in Great Britain from 4:1 to about 6:1, and in France from 4:1 to 7:1. Measured from a different angle, income from capital also grew throughout this period as a share of national income. From 1980 to the present, income from capital grew in the United States from 20 to 25 percent of the national total, in Great Britain from 18 to nearly 30 percent, and in France from 18 to about 25 percent. These changes weigh heavily in Piketty’s narrative, which stresses the outsized role that capital has seized in recent decades in relation to labor income.
There is nothing original or radical in the proposition that returns to capital generally exceed economic growth. Economists and investors regard it as a truism, at least over the long run. For example, the long-term returns on the U.S. stock market are said to be around 7 percent per annum (minus taxes and inflation) while real growth in the overall economy has been closer to 3 percent. This is generally thought to be a good thing, since returns to capital encourage investment, and this in turn drives innovation,