Is the distribution of wealth within capitalist societies better explained by (Marxist) pessimism or (Kuznetsian) optimism? Piketty’s book attempts to answer this question with the benefit of three centuries worth of data collected from twenty countries. His analysis and accompanying argument is zealously evidence driven because, as he announces in a gesture which seems basically naïve when set against Mirowski’s Never Let a Good Crisis Go to Waste, the intellectual and political debate concerning wealth distribution “has long been based on an abundance of prejudice and a paucity of fact” (2). Capital in the 21st Century opposes ideology with evidence. A central concern over the next few weeks will be to consider how convincing this post-crisis devotion to the evidence actually is.
With respect to relevant predecessors for this sort of work, Malthus is said to mark the beginnings of serious economic investigations into inequality. His work was largely anecdotal, however, insisting that welfare assistance should be halted lest it brings about overpopulation. This demonstrably bleak outlook on long-term economic prospects was shared by Ricardo who was concerned about the structural inequalities derived out of the scarcity of land. 50 years later Marx shifts emphasis away from the agricultural determination of the economy toward its industrial determination, (3-5), consequentially honing in on the predicament of the proletariat:
capital prospered in the 1840s and industrial profits grew, while labour incomes stagnated. This was obvious to everyone, even though in those days aggregate national statistics did not yet exist. It was in this context that the first communist and socialist movements developed. The central argument was simple: What was the good of industrial development, what was the good of all the technological innovations, toil, and population movements if, after half a century of industrial growth, the condition of the masses was still just as miserable as before, and all lawmakers could do was prohibit factory labour by children under the age of eight? (8)
The principle of infinite accumulation never came to pass because during the final 3rd of the 19th century the purchasing power of wages improved. So we moved from an economics defined by a series of apocalyptic predictions (Malthus, Ricardo, Marx) to one more accustomed to the construction of fairy tales: enter the work of Simon Kuznets (rising tide raises all boats: serious statistical basis) and Robert Solow (balanced growth path: similarly multidimensional). Important caveats notwithstanding, Kuznets empirically demonstrated that levels of economic inequality fell between 1913 and 1948 – the Kuznets curve became a powerful political weapon of the Cold War effort. Nevertheless, since the 1970s economic inequality has again increased demonstrably and yet it has simultaneously fallen out of the focus of mainstream economics. This disparity needs to be addressed, Piketty believes: questions of distribution were at the heart of 19th century economics and so they should be again. The major (empirically grounded) contention of the whole book is as follows:
When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based (1)
Over the course of the next nine meetings we’re going to let Piketty’s attempt to convince us that this is the case. We’re also going to witness the mechanics of his practical-political project of offering this evidence up for policy considerations. During this period, we will learn from the book to avoid economic determinism in favour of empirical economics, that wealth distribution is characterised by processes of convergence and divergence. The diffusion of knowledge and skills is said to be the most powerful of the former whereas the lack of investment in training is the most crucial of the latter. Piketty’s recommendations will be to preserve economic openness without recourse to protectionism or nationalism. Inequality, in this sense, isn’t necessarily a bad thing (8, 20). The problem, from the perspective of policy advice – the perspective from which he is writing – is with unjust inequality, that is, with inequality derived more out of where one is born/who one has married (capital), and less out of what one does to earn (labour).
Drawing throughout on the World Top Incomes Database (WTID), the book has the advantage of a long-term historical perspective (data-driven) and cutting-edge computer technology over all its predecessors. The formula to bear in mind throughout is r>g
My conclusions are less apocalyptic than those implied by Marx’s principle of infinite accumulation and perpetual divergence (since Marx’s theory implicitly relies on a strict assumption of zero productivity growth over the long run). In the model I propose, divergence is not perpetual and is only one of several possible future directions for the distribution of wealth. But the possibilities are not heartening. Specifically, it is important to note that the fundamental r > g inequality, the main force of divergence in my theory, has nothing to do with any market imperfection. Quite the contrary: the more perfect the capital market (in the economist’s sense), the more likely r is to be greater than g. It is possible to imagine public institutions and policies that would counter the effects of this implacable logic: for instance, a progressive global tax on capital. But establishing such institutions and politics would require a considerable degree of international coordination. It is unfortunately likely that actual responses to the problem – including various nationalist responses – will in practice be far more modest and less effective (27).
Next week we will start to consider how Piketty justifies his dogmatically affirmed pro-empiricist anti-apocalyptic disposition.