Pro Thomas Piketty

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Occupy was right: capitalism has failed the world
One of the slogans of the 2011 Occupy protests was 'capitalism isn't working'. Now, in an epic, groundbreaking new book, French economist Thomas Piketty explains why they're right

Sunday 13 April 2014

The École d'économie de Paris (the Paris School of Economics) is actually situated in the most un-Parisian part of the city. It is on the boulevard Jourdan in the lower end of the 14th arrondissement, bordered on one side by the Parc Montsouris. Unlike most French parks, there is a distinct lack of Gallic order here; in fact, with lakes, open spaces, and its greedy and inquisitive ducks, you could very easily be in a park in any British city. The campus of the Paris School of Economics, however, looks unmistakably and reassuringly like nearly all French university campuses. That is to say, it is grey, dull and broken down, the corridors smelling vaguely of cabbage. This is where I have arranged an interview with Professor Thomas Piketty, a modest young Frenchman (he is in his early 40s), who has spent most of his career in archives and collecting data, but is just about to emerge as the most important thinker of his generation – as the Yale academic Jacob Hacker put it, a free thinker and a democrat who is no less than "an Alexis de Tocqueville for the 21st century".

This is on account of his latest work, which is called Capital in the Twenty-First Century. This is a huge book, more than 700 pages long, dense with footnotes, graphs and mathematical formulae. At first sight it is unashamedly an academic tome and seems both daunting and incomprehensible. In recent weeks and months the book has however set off fierce debates in the United States about the dynamics of capitalism, and especially the apparently unstoppable rise of the tiny elite that controls more and more of the world's wealth. In non-specialist blogs and websites across America, it has ignited arguments about power and money, questioning the myth at the very heart of American life – that capitalism improves the quality of life for everyone. This is just not so, says Piketty, and he makes his case in a clear and rigorous manner that debunks everything that capitalists believe about the ethical status of making money.

The groundbreaking status of the book was recognised by a recent long essay in the New Yorker in which Branko Milanovic, a former senior economist at the World Bank, was quoted as describing Piketty's volume as "one of the watershed books in economic thinking". In the same vein, a writer in the Economist reported that Piketty's work fundamentally rewrote 200 years of economic thinking on inequality. In short, the arguments have centred on two poles: the first is a tradition that begins with Karl Marx, who believed that capitalism would self-destruct in the endless pursuit of diminishing profit returns. At the opposite end of the spectrum is the work of Simon Kuznets, who won a Nobel prize in 1971 and who made the case that the inequality gap inevitably grows smaller as economies develop and become sophisticated.

Piketty says that neither of these arguments stand up to the evidence he has accumulated. More to the point, he demonstrates that there is no reason to believe that capitalism can ever solve the problem of inequality, which he insists is getting worse rather than better. From the banking crisis of 2008 to the Occupy movement of 2011, this much has been intuited by ordinary people. The singular significance of his book is that it proves "scientifically" that this intuition is correct. This is why his book has crossed over into the mainstream – it says what many people have already been thinking.

"I did deliberately aim the book at the general reader," says Piketty as we begin our conversation, "and although it is obviously a book which can be read by specialists too, I wanted the information here to be made clear to everyone who wants to read it.' And indeed it has to said that Capital in the Twenty-First Century is surprisingly readable. It is packed with anecdotes and literary references that illuminate the narrative. It also helps that it is fluently translated by Arthur Goldhammer, a literary stylist who has tackled the work of the likes of Albert Camus. But even so, as I note that Piketty's bookshelves are lined with such headache-inducing titles as The Principles of Microeconomics and The Political Influence of Keynesianism, simple folk like me still need some help here. So I asked him the most obvious question I could: what is the big idea behind this book?

"I began with a straightforward research problematic," he says in elegant French-accented English. "I began to wonder a few years ago where was the hard data behind all the theories about inequality, from Marx to David Ricardo (the 19th-century English economist and advocate of free trade) and more contemporary thinkers. I started with Britain and America and I discovered that there wasn't much at all. And then I discovered that the data that did exist contradicted nearly all of the theories including Marx and Ricardo. And then I started to look at other countries and I saw a pattern beginning to emerge, which is that capital, and the money that it produces, accumulates faster than growth in capital societies. And this pattern, which we last saw in the 19th century, has become even more predominant since the 1980s when controls on capital were lifted in many rich countries."

So, Piketty's thesis, supported by his extensive research, is that financial inequality in the 21st century is on the rise, and accelerating at a very dangerous pace. For one thing, this changes the way we look at the past. We already knew that the end of capitalism predicted by Marx never happened – and that even by the time of the Russian revolution of 1917, wages across the rest of Europe were already on the rise. We also knew that Russia was anyway the most undeveloped country in Europe and it was for this reason that communism took root there. Piketty goes on to point out, however, that only the varying crises of the 20th century – mainly two world wars – prevented the steady growth of wealth by temporarily and artificially levelling out inequality. Contrary to our perceived perception of the 20th century as an age in which inequality was eroded, in real terms it was always on the rise.

In the 21st century, this is not only the case in the so-called "rich" countries – the US, the UK and western Europe – but also in Russia, China and other countries which are emerging from a phase of development. The real danger is that if this process is not arrested, poverty will increase at the same rate and, Piketty argues, we may well find that the 21st century will be a century of greater inequality, and therefore greater social discord, than the 19th century.

As he explains his ideas to me with formulae and theorems, it still sounds a little too technical (I am someone who struggled with O-level maths). But by listening carefully to Piketty (he is clearly a good and patient teacher) and by breaking it down into bite-sized chunks it does all start to make sense. For this beginner he explains that income is a flow – it moves and can grow and change according to output. Capital is a stock – its wealth comes from what has been accumulated "in all prior years combined". It's a bit like the difference between an overdraft and a mortgage, and if you don't ever get to own your house you'll never have any stock and always be poor.

In other words, in global terms what he is saying is that those who have capital and assets that generate wealth (such as a Saudi prince) will always be richer than entrepreneurs who are trying to make capital. The tendency of capitalism in this model is to concentrate more and more wealth in the hands of fewer and fewer people. But didn't we already know this? The rich get rich and the poorer get poorer? And didn't the Clash and others sing about it in the 1970s?

"Well actually, we didn't know this, although we might have guessed at it," says Piketty, warming to his theme. "For one thing this is the first time we have accumulated the data which proves that this is the case. Second, although I am not a politician, it is obvious that this movement, which is speeding up, will have political implications – we will all be poorer in the future in every way and that creates crisis. I have proved that under the present circumstances capitalism simply cannot work."

Interestingly, Piketty says that he is an anglophile and indeed began his research career with a study of the English system of income tax ("one of the most important political devices in history"). But he also says that the English have too much blind faith in markets which they do not always understand. We discuss the current crisis in British universities, which having imposed fees now find that they are short of cash because the government miscalculated what students would have to pay and is now unable to ensure that the loans handed out to cover the fees will ever be repaid. In other words, the government thought it was on to a sure money-maker by introducing fees; in fact, because it could not control all the variables of the market, it was gambling with the nation's money and looks set to lose spectacularly. He chuckles: "This is a perfect example of how to inflict debt on to the public sector. Quite extraordinary and quite impossible to imagine in France."

For all that he is keen on Britain and the United States, Piketty says that he only really feels at home in France. Capital in the Twenty-First Century is constructed out of a plethora of French references (the historian François Furet is key), and Piketty declares that he understands the French political landscape best of all. He was brought up in Clichy in a mainly working-class district and his parents were both militant members of Lutte Ouvrière (Workers' Struggle) – a hardcore Trotskyist party which still has a significant following in France. Like many of their generation, disappointed by the failure of near-revolution of May '68, they dropped out to raise goats in the Aude (this was a classic trajectory for many babacools – leftist hippies – of that generation). The young Piketty worked hard at school, however, studying in Paris and finishing up with a PhD from the London School of Economics at the age of 22. He then moved on to Massachusetts Institute of Technology, where he was a noted prodigy, before moving back to Paris to finally become director of the school where we are now sitting.

His own political itinerary began, he tells me, with the fall of the Berlin Wall in 1989. He set out to travel across eastern Europe and was fascinated by the wreckage of communism. It was this initial fascination that led him towards a career as an economist. The gulf war of 1991 also influenced him. "I could see then that so many bad decisions were taken by politicians because they did not understand economics. But I am not political. It is not my job. But I would be happy if politicians could read my work and draw some conclusions from it."

This is slightly disingenuous as Piketty did actually work as an adviser to Ségolène Royal in 2007, when she was the socialist candidate in the presidential elections. This was not a happy period for him – his love affair with the politician and novelist Aurélie Filipetti, another Royal acolyte, ended around then with acrimonious accusations on both sides. Fair enough, after this murky business, that Piketty might want to distance himself from the everyday rough and tumble of real politics.

But no matter. What have we learned? Capitalism is bad. Hooray! What's the answer? Socialism? Hope so. "It is not quite so simple," he says, disappointing this former teenage Marxist. "What I argue for is a progressive tax, a global tax, based on the taxation of private property. This is the only civilised solution. The other solutions are, I think, much more barbaric – by that I mean the oligarch system of Russia, which I don't believe in, and inflation, which is really just a tax on the poor." He explains that oligarchy, particularly in the present Russian model, is quite simply the rule of the very rich over the majority. This is both tyrannical and not much more than a form of gangsterism. He adds that the very rich are not usually hurt by inflation – their wealth increases anyway – but the poor suffer worst of all with a rising cost of living. A progressive tax on wealth is the only sane solution.

But for all that he is talking sense, much of it common sense, I put to him that no political party in Britain or the United States, of left or right, would dare to go to the polls with such idealistic ideas. The present government of François Hollande is widely despised not because of the president's sexual peccadilloes (in contrast, these are pretty much widely admired) but because of the punitive tax regime he has been seeking to impose.

"This is true," he says. "Of course it is true. But it is also true, as I and my colleagues have demonstrated in this book, that the present situation cannot be sustained for much longer. This is not necessarily an apocalyptic vision. I have made a diagnosis of the past and present situations and I do think that there are solutions. But before we come to them we must understand the situation. When I began, simply collecting data, I was genuinely surprised by what I found, which was that inequality is growing so fast and that capitalism cannot apparently solve it. Many economists begin the other way around, by asking questions about poverty, but I wanted to understand how wealth, or super-wealth, is working to increase the inequality gap. And what I found, as I said before, is that the speed at which the inequality gap is growing is getting faster and faster. You have to ask what does this mean for ordinary people, who are not billionaires and who will never will be billionaires. Well, I think it means a deterioration in the first instance of the economic wellbeing of the collective, in other words the degradation of the public sector. You only have to look at what Obama's administration wants to do – which is to erode inequality in healthcare and so on – and how difficult it is to achieve that, to understand how important this is. There is a fundamentalist belief by capitalists that capital will save the world, and it just isn't so. Not because of what Marx said about the contradictions of capitalism, because, as I discovered, capital is an end in itself and no more."

Piketty delivers this speech, erudite and powerful, with a quiet passion. He is, one would guess, a relatively modest and self-effacing character, but he loves his subject and it is indeed a delight to find oneself in the midst of a private seminar on money and how it works. His book is indeed long and complicated but anyone who lives in the capitalist world, which is all of us, can understand the arguments he makes about the way it works. One of the most penetrating of these is what he has to say about the rise of managers, or "super-managers", who do not produce wealth but who derive a salary from it. This, he argues, is effectively a form of theft – but this is not the worst crime of the super-managers. Most damaging is the way that they have set themselves in competition with the billionaires whose wealth, accelerating beyond the economy, is always going to be out of reach. This creates a permanent game of catch-up, whose victims are the "losers", that is to say ordinary people who do not aspire to such status or riches but must be despised nonetheless by the chief executives, vice-presidents and other wolves of Wall Street. In this section, Piketty effectively rips apart one of the great lies of the 21st century – that super-managers deserve their money because, like footballers, they have specialised skills which belong to an almost superhuman elite.

"One of the great divisive forces at work today," he says, "is what I call meritocratic extremism. This is the conflict between billionaires, whose income comes from property and assets, such as a Saudi prince, and super-managers. Neither of these categories makes or produces anything but their wealth, which is really a super-wealth that has broken away from the everyday reality of the market, which determines how most ordinary people live. Worse still, they are competing with each other to increase their wealth, and the worst of all case scenarios is how super-managers, whose income is based effectively on greed, keep driving up their salaries regardless of the reality of the market. This is what happened to the banks in 2008, for example."

It is this kind of thinking that makes Piketty's work so attractive and so compelling. Unlike many economists he insists that economic thinking cannot be separated from history or politics; this is what gives his book the range the American Nobel laureate Paul Krugman described as "epic" and a "sweeping vision". Piketty's influence indeed is growing well beyond the small enclosed micro-society of academic economists. In France he is becoming widely known as a commentator on public affairs, writing mainly for Le Monde and Libération, and his ideas are frequently discussed by politicians of all hues on current affairs programmes such as Soir 3. Perhaps most importantly, and unusually, his influence is growing in the world of mainstream Anglo-American politics (his book is apparently a favourite in the Miliband inner circle) – a place traditionally indifferent to French professors of economics. As poverty increases across the globe, everyone is being forced to listen to Piketty with great attention. But although his diagnosis is accurate and compelling, it is hard, almost impossible, to imagine that the cure he proposes – tax and more tax – will ever be implemented in a world where, from Beijing to Moscow to Washington, money, and those who have more of it than anyone else, still calls the shots.

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Thomas Piketty is right: everything you need to know about “Capital in the Twenty-First Century”
What is to be done about inequality?

27 APRIL, 2014

ncome inequality in the United States and elsewhere has been worsening since the 1970s. The most striking aspect has been the widening gap between the rich and the rest. This ominous anti-democratic trend has finally found its way into public consciousness and political rhetoric. A rational and effective policy for dealing with it – if there is to be one – will have to rest on an understanding of the causes of increasing inequality. The discussion so far has turned up a number of causal factors: the erosion of the real minimum wage; the decay of labour unions and collective bargaining; globalisation and intensified competition from low-wage workers in poor countries; technological changes and shifts in demand that eliminate mid-level jobs and leave the labour market polarised between the highly educated and skilled at the top and the mass of poorly educated and unskilled at the bottom.

Each of these candidate causes seems to capture a bit of the truth. But even taken together they do not seem to provide a thoroughly satisfactory picture. They have at least two deficiencies. First, they do not speak to the really dramatic issue: the tendency for the very top incomes – the “1 per cent” – to pull away from the rest of society. Second, they seem a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces within modern industrial capitalism. Now along comes Thomas Piketty, a forty-two-year-old French economist, to fill those gaps and then some. I had a friend, a distinguished algebraist, whose preferred adjective of praise was “serious”. “Z is a serious mathematician,” he would say, or “Now that is a serious painting”. Well, this is a serious book.

It is also a long book: 577 pages of closely printed text and seventy-seven pages of notes. (I call down a painful pox on publishers who put the footnotes at the end of the book instead of the bottom of the page where they belong, thus making sure that readers like me will skip many of them.) There is also an extensive “technical appendix” available online that contains tables of data, mathematical arguments, references to the literature, and links to class notes for Piketty’s (evidently excellent) lecture course in Paris. The English translation by Arthur Goldhammer reads very well.

Piketty’s strategy is to start with a panoramic reading of the data across space and time, and then work out from there. He and a group of associates, most notably Emmanuel Saez, another young French economist, a professor at Berkeley, and Anthony B Atkinson of Oxford, the pioneer and gray eminence of modern inequality studies, have laboured hard to compile an enormous database that is still being extended and refined. It provides the empirical foundation for Piketty’s argument.

It all begins with the time path of total – private and public – wealth (or capital) in France, the United Kingdom, and the United States, going back to whenever data first become available and running up to the present. Germany, Japan, and Sweden, and less frequently other countries, are included in the database when satisfactory statistics exist. If you are wondering why a book about inequality should begin by measuring total wealth, just wait.

Since comparisons over vast stretches of time and space are the essence, there is a problem about finding comparable units in which to measure total wealth or capital in, say, France in 1850 as well as in the United States in 1950. Piketty solves this problem by dividing wealth measured in local currency of the time by national income, also measured in local currency of the time. The wealth-income ratio then has the dimension “years”. The comparison just mentioned says in fact that total wealth in France in 1850 amounted to about seven years worth of income, but only about four years for the United States in 1950. This visualisation of national wealth or capital as relative to national income is basic to the whole enterprise. Reference to the capital-output or capital-income ratio is commonplace in economics. Get used to it.

There is a small ambiguity here. Piketty uses “wealth” and “capital” as interchangeable terms. We know how to calculate the wealth of a person or an institution: you add up the value of all its assets and subtract the total of debts. (The values are market prices or, in their absence, some approximation.) The result is net worth or wealth. In English at least, this is often called a person’s or institution’s capital. But “capital” has another, not quite equivalent, meaning: it is a “factor of production,” an essential input into the production process, in the form of factories, machinery, computers, office buildings, or houses (that produce “housing services”). This meaning can diverge from “wealth.” Trivially, there are assets that have value and are part of wealth but do not produce anything: works of art, hoards of precious metals, and so forth. (Paintings hanging in a living room could be said to produce “aesthetic services,” but those are not generally counted in national income.) More significantly, stock market values, the financial counterpart of corporate productive capital, can fluctuate violently, more violently than national income. In a recession, the wealth-income ratio may fall noticeably, although the stock of productive capital, and even its expected future earning power, may have changed very little or not at all. But as long as we stick to longer-run trends, as Piketty generally does, this difficulty can safely be disregarded.

The data then exhibit a clear pattern. In France and Great Britain, national capital stood fairly steadily at about seven times national income from 1700 to 1910, then fell sharply from 1910 to 1950, presumably as a result of wars and depression, reaching a low of 2.5 in Britain and a bit less than 3 in France. The capital-income ratio then began to climb in both countries, and reached slightly more than 5 in Britain and slightly less than 6 in France by 2010. The trajectory in the United States was slightly different: it started at just above 3 in 1770, climbed to 5 in 1910, fell slightly in 1920, recovered to a high between 5 and 5.5 in 1930, fell to below 4 in 1950, and was back to 4.5 in 2010.

The wealth-income ratio in the United States has always been lower than in Europe. The main reason in the early years was that land values bulked less in the wide open spaces of North America. There was of course much more land, but it was very cheap. Into the twentieth century and onward, however, the lower capital-income ratio in the United States probably reflects the higher level of productivity: a given amount of capital could support a larger production of output than in Europe. It is no surprise that the two world wars caused much less destruction and dissipation of capital in the United States than in Britain and France. The important observation for Piketty’s argument is that, in all three countries, and elsewhere as well, the wealth-income ratio has been increasing since 1950, and is almost back to nineteenth-century levels. He projects this increase to continue into the current century, with weighty consequences that will be discussed as we go on.

In fact he predicts, without much confidence and without kidding himself, that the world capital-income ratio will rise from just under 4.5 in 2010 to just over 6.5 by the end of this century. That would bring the whole world back to where a few rich countries of Europe were in the nineteenth century. Where does this guess come from? Or, more generally, what determines an economy’s long-run capital-income ratio anyway? This is a question that has been studied by economists for some seventy-five years. They have converged on a standard answer that Piketty adopts as a long-run economic “law.” In rough outline it goes like this.

Imagine an economy with a national income of 100, growing at 2 per cent a year (perhaps with occasional hiccups, to be ignored). Suppose it regularly saves and invests (that is, adds to its capital) 10 per cent of national income. So, in the year in which its income reaches 100 it adds 10 to its stock of capital. We want to know if the capital-income ratio can stay unchanged for next year, that is to say, can stabilize for the long run. For that to happen, the numerator of the capital-income ratio must grow at the same 2 per cent rate as the denominator. We have already said that it grows by 10; for that to be 2 per cent of capital, capital must have been 500, no more, no less. We have found a consistent story: this year national income is 100, capital is 500, and the ratio is 5. Next year national income is 102, capital is 510, the ratio is still 5, and this process can repeat itself automatically as long as the growth rate stays at 2 per cent a year and the saving / investment rate is 10 per cent of national income. Something more dramatic is true: if capital and labor combine to produce national output according to the good old law of diminishing returns, then wherever this economy starts, it will be driven by its own internal logic to this unique self-reproducing capital-income ratio.

Careful attention to this example will show that it amounts to a general statement: if the economy is growing at g per cent per year, and if it saves s per cent of its national income each year, the self-reproducing capital-income ratio is s / g (10 / 2 in the example). Piketty suggests that global growth of output will slow in the coming century from 3 per cent to 1.5 per cent annually. (This is the sum of the growth rates of population and productivity, both of which he expects to diminish.) He puts the world saving / investment rate at about 10 per cent. So he expects the capital-income ratio to climb eventually to something near 7 (or 10 / 1.5). This is a big deal, as will emerge. He is quite aware that the underlying assumptions could turn out to be wrong; no one can see a century ahead. But it could plausibly go this way.

The key thing about wealth in a capitalist economy is that it reproduces itself and usually earns a positive net return. That is the next thing to be investigated. Piketty develops estimates of the “pure” rate of return (after minor adjustments) in Britain going back to 1770 and in France going back to 1820, but not for the United States. He concludes: “[T]he pure return on capital has oscillated around a central value of 4–5 per cent a year, or more generally in an interval from 3–6 per cent a year. There has been no pronounced long-term trend either upward or downward.... It is possible, however, that the pure return on capital has decreased slightly over the very long run.” It would be interesting to have comparable figures for the United States.

Now if you multiply the rate of return on capital by the capital-income ratio, you get the share of capital in the national income. For example, if the rate of return is 5 per cent a year and the stock of capital is six years worth of national income, income from capital will be 30 per cent of national income, and so income from work will be the remaining 70 per cent. At last, after all this preparation, we are beginning to talk about inequality, and in two distinct senses. First, we have arrived at the functional distribution of income – the split between income from work and income from wealth. Second, it is always the case that wealth is more highly concentrated among the rich than income from labor (although recent American history looks rather odd in this respect); and this being so, the larger the share of income from wealth, the more unequal the distribution of income among persons is likely to be. It is this inequality across persons that matters most for good or ill in a society.

This is often not well understood, and may be worth a brief digression. The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option. If a small class of owners of wealth – and it is small – comes to collect a growing share of the national income, it is likely to dominate the society in other ways as well. This dichotomy need not arise, but it is good to be clear.

Suppose we accept Piketty’s educated guess that the capital-income ratio will increase over the next century before stabilising at a high value somewhere around 7. Does it follow that the capital share of income will also get bigger? Not necessarily: remember that we have to multiply the capital-income ratio by the rate of return, and that same law of diminishing returns suggests that the rate of return on capital will fall. As production becomes more and more capital-intensive, it gets harder and harder to find profitable uses for additional capital, or easy ways to substitute capital for labor. Whether the capital share falls or rises depends on whether the rate of return has to fall proportionally more or less than the capital-income ratio rises.

There has been a lot of research around this question within economics, but no definitely conclusive answer has emerged. This suggests that the ultimate effect on the capital share, whichever way it goes, will be small. Piketty opts for an increase in the capital share, and I am inclined to agree with him. Productivity growth has been running ahead of real wage growth in the American economy for the last few decades, with no sign of a reversal, so the capital share has risen and the labor share fallen. Perhaps the capital share will go from about 30 per cent to about 35 per cent, with whatever challenge to democratic culture and politics that entails.

There is a stronger implication of this line of argument, and with it we come to the heart of Piketty’s case. So far as I know, no one before him has made this connection. Remember what has been established so far. Both history and theory suggest that there is a slow tendency in an industrial capitalist economy for the capital-income ratio to stabilise, and with it the rate of return on capital. This tendency can be disturbed by severe depressions, wars, and social and technological disruptions, but it reasserts itself in tranquil conditions. Over the long span of history surveyed by Piketty, the rate of return on capital is usually larger than the underlying rate of growth. The only substantial exceptional sub-period is between 1910 and 1950. Piketty ascribes this rarity to the disruption and high taxation caused by the two great wars and the depression that came between them.

There is no logical necessity for the rate of return to exceed the growth rate: a society or the individuals in it can decide to save and to invest so much that they (and the law of diminishing returns) drive the rate of return below the long-term growth rate, whatever that happens to be. It is known that this possible state of affairs is socially perverse in the sense that letting the stock of capital diminish until the rate of return falls back to equality with the growth rate would allow for a permanently higher level of consumption per person, and thus for a better social state. But there is no invisible hand to steer a market economy away from this perversity. Yet it has been avoided, probably because historical growth rates have been low and capital has been scarce. We can take it as normal that the rate of return on capital exceeds the underlying growth rate.

But now we can turn our attention to what is happening within the economy. Suppose it has reached a “steady state” when the capital-income ratio has stabilised. Those whose income comes entirely from work can expect their wages and incomes to be rising about as fast as productivity is increasing through technological progress. That is a little less than the overall growth rate, which also includes the rate of population increase. Now imagine someone whose income comes entirely from accumulated wealth. He or she earns r per cent a year. (I am ignoring taxes, but not for long.) If she is very wealthy, she is likely to consume only a small fraction of her income. The rest is saved and accumulated, and her wealth will increase by almost r per cent each year, and so will her income. If you leave $100 in a bank account paying 3 per cent interest, your balance will increase by 3 per cent each year.

This is Piketty’s main point, and his new and powerful contribution to an old topic: as long as the rate of return exceeds the rate of growth, the income and wealth of the rich will grow faster than the typical income from work. (There seems to be no offsetting tendency for the aggregate share of capital to shrink; the tendency may be slightly in the opposite direction.) This interpretation of the observed trend toward increasing inequality, and especially the phenomenon of the 1 per cent, is not rooted in any failure of economic institutions; it rests primarily on the ability of the economy to absorb increasing amounts of capital without a substantial fall in the rate of return. This may be good news for the economy as a whole, but it is not good news for equity within the economy.

We need a name for this process for future reference. I will call it the “rich-get-richer dynamic.” The mechanism is a little more complicated than Piketty’s book lets on. There is some saving from labor income, and thus some accumulation of capital in the hands of wage and salary earners. The return on this wealth has to be taken into account. Still, given the small initial wealth and the relatively low saving rate below the top group, as well as the fact that small savings earn a relatively low rate of return, calculation shows that this mechanism is not capable of offsetting the forecast of widening inequality.

There is yet another, also rather dark, implication of this account of underlying trends. If already existing agglomerations of wealth tend to grow faster than incomes from work, it is likely that the role of inherited wealth in society will increase relative to that of recently earned and therefore more merit-based fortunes. Needless to say, the fact that the aggregate of wage incomes grows only at a relatively slow rate does not exclude the possibility that outstandingly successful innovators, managers, entrepreneurs, entertainers, and others can accumulate large amounts of wealth in a lifetime and join the ranks of the rentiers. But a slower rate of growth certainly makes such success stories less likely. There will be more to say about this. Yet the arithmetic suggests that the concentration of wealth and its ability to grow will favor an increasing weight of inheritance as compared with talent.

Piketty likes to describe the distribution of income and wealth concretely, and not in terms of summary statistics. He looks at the proportions of the total claimed by the top 1 per cent (sometimes also the top tenth of the 1 per cent), the top 10 per cent, the next 40 per cent, and the bottom half. (He labels the 40 per cent between the top decile and the median as the “middle class.” There is an element of oxymoron in a middle class that lies entirely above the median; but I suppose this usage is no worse than the American habit of describing everyone between the clearly rich and the abjectly poor as being in the middle class.)

The data are complicated and not easily comparable across time and space, but here is the flavor of Piketty’s summary picture. Capital is indeed very unequally distributed. Currently in the United States, the top 10 per cent own about 70 per cent of all the capital, half of that belonging to the top 1 per cent; the next 40 per cent – who compose the “middle class” – own about a quarter of the total (much of that in the form of housing), and the remaining half of the population owns next to nothing, about 5 per cent of total wealth. Even that amount of middle-class property ownership is a new phenomenon in history. The typical European country is a little more egalitarian: the top 1 per cent own 25 per cent of the total capital, and the middle class 35 per cent. (A century ago the European middle class owned essentially no wealth at all.) If the ownership of wealth in fact becomes even more concentrated during the rest of the twenty-first century, the outlook is pretty bleak unless you have a taste for oligarchy.

Income from wealth is probably even more concentrated than wealth itself because, as Piketty notes, large blocks of wealth tend to earn a higher return than small ones. Some of this advantage comes from economies of scale, but more may come from the fact that very big investors have access to a wider range of investment opportunities than smaller investors. Income from work is naturally less concentrated than income from wealth. In Piketty’s stylised picture of the United States today, the top 1 per cent earns about 12 per cent of all labor income, the next 9 per cent earn 23 per cent, the middle class gets about 40 per cent, and the bottom half about a quarter of income from work. Europe is not very different: the top 10 per cent collect somewhat less and the other two groups a little more.

You get the picture: modern capitalism is an unequal society, and the rich-get-richer dynamic strongly suggest that it will get more so. But there is one more loose end to tie up, already hinted at, and it has to do with the advent of very high wage incomes. First, here are some facts about the composition of top incomes. About 60 per cent of the income of the top 1 per cent in the United States today is labor income. Only when you get to the top tenth of 1 per cent does income from capital start to predominate. The income of the top hundredth of 1 per cent is 70 per cent from capital. The story for France is not very different, though the proportion of labor income is a bit higher at every level. Evidently there are some very high wage incomes, as if you didn’t know.

This is a fairly recent development. In the 1960s, the top 1 per cent of wage earners collected a little more than 5 per cent of all wage incomes. This fraction has risen pretty steadily until nowadays, when the top 1 per cent of wage earners receive 10–12 per cent of all wages. This time the story is rather different in France. There the share of total wages going to the top per centile was steady at 6 per cent until very recently, when it climbed to 7 per cent. The recent surge of extreme inequality at the top of the wage distribution may be primarily an American development. Piketty, who with Emmanuel Saez has made a careful study of high-income tax returns in the United States, attributes this to the rise of what he calls “supermanagers.” The very highest income class consists to a substantial extent of top executives of large corporations, with very rich compensation packages. (A disproportionate number of these, but by no means all of them, come from the financial services industry.) With or without stock options, these large pay packages get converted to wealth and future income from wealth. But the fact remains that much of the increased income (and wealth) inequality in the United States is driven by the rise of these supermanagers.

There is not much understanding of this phenomenon, and this book has little to add. Piketty is of course aware that executive pay at the very top is usually determined in a cozy way by boards of directors and compensation committees made up of people very like the executives they are paying. There is certainly an element of the Lake Wobegon illusion: every board wants to believe that “its” high executives are better than the median and deserve to be paid more than the median.

It is of course possible that “supermanagers” really are supermanagers, and their very high pay merely reflects their very large contributions to corporate profits. It is even possible that their increased dominance since the 1960s has an identifiable cause along that line. This explanation would be harder to maintain if the phenomenon turns out to be uniquely American. It does not occur in France or, on casual observation, in Germany or Japan. Can their top executives lack a certain gene? If so, it would be a fruitful field for transplants.

Another possibility, tempting but still rather vague, is that top management compensation, at least some of it, does not really belong in the category of labor income, but represents instead a sort of adjunct to capital, and should be treated in part as a way of sharing in income from capital. There is a puzzle here whose solution would shed some light on the recent increase in inequality at the top of the pyramid in the United States. The puzzle may not be soluble because the variety of circumstances and outcomes is just too large.

In any case, it is pretty clear that the class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers. So Piketty’s foreboding vision of the twenty-first century remains to be dealt with: slower growth of population and productivity, a rate of return on capital distinctly higher than the growth rate, the wealth-income ratio rising back to nineteenth-century heights, probably a somewhat higher capital share in national income, an increasing dominance of inherited wealth over earned wealth, and a still wider gap between the top incomes and all the others. Maybe a little skepticism is in order. For instance, the historically fairly stable long-run rate of return has been the balanced outcome of a tension between diminishing returns and technological progress; perhaps a slower rate of growth in the future will pull the rate of return down drastically. Perhaps. But suppose that Piketty is on the whole right. What, if anything, is to be done?

Piketty’s strong preference is for an annual progressive tax on wealth, worldwide if possible, to exclude flight to phony tax havens. He recognises that a global tax is a hopeless goal, but he thinks that it is possible to enforce a regional wealth tax in an area the size of Europe or the United States. An example of the sort of rate schedule that he has in mind is 0 per cent on fortunes below one million euros, 1 per cent on fortunes between one and five million euros, and 2 per cent above five million euros. (A euro is currently worth about $1.37.) Remember that this is an annual tax, not a onetime levy. He estimates that such a tax applied in the European Union would generate revenue equal to about 2 per cent of GDP, to be used or distributed according to some agreed formula. He seems to prefer, as would I, a slightly more progressive rate schedule. Of course the administration of such a tax would require a high degree of transparency and complete reporting on the part of financial institutions and other corporations. The book discusses in some detail how this might work in the European context. As with any tax, there would no doubt be a continuing struggle to close loopholes and prevent evasion, but that is par for the course.

Annual revenue of 2 per cent of GDP is neither trivial nor enormous. But revenue is not the central purpose of Piketty’s proposal. Its point is that it is the difference between the growth rate and the after-tax return on capital that figures in the rich-get-richer dynamic of increasing inequality. A tax on capital with a rate structure like the one suggested would diminish the gap between the rate of return and the growth rate by perhaps 1.5 per cent and would weaken that mechanism perceptibly.

This proposal makes technical sense because it is a natural antidote to the dynamics of inequality that he has uncovered. Keep in mind that the rich-get-richer process is a property of the system as it operates on already accumulated wealth. It does not work through individual incentives to innovate or even to save. Blunting it would not necessarily blunt them. Of course a lower after-tax return on capital might make the accumulation of large fortunes somewhat less attractive, though even that is not at all clear. In any case, it would be a tolerable consequence.

Piketty writes as if a tax on wealth might sometime soon have political viability in Europe, where there is already some experience with capital levies. I have no opinion about that. On this side of the Atlantic, there would seem to be no serious prospect of such an outcome. We are politically unable to preserve even an estate tax with real bite. If we could, that would be a reasonable place to start, not to mention a more steeply progressive income tax that did not favor income from capital as the current system does. But the built-in tendency for the top to outpace everyone else will not yield to minor patches. Wouldn’t it be interesting if the United States were to become the land of the free, the home of the brave, and the last refuge of increasing inequality at the top (and perhaps also at the bottom)? Would that work for you?

[Admin]

Thomas Piketty and Millennial Marxists on the Scourge of Inequality
Capitalism’s new critics take on an economics run amok.

April 14, 2014

Socialism and capitalism seem like natural antagonists, but their rivalry is Oedipal. To many, the relationship appears straightforward. Capitalism, they would argue, created the modern industrial working class, which supplied the socialist movement with its staunchest recruits. This story, variations of which reach back to Karl Marx, has been repeated so often that it seems intuitive. But it gets the lines of paternity backward. Capitalism did not create socialism; socialists invented capitalism.

The origins of capitalism could be dated to when someone first traded for profit, though most historians prefer a shorter time line. Even so, scholars tend to agree that something usefully described as capitalism had materialized in parts of the world by 1800, at the latest. But the idea of capitalism took longer to emerge. The word wasn’t coined until the middle of the nineteenth century, and it didn’t enter general usage until decades later.

By that point, socialists had been a familiar force in politics for almost a century. Yet socialism’s founders—figures like Henri de Saint-Simon and Charles Fourier—did not intend to overthrow capitalism. Their aspirations were, if anything, grander. They planned to launch a new religion grounded in principles revealed by another recent discovery: social science. Each half of the formulation—the social and the scientific—mattered equally. For most of the nineteenth century, socialism’s chief opponent was individualism, not capitalism. According to socialism’s pioneering theorists, society was more than a collection of individuals. It was an organism, and it had a distinctive logic of its own—a singular object that could be understood, and controlled, by a singular science. Socialists claimed to have mastered this science, which entitled them to act in society’s name. One of their first tasks would be to replace Christianity, liberating humanity from antiquated prejudices that had undermined revolution in France and could jeopardize future rebellions in Europe.

Socialism, though, was only the latest attempt to grapple with a deeper problem. With the lonely exception of ancient Greece some 2,000 years prior, democracy had been a marginal concept in political debate throughout history. But it returned to life at the close of the eighteenth century, no time more prominently than when Maximilien de Robespierre announced that “the essence” of revolutionary France’s democratic experiment was “equality”—a leveling spirit that could, in theory, be extended to every sphere of collective life.

One year later, Robespierre was dead, and equality’s proselytizers were in retreat, but they would advance again. Egalitarian impulses took many forms, and some of the most fervent acolytes believed they had altered the original model enough to justify a new title for their utopia: socialism. The details of this evolution were complex, but they were captured in the career of a single pamphlet, scribbled by the radical journalist Sylvain Maréchal in the last days of the French Revolution and tucked away in his papers for decades. After finally seeing daylight in 1828, the work became one of the key texts in socialism’s founding. It was named, appropriately, Manifesto of the Equals.

* * *

Though a descendant of rabbis, Marx never fancied himself the leader of a religion. But the prospect of a social science yoked to a political movement that promised a revolution of the oppressed? That warranted a manifesto of its own. Marx wanted to craft a vision of socialism that responded not just to the French Revolution, but also to what historians would later call the Industrial Revolution. It took time for capitalism to become the center of his critique. The Communist Manifesto doesn’t use the word at all, instead reserving its ire for “bourgeois society.” Capital assumed greater importance for Marx as he read deeper in political economy, but he preferred to speak of a “capitalist mode of production,” his label for a system in which labor power was sold like any other commodity and production for markets at a profit had become the rule. Eventually, though, capitalism would assume the place in Marxist thought that society had occupied for the early socialists. The scientific aspirations of the earlier varieties of socialism carried over, but the object of inquiry had shifted. By Marx’s death in 1883, the word had become popular enough that Wilhelm Liebknecht could eulogize Marx as the originator of the social science that “kills capitalism.”

From the beginning, the idea of capitalism was a weapon. Marxists used it to bludgeon their adversaries on the left, whom they could dismiss as utopian dreamers blind to the realities of life under capital’s rule. As Marx’s son-in-law Paul Lafargue would declare, communists were “men of science, who do not invent societies but who will rescue them from capitalism.” But the Marxist interpretation of capitalism was also the product of a particular way of thinking. “Totality” and “dialectics” were the key words of its philosophy, and its politics concentrated on revolution. Together, they promised a complete overhaul of society. Focusing on capitalism helped guide attacks on a bourgeois status quo that might otherwise have seemed impervious to change. Visions of the cohesive socialism to come nurtured the belief that there was a fixed and antithetical entity in the present to oppose. All that socialists needed to seal their victory was a revolution, which capitalism’s contradictions would deliver to them.

Marxists were not the only ones convinced that revolution was imminent. A remarkable series of transformations—the corporation’s rise, an unprecedented growth in productive capacity, the knitting together of what a few people had started referring to as a world economy—were redefining social life and what it meant to be a socialist. Restraining monopolies, bolstering labor movements, nationalizing land, instituting progressive taxation, establishing a welfare state—these were no longer the province of a radical fringe. By the end of the nineteenth century, laissez-faire’s obituary had been written so often that William Harcourt, former chancellor of the Exchequer and one of Great Britain’s most influential politicians, could proclaim that “we are all socialists now.”

Harcourt’s socialism was not Marx’s; it was, for example, intended to foil a revolution, not to foment one. At a time when a profusion of competing socialisms vied with each other for prominence, many bore little resemblance to what Marx had sketched (though, with the master dead, what Marx would have preferred also became grounds for dispute). Yet Marx’s successors had at least won an intellectual victory. Talk of a more equitable society had become ubiquitous and, along the way, “capitalism” slipped into the vocabulary, too.

Many, especially on the right, balked at the term. They claimed that “capitalism” was too precise, or not precise enough, or that it put an exaggerated emphasis on the role of capitalists in a system that was larger than any one group, no matter how powerful. Others accepted the word but gave it new meaning. By 1918, one German estimate tallied more than 100 ways of defining capitalism. Even then, it was still a rarity compared with the 1930s, when the Great Depression shoved capitalism—frequently assumed to have entered its final days—into the spotlight.

By the twentieth century, capitalism often seemed less the name for a specific mode of production than a more general way of describing a modern world perpetually overturning itself. With society gripped by changes that were routinely characterized as unparalleled in history, capitalism appeared about as faithful a designation for the new order as any. Yet Marxists never relinquished their proprietary claim to the label. As one of Marx’s translators observed in 1898, “It was the Marxists who forced the discussion of the question, and it is they who are most active in keeping it up.” The German economist Werner Sombart reiterated the point a few years later when he noted, “The concept of capitalism and even more clearly the term itself may be traced primarily to the writings of socialist theoreticians. It has in fact remained one of the key concepts of socialism down to the present time.”

Doubts about capitalism’s analytic utility, however, were not confined to the right. As the historian Howard Brick has demonstrated, throughout much of the twentieth century a substantial contingent of thinkers on the left believed that capitalism was either in the process of giving way to a more advanced mode of economic organization, or that the conversion to a postcapitalist order had already taken place. This perspective enjoyed its greatest prominence in the aftermath of World War II, a period viewed today as the golden age of capitalism but that at the time was also portrayed as the dawning of postcapitalism. States endowed with new powers by wartime victories seemed like they might be on the verge of uncovering a course beyond capitalism and socialism, where the good of society would supersede the exigencies of economics. Marxists flirted with speculations along these lines, too, before the onset of the Cold War hardened previously fluid divisions. Academics continued the debate in the 1960s when proponents of convergence theory argued that both sides of the Iron Curtain had moved toward a common model where bureaucratic efficiency trumped clashing ideologies.

With the riddle of prosperity solved, many on the left assumed that the time had come to address loftier questions: eliminating poverty, expanding civil rights, protecting the environment, and more existential concerns like nurturing individuality in a bureaucratized society. No wonder radicals in the 1960s could insist that “capitalism” wasn’t large enough to capture their critique. Paul Potter, former president of Students for a Democratic Society, complained that the word summoned images of an old left mired in archaic battles from the Great Depression. For Potter, “the system” was larger than capitalism, and “rejection of the old terminology” was “part of the new hope for radical change.”

In the 1970s, visions of a society beyond capitalism or socialism melted away, along with the robust growth rates that had made them plausible. Economic questions returned with a ferocity that made the prophets of postcapitalism appear deluded about the impediments they faced, and the once-imposing schema detailed by social theorists like Talcott Parsons came to seem flabby when contrasted with the remorseless clarity offered by an ascendant economics profession and its corps of mathematicians. Capitalism, now stripped of its explicitly socialist connotations, became a staple in the rhetoric of both left and right. By the end of the decade, it was easier to deny the existence of society—as Margaret Thatcher famously would—than to challenge capitalism’s pre-eminence as a category of analysis.

Socialists might have enjoyed watching the triumph of an idea they had concocted if they had not been busy combating growing dissent within their ranks. These difficulties seemed manageable in the 1970s, when Western governments had many fires of their own to put out. Ten years later, capitalists had regained their footing, while the socialist project continued to decay. Francis Fukuyama’s advertisement for history’s denouement was still on the horizon, but the habits of thinking that would undergird his thesis had already sunk deep roots. Marxism was built upon faith in revolution, but in the West revolution seemed more implausible than ever, and in Eastern Europe the continent’s only widespread revolution had Marxism in its sights. The collapse of communist governments that began in 1989 revealed that history had readied one last twist of the knife: nothing did more to entrench the acceptance of capitalism than the demise of the movement that had invented the concept.

* * *

Until recently, that was how the story ended. Not that opposition to capitalism ceased after the fall of the German Democratic Republic and the USSR. There were still governments nominally committed to communism, and non-Marxist left-wing parties continued to win elections. In the United States, the campaign against globalization captured national attention in 1999, when activists clashed with police in Seattle during a meeting of the World Trade Organization. But for large swaths of the left and the right, these seemed like shallow eddies running against the overpowering tide of what was increasingly referred to as “global capitalism.”

Marxists had painted an intimidating picture of the enemy: a totalizing system governed by the iron discipline of free markets, assimilating whatever it could, destroying the rest. When capitalism’s overthrow was excised from their master narrative, the only counsel that Marxists could offer was stoic resistance against despair, and the hope that the contradictions of capital would eventually yield the long-anticipated catastrophe. In the words of Perry Anderson, elder statesman of Anglo-American Marxism, the left required “uncompromising realism” that would never “lend credence to illusions that the system is moving in a steadily progressive direction.” That meant, above all, maintaining an unwavering focus on capitalism. “Only in the evolution of this order,” he maintained, “could lie the secrets of another one.”

The disasters of 2008 were not quite what Marxists had hoped capitalism’s internal logic would supply—the particular form the financial crisis assumed took almost everyone by surprise—but they were close enough. In the scramble for explanations that ensued, the handful of Marxists who had been writing thoughtfully about economics for decades (David Harvey, Robert Brenner and Giovanni Arrighi in particular) gained credibility for having at least declared that a crisis had been brewing. True, they had been issuing these predictions for some time, and many Marxists had been announcing capitalism’s imminent demise for even longer. Yet when contrasted with the pre-crisis consensus of experts who were supposed to know what they were talking about—economists, politicians and other important people in suits—stubborn pessimism seemed like a bracing corrective. A small but serious Marxist renaissance followed. Capitalism was in question again, and the shock of the emergency had jolted its previously moribund antagonist back to life, if not as a political movement, then at least as an intellectual one.

The icons of Marxism’s resurgence had more than their fair share of gray whiskers, but in the United States the most enthusiastic followers sprang from the ranks of the young and bookish. Thus was born one of the most curious features of the contemporary intellectual scene: millennial Marxism. Even among those who remained skeptical about Marxism, or just apathetic (surely the majority), 2008 assumed the status that 1989 had for their elders. Although the financial crisis and its aftermath did not have the same global ramifications as communism’s crack-up, they had a far greater impact in the United States—one whose damage fell disproportionately on the young. The disintegration of the Soviet bloc affected other people far away; the Great Recession happened here. Children of the Clinton years who could recall their parents rhapsodizing about tech booms and a new economy entered the weakest job market since the 1930s, and they did it encumbered with unprecedentedly high levels of student debt. This was an audience primed for lectures on the contradictions of capitalism.

There were other, less obvious sparks to Marxism’s rekindling. Among twentysomethings, the Soviet Union was a distant memory, if it was remembered at all, freeing socialists from the burden of explaining the drab realities of life under communism. Many had just left college, carrying with them fresh memories of an academic world that doubles as Marxism’s heartiest stronghold. Some of the intellectually inclined among them had grown weary of the squabbles about postmodernism and the end of history that had been grinding on for most of their lives. Marxism, which fell into neither of those camps, seemed novel by comparison. Those less disposed toward meditating on the world-historical welcomed the chance to re-emphasize work and labor, topics that had earlier seemed passé. Unions had once been pillars of the New Deal order, making them inviting targets for baby boomers looking to rebel. A half-century of retreat turned them into underdogs in need of allies, and made it easier to see labor not as the province of middle-aged white men attending AFL-CIO meetings but as an issue of universal significance. The commitment was lighter, but easier to share, maybe with a post on Facebook.

Shifts in American politics also provoked a leftward turn. Barack Obama owed his election to support from under-30s, but the visions of his youthful supporters—something like a second Camelot, but with more Beyoncé—were inchoate. Once Timothy Geithner, Rahm Emanuel and Hillary Clinton proved disappointing substitutes, new outlets appeared for the expectations that Obama had aroused. The political itinerary of the archetypal millennial might have started with volunteering for Obama’s 2008 campaign and joining one of the enormous crowds that thronged his swing-state rallies in the run-up to the election; then, jumping ahead two years, attending Jon Stewart and Stephen Colbert’s “Rally to Restore Sanity and/or Fear,” a satirical rendition of “Hope and Change” pitched to much the same demographic; and, finally, in the autumn of 2011, a trip to Zuccotti Park or some other scruffy redoubt of Occupy Wall Street.

The anarchist core of Occupy had not joined the groundswell for Obama, but what the diehards wanted was always less important than what Occupy came to represent for the vastly larger numbers who were attracted to the movement but never set foot in one of its outposts. Discussions of economic inequality had been in retreat for decades until, suddenly, “We are the 99 percent!” became the most popular rallying cry since “Yes we can.” That a few thousand people scattered across the country could become the receptacle of hopes placed three years earlier in a newly elected president of the United States was astounding. It was also, perhaps inevitably, ephemeral.

* * *

Inequality receded from the media’s attention once the protesters were evicted from Zuccotti Park. Unaccustomed recognition had energized activists, and tactics associated with Occupy spread far beyond the encampments, but these were only pieces of a grander transformation that had briefly seemed within reach. Yet the protests have had an enduring, and surprising, legacy. The crowds that gathered in Zuccotti Park were not marching to advance the careers of young, ambitious, radical writers, but there were more than a few who fit that description in their number. Cloaked in the moral authority of Occupy and connected by networks stitched together during those hectic days in 2011, a contingent of young journalists speaking through venues both new and old, all of them based in New York City—Jacobin, n+1, Dissent and occasionally this magazine, among others—have begun to make careers as Marxist intellectuals. Since 2008, mainstream journals ranging from Time to Foreign Affairs had been speculating that Marx might have his vengeance (the latter with an article from Fukuyama publicizing the latest revelation bestowed on him after consultation with History’s oracles). Now, it seemed, Marx’s heirs had arrived, and they were naturals with social media.

There’s a hefty dose of irony here, because Marxists were some of Occupy’s greatest early skeptics. But the savvier among them quickly spotted an opportunity and fashioned themselves as spokespeople for the movement. Not the movement as it was, but as they thought it should be: an expression of working-class resentment against capitalism and the ruling class. The positions were radical, but the language was more comprehensible to mainstream observers than most of what was spilling out of Zuccotti.

This new cohort of Marxists has thrived on the peculiarities of the contemporary media ecology. Despite the skepticism of their less technologically besotted elders, they have made the web into an effective mechanism for disseminating their ideas. Thanks to the Internet, little magazines can conjure up a global audience if they know how to get enough clicks. It’s a technology suited to subjects that appeal to passionately devoted followers spread across wide distances, whether it is Marxism or national politics (hence, Politico) or sports (Grantland) or videos of adorable cats (pretty much everything else on the nonporn Internet). And it’s perfect for aspiring institution-builders looking to create their own forums rather than climb to the top of an existing organization; all the better if there’s a radical ideology to distinguish the new crowd from their more senior (and, implicitly, stodgy/troglodyte/dying) counterparts. After such a long exile from public debate, even conventional Marxist tropes seem original, and daring, to those without a background in Marxism, which happens to include the overwhelming majority of American journalists.

Combine all this with some fondness for navel gazing and with the fortunes of geography—politics aside, New York writers are New York writers, and they like to talk about each other—and the pieces are in place for the articles declaring the rebirth of Marxism that have become a minor genre in the last year. Like a puffer fish temporarily ballooning to vastly larger sizes, the Marxist revival can seem more imposing than it is. For a certain type of reader, however, it’s easy to forget the illusion when there are so many withering tweets to skim.

More important, though, are the contours of the understanding of capitalism that have been set in place for decades. Those born in the West since the 1970s are the first generation ever to grow up with capitalism as the natural center of economic debate. The question has been how best to fix what ails capitalism, not whether to ditch it altogether. This fact worked in the status quo’s favor before 2008. Reformist impulses survived, but with curtailed horizons. Even the most admirable pieces of technocratic fiddling, from bolstering the Earned Income Tax Credit to streamlining government, while laudable on their own merits, were hardly visionary.

After the financial crisis, however, it seemed like capitalists had flunked a test they had themselves designed. Marxism might have failed as a political project, but the conditions were set for its recovery as critique, both because of where it diverged from the consensus and what it affirmed. It was easy to swap one kind of economism for another. Like a photographic negative, the Marxist critique took what was light in the capitalist worldview and made it dark. The outlines of the picture were the same, but the shadings reversed. The resulting image was arresting—definitely worth putting on Instagram.

* * *

What are the ideas behind this intellectual reawakening? To some extent, it’s too soon to tell. Stimulating critical engagements can run in the same journal alongside paint-by-numbers Marxism. One early Jacobin editorial announced in 2011 that it had become “clear to all that Obama, and the Democrats generally, have made themselves the instruments of an energized and revanchist ruling class which has seized a moment of economic dislocation and working class disarray to roll back the meager but long-hated social protections of the New Deal and Great Society”—a claim that was, in fact, clear to almost nobody anywhere. But just a few pages over, the Australian economist Mike Beggs dismissed most of Marxist economics as a futile attempt to breathe life into a “Zombie Marx.”

The latest issue of Jacobin carries an even more striking departure from Marxist orthodoxy in the form of an editorial defending “cyborg socialism.” Written by Alyssa Battistoni, a graduate student in political science at Yale who has established herself as the most exciting voice in a crowded field, the piece (along with a companion essay) offers the beginnings of a socialism that faces up to the challenges posed by ecological crisis and distances the journal from what Battistoni calls “sweeping critiques of the ‘it’s capitalism, stupid’ variety.” Her perspective can be reconciled, after enough contortions, with the more traditionally Marxist articles that form the bulk of what the magazine publishes, in print and online. But there’s no reason it needs to be, and it’s just as easy to imagine her work spinning onto altogether different paths.

More internally consistent are the books that have begun to arrive. Cubed, from Nikil Saval, an editor at n+1 and a labor activist in his early 30s, is so far the most formidable of the lot. Saval labels it a “social history” of the office, but that’s a bit of false advertising. At least for scholars, the description suggests detailed statistical research, based on deep immersion in the archives, about those otherwise forgotten to history. Saval’s primary sources, by contrast, are often cultural; novelists, architects, filmmakers, designers and theorists of the office receive as much attention as the workers themselves.

Cubed, however, is less concerned with people than with a promise they were made: that those who spent their careers hunched over desks wrangling paper would have a more dignified laboring life than the traditional working class—that the office, in short, was not just a white-collar factory. Time and again, Saval shows employers breaking that promise. Ultimately, he offers a beautifully rendered exploration of a very old question: Why is there no socialism in the United States? According to Saval, part of the answer turns on the allure of a white-collar lifestyle that trapped its victims in isolated workspaces and stymied union organizing. Cubed is targeted at a mainstream audience, and Saval underplays the radicalism of his thesis, but it’s there for those who know where to look, who can recognize a reference to “homogenous, empty time” as a wink at Walter Benjamin, even though it doesn’t come inside quotation marks.

Like a substantial portion of the writings by millennial Marxists, Cubed breaks little new intellectual ground. In Saval’s hands, the office becomes a site for illustrating shifts in capitalism that many others have already demonstrated, not for writing a history that revises this larger picture. Although sections of the book shine—especially when it discusses gender in the workplace—they never cohere into anything greater. The influence of C. Wright Mills’s 1951 classic White Collar is pervasive, but not always for the better. Even the dichotomy between factory and office, so fundamental to Saval’s analysis, seems more a product of Mills’s time than of ours, when both forms of employment are giving way to a rapidly growing service sector. Saval writes that “the United States is a nation of clerks,” but it will soon be almost as fair to say we are a nation of nurses. After all the caveats have been registered, however, the elegance of his prose and the intensity of his (just barely concealed) moral commitment linger.

For a more full-throated celebration of Marxism, there’s Utopia or Bust, the latest work from Benjamin Kunkel, one of Saval’s senior colleagues at n+1. Kunkel describes himself in the book’s introduction as “a guy with a literary background,” but that undersells the product. Indecision, Kunkel’s first and only novel, is modest but charming and deceptively thoughtful. A kind of socialist coming-of-age story, it charts the growing awareness of Dwight Wilmerding, its ignorant but enthusiastic narrator. As Kunkel notes in Utopia or Bust, Dwight’s “naiveté was meant…to allow him to look at the world—which could only be that of neoliberal globalization—with relatively fresh eyes.” That might seem like a retrospective justification, but it’s an apt summary of a book that ends with Dwight’s only semi-ironic conversion to “democratic socialism.”

Since the release of Indecision in 2005, Kunkel has spent much of his time examining neoliberal globalization for himself. While other novelists have turned their attention to radical politics—last year alone, that included Rachel Kushner’s The Flamethrowers, Jhumpa Lahiri’s The Lowland and Jonathan Lethem’s Dissident Gardens—Kunkel has gone further, now styling himself (again, only semi-ironically) a “Marxist public intellectual” and “autodidactic political economist.” Utopia or Bust collects previously published records of this transformation, mostly essays from the London Review of Books examining contemporary Marxism’s canonical figures. The result, in Kunkel’s words, is a brief study of “global capitalism and its theorists.” Playful and unfailingly lucid, even when the theorists in question are neither, the book is one of the most enjoyable pieces of Marxist criticism in many years—imagine a more politically oriented Zadie Smith who can’t wait to explain Fredric Jameson’s interpretation of postmodernism. Kunkel has more than solidified his unofficial role as the smart older brother to all the sad young literary Marxists populating the Internet.

Precisely because of its clarity, however, Utopia or Bust reveals some of the more peculiar aspects of a group that can seem more inclined to recite Marx than to rethink Marxism, or move beyond it. The book is a prelude to a larger work that Kunkel promises will integrate Marxism and ecology, but evidence of that project is largely absent here. Though capable of skewering his subjects, Kunkel goes soft when he turns to the Marxist political economists, generally confining his analysis to exposition and immanent critique.

Then there is the constant affirmation of defeat required by a fixation on what Kunkel calls a “near unchallenged global capitalism.” Power disparities are real, and so too are the injustices perpetrated by those who command the enormous resources available to the world’s economic elite. But Marxists have a weakness for taking capitalists at their word, which distorts their appraisal of the messy way that actually existing capitalism functions. Depictions of a totalizing capitalism were useful to fin-de-siècle socialists trying to convince potential recruits that revolution was looming, and they have been a handy cudgel ever since, even for capitalists eager to declare victory over socialism after 1989. But that’s a polemical virtue, not an analytical one. As Joseph Schumpeter observed many years ago, “the capitalist order not only rests on props made of extra-capitalist material but also derives its energy from extra-capitalist patterns of behavior.” The best Marxist writing recognizes this implicitly, but the insight gets mangled when the theorizing begins. Exceptions to the rule of capital have always been essential: household labor conducted without wages, slavery up through the nineteenth century, and investments gushing in from China today, to name just a few. And that doesn’t include supposedly atavistic holdouts from a pre-capitalist order that have not just endured but thrived in the last century, including conservative variants of Islam that underwrite Middle Eastern governments responsible for mainlining oil into the global economy. Capitalism has never wielded anything like unchecked domination over the globe. If it came close, the system would crack apart in about as much time as it takes to finish this sentence.

* * *

Searching for conceptual breakthroughs in the journals of the newest left, however, misunderstands their project. They aim not just to transform the world of ideas but also to advance a political agenda, a point that’s made especially clear in Jacobin. Here, politics does not mean an endless conversation open to ambiguity, uncertainty and difference. No, politics is a war—specifically, a class war—and the only hope an embattled left has is to organize. The inspiration derives from a mash-up of the greatest hits of European Marxism and the history of the American right from Barry Goldwater to Ted Cruz. Allies will be taken, even sought out, wherever they can be found. But the purpose is to teach (and preach), not to learn.

While the tactics are clear, questions both proximate and distant remain unanswered. Where, for instance, are the troops supposed to come from? Occupy provided cover on this front through 2012. But as the prospects of its return have dwindled, seemingly to nothing, so has the plausibility of a dramatic reordering of politics. That leaves Marxists with the prospective coalition members that beleaguered American socialists have courted for decades: a labor movement that, occasional bright spots aside, seems trapped in perpetual decline; bureaucrats struggling to protect themselves from government cutbacks; and anyone else that can be drawn in from among the marginalized and dispossessed and forced, at last, into class consciousness.

On whether that coalition would push for revolution—a crucial issue in the history of socialism—the next left has so far been ambivalent. The preferred formulation is “revolutionary reformism,” the idea being that appropriate reforms today can lead to more drastic changes tomorrow. This tactically savvy move positions young Marxists as peddlers of gateway drugs to radicalism, the type of revolutionaries who might be recurring panelists on MSNBC. It also leads to mushiness when the discussion turns abstract, encouraging a reliance on vague exhortations to be “both patient and visionary, pragmatic and utopian” (in the words of Jacobin’s founder, Bhaskar Sunkara) that sound borrowed from a commencement address.

In good Marxist tradition, the millennials are best when they’re on the attack. Here, too, they’ve been shrewd, picking as one of their chief targets a group that more than anything resembles slightly older versions of themselves: technocratic liberals like Ezra Klein and Matthew Yglesias, former enfant terrible representatives of the blogger left in the latter days of the Bush administration who have since posted and reposted their way to mainstream respectability. En route, they have ditched their openly liberal politics and youthful provocations—in 2008, Klein could still tweet of Tim Russert: “fuck him with a spiky acid-tipped dick”—to refashion themselves as masters of data and translators of politically relevant scholarship for popular audiences. Left-wing politics are faintly present, but they’re of the “reality has a well-known liberal bias” kind. And they’ve become fainter still in the young technocrats’ latest effort, a website named Vox headed by Klein and Yglesias and advertised as “the world’s first hybrid news site/encyclopedia.”

Their differences with the Marxists are obvious, but there’s a kinship in the shared aspirations to push beyond punditry’s traditional conventions. One hopes to frame debate through data, the other to engage more directly with politics—perhaps, eventually, with a socialist party of their own. More than ambition, however, links these two. They have each picked up halves of a project that reaches back centuries: to know society, and to remake it.

Both groups appear supremely confident, one in its information, the other in its ideology. But cracks have begun to emerge beneath the glossy surfaces. In the wake of the financial crisis, it was easy to predict the closing of a historical parenthesis that would usher in a new politics, heralded either by Obama or Occupy. With those options exhausted, the most astute in both camps are occupying themselves with an unfamiliar challenge: figuring out what to do after the crisis is over.

* * *

The answer might involve confronting an issue older than the feud between socialism and capitalism. Economic inequality, after fading from attention post-Occupy, has in recent months roared back to prominence. Obama’s announcement in December that income inequality constitutes “the defining challenge of our time” is perhaps the most memorable line of his second term. Pope Francis has pronounced inequality “the root of social ills” and called for a campaign against its “structural causes.” Even the hosts of the annual World Economic Forum at Davos singled out inequality as one of today’s most pressing “global risks.” It has also become something of a cottage industry among Washington’s liberal wonks thanks to Democratic power broker John Podesta, who launched a research center devoted to the subject last fall.

Good timing, then, for the French economist Thomas Piketty, author of Capital in the Twenty-First Century, a newly translated book that stands a fair chance of becoming the most influential work of economics yet published in our young century. It is the most important study of inequality in over fifty years, synthesizing conclusions that Piketty and a team of other researchers have reached over more than a decade of investigation. It is also the kind of sweeping theoretical inquiry that Marxists sometimes pretend is their exclusive preserve. Not coincidentally, Piketty adopts the same label for his project that Marxists often claim for themselves. Dismissing the pretensions of “economic science,” he writes, “I much prefer the expression ‘political economy.’”

Piketty’s name has long been familiar to economists, who know him as one of the world’s leading experts on inequality. He owes his reputation not to mathematical dexterity, the typical entry to prestige within the dismal science, but to his prodigious skills as a researcher. Before Piketty, economists had typically relied on household surveys to map inequality. But his sources—chiefly, tax and estate records—have a distinct advantage over the standard practice: they illuminate shifts among the wealthiest that household surveys obscure. Piketty discovered a way of tracking the fortunes of the 1 percent years before Occupy introduced the phrase. Not coincidentally, charts produced by Piketty and his longtime collaborator Emmanuel Saez became ubiquitous in Occupy’s heyday.

From the outset of Capital in the Twenty-First Century, Piketty situates himself in a dialogue with Marx. Even the title gestures at this ambition, with its nod to an earlier Capital, presumably for the nineteenth century. But he adds another name to the conversation. Simon Kuznets was arguably the greatest empirical economist the discipline has ever seen, and he is Piketty’s most significant predecessor in the study of economic inequality. Capital in the Twenty-First Century shuttles between Marx and Kuznets, trying to match the former’s monumental scale and the latter’s meticulous empirics. Sometimes he stumbles, but the audacity of the effort, and his many successes, command admiration. Piketty’s goal is nothing less than to revive the ideal of an integrated social science that treats other disciplines not as rivals to be colonized (as is often the case when economists go peeking across departmental fences) but as colleagues in a shared project.

Hopes of unifying the social sciences were prevalent in the first half of the twentieth century, but they have an especially lengthy genealogy in France. In the nineteenth century, self-described “social economists,” like the first socialists, claimed to speak on behalf of society as a whole and issued repeated calls for a cohesive social science. At the time, economic training prepared future leaders to deal with the challenges of policy-making, not to master recondite theories. Most economists were educated either in classics or law and had little grasp of mathematics. That resistance to mathematicization endured well into the twentieth century. As Piketty notes, the legacy of this tradition has carried into the present. In France, he observes, somewhat hyperbolically, “economists are not highly respected in the academic and intellectual world or by political and financial elites,” and therefore “must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy.” Tapping into a resonant vocabulary, he recently told an interviewer, “I regard myself as a social scientist as much as an economist.” If the methodological aspiration sounds reminiscent of earlier generations of postcapitalist thinkers, so do the politics. Though not a Marxist, Piketty is firmly of the left. A supporter of France’s Socialist Party, he has said that he “dreams of a rational and peaceful overcoming of capitalism.”

* * *

Chest-pounding about methodology and decrees on capitalism would be of little interest if they were not joined to substantive intellectual discoveries. Piketty’s contributions on this front come in three interlocking clusters: historical, theoretical and political. Relying chiefly on data from Britain, the United States and France, he casts his gaze over what the French historian Fernand Braudel, cited by Piketty as one of his inspirations, termed the longue durée. Much of Capital in the Twenty-First Century is, essentially, a history of the modern world viewed through the relationship between two factors: economic growth, with all its promises, and the return on capital, a reward that goes to the small fraction of the population that has mastered what Tina Fey’s character in 30 Rock referred to as “that thing that rich people do where they turn money into more money.”

The rich perfected that art a long time ago. According to Piketty, the average return on capital, after adjusting for inflation, has hovered around 5 percent throughout history, with a slight decline after World War II. Whatever problems capitalists will face in the future, he suggests, a crisis generated by falling profits is not likely to be among them. Economic growth, by contrast, has a far more abbreviated chronology. According to the most reliable estimates—sketchy, but better than nothing—for most of human history, economic growth was on the order of 0.1 percent a year, provided there were no famines, plagues or natural disasters. This gloomy record began to change for part of the world during the Industrial Revolution. Judged by later standards, “revolution” might seem too generous a phrase for growth rates in per capita output that ran to under 1.5 percent in both Western Europe and the United States; but compared with the entire earlier history of human existence, those rates were astonishing.

More impressive developments were in store. The twentieth century, Piketty writes, was the moment when “economic growth became a tangible, unmistakable reality for everyone.” In the United States, which had benefited earlier from high growth rates, per capita output ticked up to just under 2 percent between 1950 and 1970. In the same period, growth in Europe doubled that; Asian countries averaged just a step behind Europe; and many African nations reached numbers closer to—but ahead of—the United States.

Piketty is less concerned with this global story, however, than with a concurrent development in Europe. In the nineteenth century, growth had done nothing to reduce income inequality. This was the world Marx diagnosed in Capital, and in crucial respects, Piketty thinks he got it right. Not that the entire apparatus of Marxist political economy holds, if it ever did. On the key issue of the tendency for wealth to accumulate in fewer hands, though, Piketty believes Marx arrived at a profound insight.

But not a timeless one. Wages for workers had begun to rise around the time Capital was published, a significant but not fatal complication to Marx’s analysis. The real challenge came with World War I. Piketty uses a simple formula to illuminate the dynamics at work. Inequality tends to rise, he argues, when the average rate of return on capital exceeds the economy’s growth rate (or, as he puts it, when r > g). That ratio worked in capital’s favor throughout the nineteenth century, and at the dawn of the twentieth, there was little reason to believe it would change without a revolution by the proletariat. Then 1914 inaugurated three decades of catastrophe.

The wealth of Europe’s elite was one of the era’s casualties: outright destruction, high inflation, confiscatory taxation, and governments that began catering to labor’s demands all combined to obliterate vast swaths of capital. By 1950, economic inequality had plummeted, not because of the welfare state’s rational evolution, but through some of history’s greatest tragedies. What amounted to the collective suicide of capitalist Europe coincided with astounding growth rates produced by recovery from the war. With capital reeling and growth rocketing ahead, the conditions were set for unprecedented egalitarian advances, including the birth of a property-owning middle class, all because of an extraordinary inversion: for the first time, g > r.

* * *

Seen from Piketty’s vantage point, thousands of feet above the rubble, the fragility of this moment becomes clear. Economic growth was a recent invention, major reductions to income inequality more recent still. Yet the aftermath of World War II was filled with prophets forecasting this union into eternity. Kuznets offered the most sophisticated expression of this cheerful projection. Extrapolating from the history of the United States between 1913 and 1948, he concluded that economic growth automatically reduced income inequality. This was the moment when, as Piketty observes with both regret and nostalgia, “the illusion that capitalism had been overcome” secured widespread acceptance.

Time soon deflated this optimism. Although the growth of global GDP has accelerated—billions of people across Asia are now catching up to their rivals, a position analogous to Europe after World War II—the best available evidence suggests that these levels are impossible to sustain at the technological frontier. Europe’s per capita growth dropped to just below 2 percent from 1980 to 2012; the United States’ was even slower, coming in at 1.3 percent. Meanwhile, the link between rising GDP and falling inequality was severed, with the largest gains from diminished growth flowing to the richest of the rich—not even to the 1 percent, but to the one-tenth of 1 percent and higher.

Although the contours of Piketty’s history confirm what economic historians already know, his anatomizing of the 1 percent’s fortunes over centuries is a revelation. When joined to his magisterial command of the source material and his gift for synthesis, they disclose a history not of steady economic expansion but of stops and starts, with room for sudden departures from seemingly unbreakable patterns. In turn, he links this history to economic theory, demonstrating that there is no inherent drive in markets toward income equality. It’s quite the opposite, in fact, given the tendency for the returns on capital to outpace growth. Unfortunately for us, he concludes, “the inequality r > g has clearly been true throughout most of human history, right up to the eve of World War I, and it will probably be true again in the twenty-first century.”

Like any major work of scholarship, Capital in the Twenty-First Century will be subjected to numerous critiques. Many lines of attack are already obvious. Specialists will challenge individual interpretations and note that there are not nearly as much data as investigators would like, especially before the twentieth century. Piketty does the best with what is available, but the best simply might not be enough to verify his claims, and even his sympathizers might cringe at the readiness with which he uses a largely European—to be more precise, largely French—history to ground proclamations about the universal dynamics of capitalism. The mechanics of how Europe and the United States achieved such notable egalitarian successes require far more scrutiny than they receive here, where the causal story can veer into a martial determinism portraying inequality’s decline as a natural byproduct of war. He has a weakness for grand decrees pitting democracy against capitalism that, while rhetorically effective, muddy the analysis. Ideal types of both can be constructed and contrasted, but these histories are so entangled that any serious inquiry would soon confront insuperable obstacles. Piketty knows this—“economic and political changes are inextricably intertwined,” he writes, “and must be studied together”—but the critical perspective turns goopy when the rhapsodies to democracy commence.

Then there is the question of style. Piketty’s writing is straightforward, but the book is mammoth, often repetitive, and padded with forays into cultural criticism that are not nearly as edifying as he thinks. Discussions of Balzac and Jane Austen are mildly helpful as demonstrations of the attitudes toward capital in the nineteenth century, but they offer rapidly diminishing returns and do little to substantiate Piketty’s strange contention that novelists have lost interest in the details of money, a claim plausible only to someone who has never heard of Tom Wolfe or Martin Amis. Other references—Mad Men, Django Unchained, Damages and, repeatedly, Titanic—add even less. Though perhaps they address other concerns: judging from a footnote, Piketty still harbors a grudge about the plotlines in Desperate Housewives.

* * *

Despite the lengthy historical surveys, Capital in the Twenty-First Century, as its title implies, is as much about the future as it is about the past. Per capita growth for developed economies, Piketty believes, has settled at approximately its maximum sustainable rate, around 1 percent annually. That was enough to make people in the nineteenth century feel they were caught in perpetual revolution, but judged by the best of the twentieth century, or China and India today, it seems positively anemic. With growth reduced, escalating income inequality is all but inevitable without aggressive policy intervention. Piketty’s demand for a global progressive tax on capital has garnered the most attention, usually from commentators eager to dismiss it as utopian. But the global tax is more of a rhetorical gambit than a substantive proposal. It is designed to make Piketty’s real aspiration—the same tax, but confined to the European Union—seem more attainable. When the alternative requires obtaining planetary consent, making one continent sign on to a policy becomes a reasonable reach. Countries as large as the United States, he believes, could go it alone with considerable success.

Progressive taxation of capital is one part of a larger project that Piketty calls building “a social state for the twenty-first century.” This economist is no revolutionary: the major arguments over the structure of government, he believes, have already been settled. The twentieth century bequeathed a vision of government responsible for the education, health and pensions of its citizens, and those obligations will be upheld in the twenty-first. For Piketty, the most urgent task is not raising the general welfare but clawing back the advances of the 1 percent. Much needs to be done, he writes, “to regain control over a financial capitalism that has run amok.”

A good first step would involve hiking tax rates for the wealthy to “confiscatory” levels—about 80 percent for those earning over half a million dollars a year, according to Piketty’s admittedly rough estimates. Boosting taxation on the rich would not only enlarge the state’s coffers; it would help restore sanity to a culture of executive compensation deranged by low marginal rates. The aim is not so much to tax millionaires but to push rates high enough to deter people from pursuing a millionaire’s salary in the first place, a goal he asserts, with ample evidence, that can be achieved without damaging long-term growth.

There are, however, limits to what Piketty thinks democracy can achieve. Political economy, after all, has two halves. Politics constitute a sphere of choice in which people come together and decide their fates. But there are certain laws that not even the unanimous will of the people can repeal, and that’s when the economists arrive. According to Piketty, the tendency for inequality to rise when the return on capital exceeds growth is one of those laws. Though democracies can manage the challenges this poses, the fundamental condition will persist. The disease is chronic; the question is whether it will prove fatal.

Piketty offers little ground for optimism. The only forces capable of substantially reversing the march toward inequality that he uncovers are war and economic depression—even then, war seems like a surer tonic—and he could have been grimmer. Capital in the Twenty-First Century is permeated with an idealistic vocabulary taken from the eighteenth century. Claims to France’s revolutionary legacy wind through the book, starting with the introduction, which opens with a quotation from the Declaration of the Rights of Man and the Citizen. Yet democracy has shown another face in its subsequent career. Democratic ideals have inspired countless egalitarian movements, but liberal democracy has triumphed across so much of the world because of its success as counterrevolutionary reform: no other political system has done a better job defanging social resentment and fostering acceptance of vast inequalities. The ability to dismiss elected officials when they prove disappointing might seem like a feeble vestige of what democracy promised, especially after tabulating the paltry fraction of the population that bothers to engage in the process, but it has proved remarkably effective at the baser task of protecting the powerful.

* * *

A skeptical technocrat would caution that our data set is too small to justify despair. There are few examples of successful efforts to rewind inequality at the national level, but just a century ago there were even fewer, violent or otherwise. The contemporary political scene, with its bulky welfare states and army of experts, is more novel than foreshortened historical memories allow. In this setting, Capital in the Twenty-First Century, though dubious as a work of democratic theory, might achieve more in the world of democratic practice.

But if that occurs, it will owe much to Piketty’s affinities with two startling predecessors. More than fifty years have passed since the appearance of Milton Friedman and Anna Schwartz’s A Monetary History of the United States, but it remains the most influential work of economics in the last century not written by John Maynard Keynes. Like Piketty, Friedman and Schwartz grounded their theorizing on a command of vast stores of data. It was a ruthlessly academic text, yet it entranced a rising generation of economists, including the young Ben Bernanke, who credited it with inspiring his specialization in monetary theory. When stagflation seemed to undermine the pillars of Keynesian economics in the 1970s, desperate policy-makers clutched at policies legitimized by Friedman and Schwartz (the former, as it happens, a protégé of Simon Kuznets). Political debate can swerve in unexpected directions, and though it helps to have the powerful on your side, the opposition of weighty interests is not always decisive. Economists were at the vanguard of the turn against the postwar order decades ago, predictably enough, because no other social science wields comparable influence over governance. Piketty’s career shows that at least some economists are ready to help repair the damage their colleagues have inflicted.

They might be helped along the way by a reinvigorated radical, even Marxist, left. But it would be over Piketty’s objections. Early on, he locates himself firmly in a generation defined by communism’s breakdown. “I was vaccinated for life against the conventional but lazy rhetoric of anticapitalism,” he writes, “some of which simply ignored the historic failure of Communism and much of which turned its back on the intellectual means necessary to push beyond it.” Though he is a more generous reader of Marx, Piketty falls into the same harsh tone whenever he turns to Marx’s successors. The hostility matches the temper among French intellectuals after their widespread turn against Marxism in the 1970s, but it is troubling to watch him snarling at prospective allies when the scale of the challenge facing advocates of equality is so daunting. It also runs against a more ecumenical disposition evinced in the book’s concluding paragraphs, in which he announces that the “bipolar confrontations of the period 1917–1989 are now clearly behind us” and declares that the time has come to abandon intellectual terrain shaped by Cold War conflicts.

Piketty’s rhetoric isn’t new. Variations of his theme date back at least to 1917, and paler imitations of it were ubiquitous in the “third way” manifestos of the 1990s. But it resonates in a different way today. Though it was easy to treat 1989 as the culmination of liberal capitalism’s majestic ascent, 2008 is harder to interpret, especially when so many of the predictions issued at the zenith of the financial crisis have failed to materialize: no second coming of the New Deal, no breakdown of the European Union, no fundamental recasting of geopolitics. After all this time, 2008 still seems like a violent rending of history’s fabric. It is difficult, perhaps impossible, to weave a tapestry out of so many shreds.

That is probably for the best. The notion that history could have an end was always a delusion, an excuse to dress up passing preferences as dictates of a higher authority barely short of the divine. Determining history’s conclusion requires mastery of its entire arc, and that is a knowledge nobody can claim. What looks permanent can vanish in an instant, while the seemingly archaic can revive just as swiftly. Calling a stop to the game wards off the more troubling proposition that history has its jaws fastened around us, and isn’t ready to let go. The future will always surprise; that is our burden, and our privilege. Reflexive grasping at the language of the past, vividly displayed in the Marxist resurgence, brings a sense of order to what would seem like chaos. But a more promising alternative might be on the way. Marxism is one kind of socialism, but history suggests a much richer set of possibilities, along with some grounds for hope. So does a work like Capital in the Twenty-First Century—a sign that another lost tradition, the postcapitalist visions in abeyance since the 1970s, could be poised for a return; or, even better, that we might put aside old pieties and chart our own path.

[Admin]

Thomas Piketty terrifies Paul Ryan: Behind the right’s desperate, laughable need to destroy an economist
Five years post-collapse, Piketty and Elizabeth Warren offer a way ahead. That's why the right must destroy them

THURSDAY, MAY 1, 2014

Thomas Piketty’s “Capital in the 21st Century” hit No. 1 at Amazon, right around the time that Elizabeth Warren released her book “A Fighting Chance.” Far from being the only figures addressing the failure of unregulated market capitalism to produce fair outcomes and broad prosperity, they embody two key facets of that criticism: the intellectual/academic and pragmatic/political. But there are a host of other figures criticizing the workings of actually existing capitalism and the increasingly destructive inequalities of wealth we see it producing all around us.

It may have taken more than five years since the financial crisis hit in late 2008, but are we finally seeing signs of a coherent response coming together? A number of recent developments suggest that we are. Just in the last few weeks, for example, another hot new book is “Flash Boys,” the latest from Michael Lewis on the most recent form of mass-scamming on Wall Street, and there’s new attention being drawn to the work of Martin Gilens demonstrating the power of elite control of our political system. His book “Affluence and Influence: Economic Inequality and Political Power in America” was an award-winner in political science last year, but his follow-up study with Benjamin I. Page, the essay “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens,” has touched a broader nerve, with stories at the New Yorker, Huffington Post, and by Michael Lind here at Salon, among others, with added notice on cable TV. And of course, Pope Francis keeps mouthing off against inequality, too (which routinely causes Paul Ryan to comically insist – almost Stephen Colbert-style – that the pope is actually inveighing against the welfare state).

What makes Piketty and Warren stand out, in particular, is that real change needs both a framework of shared knowledge and possibility — which Piketty’s vast store of data helps provide — and exemplars of articulate, high-level struggle setting the terms of public debate, which is where Warren comes in.

This is not to say that Piketty’s work is something simply to rally around. That’s more of the pope’s territory. There is plenty to debate about Piketty’s work. But so far, criticism from the right has been ludicrous, while criticism from the left has been largely overlooked — a situation that must inevitably change if something is really to be done about inequality.

A neat summary of the right’s real source of upset comes from Lynn Stuart Parramore in an Alternet article republished here at Salon:

As fellow-economist James K. Galbraith has underscored in his review of the book, Piketty “explicitly (and rather caustically) rejects the Marxist view” of economics.

But he does do something that gives right-wingers in America the willies. He writes calmly and reasonably about economic inequality, and concludes, to the alarm of conservatives, that there is no magical force that drives capitalist societies toward shared prosperity.

This is not a new problem. “Free markets” and capitalism are actually quite contrary in their foundations. The essence of free markets are competition, driving down prices to nearly the cost of production. The essence of capitalism is the accumulation of capital, which depends on hefty profits, and thus limited competition. Hence, “free markets” are mostly mythical, sometimes fleetingly appearing here or there, only to be quickly contained, if possible. If not, the results can be massive ruination, as happened with successive mass railroad bankruptcies in both Britain and America in the 19th century, a subject explored in depth in Michael Perelman’s 2006 book, “Railroading Economics: The Creation of the Free Market Mythology.”

As Perelman’s subtitle suggests, the mythology was actually created against the backdrop of certain knowledge that it spelled ruin, if taken seriously. But nothing works better to suppress contradictions than having an outside enemy. So long as there was Marxism to kick around, the contradictions of “free market capitalism” were relatively easy to contain. With Piketty’s data exposing the downside of capitalist accumulation from a different angle, it’s hardly surprising to hear the “Marxism” charge raised again, in a desperate attempt to suppress critical inquiry. Now, however, too many people have been hurt to be so easily scared off by baseless name-calling.

If the right is merely reflexively, defensively name-calling, on the left there are some very serious questions with Piketty’s work. They are too deep and serious to do in-depth justice to here, but see, for example, Galbraith’s review in Dissent, which Parramore quoted from above, Doug Henwood of the Left Business Observer, at Bookforum, and Dean Baker at Huffington Post.

Piketty himself first told MSNBC’s Chris Hayes (long-form interview) that his book was “about history, I’m trying to put history into this … very hot debate about inequality … I want everybody to be able to make their own mind … I don’t pretend I know what’s going to happen next, but I want to give people a lot of historical material that was not available before, so that they make their own mind.” He then added, regarding his own views:

One of the conclusions that I take from my own work is that we don’t need 19th century economic inequality to grow. One lesson of the 20th Century is that the kind of extreme concentration of wealth that we had in the 19th Century was not useful, and probably even harmed growth, because it reduced mobility and access of new groups of the population into entrepreneurship and power. It lead to the capture of our political institutions prior to World War i. We don’t want to return to this.” Now, there is a tendency to move in that direction, and we should be worried about that.”

Although they vary somewhat, critiques from the left tend to focus first on one of three areas — the disconnect between the hard-nosed severity of the data collected and the lack of realism in his proposed responses (many, not just on the left, have noted this, but Henwood expresses it particularly well), the questionable nature of some of his theoretical assumptions (Galbraith begins immediately with “capital” itself, critiquing how Piketty has continued and extended the neo-classical divorce of capital from its sociopolitical matrix), or the lack of empirical realism in dealing with actual economic institutions (Dean Baker’s forte, which lucidly connects theoretical and pragmatic/political concerns).

And yet, for the most part, all the critics agree it’s a very good thing this book has been written, and that it’s getting so much attention. Whatever it’s flaws may be, we are much better off having this sort of data, across this range of time, clearly showing the growing concentration of wealth, as opposed to the trickle-down fantasies of yore. The question is: What more do we need?

That’s where Elizabeth Warren comes in. Not because she’s perfect, but because she complements some of what’s missing with Piketty, and has a knack for making sometimes murky connections strikingly clear. There are confusions surrounding Warren as well, but hers are relatively simplistic compared to Piketty. She’s written a book, she’s out there promoting it, she’s getting lots of positive attention, ergo she must be running for president. Why else would a politician write a book? Well, in Warren’s case, because she’s a writer, an educator, an issue advocate and an activist — and has been all of these much longer than she’s been a politician, which she only became out of necessity and in service to her earlier roles. She’s not really writing a personal political biography; she’s writing a history of her political education as a citizen fighting for others just like her. Given her passions and interests, and the state of the world and politics today, the real question for her would have been, “Why haven’t you written a book?” if she were not doing just as she is.

What may well matter most about Warren in relation to all the above is her experience in dealing with some of the specific institutional realities that Baker refers to, and making coherent sense of them in a way that’s easy for ordinary citizens to grasp. In his criticism of Piketty’s book, Baker noted:

In questioning his contribution to advancing technology, Piketty asks: “Did Bill [Gates] invent the computer or just the mouse?” (To be fair, the comment is a throwaway line.) Of course the mouse was first popularized by Apple, Microsoft’s rival. It’s a trivial issue, but it displays the lack of interest in the specifics of the institutional structure that is crucial for constructing a more egalitarian path going forward.

Think of this on the one hand, and think of Elizabeth Warren’s deft use of the humble toaster in explaining the logic of her proposal for a Financial Product Safety Commission:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan swept into the White House, the “R-word” supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of reaching store shelves.

This is hardly the only reason Warren is important. She is, obviously, the only straightforward economic populist who’s even being mentioned as a possible presidential candidate, regardless of her current expressed lack of interest in running. But even if there were half a dozen such candidates, this intuitive feel for the perfect specific detail (and how to unpack it with Martha Stewart-like perfection) exactly matching what’s missing in Piketty, along with her fighting spirit, are a vital part of what makes her such a particularly important figure, not just for what she may do in the years to come, but for qualities she models and inspires in others. A true populist leader does a lot of that — modeling and inspiring others. It’s something that most good teachers know and do instinctively. So there’s that, too.

But there’s one more point that needs making here in terms of how Piketty and Warren complement each other. Perhaps the most serious flaw in Piketty’s approach is his theoretical dependency on growth, matched with his failure to value natural capital, along with ecosystem services that nature provides [U.N. reports here]. Significantly, in their commentary about Piketty’s work, at the American Prospect, political scientists Jacob S. Hacker of Yale, and Paul Pierson at Univerisity of California, Berkeley, wrote:

Inequality is becoming a “wicked” problem like climate change—one in which a solution must not only overcome powerful entrenched interests in individual countries but must be global in scope to be effective.

In fact, it is even worse than they describe, because the two problems are inter-linked — and because economists, at least, seem utterly blind to the fact.

Consider this admiring description of Piketty’s work from Branko Milanovic, formerly lead economist in the World Bank’s research department, and a leading expert on international inequality (who also wrote a highly detailed review here), in a short piece on the same page at the American Prospect:

Piketty’s key message is both simple and, once understood, almost self-evident. Under capitalism, if the rate of return on private wealth (defined to include physical and financial capital, land, and housing) exceeds the rate of growth of the economy, the share of capital income in the net product will increase. If most of that increase in capital income is reinvested, the capital-to-income ratio will rise. This will further increase the share of capital income in the net output. The percentage of people who do not need to work in order to earn their living (the rentiers) will go up. The distribution of personal income will become even more unequal.

The story elegantly combines theories of growth, functional distribution of income (between capital and labor) and income inequality between individuals. It aims to provide nothing less than the description of a capitalist economy.

This is arguably the most positive short description I’ve seen of Piketty’s work — and yet, look at what it leaves out: the looming potential destruction of the world economic system due to global warming in the next 100 to 300 years. (Almost 40 percent of scenarios project a 25 percent to 100 percent decrease in yield by the 2090-2109 time-frame [chart] according to the most recent IPCC Working Group II report.) And global warming is only one of nine environmental failure modes from crossing planetary boundaries that could undermine our global civilization.

This is not to say such destruction is certain, but it is a very real possibility — just as the 2008 financial crisis was a real possibility for years before it finally appeared. And yet, it is not a possibility within the framework Milanovic has just described. I want to be clear: it could be entirely possible that we can have a healthy growing economy and start paying down our enormous environmental debt — but we will never know if that’s possible if we don’t first develop the analytical tools to put the question in terms that can be measured.

It is worth noting that in early October 2008, just after the financial crisis first hit, George Soros appeared on “Bill Moyers Journal,” and proposed a kind of “Green New Deal” as the logical way forward for America and the world:

GEORGE SOROS: ….for the last 25 years the world economy, the motor of the world economy that has been driving it was consumption by the American consumer who has been spending more than he has been saving, all right? Than he’s been producing. So that motor is now switched off. It’s finished. It’s run out of – can’t continue. You need a new motor. And we have a big problem. Global warming. It requires big investment. And that could be the motor of the world economy in the years to come.

BILL MOYERS: Putting more money in, building infrastructure, converting to green technology.

GEORGE SOROS: Instead of consuming, building an electricity grid, saving on energy, rewiring the houses, adjusting your lifestyle where energy has got to cost more until it you introduce those new things. So it will be painful. But at least we will survive and not cook.

We failed to turn on that new motor when it could have prevented enormous needless suffering. But we still face much the same dilemma today. The logic of a Green New Deal remains as compelling as ever.

But how does this connect to Elizabeth Warren? Funny you should ask. Two words: Dust bowl. Elizabeth Warren is from Oklahoma. Oklahoma is the epicenter of America’s most devastating experience of the human cost of preventable environmental destruction. While organizers, activists and everyday concerned citizens have struggled mightily for decades trying to weave together the interests and outlooks of labor and environmentalists — interests that capitalist accumulation effortlessly plays off against each other even in its sleep — Elizabeth Warren’s people have the lived historical experience of how economic and environmental suffering are not trade-offs, one against the other, but are intimately joined together. Warren has already shown how deeply rooted she is in where and who she came from. If anyone can help lead America forward toward a Green New Deal, odds are, Elizabeth Warren can.

For all its flaws, Piketty’s “Capital in the 21st Century” has helped set the stage for a struggle that’s long overdue —and one that, of necessity, needs to be expanded even further. And Warren is the most high-profile person in America today working to figure out how that struggle can succeed. This is their moment — but it’s all of our futures.

[Admin]

The ultimate guide to shutting down conservative anti-Piketty hysteria
"Capital in the 21st Century" has sent conservatives into a rage. Here's how to debunk their favourite attacks

SUNDAY, MAY 4, 2014

Thomas Piketty’s wildly popular new book, “Capital in the 21st Century,” has been subject to more think pieces than the final episode of “Breaking Bad.” Progressives are celebrating the book — and its unexpected popularity — as an important turning point in the fight against global wealth inequality. This, of course, means that conservatives have gone completely ballistic.

Rush Limbaugh, for example, has come out guns a-blazing: “Some French socialist, Marxist, communist economist has published a book, and the left in this country is having orgasms over it,” he exclaimed during a recent broadcast.

When the right drops the C-bomb, the M-bomb and S-bomb all at once, you can be certain a book is having an impact. And “Capital” may well be the “General Theory” of the first half of the 21st century, redefining the way we think about capitalism, democracy and equality.

This, of course, means that the right-wing attacks have only just begun. That in mind, here is a handy guide to navigating the more absurd responses:

Claim: Piketty is a dirty Marxist

There are two Marxes. One, a scholar of capitalism of repute, put forward testable hypotheses, some of which you may accept, some of which you may reject. The other is a conservative boogeyman, the human representation of all they find evil. If they dislike something, it must be Marxist.

James Pethokoukis, a formidable writer, went full hack for his National Review review,

Thanks to Piketty, the Left is now having a “Galaxy Quest” moment. All that stuff their Marxist economics professors taught them about the “inherent contradictions” of capitalism and about history’s being on the side of the planners — all the theories that the apparent victory of market capitalism in the last decades of the 20th century seemed to invalidate — well, it’s all true after all.

How to respond: Most times someone drops the M-Bomb, he is intending to be provocative. With enough effort, you can make almost anything Marxist. While Marxists don’t agree on everything, and the term is very nebulous (Marx once said he wouldn’t describe himself as a Marxist), there are some pretty established rules for determining if someone is, indeed, a Marxist. First, he generally doesn’t write things like,

“Marxist analysis emphasized the falling rate of profit — a historical prediction that turned out to be quite wrong” (“Capital in the 21st Century,” page 52)
“Marx usually adopted a fairly anecdotal and unsystematic approach”. (“Capital in the 21st Century,” page 229)
“Marx evidently wrote in great political fervor, which at times lead him to issue hasty pronouncements from which it is difficult to escape. That is why economic theory needs to be rooted in historical sources …” (“Capital in the 21st Century,” page 10)
“… Marx totally neglected the possibility of durable technological progress and steadily increasing productivity.” (“Capital in the 21st Century,” page 10)
These are not the words of a Marxist, but rather a reasonable scholar, investigating the truth of the claims written by the greatest political economist who ever lived. The fact that Piketty abstains from the vitriol and misrepresentation that typify most writing on Marx are to his credit.

Piketty certainly does argue that capitalism will not inevitably reduce inequality, as economist Simon Kuznets had famously claimed. As to whether capital will accumulate without end, as Marx believed, he is more nuanced.

Piketty argues that capital will accumulate in the hands of the few when growth is slower than the rate of return on capital and dis-accumulate if not (This is the now famous “r>g” formula). As growth slows, companies can replace workers with machines (written by economists as “substitution between capital and labor”), but only if there is a high elasticity of capital to labor (higher elasticity means easier replacement). This means that the share of income going to the owners of capital will rise, and the distribution of that capital will become more unequal.

Piketty does not hold to a labor theory of value, he does not believe that capitalism is founded on the exploitation of the proletariat, and he does not believe the system will inevitably collapse on its own contradictions. But critics who call Piketty a Marxist don’t actually mean, “Piketty subscribes to a collection of propositions generally accepted by Marxists”; they mean it as a verbal grenade. Step over it and move to more substantive criticisms.

Claim: The social safety net has already solved the problem

In order to somewhat compensate workers for voluntary unemployment and the ludicrously low wages that “markets” pay them, modern societies have developed transfer systems, or social safety nets of various levels of robustness, to bolster the incomes of low-wage workers. Some conservatives argue that these transfers have solved the inequality problem.

Scott Winship, the lovable but irksome economist dedicated to upsetting the inequality consensus, writes in Forbes,

Most importantly, in the United States, most public transfer income is omitted from tax returns. That includes not just means-tested programs for poor families and unemployment benefits, but Social Security. Many retirees in the Piketty-Saez data have tiny incomes because their main source of sustenance is rendered invisible in the data.

How to respond: There’s not enough room to give his data claims a full airing. For our purposes, it suffices to say that, while America does have a transfer system, it’s far less robust than that of other developed nations.

Government revenues are far lower in the U.S. than in other countries, making redistribution more difficult, and thus our safety net is far more frail.

Far more interesting is what would happen if conservatives made this their line. After all, if transfers are what is preventing inequality from skyrocketing then the rising share of pre-transfer income accruing to the wealthy capital owners means we need more robust transfer system. Because few, if any, thinkers on the right have argued for a stronger transfer system (and are, in fact, attempting to violate it), they must accept the logical conclusion: Their policies will set off skyrocketing inequality (or, more likely: They don’t give a shit).

Claim: Inequality isn’t a problem because look at consumption!

There are lots of ways to look at inequality. You could look at income inequality by examining how much a person takes home every year from their labor, income from assets and transfers. You could also look at wealth inequality by figuring out how many assets they own, in the form of stocks, bonds, property, and subtract from it their debts. Or you could look at how much they are able to consume.

Some conservative economists argue that an increase in income inequality has not been mirrored by an increase in consumption inequality because the wealthy save or invest their income. Kevin Hassett, a former Romney economic adviser, illustrates this point, arguing:

From 2000 to 2010, consumption has climbed 14% for individuals in the bottom fifth of households, 6% for individuals in the middle fifth, and 14.3% for individuals in the top fifth when we account for changes in U.S. population and the size of households. This despite the dire economy at the end of the decade.

Although he initially made this argument against Piketty in 2012, he has revived it recently in a lecture on the subject.

How to respond: In large part, this is a common trope on the right — the “but they have cellphones!” argument. The empirical literature on this subject is still very much in flux, and there is not a consensus. Some recent studies find that consumption inequality has increased with income inequality. But even if we except the consumption inequality argument, conservatives have some explaining to do. After all, if income inequality has been rising while consumption inequality has stayed the same, where is the spending coming from? Debt. Which means that wealth inequality is increasing, as the rich save more and the poor fall further into debt. Research released this week by Amy Traub of Demos finds that the recent increase in credit card debt hasn’t been driven by profligate spending, but unemployment, children, the declining value of homes and lack of health insurance. Recent research by Emmanuel Saez and Gabriel Zucman show how the bottom 90 percent simply haven’t been able to save their incomes and thereby build wealth.

Claim: We need lazy rich people

Tyler Cowen is one of the more honest of Piketty’s critics, and there is certainly a lot to like in his review. However, this section is a head-scratcher:

Piketty fears the stasis and sluggishness of the rentier, but what might appear to be static blocks of wealth have done a great deal to boost dynamic productivity. Piketty’s own book was published by the Belknap Press imprint of Harvard University Press, which received its initial funding in the form of a 1949 bequest from Waldron Phoenix Belknap, Jr., an architect and art historian who inherited a good deal of money from his father, a vice president of Bankers Trust… consider Piketty’s native France, where the scores of artists who relied on bequests or family support to further their careers included painters such as Corot, Delacroix, Courbet, Manet, Degas, Cézanne, Monet, and Toulouse-Lautrec and writers such as Baudelaire, Flaubert, Verlaine, and Proust, among others.

How to respond: It’s very true that in the past, many artists, writers and thinkers benefited from familial wealth (or rich benefactors). This, however, is not to be celebrated! It means that marginalized people are frequently removed from mainstream discussion. It’s also a dreadful defense of inequality. As theologian Reinhold Niebuhr writes,“The fact that culture requires leisure, is however, hardly a sufficient justification for the maintenance of a leisured class. For every artist which the aristocracy has produced, and for every two patrons of the arts, it has supported a thousand wastrels.”

Poverty and oppression can also create other powerful types of art, from boheim to the blues. More important, there are far better ways to fund the arts than throwing money at rich families and hoping they cook up something nice. For instance, the National Endowment for the Arts has funded arts education, dance, design, folk and traditional arts, literature, local arts agencies, media arts, museums, music, musical theater, opera, theater and visual arts. In the aftermath of the Great Depression the Works Progress Administration had an arm devoted to funding the arts that supported Jackson Pollock, William Gropper, Willem de Kooning, Leon Bibel and Ben Shahn. The CIA has even gotten into the game.

As Niebuhr notes, “An intelligent society will know how to subsidize those who possess peculiar gifts … and will not permit a leisured class to justify itself by producing an occasional creative genius among a multitude of incompetents.” It’s a wonder that conservatives want the wealthy financing art and philosophy — Marx, after all, would have died of penury without the beneficence of the wealthy Engels. Given that his economist friends have been impressed by Piketty’s cultural depth because of his ability to cite Jane Austen, I wouldn’t put much weight on their cultural defense of privilege.

Claim: Piketty is French, and we saved their butts in World War II

This is true. You’ve lost the debate.

[Admin]

Taking on the Heiristocracy
History shows that growth alone won’t stop vast economic inequality.

May 2014

In his annual address, the president of the American Economic Association, Irving Fisher, sounded the alarm about the issue he described as “the great peril today”—the “striking inequality of capital,” which, he argued, was “perverting” American democracy. It was “distressing,” he said, that wages were “actually decreasing while profits have been increasing.” “Something like two-thirds of our people have no capital,” said Fisher, while “the major part of our capital is owned by less than 2 percent of the population.” Moreover, “half of our national income is received by one-fourth of our population.”

In the year 2014, the theme of Irving Fisher’s address is resonant—which is why you may be surprised to learn that he gave it in 1919. Fisher, moreover, was a mainstream economist, very much in the neoclassical tradition. Milton Friedman called him “the greatest economist the United States has ever produced.” Today, the overriding concern of most mainstream American economists is what it has been for decades: economic efficiency. Questions of equity, on the other hand, have fallen by the wayside. But as Fisher’s address vividly demonstrates, concerns about distribution were once seen as vitally important.

In his important new book, Capital in the Twenty-first Century, French economist Thomas Piketty asserts that one of his chief goals is “putting the distributional question back at the heart of economic analysis.” As he notes, today the concentration of wealth has soared to levels that have not been seen in over a century. In recent years, the issue of economic inequality has moved out of the seminar rooms to become an issue of broad public concern. We’ve heard it in the rallying cry of the Occupy movement—“We are the 99 percent!”—and in Pope Francis’s thundering denunciations of capitalist excess and “trickle-down” economics. We’ve seen it in the surprising electoral success of economic populists like Elizabeth Warren and Bill de Blasio. Late last year, President Barack Obama gave a speech devoted to the subject, and the Democratic Party is pushing economic inequality as its major campaign theme for the 2014 midterm elections.

Inequality is on the political map, all right, and without question, the economist most responsible for putting it there is Thomas Piketty. Beginning in 2003, Piketty, along with his colleague and frequent coauthor Emmanuel Saez, published a series of ground-breaking studies documenting the dizzying rise of income inequality in the United States. Piketty’s innovation in this empirical work was his use of tax returns, rather than household surveys, to measure inequality. Tax returns give a more accurate picture of inequality than household surveys, which frequently fail to capture what is going on at the top of the income distribution. Partly this is because of nonresponse bias (rich people are far less likely to participate in such surveys) and partly it is due to the practice of “top-coding,” which caps the reported top incomes at a maximum value and thus prevents the exact amounts from being disclosed.

Piketty and Saez have demonstrated that while groups at the top of the income distribution have increasingly reaped disproportionately large economic rewards, in recent decades it is those with incomes at the very top—the top 1 percent and, even more, the top 0.1 percent—where the gains have been truly spectacular. And when Piketty and his colleagues examined inequality in other rich countries, the pattern held: since the 1970s, inequality has risen sharply in every developed economy, with the gains concentrated among the richest 1 percent. Saez’s most recent report found that in 2012, the top 1 percent of U.S. earners took in over a fifth of all income—among the highest levels ever recorded since the enactment of the income tax in 1913.

In Capital in the Twenty-first Century, Piketty sums up his research, tracing the history and pattern of economic inequality across a number of countries from the eighteenth century to the present, analyzing its causes, and evaluating some policy fixes. Spanning nearly 700 densely packed pages, it’s a big book in more than one sense of the word. Clearly written, ambitious in scope, rooted in economics but drawing on insights from related fields like history and sociology, Piketty’s Capital resembles nothing so much as an old-fashioned work of political economy by the likes of Adam Smith, David Ricardo, Karl Marx, or John Maynard Keynes. But what is particularly exciting about this book is that, due to advances in technology, Piketty is able to draw on data that not only spans a substantially longer historical time frame, but is also necessarily more complete and consistent than the records earlier theorists were forced to rely on. As a result, his analysis is significantly more comprehensive than those of his predecessors—and easily as persuasive.

Another of Piketty’s strengths is his enthusiastically interdisciplinary approach. One of the pleasures of this book is the way Piketty draws on sources as varied as the classic economic theorists, the great nineteenth-century social novelists like Jane Austen and Honoré de Balzac, recent research by historians and sociologists, and popular movies and TV shows like Titanic and Mad Men. He prefers the richness of these sources to the sterile mathematical models that are prevalent in contemporary academic work in economics. Indeed, he is scathing about much contemporary work in the economics field, condemning its “childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.”

Capital is a consistently engrossing read, encompassing topics including the stunning comeback that inherited wealth has made in today’s advanced economies, the dubiousness of the economic theory that a worker’s wage is equal to his or her marginal productivity, the moral insidiousness of meritocratic justifications of inequality, and more. But the book’s major strength lies in Piketty’s ability to see the big picture. His original and rigorously well-documented insights into the deep structures of capitalism show us how the dynamics of capital accumulation have played out historically over the past three centuries, and how they’re likely to develop in the century to come. From his analysis he’s derived several important lessons, none of them particularly comforting.

The first of these is that, contrary to widely held economic theories, there is no “natural” tendency of inequality to wane in advanced capitalist societies. In the 1950s, economist Simon Kuznets famously argued that in advanced economies, inequality looks like an inverted U curve, with inequality increasing during the early stages of industrialization, then decreasing as economic development spurs growth that benefits all. But as Piketty demonstrates, Kuznets’s inequality theory was based on fatally incomplete data—he only dealt with one country (the United States), from the years 1913 to 1948.

Economic inequality in the U.S. and Europe experienced a precipitous decline between World War I and World War II, but the causes were hardly natural. Inequality fell due to a series of shocks that included the physical destruction in Europe left by two massive wars, the bankruptcies of the Great Depression, and, he says, “above all” to “new public policies”—policies that included rent control, nationalizations, steeply progressive income taxes, and “the inflation-induced euthanasia of the rentier class that lived on public debt.”

The decline in inequality that began between the wars and continued for decades afterward was a historical anomaly that is unlikely to repeat itself—something that many American liberals, still mired in New Deal and Great Society nostalgia, need to hear. Left to its own devices, capital begets capital, wealth becomes increasingly concentrated, and inequality spirals. Piketty warns us that “[t]he consequences for the long-term dynamics of wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake, and that the divergence in the wealth distribution is occurring on a global scale.”

Piketty’s second major lesson is that, contrary to the fervent hopes of advocates ranging from supply-side economics’ true believers to many left-leaning economists, growth will not save us. As Piketty explains, economic growth does indeed tend to decrease economic inequality. Demographic growth, which is one component of economic growth, tends to decrease the influence of inherited wealth. For example, if families are larger, the average inheritance per child will be smaller, everything else being equal. In addition, high-growth economies tend to increase social mobility, because they provide greater opportunities for those whose parents weren’t part of the old economic elite. During the late 1990s—the last period of sustained, relatively high growth we saw in the U.S.—workers experienced a nearly full employment economy, which increased wages and caused inequality to decline, albeit only slightly and temporarily. But Piketty argues that the sustained, high rates of economic growth we saw in advanced economies in the twentieth century are very likely a thing of the past. He emphasizes that “there is no historical example of a country at the world technological frontier whose [inflation-adjusted] growth in per capita output exceeded 1.5 percent over a lengthy period of time” (one hundred years or so).

Piketty’s central insight is that inequality is an increasing function of the gap between r, the net rate of return on capital, and g, the rate of economic growth. Throughout most of history, the rate of return on capital has been durably and significantly higher than the rate of economic growth, and this trend is likely to continue, particularly given the likelihood of slower growth rates in advanced economies. The ratio of capital to income—as good a measure as any of the influence of wealth in society—peaked at about 700 percent in Europe in the nineteenth century, then plummeted to between 200 and 300 percent in the 1950s and ’60s. Currently it hovers around 600 percent and shows every sign of returning to its nineteenth-century peak. Indeed, plugging highly plausible assumptions into Piketty’s model yields predictions that Europe and America will experience rates of inequality and wealth concentration that will not only match but exceed their nineteenth-century peaks.

This dystopic scenario is deeply disturbing, but it doesn’t have to be our destiny. Piketty notes that “the history of income and wealth is always deeply political, chaotic, and unpredictable.” This brings us to Piketty’s third major lesson, which is that, happily, there is, in theory at least, a solution to the problem of soaring economic inequality, and a surprisingly simple one at that: taxes. Specifically, Piketty advocates a steeply progressive income tax and a global tax on wealth. He estimates that the optimal top marginal income tax rate is approximately 80 percent. Such a rate, he says, “not only would not reduce the growth of the U.S. economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.”

Piketty’s proposed global tax on wealth would be progressive, annual, and applicable to all forms of capital, from real estate to financial and business assets. He advocates that the tax be based on bank information that is automatically shared, a move that would enable governments to manage banking crises more efficiently and would also promote financial transparency. Even a modest wealth tax could bring in significant revenue, and it would minimize the “substantial risk that the top centile’s share of global wealth will continue to grow indefinitely.”

Piketty admits that such a tax is “utopian.” International cooperation would be a formidable challenge, particularly given our globalized banking system with its vast panoply of seductive tax havens for the 1 percent. But precisely since our economy is now global, solutions to economic problems need to be global as well. More fundamentally, Piketty lacks a theory of politics that tells a persuasive story about how such changes might come about in the real world. In the twentieth century, it took the economic shocks of two world wars and the Great Depression to compel governments to adopt aggressively redistributionist tax policies. Absent such traumas, and given the declining power of institutions like labor unions that built support for such measures, what would make governments adopt such far-reaching reforms today?

Even in social-democratic Europe, many governments, including the party that Piketty supports, the French Socialists, are strongly supporting lower taxes and fiscal austerity. In the U.S., while Democrats have adopted economic inequality as a major campaign theme, in substance their anti-inequality political agenda is, sadly, less than meets the eye. It appears to consist mainly of supporting a long-overdue increase in the minimum wage, a modest expansion of food stamp benefits, and, perhaps, tax cuts for lower-middle-class families. Yes, last year Congress implemented far tougher financial reforms than expected. But among most mainstream Democrats, there appears to be little appetite for enacting policies that would seriously upset Wall Street or challenge the entrenched power of the 1 percent. No one is talking about returning to an 80 percent marginal tax rate.

So are we doomed to a dystopic future after all—a Hunger Games-like society where a tiny but powerful elite lives in luxury and splendor while the masses toil and starve? Hardly. As Piketty argues, history suggests that the levels of inequality we are approaching tend to be politically unsustainable. As Piketty notes, there is an odd yet widely accepted idea that the U.S. is significantly more inegalitarian than Europe because we like it this way. Certainly, many U.S. conservatives appear highly invested in persuading their fellow Americans—and perhaps themselves—that this is the case. But recent opinion polls tell a rather different story.

Moreover, as Piketty rightly emphasizes, equality is our American birthright. We Americans are, after all, a proudly democratic people whose signature achievement—ridding ourselves of kings, queens, and a titled aristocracy—marked a revolutionary step forward in human progress. In the early years of the American republic, the U.S. truly was a more egalitarian society than Europe—
Piketty’s historical data confirms this. During the Gilded Age of the late nineteenth century, when economic inequality soared and wealthy elites began to exercise unprecedented power over our society and our political system, many Americans—even free market economists like Irving Fisher—expressed alarm.

The inequality crisis America faced in the early twentieth century was a profoundly serious one, but in the end we rose to the challenge. After all, as Piketty points out, America is the country that, after World War I, literally invented “confiscatory” taxes—the type of progressive tax that is designed not so much to yield revenue but to “put an end to” large incomes and estates, because they are regarded as “socially unacceptable and economically unproductive.” Even an ardent apostle for capitalism like Fisher felt that the best solution to the early-twentieth-century inequality problem was a steeply progressive tax on the largest estates—with a rate that could climb as high as 100 percent for an estate that was more than three generations old. America’s twenty-first-century inequality crisis is, if anything, even more daunting and complex than the one we experienced a century ago. But as Piketty reminds us, the solutions to this problem are political, and they lie within our grasp. Should Americans choose to deploy those solutions, not only would we be doing the right thing, we’d be living up to our deepest traditions and most cherished ideals.