ECONOMICS IS THE MASTER DISCIPLINE of our time. You may not think you are interested in economics, but whatever you care about — the environment, the future of the university, race and poverty, or whether independent artists can eat — economics is interested in you.
So a new book just out, Thomas Piketty’s Capital in the Twenty-First Century, is potentially significant for all of us — especially if, as economists are saying, it’s this decade’s most important book in the field. And it matters that Piketty’s book is revolutionary. It rewrites the mission of economics, discarding claims that the discipline is a super-science of human behavior or public policy. Piketty wants to return his field to what the 19th century called “political economy”: a discipline about power, justice, and — also, but not first — wealth. The questions of political economy are political: how should we freely organize our interdependent economic lives?
With that mission, Capital in the Twenty-First Century asks questions that blend empirical complexity and political urgency. How unequal is the division of wealth and income? How did it get that way, and where is it going? How worried should we be, and what can we do? And — check this out — are democracy and capitalism in conflict?
Spoiler alert: Yes. And Piketty’s answer spoils, in a different sense of the word, the longstanding conventional wisdom, supported by economics Nobel winners like Friedrich Hayek and Milton Friedman, plus lots of less controversial characters, that capitalism is democracy’s best friend. Free markets respect freedom by honoring personal choice, we’ve been told. They treat people as equals by tying economic rewards to social contributions and opening paths to social mobility. They check an overreaching government by dispersing power among owners, workers, and entrepreneurs. They create widely-shared wealth, so no one’s life needs to be hopeless or degraded.
Pretty to think so, but Piketty’s vast stockpile of new data, weaponized with some simple algebra, vaporizes that story. It shows a world getting radically more unequal, the return of hereditary wealth, and — at least in the US — an economy so distorted that much of what happens at the very top can be fairly described as class-based looting. And he gives some fairly strong reasons to suspect that this, not the relatively open and egalitarian economies of the mid-20th century, is what capitalism looks like.
Piketty’s book feels, itself, economical: it’s undramatic and almost always clear, and the French is handsomely translated by the indispensable Arthur Goldhammer. Reading it is like talking to a smart person who knows you’re smart and knows, too, that you’re not an economist. It’s a pleasure, but — and this is one measure of its success — it’s also a spur to frustration. Since Capital is economics on Piketty’s terms, it diagnoses, gives little comfort, and doesn’t pretend to offer a complete cure. So as it builds its case for an inexorable conflict between democracy and capitalism, it leads its reader to an urgent question it doesn’t, in itself, do all that much to answer: how can democracy prevail? After Piketty, this has to be our question.
Piketty, Capital, and Inequality
If you have heard one thing about Piketty’s argument, it is probably this: r > g. This controversial little inequality means that the rate of return on capital (r) is greater than the overall growth rate of the economy (g). It’s a shorthand for a historical observation: over the history we can measure (a couple of hundred years, give or take a degree of confidence), financial investments and land — capital — have yielded returns of about four to five percent a year on their base value. Growth in the economy as a whole, the total pool of wealth, has been closer to one or two percent per year. That means the part of the pie that capital represents is growing faster than the pie as a whole, so it’s leaving a smaller share for everyone else. Although we all know that compound interest is powerful stuff, it’s worth working through the implications of that difference on the largest scale, over the long haul.
Wealth begets wealth: at a five percent rate of return, the value of capital doubles every 14 years, while at a two percent rate, the economy doubles in size after 35 years. That means that over a century and change, wealth coming from capital would have doubled seven times, to 128 times its starting size, while the overall economy would be only eight times larger.
At the end of that imaginary century, everyone would be much richer; but anyone whose ancestors had been sitting on a pile of money or a spread of land would be hugely richer. This wouldn’t matter if everyone had a nice chunk of capital, so they shared in the gains. But ownership of financial assets and land has always been highly unequal.
Capitalism, purely by the numbers, looks to be a giant inequality machine. So why, more than 200 years after the Industrial Revolution, don’t we live in a wildly unequal world, divided between Scrooge McDucks swan diving into their cash and Bob Cratchits pleading for a break (while trying to understand what Disney has wrought with the archetypical job-creator)? Actually, we do. Piketty and his fellow researchers have spent the last 20 years mining all kinds of data and devising clever ways to make them talk, and they have concluded that in the US today, the wealthiest 10 percent hold about 70 percent of assets, and the top one percent alone 35 percent. Both those numbers have been climbing since 1970. Europe has seen similar rises since 1970, although the share of the top 10 percent and the top one percent are each about 10 points lower there. The lowest inequality Piketty has observed was in Scandinavia in the 1970s: The top 10 percent held 50 percent of wealth, and the top one percent owned “just” 20 percent. For about 40 years, we’ve been living a world where r > g seems to be doing its stratifying work.
It might be much worse except that, as Piketty persuasively explains, the 20th century was a very strange one, full of epochal destruction and singular progress. It started with wealth inequality much more extreme than today. In Britain circa the first episode of Downton Abbey, the top one percent controlled 70 percent of wealth. But between World War I and sometime in the 1970s, r > g was suppressed by the worst and the best of the century. In the 30 years before the start of the first world war and the end of the second, the United States and — especially — Europe liquidated a huge amount of capital, especially in great fortunes, through devaluation, collapse, and the cost of war. For the next 30 years, taxes on asset-based incomes — profits, rents, royalties — and confiscatory tax rates on the highest incomes kept capital concentration under control in the US and continued to drive it down in Europe.
There have been two big runs, then, for r > g. The first one started sometime before 1810, when Piketty starts most of his historical estimates, and climaxed in the Gilded Age. Then the clock started again around 1970. Our new Gilded Age is the consequence.
Occupy had it right, more or less. The economy is rapidly becoming more unequal, whether measured in terms of who owns it or in terms of how its annual payouts are distributed. In the US today, a member of the one percent has on average almost 40 times the income of the 90 percent who fall somewhere below the top 10 percent — the “ordinary American.” Stratification increases much more dramatically at the very top, where mere percentiles run out, and inequality of wealth is much more extreme than inequality of income. Capitalism is producing a new super-class of rentiers — those who live on income from capital. They own the world, and they collect its dividends.
Living in a New Gilded Age
What is the human meaning of the changes that these numbers describe? If you live in a dramatically stratified society — and Piketty’s point is that you do — you know this class structure. There’s a small set of the super-wealthy, with powerful influence in culture and politics. These people control capital. Then there is a slice of professionals and mid-level executives, as well as some small-business owners, who generally own their houses and save some significant financial assets over their lifetimes – the nine percent. The true middle class, 40 or 50 percent, owns a house but not much else. Many of the rest have negative or neutral net value and live month-to-month.
Piketty’s book charts the economic basis of cultural changes that we’re all witnessing: as capital accumulation builds up the financial power of the one percent and the 0.1 percent, social life changes. Talent and ambition follow the money, going where capital either trades (Wall Street) or ventures (Silicon Valley). The professions seem drab and mediocre by contrast, and building up a good life by working for wages is impossible. Working-class security, middle-class mobility, and stable, respected professions all give way to a rush for the big money. Remaining in the asset-holding middle class — the real social innovation of the last century, and the rhetorical (though not actual) center of American political life — ceases to feel desirable or even viable. Picking the right parents becomes the key to good prospects — or marrying into the right family if you are born into the wrong one. Piketty lingers over Jane Austen’s asset-oriented marriage comedies with affection but also a certain horror: the need to marry someone with the right capitalization level, a central assumption of those plots, is no longer a quaint feudal relic. It is courtship in advanced capitalism. And it’s not just this: it’s the de facto ownership of the Republican Party by the one percent; it’s the way big fortunes finance both parties; it’s the way, under the Roberts court, even the Constitution has become a tool that oligarchs can use to limit our political life.
Once you start to look at things through Piketty’s lens, it’s not hard to feel that, as the iconic Occupy sign had it, shit is fucked up and bullshit. We’ve been spun a story: mainstream economics for the last 60-odd years has succored a complacent folk tale, albeit with lots of mathematical sophistication tacked on. Except for some discernible “market failures,” it told us that all was for the best in this best of worlds. What you earn must be what you are contributing; otherwise, the market would step in to restore efficiency. As long as this machine is working, we can concentrate on total wealth — how big is the pie? — and set aside divisive issues about distribution as afterthoughts.
Piketty reveals that these just-so stories have veiled urgent and inflammatory problems: capitalism produces self-accelerating inequality that corrupts both politics and culture and splits society into privileged rent collectors and everyone else, who must choose either to get halfway rich ministering to capital or to stay on the low end of the pole doing the humanly necessary work of teaching, nursing, keeping the utility wires humming, and so forth. Piketty’s multi-century portrait of wealth and income obliterates economists’ complacent narratives.
Or, put differently, it historicizes them. There was a period when profound inequality seemed a thing of the past, growth was widely shared, and the division between capital and labor in national income looked stable. Much of modern economics took shape in this happy time. Those economists assumed they were living in Act V of a comedy, watching history’s conflicts resolve into harmony. It turns out they were in Act II of a tragedy, observing but failing to understand capitalist dynamics that war and depression had recently re-set near the starting line. We are now in Act III or IV of that tragedy. Tragedy demands altogether different judgments from comedy. We have more important problems than accessorizing the groomsmen for the marriages of liberty and equality, capital and labor, and public and private.
What Can We Know?
Suppose you care about civic equality, social mobility, the dignity of ordinary people, and the long-term prospects of democracies that need all these values. What to do in the face of rising inequality and oligarchy? Piketty recommends a small, progressive global tax on capital to draw down big fortunes and press back against r > g. He admits this idea won’t get much traction at present, but recommends it as a fixed point in political imagination, a measure of what would be worth doing and how far we have to go to get there.
It’s an excellent idea, but it also shows the limits of Piketty’s argument. He has no theory of how the economy works that can replace the optimistic theories that his numbers devastate. Numbers — powerful ones, to be sure — are what he has. He has counted things that were harder to count before now — income, asset value — and adorned the bottom line with some splendid formulas for holding onto their importance. But r > g, as Piketty readily admits, is not a theory of anything; it is a shorthand generalization of some historical facts about money’s tendency to make money. Those facts held in the agrarian and industrial societies of Europe and North America in the nineteenth century and seem to be holding in today’s industrial and post-industrial economies. But these are very different worlds. Is there something constant that unifies different versions of inequality — that unites plantation owners and Apple shareholders, in their shared privilege above bondsman and Best-Buy techs — or is the inequality itself the only constant? Without answers to these questions, we don’t have a theory of capitalism, just a time-lapse picture of it.
This is not only a theoretical problem. It bears on whether past is prologue, whether inequality yesterday forecasts inequality tomorrow. Without a theory of how the economy produces and allocates value, we can’t know whether r > g will hold into the future. This is essential to whether Piketty can answer his critics, who have argued that we shouldn’t worry much. They claim that rates of return on capital should fall rapidly toward that of the overall economy, as much mainstream theory would predict, or that the overall growth rate will spike with new technological innovations. Either would greatly blunt r > g. Piketty doesn’t really have an answer to these challenges, other than the weight of the historical numbers.
The lack of a general theory is a bit of an epistemic irony. Piketty’s work is a triumph of the Enlightenment aim to make the world intelligible, demystifying it by showing us the patterns that emerge from millions of facts. But by calling for economics to become a historical science, concerned with what has happened and is happening rather than with evermore refined mathematical models, he carries out a massive epistemic dethroning. History happens only once. Its “natural experiments” are few and highly incomplete. And casting light on big and inconvenient facts, he also points out an area of darkness; ignorance where we had been lulled into thinking we had knowledge.
Going beyond Piketty, but informed by his argument, how should we think about rising inequality? For one, we shouldn’t be complacent because he can’t prove that r > g will hold in the future. Instead, as environmentalists have long argued, we should use a version of the “precautionary principle”: with a clear worst-case scenario in front of us, and plenty of evidence that things are trending that way, we shouldn’t demand an airtight demonstration before we start trying to prevent it. The precautionary principle is a useful compass when the stakes are high and certainty is scarce. That is pretty much always the situation of acting in real time, with only “historical sciences” like Piketty’s economics to guide us.
Second, we should grope toward a more general theory of capitalism by getting more systematic about two recurrent themes in Piketty’s work: a) power matters and b) the division of income between capital and labor is one of the most important questions in any economy. Piketty makes much of the grabbiness of crony-capitalist executives and the forgiving tax laws that help them get away with huge hauls, but when he talks about the larger vicissitudes of labor and capital, he is mostly interested in the effects of big shocks such as economic crisis and war. Yet the period of shared growth in the mid-20th century was not just the aftermath of war and depression. It was also the apex of organized labor’s power in Europe and North America, the fruit of many decades of organizing, not a little of it bloody, not a little under the flag of democratic socialism. Various crises cleared the ground, but the demands of labor, and an organized left more generally, were integral to building the comparatively egalitarian, high-wage world that came after the wars, with its strong public sector, self-assertive workers, and halfway tamed capital. There’s a lesson we can learn here about what we might do to combat inequality, and how.
Why not generalize a thought that surfaces in many of Piketty’s specific analyses: the rate of return on capital is in part the product of struggles, between those who own the world and those who just work here. Sometimes these are contract negotiations, sometimes strikes, and sometimes elections and lawmaking. Together these struggles decide what can be owned (slaves count as capital in some of Piketty’s calculations), what the owners can do with it, and how much bargaining power non-owners bring to the table. Maybe the basic question is power, the comparative power of organized wealth on the one hand and organized working people on the other. Focusing on this question means putting human struggle at the very heart of any analysis of economic life. As the author of an earlier book titled Capital put it (though not in that book), the root is man.
Which Political Economy?
That author was Karl Marx, of course. His name was unmentionable for a few decades, except as kitsch or anti-utopian bromide. Today his charisma has returned, and the echo of his title in Piketty’s has lent a certain frisson. Some of the Marxian revival is very serious, a bit is trendy, and much is symbolic. Whether or not one wants to travel far with theories of surplus value, overproduction crisis, and the proletariat as the universal class, Marx stands for essential ideas that have been scorned but are back and vital again: economies are about power; to understand an economy you have to ask who gets, and how; the ways that economies undercut freedom and equality are cause for outrage; and political democracy will not be complete until we find a way to extend its commitments to economic life. Marx stands, too, for the conviction that, as humans, we owe ourselves more than mutual advantages under the aegis of the invisible hand.
Part of the power of Piketty’s argument, troubling as his predictions are, is that he shows that the questions Marx addressed are still on the table. This is important for those of us who are far from being Marxists of any traditional kind, but for whom Marx’s questions resonate, along with his refusal to believe that standard pro-market answers should give us any satisfaction.
I am sure I am not alone, among those who got some of their book learning in the last two decades, in a particular memory of college. There were courses in which we thought very hard about what kind of distributive justice would respect the freedom and equality of every member of society. There were classes in which we talked about how power, multifarious power, shaped everything from prisons to sexual identity, and how one could hope to counter it.
And then there was this: an economics class, in my case taught by a former head of Ronald Reagan’s Council of Economic Advisers, where we drew intersecting lines representing supply and demand and learned to demonstrate that high tax rates on the wealthy would diminish marginal productivity, plaguing us all with lost social wealth. A thousand whispers and hints let us know that those other classes were for stimulation, personal ethics, and literary aesthetics. The economics class, though – that was the world. The real world.
Well, Piketty has gone deeper into the real world than the people who taught Economics 101, and his lesson is that it needs those other classes. It needs the rich history of political economy, which includes not just Marx, but John Stuart Mill, even Adam Smith, and a rich panoply of American reformers and radicals.
Piketty shows that capitalism’s attractive moral claims — that it can make everyone better off while respecting their freedom — deserve much less respect under our increasingly “pure” markets than in the mixed economies that dominated the North Atlantic countries in the mid-20th century. It took a strong and mobilized left to build those societies. It may be that capitalism can remain tolerable only under constant political and moral pressure from the left, when the alternative of democratic socialism is genuinely on the table. Piketty reminds us that the reasons for the socialist alternative have not disappeared, or even weakened. We are still seeking an economy that is both vibrant and humane, where mutual advantage is real and mutual aid possible. The one we have isn’t it.
Reading Piketty gives one an acute sense of how much we have lost with the long waning of real political economy, especially the radical kind. As mentioned, Piketty does not expect his one real proposal, a modest wealth tax, to go far in this political environment. Ideas need movements, as movements need ideas. We’ve been short on both. In trying to judge what to do about Piketty’s grim forecasts, there is a crevasse between “write op-eds advocating higher tax rates” and “rebuild the left.” It isn’t Piketty’s job to fill that gap, but he does show just how wide it yawns, and how devastating is the absence it represents.