Capital in the 21st Century

Submitted by Matthew on 5 October, 2017 - 8:55 Author: Martin Thomas

Economic inequality has increased. It is on a solid trend to continue increasing. The USA, the most unequal of the richer countries, may set a new historical record for income inequality by 2030, and other countries are following similar though not identical trajectories.

So says Thomas Piketty in his book Capital in the 21st Century. It has been a best-seller in many countries, despite costing £30 and stretching to six or seven hundred pages. Politically, Piketty has been in the orbit of the French Socialist Party. He told an interviewer: “I never managed really to read [Marx]... Das Kapital, I think, is very difficult to read and for me it was not very influential”.

I suspect that’s a self-deprecating fib: for example, Piketty systematically refers to the commodity which workers sell to bosses as “labour power”, implicitly making the distinction between “labour” and “labour power” which is one of the things which most marks off Marxist from conventional economics. In any case, Piketty’s book studies issues of the economic history of the last century which Marx, obviously, never got a chance to think about, and which today’s self-proclaimed Marxists have not studied sufficiently. Piketty’s other message, less expanded on by reviewers or even by Piketty himself, is that “the history of inequality has always been chaotic and political”.

“The resurgence of inequality after 1980s”, he writes, “is due largely to the political shifts of the past several decades”, and not to ineluctable social or technical trends. Inequality of incomes from property was huge in Europe (not so much so in the USA) in the years before World War One, then declined a lot after the war and until recent decades. A “patrimonial middle class” emerged among the 40% between the richest 10%, and the poor 50% at the bottom. That 40% owned very little wealth in 1910. By 2010 they owned houses, cars, maybe a few financial assets. Another 50% still owned almost nothing, but the 40% had taken some of what the top 10% previously had. The best-off of the working class, and a chunk of the “professional” self-employed or semi-autonomous employees, won gains. But, Piketty argues, only big social explosions and crises — the two world wars, and the periods of revolutions or huge class struggles after them — shook the old oligarchies and forced the concessions and revaluations that allowed the rise.

“The reduction of inequality during the 20th century”, Piketty told New Left Review, “was largely the result of violent political upheavals, and not so much of peaceful electoral democracy”. Inequality of wealth reached a low point in the 1970s, but was still high. It has since increased again. As yet overall inequality of income is less than it was a hundred years ago, except where the increases in inequality of incomes from labour have been so exceptionally large, in the USA, UK, and so on, as to push it up more.

The trend, though, is for the inequalities of income to rise, and to feed into and combine with inequalities of wealth. And specifically with inequalities of inherited wealth, which are increasing in effect. Inequality between the top ten per cent and the rest has increased. That is only half the story. Inequality within the top ten per cent has soared even more. The top one per cent, or even the top 0.1 per cent, hold a big proportion of wealth. Economic inequality, however, has a big effect on how much, or how little, real democracy there is in a society. Piketty titles a section: “The rentier [i.e., person who lives off income from property], enemy of democracy”. In a warm review of Piketty’s book, Paul Krugman in the New York Times sums it up well: “a drift towards oligarchy”.

Piketty sees a mathematical relation between different economic rates as the driving force of wealth inequalities. If the rate of return on wealth — the income you get from it per year, as a percentage of the stash — is greater than the overall rate of growth of the economy, then the wealthy will pay for luxury and still see their wealth increase relative to the whole economy. The mathematical relation between the rate of return on wealth and the overall rate of growth of the economy explains less, I think, than Piketty claims. Why is the relation that way? Why, for example, are there not large surges of directly-financed (not PFI) public investment spending which boost growth without levering up the rate of return for wealthy individuals? Isn’t the mathematical relation as much a result of the increasing inequality (the increasing will and ability of the ultra-rich to pocket large revenues) as a cause of it?

Piketty’s use of the word “capital” is very different from a Marxist usage, and indeed from strict orthodox economic usage too. James K Galbraith, son of the famous liberal economist J K Galbraith, reviewing Piketty in the US social-democratic magazine Dissent, makes that point very clearly, and several others too. But if Galbraith’s more exact term, “private financial valuation”, is substituted for Piketty’s “capital”, the narrative remains strong. Galbraith’s review accepts Piketty’s basic narrative, but proposes more in the way of conclusions than Piketty ever does. “Raise minimum wages! Support unions! Tax corporate profits and personal capital gains!...” So long as we read that as an appeal to workers to mobilise ourselves to win those demands, rather than as pleas to this or that politician, that’s an answer that shows the bridge from here to the “violent political upheavals” which can bring some real human equality.