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 is a best-seller in France, where it was originally published, and now also in Britain and the USA, despite costing £30 and stretching to 640 pages.
His 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.
A large part of the volume documents a decrease in inequality over the 20th century. Inequality of incomes from labour, or notionally from labour, changed relatively little, before a big surge at the top of the range in the USA, the UK, and other English-speaking countries in recent decades. Inequality of incomes from property was, however, 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”.
The inequality of wealth was still high even at its low point in the 1970s. 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. “Inherited wealth comes close to being as decisive at the beginning of the 21st century as it was in the age of Balzac” [early 19th century].
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 focus by the Occupy movement on the top one per cent had sense. The top one per cent, or even the top 0.1 per cent, hold a big proportion of wealth.
Some conventional economists suggest that the inequality is one between different phases of life, more than between social classes. People start off poor, build up savings and wealth, and then run them down in old age. The well-off and the worse-off are really the same people at different times in their lives. Piketty refutes that idea, showing that inequality of wealth is high within age groups.
He demolishes the idea that the inequality arises primarily from globalised communications, so that revenues flow to a few actors or singers or sportspeople who become tagged (perhaps almost randomly) as “superstars”. The big majority of those with huge incomes “from labour” are “supermanagers”, not superstars.
Why are they paid so much? Mostly because they themselves, or their friends, decide what to pay them. Some economists argue that it is because the advance of technology has dictated increasing rewards to skill. That is very dubious in general, and even more dubious for the “supermanagers”.
Remember when the bosses of Britain’s big banks were asked by a parliamentary committee, on 10 February 2009, what banking qualifications they had. None, they mumbled. As Piketty puts it, this is more like “hands in the till” than Adam Smith’s proverbial “hidden hand of the market”.
The “political” character of “supermanager” pay-outs (in Marxist terms, more a disguised profit pay-out than a “wage”) is shown by the fact that those pay-outs have so far increased much more in the USA and the UK than in other countries, (though the others are following). If there were “technological” reasons, they would apply more or less equally in all rich countries.
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.
That has been the general pattern through history. It took World War One, World War Two, and the tumult around the following them, to reverse the pattern.
With dislocations, financial crashes, and expropriations, the rate of return on wealth sank. The overall rate of growth, spurred by frantic wartime construction and post-war reconstruction, rose above it. People who lived solely from inherited wealth had to dip into their stash to sustain their luxury, and gradually they, or their heirs, were levelled down a bit.
Now the rate of return on wealth is rising above the overall rate of growth. It is even higher for the ultra-rich than for the merely rich. Piketty demonstrates that neatly by showing that the rates of return on US college endowment funds range from 10.2% for the richest (Harvard, Yale, Princeton) down to 6.2% for the majority with relatively small funds. Thus inequality spirals, and cumulatively.
Piketty argues that history shows that formal democracy and formal egalitarianism in official discourse has almost no grip on the development of economic inequality. Republican, “officially left-wing” France was pretty much as economically unequal before World War One as monarchist, “officially conservative” Britain,
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”.
Krugman draws no political conclusions. Piketty does. He advocates a global wealth tax, and very high rates of income tax on very high incomes. He concedes that it will be difficult to get governments to do such things, but responds with a shrug. Other things could help, such as deliberately high inflation rates which erode “rentiers”. In any case, he is just not very optimistic.
“A progressive levy on individual wealth” would be “a less violent and more efficient response” than “Soviet-style centralised planning”.
Democratic working-class socialist alternatives to both Stalinism and adroitly-taxed capitalism he simply does not discuss.
Although Piketty doesn’t spell out this conclusion, according to his statistical analyses, which for France go back to the time of the French Revolution of 1789, the current spiral of increasing inequality is without precedent, or at least without precedent in recent centuries. Inequality on the eve of World War One was high, but it had been not much lower in the 19th century.
If the limited reductions in inequality achieved in the mid 20th century (and Piketty concedes, even stresses, that they were limited) arose only through “violent political upheavals”, then the current spiral of inequality, which has its own momentum, will be broken by nothing less.
Piketty is not a Marxist. Politically, he is in the orbit of the French Socialist Party. He told Isaac Chotiner, interviewing him for the US magazine New Republic: “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 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, the reviews which either (from the right) berate Piketty for being a hidden Marxist, or (from the left) condemn him for not being a proper Marxist, are beside the point.
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 Marxists have not studied sufficiently.
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, in by far the best review I’ve read of 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.
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?
Galbraith’s review accepts Piketty’s basic narrative, but proposes a more effective conclusion. “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.