Science in Society Archive

Capitalism and the Inexorable Rise of Inequality

Review of T Piketty: Le capital au XXIe siècle. Paris, Éditions du Seuil, 2031. English translation by A Goldhammer:  Capital in the Twenty-First Century, Cambridge MA, Belknap, 2014. 696 pp, £29.95. ISBN 9780674430006.


Capital in the Twenty-First Century

As recently as a hundred years ago, the rich and the poor in the UK lived very different lives. It was as though there were, in the words of Benjamin Disraeli, two nations. Things have changed a lot since then; the class system still exists, but the divisions are nowhere near as great as they used to be. Income differentials are smaller, or appear to be, everyone seems to have the same sorts of possessions though some are more fashionable and expensive than others, and with advances such as the welfare state, the National Health Service, comprehensive schools, and the great expansion in higher education, we believe that we have left the Victorian and Edwardian eras firmly behind and are moving slowly but surely towards a much more egalitarian future.

Recently, however, the apparently inexorable increase in equality has been reversing. It is the lower income groups that are most affected by unemployment, by cuts in benefits, and by the replacement of well-paid full time jobs by part time jobs at much lower wages. Those in the middle have been more or less holding their own, partly because they tend to have more of a cushion especially if they already own their home, but they too are beginning to feel the pinch.

Meanwhile, those at the top are surging ahead. In 2012, while the pay of the average worker in the UK increased by an average of 1.9%, which was below the rate of inflation, executives did much better. Pay for chairman of FTSE-100 companies went up by 6% and senior independent directors of those companies were given average increases of 10% [1]. What is more, while the trend towards greater inequality may only have become obvious in the wake of the 2008 financial crisis, it has actually been going on for very much longer. Piketty points out that in 1970, the richest 1% in the US took 9% of national income, but by 2000-2010 this had risen to 20%. In the same period, the income of the lowest 40% actually fell in real terms.

Governments and the economists who advise them insist that what we are experiencing today is an anomaly. They insist that while there may be a case for improvements in regulation and in the details of the way bankers’ bonuses are calculated, the free market economy has consistently delivered greater prosperity and less inequality, and after the current unfortunate spell is over, it will do so again. On no account must we interfere with it.

Capitalism and inequality

In Capital in the Twenty-first Century, the French economist Thomas Piketty takes a radically different view. What is happening today, he tells us, is not an anomaly at all.  On the contrary, if we look back over the last three centuries, we see that the natural trend of a capitalist economy is towards ever greater inequality.

The only sustained exception to this was the sixty years beginning in 1910. This period included two world wars and the great depression, and the destruction they brought, together with the measures, including higher taxes, that governments were obliged to take to put right the damage, resulted in a marked decrease in inequality. By about 1970 the effect had worn off and inequality began to rise again. Piketty predicts that it will continue to rise if we do not take positive action to stop it.

The mistake most economists make, Piketty argues, is to draw general conclusions from what was actually a very unusual time. They do this partly because there are more and better data available, and partly because it covers what most of us think of as the modern age. This intuitive idea is supported by the so-called Kuznets curve, according to which inequality can be expected to rise in the early stages of a capitalist economy and then fall back. If that were the case, what happened before the First War would not be very relevant to our understanding of the world today.

Piketty and his colleagues set out to track inequality back as far as the eighteenth century, concentrating on France, the UK and the US.  They could not of course find everything they needed in a single repository in each country, and the data they did find were not in the same form throughout the whole period, but there are records, chiefly of tax assessments and the values of estates, which are good enough to be used to estimate the division of wealth and income among the classes. Piketty also refers to the novels of Jane Austen and Honoré de Balzac because both describe the incomes of their characters in what for us is surprising detail. At the time, saying how much money someone had was a very convenient device to indicate their station in life; now it serves as a useful confirmation of what the records tell us.

Why does inequality increase?

In Das Kapital,  Marx argued that because the bourgeoisie, the owners of the means of production, do not pay their workers a proper share of the value of the goods they produce, the gap between rich and poor is bound to grow. As this continues, the economy suffers because there are not enough customers with money to buy what is being manufactured. In the end, the situation becomes untenable and the proletariat rise up and overthrow the bourgeoisie.

Things haven’t worked out like that, at least not yet. Writing in the mid-nineteenth century, Marx did not foresee the rise of trade unionism or the rapid growth of technology, both of which acted to mitigate the effect he had described. The apocalypse has not come to pass, and most economists seem confident that it isn’t going to. Though if the existence of strong trade unions was one of the reasons that Marx’s prediction turned out to be wrong, their near destruction in the Reagan-Thatcher era could yet turn out to have been a Pyrrhic victory (cf. [2]).

Piketty claims that what happens essentially depends on the difference between two quantities, r, the rate of return on capital and g, the growth rate of the economy. He explains: “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. Inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labour by a wide margin and the concentration of capital will attain extremely high levels.”

Economists seem agreed that if the growth rate falls, so will the rate of return on capital. It need not fall at the same rate however, and according to Piketty, history shows that r will fall more slowly than g and the gap between the two will widen. This tends to happen if it is easy to replace workers with machines, in which case employers have the upper hand -- which is not all that different from Marx’s picture of the factory owners having the power not to share the profits fairly with the workers.

Does it matter?

The most impressive part of Piketty’s work is the vast amount of evidence that he has collected to support his case. There are lots of data in the book, and more available on the web. There have been, as you would expect, some criticisms of the data and the way they are analysed, but there is no serious doubt about them. It is very difficult to argue against the evidence when there is so much of it and when the conclusions are plain to the naked eye, there being no need for sophisticated statistical techniques to extract the trend.

The message we should take from the book is that not only is inequality increasing today, it almost always increased in the past as well. The only period in which there was a sustained decrease, the years 1910-1970, was an anomaly caused by the major upheavals taking place at the time.  

Should we be worried? Yes we should, for a number of reasons. First, as Wilkinson and Pickett show in The Spirit Level [3], unequal societies offer a lower quality of life to almost everyone. The top 1% may benefit but hardly anyone else does. Second, at most a modest amount of inequality is needed to push an economy along; a high level of inequality actually holds it back [4].  Third, if inequality continues to rise, the economy will eventually become unstable and unsustainable. No less a commentator than the Governor of the Bank of England has spoken of the breaking down of the social contract that is essential to what he calls inclusive capitalism [5].

What is to be done?

According to Piketty, inequality tends to rise when income from wealth becomes more important than what people earn by working. The way to prevent this happening is to make it harder for people to build up large fortunes and then to tax the fortunes they do accumulate. Piketty suggests there should be a progressive income tax with a top rate of 80% on incomes above $1 million and also a global tax on assets.

As you’d expect, there has been a lot of opposition to the idea. Some of it is based on economic theory, but after the failure of economists to predict the crisis of 2008, such arguments carry less weight than they did twenty or thirty years ago. There is also the practical objection that it is very hard to collect taxes from the rich, whether individuals or corporations. But that is to a large extent because of the ways taxes are assessed and collected. It will be a challenge to devise and agree on stricter laws, the elimination of tax havens, and the ending of trusts and shell companies that have made tax avoidance a major industry; but if the governments of the world’s major economies really want to do it, they can. The rich will no doubt complain that some of the provisions of the new tax regime are unfair, but they have only themselves to blame for running a coach and horses through the current one.

It is not possible to lay out in advance a strategy for the next fifty years and Piketty does not claim to have done this. Reform of the tax system will be important, but it can hardly be the whole story. The chief contribution of Capital in the Twenty-first Century is to show that increasing inequality is a problem that will not go away by itself and that it can be solved, if we aren’t put off by the scare-mongering of those who would rather it wasn’t.

Article first published 23/07/14



References

  1. “FTSE-100 chairmen average pay rose 6% in 2012.” Press release, Income Data Services, 4 March 2013, http://www.incomesdata.co.uk/wp-content/uploads/2014/06/IDS-FTSE-100-NEDs-release-2013.pdf  13/07/14.
  2. Card D, Lemieux T and Riddell, WC.  Unionization and Wage Inequality: A Comparative Study of the US, the UK and Canada (NBER Working Paper 9473). Cambridge MA, National Bureau of Economic Research, 2003. www.nber.org/papers/w9473 13/07/14.
  3. Wilkinson R and Pickett K. The Spirit Level. London, Allen Lane, 2013.
  4. Ostry J, Berg A and Tsangarides C. Redistribution, Inequality and growth. IMF Staff Discussion Note SDN14/02. International Monetary Fund. www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
  5. Carney M.  Speech given at the Conference on Inclusive Capitalism, London, 27 May, 2014. http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech731.pdf

Got something to say about this page? Comment

Comment on this article

Comments may be published. All comments are moderated. Name and email details are required.

Name:
Email address:
Your comments:
Anti spam question:
How many legs does a spider have?

There are 7 comments on this article so far. Add your comment above.

Hazel Henderson Comment left 24th July 2014 08:08:53
Although Piketty has done a brilliant job within the limits of the economics box , he misses the key error in economics : overlooking energy , which should have been the key factor of production ,which cannot be subsumed under "land","labor" or "capital" the 3 main categories. Energy in the form of the daily free photons from our sun are what actually powers all human production and all life forms in our biosphere.

Patricia Patterson Tursi Comment left 24th July 2014 08:08:00
I am not an economist, but I have been wondering if socialism is not a better system than capitalism, especially a limited form where natural resources are nationalized and not privatized. I have wondered if socialism and capitalism could, depending on their forms, be similar. To me, a revision of tax laws as suggested by Piketty is a no-brainer. But where is there an example of a successful socialistic or capitalistic system? Could it be that it is the form of each that is the problem and not the inherent form of economy that is the issue? This is an essential issue and Piketty's arguments are cogent. Reagan and his anti-union, anti-regulation, and his anti-taxation, more than doubled the national debt inequality has continued to grow by leaps and bounds. Clinton's ending Glass-Stegall and pushing NAFTA were severe blows, but his reputation is mostly untarnished as being "a populist". Obama is pushing it further with TPP and TISA will further, if not finish, the inequality. Republicans and Democrats have both sided with banking and business and abandoned the people. Was the system working better before Reagan changed it and, therefore, is it more a matter of what kind of capitalism, or what kind of socialism is better?

David Collier Comment left 26th July 2014 19:07:34
Social and economic systems are set up and maintained by people, often if not invariably with vested interests. A supra-governmental elite have temporal/financial power and appear to be addicted to it. They do not meet criteria for psychopathology, in which case they are merely greedy or stuck in the mud. It is not about epiphenomenal 'systems', it is about people's hearts and minds. This is a psycho-spiritual issue. Perhaps the greedy will be reincarnated as Indian labourers earning $1 per day, not enough to properly feed the one-child family. I know because i support one such child.

Todd Millions Comment left 26th July 2014 23:11:46
I've not read this book-Micheal Hudson had a reveiw of it(also unread),and his analaysis of 'vulture capitailism'in connection with Iceland was very good.The use of corprate fronted NGO's to support the commodification of everything and everyone also bears the closest scrutiny in my opine.We are losing good approaches to such problems-diliberately and have being for 30 years now.The social disease media replacing such work as B. Fullers World Game-don't get me started.Re reading 'Grunch of Giants' is a good place to start and reorientate ourselves.

Rory Short Comment left 29th July 2014 12:12:44
What is being talked about here is money and real or honest money is just an accepted representation of the socially validated intrinsic worth of an exchanged item, be it a good or a service. As such, because every person participates in exchanges of goods and services in order to survive, new money could be legitimately issued to individuals as and when they needed it. Unfortunately up until now, with the advent of the internet and information technology which makes such issue physically practicable, this was not possible and the production of new money had to be divorced from the process of actual exchange and centralised. The adverse consequence of this divorce was twofold and dire a) the production of new money fell into the hands of a small group within society who became all powerful as they had control of the economic life blood of society, i.e. money b) everybody else, i.e. the people who were actually making exchanges thereby creating the economy, were dis-empowered because they could not produce the money which would have quite legitimately represented the intrinsic worth of what they were exchanging. I would guess that this, still existing dis-empowerment, lies at the very root of the economic ills that we are faced with.

Nobhala Phesheya Comment left 11th August 2014 16:04:04
I judging Marx's analysis of 19th century capitalism, commentators often make one basic mistake - that of assuming capitalism was already a global economic system as it is today. If one considers that Marx studied capitalism in England/Great Britain, and that today capitalism should be studied as a global system, then nothing has changed much except the scale, which is now global. All the problems that the English workers experienced are now the daily grind of the workers in the 'emerging' capitalist countries. Here in South Africa, social polarisation and inequality have intensified since the end of apartheid. Society is becoming a huge shantytown and the well-intentioned political authorities do not know what to do about it. As I write here, one loan shark bank called African Bank is collapsing and rescue efforts are underway to 'save' it, led by the government. This loan shark bank has been specialising in burdening the workers with high interest loans, in the region of 25% or higher, for credit to buy clothes, furniture and other consumer items. Surely the profit enjoyed by capitalists in this kind of venture are of a different nature to those enjoyed if the loans were for productive activities. But then the credit system (finance capital) is at the core of the system for generating inequality in capitalist society. I have not read the book by Pikkety but I would be interested to see how he paints the picture with regards to the role plaid the credit system in generating inequality and social polarisation.

Amit Bechar Comment left 30th August 2014 07:07:41
In three volumes, Marx and Engels mention "capitalism" just 11 times. Their focus was Capital. The reason for this is that capitalism as an ideology did not yet exist in the predatory form it was to become. The foundations for that was African slavery and the riches of the indigenous nations of the western hemisphere, as Marx and Engels discussed. Native peoples of the so-called Americas were defeated primarily by disease introduced from as early as two centuries before actual conquest. The introduction of smallpox and other diseases was not just collateral damage, but planned biological assault, a narrative for another day, a narrative, of course, that could be enhanced by all hundreds of stone tablets destroyed by the invaders and their missionaries that may have provided names and dates. Thomas Piketty has performed a great service. When schoars begin to combine the work of economist Carl H. Wilken and his statistical framework from raw materials economics, historians will begin to produce another story than his story.

Recommended Reading

search | sitemap | contact
© 1999 - 2017 i-sis.org.uk