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Thomas Piketty: Capital in the Twenty-First Century.

By Robert Paul Wolff.

(In 2014 Wolff wrote a long sequence of responses to his reading of Piketty’s seminal book. We repost them here to remind people of the central political issue of our day.)

CAPITAL in the Twenty-First Century, by French economist Thomas Piketty, is a big book [577 pages of text, 75 pages of notes, and an extensive on-line technical database that I have briefly sampled].  It is also, in my judgment, an important book worthy of your attention.  In the next few days, I shall be doing my best to present in some orderly way my thoughts about it.  In response to comments on this blog and an email or two, I have read several reviews of the book that have already appeared.  That may have been a mistake, but I shall try not to confuse my own reactions to the book with things I have learned from those reviews.

Piketty presents himself as politically engagé, so it would be natural to cut to the chase and announce my view of whether he is a good guy or a bad guy, a comrade or an enemy.  That impulse is all the stronger because his title is a deliberate allusion to Marx’s great work, Das Kapital.  The title, after all, is CAPITAL in the Twenty-First Century, not Capital in the Twenty-First Century.  But I shall resist the temptation, because it would be a mistake.  There is a great deal to learn from this book whether or not one situates oneself where Piketty does on the ideological spectrum [as I do not], and that must be the focus of my attention in the first part of this discussion.

A few general comments to orient you before I begin a close examination of the book.  Piketty’s central and urgent concern is inequality, in particular inequality in the ownership of capital.  Using the French termpatrimoine, or patrimony, which means inheritance, Piketty believes that unless strong [but unlikely] steps are taken by the nations of the world, we shall rapidly see a return to a patrimonial capitalism in which an ever larger fraction of an ever expanding capital is owned by a small proportion of the population  who have inherited it rather than — by any stretch of the imagination — earned it.  A society of rentiers will be re-established of a sort we have not seen since the late nineteenth century, a society dominated, as we used to say in the United States, by coupon clippers.  [Piketty’s favorite example is Liliane Betancourt, heiress of the l’Oréal cosmetics fortune and the richest person in France. who, he laconically observes, “has not worked a day in her life.”]

But though inequality is his central theme, Piketty does not arrive at a discussion of it until Part Three, The Structure of Inequality, 237 pages into the book.  First, there is an extended discussion of Income and Capital [Part One] and The Dynamics of the Capital/Income Ratio [Part Two.]  The foundation of Piketty’s exposition, to which he devotes an enormous amount of time and many, many charts and tables, is an extraordinary mass of data he and his associates have assembled, reaching back as far as the beginning of the eighteenth century, on the composition and evolution of capital and income.  Since philosophers typically know little or nothing and earn their reputations by thinking rather than actually observing the world, it would be natural for me and those like me to skip over Piketty’s detailed description of the data he has collected and go right to the conclusions he draws.  That too would be a big mistake, as big as the mistake of flipping past Marx’s great tenth chapter in CAPITAL on The Working Day, the more than one hundred pages of details he gleaned from the Parliamentary Inspectors’ Reports during his years in the Reading Room of the British Museum.  Those of us who profess to care about the condition of the working class in America in 2014 [to steal a title from Engels’ greatest work] really need to know something about how the world actually is and has been before we offer our proposals for its complete transformation.

Piketty and his colleagues have assembled an astonishing body of macroeconomic information about capital, income, profit rates, growth rates, shares of capital owned by, and shares of income going to, the top tenth, one-hundredth, thousandth, or ten-thousandth of the population in France, Britain, Germany, and America, and secondarily in Italy, the Nordic countries, certain South American countries, and, where possible, in Asia and Africa.  The centerpiece of his data-driven analysis is France, for three reasons.

First of all, as a consequence of the work of the quite advanced royal Intendants of the Old Regime and of laws passed at the time of the French Revolution, robust French data are available on many important economic magnitudes for a continuous period of more than three hundred years.  The data for Britain are good, but do not extend back so far.  The American data start with the American Revolution but for various reasons are not really satisfactory until the late 19th century.  The political fragmentation of what is now called Germany also makes its data prior to the late 19th century difficult to assemble.  And beyond those nations, things go downhill rapidly.  Piketty is committed to grounding his analysis in real facts, not in speculations or impressions, and his book is replete with caveats about the adequacy or inadequacy of the data underpinning this or that graph or table.  One of the ways in which economists could honor Piketty’s achievement is by undertaking to gather and analyze data for parts of the world he could not adequately discuss.

Second, Piketty is French, and quite naturally his frame of reference is defined by that fact in exactly the way that the frame of reference of American economists is defined by their being Americans.  In the three centuries that Piketty contemplates, there are four pivotal periods that shape his understanding of the world: The Revolution [1789-1797, more or less], La Belle Époque [from 1871 to the beginning of WW I], the period of the two world wars and their interregnum [1914-1945]. and Les Trente Glorieuses, the “glorious thirty years” from 1950-1980, a time in France of relatively much less inequality of ownership of capital, rapid economic growth, rising real wages, and the establishment of the modern French social democracy. The corresponding American historical eras or economic turning points would I suppose be the period of slavery, the period of the Western expansion, the late 19th century growth of the great industrial fortunes, the Crash and Great Depression, and the Boom Years [roughly coincident with Les Trente Glorieuses.]  All great social scientists orient themselves to the world in this manner — for Marx, the pivot of his life was of course the failure of the uprisings of 1848.

Finally, Piketty is still a young man [forty-two] who earned his doctorate at twenty-two with a detailed examination of French tax policy, and like all of us, he draws on his strengths when he comes to write his Big Book.  [Happily, Marx resisted that temptation, so we are spared in Das Kapital a discussion of the Greek Atomists.]

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Let me now give you an overview of what Piketty found, and what the focus is of his concern.  Tomorrow I shall start telling you in some detail about the unfolding of his argument.  In very broad strokes, Piketty found that from the beginning of the modern economic era [the eighteenth century] to the end of La Belle Époque Europe [but not in the same way America] was a patrimonial society in which the overwhelming preponderance of capital — land, buildings, factories, railroads, government bonds, shares of stock, patents, and so forth — was owned privately by a small segment of society who inherited rather than earned the capital they owned.  By the eve of World War I 90% of the capital in Europe and 80% in America was owned by the richest 10% of the population.  [Keep in mind that these aggregates include private ownership of land and private dwellings, not merely of shares of stock in industrial enterprises.]   World Wars I and II and the Great Depression between them, combined with the enormous increase in the rates of inflation, had the effect of causing this share of ownership to plummet to levels never before recorded.  As Europe and American recovered from the world wars and the Depression, during Les Trente Glorieuses or Boom Years, the inequality in the distribution of capital ownership recovered to pre-World War I heights, but with an important difference.

The Post-War period saw the emergence of a new class of rich, those whom Piketty calls “supermanagers,” earning annual salaries in the millions or even hundreds of millions in their roles as top corporate and financial managers.  Technically, these salaries count as income, not profits or, as Piketty calls them, using the French term, rentes.  [I shall come back to this point much later, when I offer some comments on and criticisms of Piketty’s work.]  If we give at least lip service to the economists’ fiction that these supermanagers are earning their marginal product, and therefore have a right to their salaries [lip service that Piketty both offers and withholds, exhibiting a deep ambivalence on the matter], then we might wish to say that although inequality has returned to pre-World War I heights, it is a fairer and more rational inequality.  After all, say what you will about Mar k Zuckerberg, he is no Liliane Betancourt.

HOWEVER  and this is, in some very simple-minded sense, the message of the entire book —  the ineluctable consequences of the relationship between the global growth rate and the global return on capital [g and r, as Piketty represents them] will, unless extraordinary and quite unlikely steps are taken, in the twenty-first century return us to a patrimonial capitalism in which capital is both very unequally owned and also is primarily inherited rather than earned.  The world of the rentier will again be upon us.

In the first part of CAPITAL in the Twenty-First Century, the central magnitude whose temporal evolution Piketty studies is the ratio of capital in a society to income.  Since the first of these is a stock and the second is a flow [as economists say], he must convert one or the other in order to form a ratio of them, and he does this by studying the ratio of the capital in a society to the amount of income from all sources for one year, or annual national income.  Piketty represents this ratio by the Greek capital letter β.  Let us begin by making clear how Piketty is using these two terms.  “In this book,” he says, “capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market.”  [p. 46]  “National income is defined as the sum of all income available to the residents of a given country in a given year, regardless of the legal classification of that income.”  [p. 43]

Right away, it is necessary to say something about these definitions, for they underpin everything in the book.  First of all, note that the definition of “capital” deliberately excludes what economists, following Gary Becker, call “human capital.”  Picketty has some very unflattering things to say about Becker and those who follow him, justifiably in my judgment.  Second, both of these terms are measured in monetary units — dollars, or Euros, as Picketty prefers throughout the book.  This is standard operating procedure for economists, of course, and makes it possible to use the vast array of statistical information gathered by governmental and non-governmental agencies, but it poses certain problems of which we need to be aware. A share of stock is a piece of capital, as is a building, a tool, a stockpile of coal, a warehouse full of automobile tires, an acre of land, a patent, an insurance policy, and even a logo or a trademark.  Now, a major stock market drop, like the one that precipitated the Great Recession of 2008-9, immediately strips away billions or even trillions of dollars from the market value of certain assets.  From an accounting perspective, this is no different from a war in which massive destruction is done to factories and roads and bridges  Both count as losses of capital.  But clearly there is a very great difference in reality.  If a factory is bombed, it will take a good deal of labor and raw materials and planning and time to replace it, but a capital value equivalent to that of the factory may be lost and then regained in moments by a fluctuation in the price of shares in the corporation that owns the factory.  Still and all, inasmuch as capital, on any construal, is a many-dimensional array of quite dissimilar things, how else can one examine its quantity and the movements in that quantity save by considering its value, which is to say its market value?

[At this point, as I begin to discuss the data Piketty presents and the conclusions he draws, I must issue a warning:  There is a vast amount of important information in this book, and I cannot even make passing reference to more than a small selection from it.  Please do not make the mistake of thinking that because I fail to mention something Piketty has failed to discuss it!  The principal purpose of this multi-part discussion is to encourage you to read the book.]

When Piketty measures the value of β over the past three centuries, which is to say the ratio of national capital to national income, he finds that at the beginning of this period, in 1700, national capital in Britain or France was seven times the annual national income,  [I confess that I have never been much for macroeconomics, and it took me a while to become comfortable with this way of thinking.]  This ratio holds pretty much constant for a bit over two hundred years [during which time both capital and income increase, of course], although in the nineteenth century a significant portion of the 700% is accounted for by imperial holdings in Africa and Asia that bulk up the total.  Then the onset of World War I, the interwar crash and inflation, and World War II produce a precipitous decline in the value of β, from 700% in 1910 to roughly 300% in 1950.  From then on, the capital/income ratio recovers rapidly, so that after two generations or so it is back up to 650% in France and 600% in Britain.

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Over this centuries-long period, there is a fundamental change in the composition of national capital.  In 1700, the value of agricultural land in Britain is 400% of national income — 57% of all capital — and nearly 500% of national income in France, or 70% of all capital.  This ratio drops steadily and ever faster as we come into the 19th century, so that by 2010, the end of Piketty’s survey, the value of agricultural land is no more than a few percentage points of national annual income.  The land has not become less valuable in human terms, of course — we all still have to eat.  But non-agricultural capital and housing — residential dwellings, factories, mines, government bonds, shares of stock, and so forth — take over from agricultural land as the principal components of national capital.

This U-shape characteristic of the β curve reappears again and again in the book as Piketty studies the evolution of national capital and national income and then studies the parallel evolution of capital and income in equality.   This is a visual representation of one of the most interesting and important of Piketty’s conclusions.  Since this is, to my mind, the single most interesting thing I found in Piketty’s book, I want to take some time setting it out and discussing it.

By taking so long an historical view, Piketty is able to show that the thirty-five year period of the two world wars and the intervening world economic crash was a world-historical anomaly that interrupted a long-term secular process of growth and persistent inequality in the capitalist world.  The enormous explosion of growth in the thirty years following that anomaly can be seen, through Piketty’s lens, not as the emergence of a new world order, more humane, more equal, less in thrall to inherited wealth, but as a quite natural recovery from the anomaly and re-establishment of a centuries-old pattern of extreme inequality in the ownership and control of society’s capital resources and the income from them.

To be sure, a fundamental transformation has taken place over these two generations in the structure of inequality.  The emergence of “supermanagers” and the [possibly temporary] appearance of a new somewhat propertied middle class for a time made income from wages and salaries more important than income from capital holdings as cause of inequality.  But that change, significant as it is, is even now starting to give way to a reappearance of rentier capitalism, which is to say capitalism in which ownership of capital rather than the wage earnings from commanding positions in the structure of capitalism becomes the dominant source of wealth.

Now — and this is, I think, brilliant of Piketty to recognize and document — the period of the two wars and Les Trente Glorieuses or Post-War Boom — just happens to coincide with the time when modern academic economists came into their own as the stars of the Academy and the oracles of modern Democracy, especially in America.  Perhaps we should not be surprised that these distinguished gentlemen, many of whom were honored with the newly created Nobel Memorial Prize in Economic Sciences, took what was happening during their formative years as definitive, as a matter of pure theoretical necessity for all times and places.  Finding themselves on the ascending side of a U-shaped curve, and more or less oblivious to the place of the U-shape in the larger historical picture, they quite naturally assumed that capitalism had solved the problem of crisis and inequality and was embarked on what they liked to describe as a balanced growth path.  Or, as the old saying has it, they were born on third and thought they had hit a triple.

Those of you less enamored of Marx than we old loyalists may be forgiven for not recalling that the subtitle of CAPITAL is “Critique of Political Economy.”  Marx’s book is both an anatomy of capitalist economy and society and a brilliant attack on the economists who preceded him.  I think Piketty is quite conscious of engaging in an exactly similar two-pronged assault, both on the world of capital and income and inequality and growth, and on the world of academic economists.  I think the single thing I like most about him is that after earning his doctorate at the age of 22, he went to teach at MIT, the Promised Land for young aspiring academic economists, but after two or three years got fed up and walked away from what would certainly have been a brilliant American academic career, to return to France.  Mind you, he has been teaching at les grandes écoles, which rival the Ivy League in their exclusivity.  But still!

As I begin this third part of my discussion of Piketty’s CAPITAL in the Twenty-First Century, I find myself overwhelmed by the sheer magnitude of the number of topics treated by Piketty.  Once again, I urge you to read the book rather than relying on my comments, or any of the many reviews now appearing, to inform you adequately about it.  This is one of those books that you really must make the effort to read for yourself.

Early in his book, Piketty states what he calls the First Fundamental Law of Capitalism, a “law” [really, as he explains, an accounting identity] that relates the ratio of capital to national income, β, to the national rate of return on capital, which he represents by the letter r, and the share of the income from capital in national income, which he represents as α.  If thirty percent of all the income received by anyone in a nation over the course of a year comes from capital — in other words is profit rather than earned income — then α = 30% or .3.  With these definitions, it follows necessarily that α = r x β, Piketty’s First Fundamental Law.

This may not be obvious to all of you [it was not to me when I first read it], so let me take just a moment to explain.  β is the ratio of the value of total national capital to the value of annual national income, so we may say that β = (national capital)/(annual national income).  If we multiply the total value of capital by the profit rate, r, we get the value in a year of the profits from capital [since r is the yield from capital per year].  So r x β is just [r x (total national capital)] / (total income in a year), or (income from capital)/(total income), and that is what Piketty is calling α.  In short, α = r x β.  The point of stating this accounting equality is not to prove anything by it, but rather to break out the components of α so that we can study what happens when one or another of them varies.  Later on, we shall see that Piketty is especially interested in examining the consequences of a long-term situation in  which the profit rate, r, is significantly greater than the growth rate of the economy, g, a situation that did not obtain during les trente glorieuses, but which Piketty thinks does obtain now and is likely to obtain for the remainder of the twenty-first century.  [The reason for this prediction, to get ahead of ourselves, is the rapid decline in the growth of population, but more that anon.]

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Before I continue, let me on a lighter note pay homage to a simply lovely expositional device that Piketty has hit upon to flesh out the stark numbers of his graphs and charts.  Early in the book, Piketty observes that prices in the eighteenth and nineteenth centuries were quite stable, as was the return to capital [about 5%]. During this time, the two principal sources of income from capital in France, and even in England [where capitalism developed rather earlier] were land and government bonds.  One small segment of society — the wealthiest and most powerful — lived without working, as Liliane Betancourt would much later on, on their income from their capital holdings.  The stability of the prices meant that in 1720, 1770, 1810, 1850, and even 1890, the same standard of living could be purchased with a given annual income.  This made it possible for novelists to capture in a phrase the precise social standing of a character.  “He has ten thousand pounds a year” or “he has fifty thousand francs a year” was all a novelist needed to write, and readers could be counted on to understand the standard of living the character and his family could afford, right down to the number of his household servants, the sort of carriages in which his family rode, the clothes they wore, the elegance of the balls they attended, and the suitability of suitors for his daughters.  Running through Piketty’s book is a delightful series of references to the characters of Jane Austen and Honoré Balzac.  It is, for me at least, a distinct pleasure to encounter a truly cultivated economist, who evokes the literary richness of the writings of Adam Smith and Karl Marx.  There is also a deeper purpose in Piketty’s deployment of literary references, which he never mentions but which I am persuaded is consciously before his mind.  The literary allusions allow Piketty to capture the complex relationship between the underlying reality and the surface appearance of capitalist society, something that Marx achieves by his deployment of ironic discourse and classical allusion.

One hundred sixty-seven pages into his book, Piketty enunciates another “Fundamental Law of Capitalism” relating β, the ratio of national capital to annual national income, to the social savings rate, s, and the growth rate of the economy, g.  The law states that β = s/g.  This, however, is not an accounting equality but what may be called a tendential law.  That is to say, unless interrupted by some exogenous force — a war, a depression, a regime of governmental taxation — the ratio of national capital to national income will tend toward the ratio of savings to growth.  For example, “if a country saves 12 percent of its national income every year, and the rate of growth of its national economy is 2 percent, then in the long run the capital/income ratio will be equal to six hundred percent:  the country will have accumulated capital worth six years of national income.”  [p. 166]

Why is this important?  Because if an economy grows very slowly, and if what is saved out of national income is for the most part held privately, then over time the country will come to be dominated by huge private capital holdings, which are passed on from generation to generation, resulting in what Piketty callspatrimonial capitalism.  Just to be clear, the relationship between capital formation and the (savings/growth rate) is necessary, and not especially tied to private ownership of capital.  Even if the capital is publicly owned, the ratio of capital to national income will be determined in the long run by the growth rate the society chooses and the savings rate it chooses.  But for the entire period under Piketty’s investigation, capital has been privately owned.  Public capital holdings, as he shows, which are calculated by taking the total of public assets and subtracting the total of public debts, have oscillated around zero.  This remains true even when we take into account foreign assets and debts, surprising though this may be.  We are accustomed to panic-stricken talk about America being owned by the Japanese or the Chinese [depending on which decade you are living in], but the reality is quite other.

To summarize what I have tried to communicate thus far, Piketty argues that the period of the two world wars followed by a generation and a half of rapid growth was a temporary anomaly followed by a return to the long-term relationship between capital and national income.  And because the rapid population growth of recent decades is slowing and is almost certain to slow further, resulting in a return to a long-term secular economic growth rate of 1 % or a bit more, the logic of the law β = s/g compels us to conclude that in the absence of heroic governmental intervention [the subject of Part Four of the book], we can look forward to a re-emergence of patrimonial capitalism, the capitalism of inherited wealth celebrated and anatomized by Austen, Balzac, and their contemporaries.

In my effort to summarize Piketty’s argument for you, inevitably I have omitted so much that I have managed to give a somewhat incorrect account, and at this point I need to correct that with regard to at least one important point.  This concerns the distribution of wealth in contemporary capitalist societies.  The best way to begin is with a paragraph-long quote from Piketty.  This comes from the start of Chapter Eleven, “Merit and Inheritance in the Long Run.”

“The overall importance of capital today, as noted, is not very different from what it was in the eighteenth century.  Only its form has changed:  capital was once mainly land but is now industrial, financial, and real estate.  We also know that the concentration of wealth remains high, although it is noticeably less extreme than it was a century ago.  The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a middle and a third of total wealth, and the wealthiest ten percent now own only-two thirds of what there is to own rather than nine-tenths.”  [p. 377]

The important point I have somewhat failed to capture is the emergence of a patrimonial middle class.  Why “patrimonial?”  Because the wealth of this large and politically significant middle class is for the most part inherited, in the form of housing, and also of financial assets.  The first generation may have come up “the old-fashioned way,” by hard work and self-sacrifice, but life and death being what they are, the children of these strivers start life with hefty portfolios, paid-up homes, and other forms of accumulated capital.  Over time, the logic of the s/g ratio increases the predominance of inherited over earned income, resulting in ever sharper and more inflexible class divisions.  What is more, the Great Recession of 2008-9 and the consequent evaporation of the money set aside by this middle class for their Golden Years threatens to drive their children back down into the ranks of the propertyless, increasing the share of capital owned by the truly rich.

One more example of the U-shaped curve, about which I have been talking for several days, this time with respect to what Piketty calls “the annual inheritance flow.”  In France [which, as usual, is his primary focus], we find that from 1810 until 1920, the period of remarkable stability in European capitalism, amounts of capital equal to between a fifth and a quarter of national income were passed on as inheritance each year from the dead to the living.  During the first world war, this annual passing on of capital plummeted to 8%, and by of the second world war to 4% of national income, an astonishing change.  This amount of capital being passed on from one generation to the next then recovered, so that by 2010, it had risen again to about 15%, and gives every indication of continuing to climb.  Once again, those of us for whom the post-war period was the reality of our early years formed an impression of the fundamental fairness and openness of modern capitalist society that is simply wrong for the long run.  Living during an anomaly, we naturally viewed it as the new normal, unaware that it was passing into history even as we grew up.  At what level and when will the inheritance flow stabilize?  Piketty explains that the answers to these questions depend ong and r, which is to say on the growth rate and the return to capital.  He offers two scenarios, based on different guesses about the future of these two magnitudes, which suggest that the inheritance flow by the year 2100 is likely to stabilize somewhere between 16% and 23%.  This in turn will determine just how patrimonial the capitalism of the future becomes.

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Piketty has one way of representing the temporal evolution of this concentration of wealth that I had never seen before.  It is a trifle tricky but very striking.  Let me explain.  He looks at each French age cohort [i.e., all the people born in France in the same year] and at the lifetime wage earnings of the bottom fifty percent of the working population of France.  Then he asks this question:  What fraction of each age cohort receives, as inheritance, an amount equal to the lifetime earnings of someone in the bottom half of the society?  For example [using American magnitudes to make things more perspicuous], suppose that an American worker in the bottom half of the workforce earns on average in 2014 dollars $30,000 a year for a working lifetime of 45 years [age 10 to age 65].  That is total lifetime earnings of $1,350,000.  Then ask, what fraction of this worker’s age cohort inherits at least that much — $1,350,000?  [Just to be clear, the median wage for full-time workers in the U.S. 2013 was $776 a week, which works out to more than $1,800,000 for a fifty-two week year over forty -five years.  But “median” means that all of the full-time workers in the bottom half of the workforce are below that amount.  My figure of $1,350,000 is a guesstimate of the average of all lower fifty percent workers.]

Well, the answer for France is this:  Way back in 1790, 10% of the age cohort inherited as much as a worker in the bottom half made in a life time.  That proportion of the age cohort dropped, first slowly, then rapidly, until in 1920, it hit 2%.  After WW I, only 2% of French heirs inherited as much as someone in the bottom half of his or her age cohort earned in a lifetime of working.  Then the proportion of these heirs began to rise [the same U-shaped curve again!] so that by 1990 it had reached more than 13%.  After a slight dip as a result of the Great Recession, which wiped out a good deal of inheritable capital in the form of the value of shares of stock, the proportion resumed its upward march.

Just stop and think for a moment about what this means [I assume the figures are not much different for Britain or America].  We are a society of two entirely separate and different worlds.  Half of us labor day after day [if we are lucky] for a lifetime, managing, let us suppose, in all that time to earn on average more a million and a third dollars, which we use to pay taxes, pay for health care, pay for housing and food and clothing and education.  And 12-14% of us inherit that much in one lump sum simply by having the brains and gumption to be born in to the right family.  In a country the size of America, that endowed 13% is more than forty-million people.  They loom so large in the public discourse and public consciousness that they define what it is to be an American.  Meanwhile, 165 million men and women slog on, never seeing anything remotely like the life lived by the fortunate forty million.

This is perhaps the right time to turn our attention to the truly revolutionary consequence of the period of les trente glorieuses, the Boom Years — the emergence of an elite group of corporate executives and financial executives whose income, albeit earned income or wages and not income from capital, has made them multi-millionaires and billionaires.  These people often own enormous portfolios of shares, frequently in the companies they manage, as was true of corporate magnates in earlier times.  However, there is this important difference:  the size of their ownership in the companies they run is a consequence of their positions as managers, not a condition of their positions.  They own shares because they are managers [through stock options, for example].  They are not managers because they own shares.

This has been the subject of an considerable public discussion in America in recent years, as well as of a dramatic series of organized protests [the Occupy Wall Street movement], so I need not say a great deal about it by way of introduction.  Piketty offers statistics aplenty on the wealth of the one percent, the one tenth of one percent, the one one-hundredth of one percent, and even, believe it or not, the one one-thousandth of one percent, and they are precisely as chilling as you might expect.

“Broadly speaking,” Piketty tells us, “the rise of the supermanager is largely an Anglo-Saxon phenomenon.”  [p. 315]   The charts tell the story.  In 1910, the top1% of society was receiving 18% of national income in America, and 22% in Great Britain.  With jogs up and down because of the Great Depression, this sank in 1970 to 8% in America and 6% in Britain.  But then the curves turned upward again [the very same U-shaped curve].  This time, however, thanks to the emergence of the supermanagers, America took off like a rocket, reaching 18% in 2009, before the Great Recession.  Already, however, that slight dip has been reversed and the share of national income going to The One Percent is again rising.

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The standard academic economics explanation for the stratospheric salaries and bonuses being paid to the supermanagers is the theory of marginal productivity.  Those supersalaries are not the result of inherited wealth.  They are a measure of the value that the supermanagers add to the corporations for which they work.

As the old saying goes, don’t get me started.  If anyone is interested, when I return from my safari, calm, collected, in touch with nature and my inner primate, I will undertake to say a few well-chosen words about the theory of marginal productivity.  But I do need to say something here.  First of all [as Piketty knows full well], the magnitude of the supersalaries paid to the top corporate and financial executives varies considerably by country, although there is simply no ground for supposing that American corporate executives contribute a greater marginal product than French or German or Japanese corporate executives. Even if we were to grant that top executives make very large contributions indeed to the profits of their companies, the cross-national comparison certainly suggests that as much marginal product could be wrung from the sweaty toil of American CEOs in return for markedly smaller pay packages.

But there is another point that needs to be mentioned, though I am afraid I cannot put numbers on it in a way that one would need to in order to make it stick.  Purely from an accounting point of view, the salaries and bonuses paid to top executives are costs of doing business  Like the wages paid to less well-remunerated workers, as well as the costs of raw materials, energy, and so forth, they must be subtracted from gross receipts before one can calculate the profits of the firm.  In this way, those supersalaries differ from the dividends paid to shareholders, which truly are distributions of profits.  In the good old days, when companies were run by their owners, one could, if one wanted to, break out the total take of the owner into a sum representing the wages of management and a sum constituting the return to capital.  But we are a long way from those good old days, and by and large [Bill Gates and Jeff Bezos and Mark Zuckerberg notwithstanding] no identifiable owners of big corporations in the executive suites.  I suggest that accounting practices to the contrary notwithstanding, much of what is received by corporate managers these days is actually a distribution to them of a share of the profits of the corporation.  Strictly speaking, they have no right to that portion of the profits, for it far exceeds, in most cases, what they might be permitted to claim as a return on the shares of stock they own.  It is a form of legalized theft, in which the Boards of Directors collude by authorizing the enormous pay packages.  Marx understood that profit manifests itself in many guises, but unfortunately Marx is no longer on the required reading list for up and coming American students of Economics.

Piketty exhibits a curious ambivalence toward the theory of Marginal Productivity and the ideological rationalization it provides of the enrichment of the corporate elite.  On the one hand, he scatters caveats and qualifications throughout his book, clearly aware [with a depth of understanding that I doubt I can match] of its theoretical limitations.  On the other hand, he clearly thinks that a world of unequal earned income is greatly to be preferred to a world of unequal unearned income.  It is not a future ruled by supermanagers that alarms him.  It is the prospect of the return of patrimonial capitalism.

After 470 pages of dense data-driven analysis, full of truly appalling information about the unequal distribution of wealth and income in the modern world, we come at last to Part Four of CAPITAL in the Twenty-First Century, to which Piketty gives the title “Regulating Capital in the Twenty-First Century.” These one hundred pages were a big disappointment to me.  After everything I had read, I expected Piketty to come out swinging with a series of radical proposals for the thoroughgoing reformation of capitalism, if not its replacement by a new social and economic order.  Instead, we get a discussion of taxation, followed by a utopian proposal for taxing world accumulations of capital.  To summarize his recommendations in a sentence:  Picketty offers reasons for thinking that taxation on incomes is not likely to halt or even slow the steady growth of patrimonial capitalism, and opts instead for a “global tax on capital.”  He appears to be aware of the impossibility of instituting such a global tax [who on earth would administer it?], but he writes as though he thinks that something might be accomplished, to start, in the European Economic Union.  He has little or nothing to say about what might be done with the money raised by this tax, were it to be imposed.  [He has in mind perhaps a 1% annual tax on wealth.]

Why this complete disconnect between the trenchant power of Piketty’s analysis and the feebleness of his proposals for action?  It is not enough to say that he is an economist, not an activist, for he is what the French call a man of the left, and his life choices constitute a rejection of the isolation from reality that he decries in the American academic world.

I am tempted, I admit, to trace the weakness of Piketty’s proposals for change to a biographical passage [which I have been utterly unable to find, after hours of searching, but which I swear I read!]  Piketty tells us that his parents took part in the Paris student demonstrations of 1968, but that he was born afterwards [in 1971] so that he is free of the Marxist [by which he seems to mean Stalinist] baggage of those times. [Please, please, if anyone knows where the passage is, tell me.  It is driving me nuts.]  Those demonstrations had a profound effect on the very geography of Paris.  In the part of Paris where my little apartment is, the wonderful old cobblestones were ripped up and the streets were paved over so that future demonstrators would not have the materials for barricades ready to hand, while the Sorbonne, home territory to the rebellious students, was broken up into a number of branches and scattered all over the city, on the theory, I suppose, that this would discourage revolutionary activity.

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Piketty has an extremely curious relationship to Marx.  He has clearly read him, he refers to him frequently, and yet he cannot stop explaining why Marx has nothing important to teach us about capitalism, or indeed about capital.  Here is an extract from the six page Conclusion that closes the book:

“The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages.  This inequality expresses a fundamental logical contradiction.  The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor.  Once constituted, capital reproduces itself faster than output increases.  The past devours the future.”  [p. 571]

With a few adjustments in jargon, that passage could have come straight from the pages of Das Kapital. Indeed, omit Piketty’s weak, rather hesitant Part Four, and the entire impressive massing and analysis of data in the book could be viewed as an overwhelmingly powerful confirmation of Marx’s dark vision of capitalism.  And yet, Piketty shrinks from such an identification, dismissing Marx’s theories as inadequately grounded in the available data and motivated by political concerns rather than economic insight.  What is going on?

I honestly don’t know, but  I am going to hazard a guess, based on hints I find in the text.  This portion of my remarks must be taken with even more than the usual helping of salt, because in addition to lacking any formal training as an economist, I also lack the sort of immediate familiarity with the French academic and intellectual scene that would help me to place Piketty in his intellectual milieu.

As we have seen, the object of Piketty’s greatest concern is the re-emergence of patrimonial capitalism, of a capitalism dominated by those who have inherited their wealth rather than acquired it themselves.  Many passages suggest that Piketty sees this as a question of fairness or social justice [there is even a footnote reference to Rawls at one point].  But another specter is haunting Piketty, the specter of destabilization.  The threat of destabilization appears in the Introduction, where Piketty writes that “if the rates of population and productivity growth are relatively low, then accumulated wealth naturally takes on considerable importance, especially if it grows to extreme proportions and becomes socially destabilizing. … Accumulation ends at a finite level, but that level may be high enough to be destabilizing.”  [p. 10]  Several pages later, he writes, “The second conclusion, which is the heart of this book, is that the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence or divergence.  Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.”  [p. 21]   And two pages further on, “there is a set of forces of divergence associated with the process of accumulation and concentration of wealth when growth is weak and return on capital is high [i.e., when r is significantly greater than g  RPW]  This process is potentially more destabilizing … and it no doubt represents the principal threat to an equal distribution of wealth over the long run.”  [p. 23]

Nowhere in the almost six hundred pages of this huge book does Piketty ever tell us what he means by “destabilization.”  There is a tiny clue on page 472.  “The main reason why the crisis of 2008 did not trigger a crash as serious as the Great Depression is that this time the governments and central banks of the wealthy countries did not allow the financial system to collapse and agreed to create the liquidity necessary to avoid the waves of bank failures that led the world to the brink of the abyss in the 1930s.”

The brink of the abyss.  Considering how bad things were in the ’30s, what would have been so much worse as to qualify as an “abyss”?  The only thing I can suppose Piketty has in mind is a political revolution.   I cannot be sure because he never tells us, but I think the destabilization Piketty fears is a political uprising, outside of the usual procedures of democratic government, fueled by popular outrage at the extreme inequality of inherited wealth that he labels patrimonial capitalism.

Now, let us remember.  Piketty is a man of the left, an advisor to the French Socialist Party and to its 2007 presidential candidate, Ségolène Royal.   It is surely not democratic socialism that Piketty fears, at least not the rather tepid version that now passes for socialism in France.  My speculation — and it really is only that — is that Piketty fears a right-wing uprising, a revanchist resurgence of the fascism that always lurks below the surface in modern Europe.  [Just today, as I have been writing these words, I read that in local elections, the far right National Front party of Marine Le Pen has won upset victories in ten or eleven towns over the socialist candidates.]  We on the left here in America have never had a viable nationally competitive socialist party [although, to be sure, my grandfather won election on a socialist ticket to the New York City Board of Alderman in 1917 — our family’s proudest day], so we may long for an uprising from the left.  But we have also never suffered a fascist putsch.  Well, as I say, this is all just speculation.

What do I think about the economic inequality whose history, tendency, structure, and lineaments Piketty has so brilliantly portrayed?  Let me close this lengthy review by offering some observations, some suggestions, and some alternatives to Piketty’s global tax on capital.

Piketty’s central discovery, if we may call it that, is that contemporary capitalism is over the long run steadily transferring huge quantities of wealth from the poor to the rich, reconstituting thereby the inherited or patrimonial privilege and power characteristic of Europe in the eighteenth and nineteenth centuries.  This fact may come as a surprise to professional economists, but it does not particularly startle those of us who have squandered our youth and idled away our maturity reading Karl Marx.  All societies exist for the purpose of transferring wealth from those who create it — the poor — to those who do not — the rich.  The academic professions exist for the purpose of rationalizing this transfer, the churches exist for the purpose of blessing it, and the arts exist for the purpose of decorating the transfer so as to make it as charming as possible [even though this often comes to nothing more than putting lipstick on a pig.]

In the early stages of the development of capitalism, capital, which is to say the accumulated and unconsumed product of past labor, is owned by those who manage its deployment for new production of goods and services.  But as capitalism evolves, the structure of capital changes.  The ownership of the capital remains private, but its organization is progressively socialized.  [Once again, I must refer readers to my paper, “The Future of Socialism,” archived at box.net and accessible via the link at the top of this blog.] The essential work of the management of capital is separated from ownership and placed in the hands of a cadre of professional managers [Piketty’s “supermanagers,” among them.]  Modern multi-national corporations are marvels of the rational organization of capital.  Their ownership, as opposed to their management, is dispersed among countless shareholders, who may well be wealthy individuals but may as well be pension funds of public employees.

Piketty’s little inequality, r > g, conceals a vitally important truth.  The rate of return on capital, r, is in part determined by the share of the annual product that goes to wages for those whose labor creates that product. Regardless of the fantasies of marginal productivity, invented to provide a quasi-mathematical excuse for the exploitation of the working class, there is nothing to stop a society from deciding collectively that theentire annual product of the economy shall be divided into one portion saved to create new capital, a second portion set aside to pay for social services and activities, and a third  portion paid as wages to the individuals engaged in one way or another in the production of the annual output.  Included in the second portion will of course be pensions for those no longer working, education for those not yet working, health care for those who need it [including those unable to work], and any other public undertakings democratically decided upon.  None of the annual product need be reserved as “profit” for those who hitherto have successfully asserted legal ownership of the society’s accumulated capital.  In short, every society, including ours, has a real and continuing need for capital, but our society no longer has any need at all for capitalists. 

How on earth can we transform modern capitalist society into a society without capitalists?  After all, as good old Marx reminds us, “Philosophers have hitherto only interpreted the world in various ways; the point is to change it.”

Well, I am about to depart on a two-week safari, so I will politely defer a full answer to this little question until I return [hem hem].  I remain enlightened by Piketty’s book, educated by it, helped by it in thinking about the evolution of capitalism in America, and disappointed by the timidity of the concrete steps he proposes to address the threat of growing entrenched economic inequality.  But that just means that we here in America have work to do.  I urge you all to get a copy of CAPITAL in the Twenty-First Century and read it carefully.  I believe it will repay the effort.


As Robert Paul Wolff observed in one of his books, in politics he is an anarchist, in religion he is an atheist, and in economics he is a Marxist. He is also, rather more importantly in his own estimation, a husband, a father, a grandfather, and a violist.

First published in 3:AM Magazine: Wednesday, September 12th, 2018.