Thomas Piketty’s challenge to “the 0.1%”

Capital in the Twenty-First Century, by Thomas PikettySo, a couple of days ago I finished reading Thomas Piketty’s Capital in the Twenty-First Century. I’m reliably informed that this means I’m now allowed to have an opinion on the book.

That said, there are still plenty of more learned opinions on Piketty’s book out there, so there is a limit to what I can usefully add here. It probably won’t come as a shock to hear that I enjoyed it and found it persuasive: I was firmly #TeamPiketty before I’d even read the first page, so to some extent the book was just confirming my prejudices.

What did surprise me was how well written and readable it is: helped by an excellent translation, but principally down to Piketty’s own clarity of argument and use of illuminating literary illustrations (principally Balzac and Austen, but with James Cameron’s Titanic occasionally thrown in for light relief).

Some of Piketty’s more enthusiastic supporters initially hailed his book as providing the final, devastating, data-driven, evidence-based proof that social democracy is RIGHT and neoliberal economics is WRONG. Piketty himself disclaims any such ambition, making it clear that arguments over socially sustainable (or morally appropriate) levels of inequality will always remain a matter of politics rather than science, and that:

It is not the purpose of social science research to produce mathematical certainties that can substitute for open, democratic debate in which all shades of opinion are represented. (p.571)

He also acknowledges that his proposals for combating the growth of inequality in the coming decades – such as a global, progressive tax on capital, and a return to confiscatory levels of income tax for the highest earners – are politically unfeasible, an “ideal” against which to measure any proposals that can be made into a reality. (Though he also observes that the idea of a progressive income tax once seemed similarly far-fetched and idealistic.)

However, what Piketty does is to clarify the terms of that debate, and the challenge he places before those who disagree with him – particularly on his recommendations for policies to combat inequality – is for them to be honest about the consequences of their position. Probably the fundamental claim he makes in Capital is that:

it is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved. (p.376)

Yes, you may be “intensely relaxed about people getting filthy rich” (or at least, see no cure for this that isn’t worse than the disease). Yes, you may regard it as counterproductive, even immoral, to return to the era of 80%+ top income tax rates (pioneered, counterintuitively, by the USA and Britain). Yes, you may be similarly opposed to a global tax on capital, especially one based on the automatic sharing of financial information between governments.

But in that case, Piketty says, be honest about what the consequences are, especially the consequences of continuing on the current path of a “race to the bottom” in taxation: a return to a world in which concentrations of wealth and income start to approach those of the “Old Europe” whose “suicide” between 1914 and 1945 created the illusion (which still lingers with us) that inequality had been conquered during the years of postwar growth.

Why would such a world be a problem? Partly because of the power that it would give the wealthiest to influence and control the lives of everyone else, subverting democracy. But Piketty is clearly aware that making a moral case against such levels of inequality is not enough. On a number of occasions through the book, he rather drily observes what the long term practical consequences are likely to be of allowing such inequality to flourish:

If, for example, the top decile appropriates 90 percent of each year’s output (and the top centile took 50 percent just for itself, as in the case of wealth), a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening. When it comes to the ownership of capital, such a high degree of concentration is already a source of powerful political tensions, which are often difficult to reconcile with universal suffrage. […] [I]f the same level of inequality applies to the totality of national income, it is hard to imagine that those at the bottom will accept the situation permanently. (p.263)

And not just those at the bottom:

Even if the top thousandth’s capital returned only 4 percent a year, their share would still practically double in thirty years to nearly 40 percent. Once again, the force for divergence at the top of the wealth hierarchy would win out over the global forces of catch-up and convergence, so that the shares of the top decile and centile would increase significantly, with a large upward redistribution from the middle and upper-middle classes to the very rich. Such an impoverishment of the middle class would very likely trigger a violent political reaction. (p.439)

So, in the end, the question that Piketty poses to the “1%” (and, even more, to the “0.1%” of the hyper-wealthy top thousandth), as they calmly contemplate a century that promises to deliver them an ever greater share of global wealth and income, is: do you feel lucky, punk? 

Well, do you?

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6 thoughts on “Thomas Piketty’s challenge to “the 0.1%””

  1. I’ve never understood why income inequality, as such, is thought to be a moral problem. Wealth fairly earned and used responsibly is not immoral, and does not become so as its amount increases. I am far more concerned about the ability of the relatively poor to achieve basic financial security than about the fact that some few people have a great deal of wealth. If a small farmer or a factory worker has enough to feed, clothe, and house himself and his family, the fact that a Bill Gates or a George Soros has so much more than he has really does not matter. And if that poor man cannot provide for his own, is it really the fault of the very rich? And will confiscating the wealth of the very rich really do anything to lift the poor man out of his destitution?

    I have not read Piketty’s book. Do you think it would help me understand these things, or is the evil of income inequality simply a given on which the book’s argument is based?

  2. Hi Chris, Piketty doesn’t directly (or at least, separately) address the question of whether inequality is a good or a bad thing. It’s clear that Piketty’s view is that a certain amount of inequality is a good thing (incentivising risk and innovation etc.), but that extremes of inequality are a bad thing. However, I suspect he refrains from setting this out explicitly because the point of his book is to say: regardless of whether you think inequality is a good, bad or indifferent thing, this is how the numbers have played out over time, and this is what is likely to happen over the next century if things stay on their current path. (So in other words, to answer your final question: “the evil of inequality” is not the basis for Piketty’s argument, even if it is probably the motivation for his work.)

    One use of of this (and clearly part of his intention) is that many who deny that (excessive) inequality is a problem have, lurking at the back of their minds, the idea that ultimately inequality reaches a sustainable and, in the long run, stable position – perhaps one that at present we would find unacceptable, but one we’ll all get used to in practice. One of Piketty’s key points is that no mechanism exists within capitalism to achieve such an equilibrium, indeed quite the opposite: there is nothing to stop (and plenty to encourage) wealth and income concentrating almost without practical limit. The only thing that has ever significantly reduced inequality in the long run, according to Piketty’s figures, has been the shock of the two world wars and the government policies that resulted – a shock whose effects have now largely worn off.

    As for the question of why excessive inequality is a bad thing (while acknowledging that no objective definition of “excessive” exists), there are various strands in Piketty’s book that address this question along the way. Perhaps the most telling answer comes from asking why people accumulate wealth in the first place. Yes, people do it partly to provide for the future (for retirement, or as a hedge against loss of income, or for future generations of their families), but Piketty argues that the evidence does not support the claim that these are sufficient explanations for why people amass extreme levels of wealth. Rather, it’s because of the power that this gives rich people over others, and the opportunities this gives them (and closes off to others). In the end, the practical outcome of excessive inequality is to subvert democracy and to make a mockery of “equality of opportunity”.

    A second strand in Piketty’s (incidental) case against inequality is that ultimately it undermines incentives to work and take risks. In 19th century France (as Piketty shows from the data and illustrates from Balzac’s novels), the income that could be derived from capital by the richest was far in excess of what could be earned through work – so that it was far more rational for a young man, seeking a comfortable life, to set out to marry an heiress than to apply himself to hard work. We are not yet back in that world – work and entrepreneurship still have their rewards, at least for some – but we are heading back towards it.

    This also (according to Piketty) is relevant to the United States, who pioneered confiscatory levels of taxation out of concern for the increasing inequality of the “Gilded Age”, which was seen as undermining the pioneer egalitarianism of earlier American society. Early 20th century America didn’t want to turn into “Old Europe”, weighed down by the massive wealth of hereditary rentiers; early 21st century America is well on the way towards doing precisely that.

    Finally, as I said in my post, there is the practical aspect: in the end, inequality reaches a point where those at the bottom just won’t put up with it any more. That doesn’t necessarily mean violent revolution; it probably does mean measures (such as trade protectionism or restrictions on foreign ownership of assets) that end up being more counterproductive than the measures proposed by Piketty. Yes, you may well say that the 99%, if they are living reasonably comfortably (albeit with stagnant incomes), should be able to rest content with their lot and not look resentfully at the riches and power of the 1%. But that would require a society of saints – and in a society of saints, surely the 1% would already be divesting themselves of much of their wealth, or at least disclaiming the power that it gives them, anyway?

  3. Just to emphasise (as it may have got lost in that lengthy reply!): I think the moral case against extreme wealth lies in the power over other people that it gives to the wealthy (and which is a large part of their reason for wanting such wealth in the first place).

    Yes, it is possible to have great wealth without using it to harm other people, but I think history, the Old and New Testaments, and the evidence of our own eyes would suggest that such restraint is not the usual outcome.

    In any case, the link between the mere possession of wealth and its abuse is sufficiently strong for neither the Bible, the Church Fathers nor indeed the likes of Martin Luther to feel much need to make a fine distinction between the two, most of the time.

  4. “One of Piketty’s key points is that no mechanism exists within capitalism to achieve such an equilibrium, indeed quite the opposite: there is nothing to stop (and plenty to encourage) wealth and income concentrating almost without practical limit.”

    Clogs to clogs in three? Human myopia, especially around money, isn’t intrinsic to any economic system, and while children can respect the inheritance their parents earnt for them (and possibly even grandparents) it gets harder as the generations pass. Does Piketty collect any data on familial wealth retention? I’d be particularly interested to know whether the survival analysis looks similar for the period since, say, 1850 to the way it does from 1066 to 1850. (Taking the UK as an example.)

    “Even if the top thousandth’s capital returned only 4 percent a year, their share would still practically double in thirty years to nearly 40 percent.”

    I’m not sure I follow that sentence: some assumptions missing perhaps. I’m not sure what he means to work out whether his conclusion is grounded in reality.

    One of the things I am glad of wrt Piketty, and as you might guess there are not many, is that he has refocussed attention of popular economics (well, as popular as it gets…) on capital as opposed to income. Income is a wobbly thing for most people and wobbliest at the bottom end, and income inequality is a doubtful metric for society because of that: there is a lot of churn in the bottom deciles, so that the overlap between this year’s bottom decile and next year’s is fairly small. Capital inequality is a lot slower to move, so if you’re going to worry about inequality then for heaven’s sake worry about capital. And if you’re not worrying about inequality, well it’s capital inequality you should not be worrying about! Also, capital is more economically important in the long-run than income, since almost all improvements to income are generated by wisely invested capital.

    1. Piketty does observe that individual fortunes can (and often are) frittered away by “prodigal sons”, but that this isn’t enough to disturb the overall tendency towards a concentration of wealth (i.e. net capital).

      As for the “4% for forty years”, that was quoted out of context (as my point in quoting it lay elsewhere), but Piketty is talking about the effects of the gap between economic growth rates (estimated at 1.5% per year in the long term – Piketty discusses at some length his reasons for picking this figure) and return on capital. In other words, “r > g“.

      As for churn between deciles: one thing Piketty does which could usefully be adopted more widely is to distinguish between the top decile (and within that, the top centile and the next 9%), the next 40% down, and then the bottom 50% – rather than looking simply at deciles. I think he is correct in saying that this helps to see the patterns and trends more clearly than (on the one hand) a “ten deciles” approach or (on the other) “synthetic” measures such as the Gini coefficient.

      And yes, a large part of Piketty’s argument is that the exceptional circumstances of the 20th century (and let’s, to be frank, hope they are exceptional – he said, with a nervous glance towards the headlines) made income look more important than it really is as compared with capital.

  5. “my point in quoting it lay elsewhere”

    Yes, you wanted the last sentence; my concern is that the quote is a chain and the first link doesn’t look too strong.

    More generally I’m not persuaded by r > g as a long run state of affairs: I’ve not read the book but I’ve read the reviews and critiques, and he seems to be using some definitional truisms to hide some debatable assumptions. The assumptions are debatable in part because they lead to some very odd conclusions. (In part because they are just debatable. Is the net savings rate really constant? Is r really independent of K?) Not such a problem, perhaps, if the limiting behaviour were far away and in the opposite direction from Piketty’s assumptions, but unfortunately the odd behaviours occur in the limit g = 0, and Piketty assumes that we are moving from g = 0.03 to g = 0.015. I should sit down with a pencil and paper and sketch this out: I think the odd behaviours suggest a lower bound to economic growth, dependent on the depreciation rate (at least) and it would be interesting to see whether it exceeds 0.015 for reasonable assumptions of δ…

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