Published in The Express Tribune, September 14th, 2015.
Reviewers have called it a 700-page punch in the plutocracy’s gut. The title of Thomas Piketty’s magnum opus suggests that he is updating Das Kapital, to bring Marx into the 21st century. Piketty documents a sharp increase in income inequalities over the last 25 years, not only in the US, but also in Canada, Britain, Australia, New Zealand, China, India, Indonesia and South Africa, with people with the highest incomes far outstripping the rest of society. However, he goes far beyond the compilation of statistics and provides a grand unified theory about the deep forces which have shaped human history over centuries. His analysis points out a fundamental conflict between free markets and democracy, directly contrary to widely accepted conventional wisdom that the two go together.
As one illustrative statistic, the bottom 80 per cent of the US population has only five per cent of the wealth, while the top five per cent has 72 per cent. This level of inequality matches the inequality levels seen around the Great Depression. Why is there so much inequality, and why does it continue to rise? Piketty’s answer is brilliantly simple: r > g. The ‘r’ is the rate of return to wealth. This is the profit that the wealthy can make when they invest. The ‘g’ is the growth rate of the economy, currently around 3.3 per cent, globally. There are two types of people in the economy. The wealthy earn money by investing their wealth, while rest must work for a living. If return to wealth is larger than the growth rate, the wealthy grow richer faster than the growth of the economy, while the earnings of the salaried classes grow at a slower rate. As a natural consequence, the rich get richer, while the bottom 99 per cent gets squeezed.
Many authors have searched for an explanation for rising inequality and slow growth since the mid-1970s. Piketty reverses the problem: what needs explanation is the rapid growth and increasing equality of the mid-20th century. His detailed historical evidence shows that slow growth and rising inequality is a centuries-old pattern for capitalism. It is only the 30 post-war years from 1945 to 1975, which form a rare exception to the historical trend. The prosperity that we have all come to associate with capitalism is an illusion based on an exceptional historical experience. The two world wars destroyed entrenched capital, re-arranged the global balance of power, and created rapid technological progress. A complex combination of other unusual factors led to a shift in the balance of power away from the non-productive wealthy, and towards the productive workers. This led to a short-lived period of rapid growth and prosperity for all, memories of which have shaped our understanding of capitalism.
Looking beyond the immediate past, we find that Europe up until the First World War is a picture of ‘patrimonial capitalism’: a few wealthy families dominate society. The British and European aristocracy considered the commoners to be an inferior race and had contempt for those who had to work for a living. Similarly, capitalism did not get started in the US until the 1870s. Characteristically, it soon ushered in the Gilded Age — where massive displays of luxury by newly minted fortunes of the super-rich were combined with misery for the masses.
As exceptional conditions created by the world wars faded into the background, the underlying structural dynamics of capitalism (r>g) came back into prominence in the 1970s. With growing financial liberalisation, the rates of return to wealth overtook the rates of return to all types of work. Investors and financiers now make much larger returns than the innovators and the entrepreneurs. Global economic growth is slowing down while wealth inequality is accelerating. Not only that, but the more wealth a person or institution owns, the faster that wealth grows. For instance, from 1987 to 2013, the global rate of return on the wealth owned by the average adult was 2.1 per cent. During that same period, the rate of return on wealth owned by the average billionaire was more than 6.5 per cent. Exactly in accordance with meticulously documented centuries-old patterns of capitalist development, wealth started to accumulate in the hands of the rich, and economic growth declined as the returns from productive work declined.
Piketty argues that the internal dynamics of capitalism ensure that wealth will concentrate, leading to a concentration of power in the hands of a small number of families. This incompatibility between democracy and capitalism is in stark conflict with the ideas of Milton Friedman. Historical evidence gathered by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism, shows that brutal effects of free market capitalism are resisted by the masses and require enforcement by force. Thus, 20th century history strongly supports Piketty over Friedman.
Today, state capture by the wealthy in advanced capitalist economies is easily documented in terms of numerous policies against the public interest which serve the interests of the elite. Ever since the French Revolution, the wealthy have learnt of the necessity to manage discontent by giving in sufficient amounts to prevent an uprising. Piketty argues that the ‘social state’, with relentless growth in the proportion of national income consumed by the state, spent on universal services, pensions and benefits, is an irreversible feature of modern capitalism. Capitalists enjoy a high degree of legitimacy today because they have found ways of co-opting thought leaders and the managerial class, as well as ways of keeping the labour class weak and divided. Nonetheless, impetus for change may be created by repeated financial crises which result from widening disparities in income and wealth. Like Marx, Piketty argues that these crises are a built-in feature of the system.
Marx’s vision in Das Kapital of a classless society which provided for the needs of all members shaped the 20th century, inspiring two major revolutions and the great battle between communism and capitalism. Only time will tell whether Das Kapital of the 21st century can fill the shoes of its predecessor.
16 thoughts on “Capitalism in the 21st Century”
Thanks, one of the clearer reviews I’ve read. It’s a shame though that Piketty treats “capitalism” as a black box, whereas market economies may take many forms. I find “capitalism” to be so vague as to be not useful. Capitalism versus socialism is a false dichotomy: both have many possible forms, and one can envisage market economies that are better than either.
I light of this, Piketty’s “brilliantly simple” r, g analysis is simplistic. We can instead inquire into *how* r and g are determined in practice, and take charge of how wealth is distributed.
A purely economic definition of capitalism is given here:
Conventional measures of economic growth are extremely misleading — see Stiglitz-Sen Fitoussi report. Measures corrected for environmental damage show negative growth.
Economic Growth has no relation to happiness — see Easterlin Paradox.
The main issue being raised here by Piketty, elsewhere by Stiglitz in Of the 1%. By the !%, For the 1% is plutonomy (as in the Citicorp Plutonomy Reports). — Natural operation of unregulated free market processes is concentration of wealth in the hand of a few, who end up controlling the economy.
I agree that r and g are not technologically determined, and we CAN change these in various ways — taxing wealth based earnings is an OLD idea, presented by MANY social reformers, which would do the job. The problem is PLUTONOMY. At this point the wealthy are heavily in control of the USA economy, and very powerful elsewhere. The obvious moves cannot even be put up for discussion in the congress, and have no chance to pass. This means that creating positive change will require political action. Given that media is under control of the wealthy, the only alternative is grassroots movements. We have had those like the Battle in Seattle, and the Occupy Wall St. but to be effective we have to have simple clear goals on which we could generate consensus. Updated versions of Henry George might do the trick. I would be happy to have a post by you summarizing your ideas in your book/s
Hello Asad, here is the link to what i had to say on the subject:
I’d be interested in your opinion
Best wishes, Jamie (I work on RWER with Edward)
reply posted on RWER Blog:
One summary of an important aspect of Morgan’s critique which he does not express so bluntly is: The moment someone claims that they have discovered laws of economics, it proves that they understand neither science nor economics. The reason is all “laws of economics” (that I have come across) violate the property of universality and therefore cannot be laws. For example “Piketty’s law” r > g is not universally valid or factually true.
Any clearly defined and accurately measured economic variable has scientific value. It is how economists use it and put all sorts of unwarranted meaning into it that is the problem. There is nothing misleading about GDP provided you understand what it is and avoid being misled yourself or mislead others. Just GDP alone clearly does not indicate everything needed to assess “economic performance” or “social progress”. There is no reason why other indicators should not be developed and implemented to measure achievement of other economic objectives.
By stating a long list of variables what they think are useful Stiglitz-Sen-Fitoussi report is just “motherhood” waffle – if everything is important then nothing is important. There is no suggestion of anything concrete about exactly what to measure and how to measure it next to bring most benefit to the study of economics. What is the next indicator after GDP or GDP per capita which could be practically measured to bring the most benefit? For example, exactly what do you measure for quality of life? Too much waffle…
We are poles apart in our views, which makes communication difficult. You have argued that GDP growth rates show that capitallsm is a good system. I would suggest that the growth is generated by exploitation of human beings and nature — and if these costs (damage to human society and to nature) are figured into the calculations, it would show the opposite. You might argue that the qualitative nature of the damage means that it is just waffle. I think that the most important things in our lives — love, compassion, trust, justice, courage — are unmeasurable.
We are poles apart because academic economists do not pinned themselves down by defining precisely terms on what they are saying. They prefer plenty of wiggle room so that they can never be proved wrong. Because no opinion can be proved wrong, economics is full of opinions which go around in circles, going nowhere. That OK, they are making a good living doing nothing constructive and in fact putting “madmen in authority” creating havoc in this world.
You inferred that I “have argued that GDP growth rates show that capitalism is a good system.” No I did not. I said good or bad is relative to objectives. What are the objectives? All I have shown is that capitalism is good for economic growth. NOTHING ELSE. You have imagined other things. Marx and you “suggest that the growth is generated by exploitation of human beings and nature”, which is another issue – a contentious one at that. Marx must have thought (I’m speculating) he was rooting for “love, compassion, trust, justice, courage”. But instead, Marx gave justifications for communism, famines, gulags, police states, Stalin and much else.
Marx gave justifications for communism…
Actually not. This is pretty uninformed view of the history. I don’t find being critical of “state socialism” or the more accurate authoritarian command economies as being objectionable but it is pretty clear that Marx would have decried them. Communism did not emerge as the logical conclusion of the 19th century socialist projects and hopes but rather as the product of a historic gamble and failure, one which even Lenin himself might have acknowledged by the end of his life (the failure part that is, he was quite well aware it was a gamble and only one that could succeed in the context of a parallel socialist revolution in the developed countries – that context not being such a wild speculation in 1918). Classical Marxism (which was democratic both operationally and theoretically) was quite clear the revolution in backward countries would redistribute poverty, not wealth, and would end in tyranny.
When it comes to taking credit, such as for raising living standards, economists quickly raise their hands. When it comes to communism, Marxist ideas were not responsible. I don’t know what Marx would have decried – neither do you. My own view is: economists provide pretentious and unscientific ideas irresponsibly which politicians pick and choose to suit their own agendas. Academics think that it is their job to throw out new ideas and it is not their responsibility for how those ideas are used. Eugene Fama, for example, does not make any effort to deny that markets are efficient in an economic sense and advice against financial deregulation. He would not accept responsibility for financial market failures – he would decry actual practices. Keynes made the astute observation: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.” No, the ideas of Marx do not belong to this quote, according to you.
When you conclude your article by saying that: “The empirical evidence presented here strongly contradicts the belief that “capitalism has failed”, before, during or after the GFC” and you argue that capitalism has been good for economic growth, and you argue that “capitalism isnt working .. ONLY Because there has not been enough of it”. It is hard to avoid concluding that you are arguing in favor of capitalism. Please NOTE carefully that I did not assert that you are wrong and I am right, I just said that our opinions are opposite, leaving room open for reasoned discourse.
I think your last few sentences are emotional rather than logical. Also your first paragraph is emotional — economists often express strong opinions, and are therefore quite easily proven wrong. My paper entitled EMPIRICAL EVIDENCE AGAINST UTILITY MAXIMIZATION provides strong empirical evidence against lots of central claims made by economists. see: http://ssrn.com/abstract=2033641
I would be happy to explain why your conclusion regarding the Keynesian fallacy and the singularity argument are based on a mis-understanding of what Keynes is saying, but emotions cloud reason, making clarity and understanding impossible.
As you may be aware from the news that Keynesian governments and central banks have been desperately trying to generate economic growth through fiscal and monetary stimulus for the past several years and it’s not working. I’m saying the Occupy claim that “capitalism isn’t working” misses the mark because capitalism has not been allowed to work, instead it is massive government intervention which has been tried and failed. I’m not even saying that economic growth must necessarily be the goal. What I’m saying is that IF economic growth is the goal, then government efforts have failed and capitalism has not been given a chance – hence it is not meaningful to say “capitalism isn’t working”.
You said: “economists often express strong opinions, and are therefore quite easily proven wrong”. Wrong to whom? They have not recognize any wrong at all. Tell me what have changed since the GFC? Only in the minds of some people. The same academics, the same bureaucrats, the same central bankers, all expressing the same opinions, only stronger and wilder, are still in charge. For example, Eugene Fama was awarded the Nobel Prize only a couple of years ago for the “Efficient Market Hypothesis”. Unfortunately, “strong empirical evidence against lots of central claims made by economists” makes little difference. I’m a scientist – I avoid emotion, ideology or logical errors.
I would be most grateful if you could “explain why your (i.e. my) conclusion regarding the Keynesian fallacy and the singularity argument are based on a misunderstanding of what Keynes is saying” I would appreciate it if you could put this as a comment on my website, so that I could publish it there, as it is “off-topic” for your current post.
“Capitalism has failed” claim arises from the GFC itself — which was a disaster created by unregulated financial markets. It does not arise from post GFC huge interventions involving bailouts. Interventions were necessary to prevent the economy from collapsing, but the government made the WRONG interventions, bailing out the banks instead of the defaulting mortgagors, which is why the interventions did not work. This ERROR was caused by the political power of the financial sector, which blocked the right intervention, since this involved forcing the banks to pay for their mistakes.
Similarly there is a huge record of unrestrained capitalism leading to crises — see Naomi Klein: The Shock Doctrine, for an economic history of the twentieth century. THAT is the evidence for the failure of capitalism, not the post GFC scenario, which no one confuses with capitalism
To prove economists wrong is quite easy. To get economist to admit they are wrong is an entirely different matter. My paper on EMPIRICAL EVIDENCE against utility theory was rejected by major journals saying that “It was too insulting to economicts” and others saying that these contradictions were “well-known” — Kenneth Arrow responded to my article as follows:
Dear Dr. Zaman:
Thank you for the very complete and well-argued critique of the utility-maximization theory. Of course, the remaining question is, what should take the place of that theory?
Kenneth J. Arrow
So he admitted that utility maximization was a wrong theory — just like many others leaders in economics have done, as many quotes on RWER website and elsewhere show.
WHY dont they change? Why dont they admit they are wrong, and start afresh with new theories? Well there are many reasons for this, which have been given by heterodox economists, who have studied the sources of resistance. A simple one is that it would completely devalue the intellectual capital that they have spent years and years acquiring. There are more complex power/knowledge reasons — that is the structure of pseudo scientific knowledge produced by economists supports existing power configurations.
I tried to put a comment on your website, but it required some form of login and registration, which I could not get through, since i did not remember by wordpress login and password
Economists including Arrow are dishonest and corrupt in protecting their own interests. Arrow said: “Thank you for the very complete and well-argued critique of the utility-maximization theory. Of course, the remaining question is, what should take the place of that theory?”. Not knowing what to replace the theory is not a sufficient reason for rejecting publication. A good critique which identifies the important flaws is an important step to building a replacement theory. Without a good diagnosis there cannot be a cure. Economics is not science. In science, exposing errors are encouraged.
I agree with you that “the structure of pseudo scientific knowledge produced by economists supports existing power configurations.”
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