Hippo - Zujaja Tauqeer HeadshotHere, 3QD Editor Zujaja Tauqeer provides insights into some of 3QD’s top hits.

 

 

 

For economists, 2014 will certainly go down as the year Thomas Piketty’s Capital arrived on America’s shores. The French economist’s magnum opus, released in English in April, was instantly hailed as a modern day classic.

Exuding erudition, dripping with literary references while simultaneously distilling reams of data, Capital aims to do nothing less than uncover the laws that govern how modern-day humans organize societal commerce. Its 700-odd pages can be condensed to one simple theorem: “r > g”. The formula’s deceptive simplicity masks decades of research by Piketty and his colleagues on centuries of data taken from the UK, France, and the US—data showing that in a capitalist economy growth naturally leads to inequality. Because gains on wealth from assets, whether financial capital or land, are always higher than the rate of economic growth for the national economy, those with large holdings will continue to command an ever-greater share of the national wealth.

His hypothesis is certainly timely if nothing else—private wealth is approaching levels of concentration not seen since the Gilded Age (according to a Credit Suisse report, in 2013, global wealth reached an all-time high of USD 241 trillion, up 4.9% since the year prior and 68% since 2003, with the US accounting for 72% of the latest increase). In the tradition of Alexis de Tocqueville, Piketty has mined America’s past and present for a clue into the future of equality, and, like economists of yore, has shifted his profession’s preoccupation back to basic questions of how and why our economy functions the way it does. Like another well-known economist with an identically titled book (hint: he was German), Piketty reaches foreboding conclusions about the workings of the capitalist economy—left to its own devices, it will naturally reward those who do not have to labor for their riches.

To understand the impact of this book on the meaning of economic developments of the past few decades and what they mean for policy making, we encourage you to check out the following reads curated from 3QD’s archives:

1. Meritocracy No More

Undoubtedly, Capital’s release marks Piketty’s triumph (as highlighted in this 3QD pick), but it also reveals some uncomfortable realities about the US’s future. Incomes from labor aren’t growing nearly as fast as inheritances and returns on investments are. Troublingly, this means that as income inequality passes down generations, wealth will become an increasing source of inherited privilege in a society claiming to be a meritocracy. Ironically, were it not for the destruction wrought by a Depression and two World Wars which crushed the fortunes of global capital stock, this inequality could have already grown much worse over the course of the 20th century.

In the absence of wars or socialist actions by organized movements and welfarist states, the outcome promised by Capital is that capital will tend to accrue and concentrate; taxation on the wealthiest will tend to zero as countries compete to attract the rich and their dollars. Only active intervention into the economy can prevent such scenarios, such as Piketty’s proposed global capital tax. It is questionable whether this audacious proposal could ever gain the cooperation of leading countries (where capital is concentrated), and tax havens (where capital seeks refuge). Still, one thing is already certain, as economist Branko Milanovic observes: “Labor and capital—those who have to work for a living and those who live from property—people in flesh—are squarely back in economics via this great book.”

2. Facing Doubters of “r > g”

Interviewed about the major critiques leveled at his life’s work, Piketty demonstrates no small amount of confidence in the thoroughness of his research and the universality of his theorem “r > g”. Responding to those who claim he doesn’t take into account the imperfections of the market, the multidimensionality of capital, and the manifold ways of assessing value, the Frenchman asserts that his fundamental maxim—that when the rate of return to capital is greater than the growth rate of the overall economy, it leads to economic inequality—will still hold true. Piketty has not escaped questioning from all quarters on the problem of executive compensation, a source of wealth concentration which may not be adequately explained by his paradigm of wealth concentration through capital accumulation. This is because executive compensation is not primarily accrued through investment but is actual income ostensibly given for work done.

In this interview, Piketty reveals that high executive pay may in fact be a result of the very process he describes. Interestingly, in the aftermath of the Reagan-Thatcher era, decreased taxes on the rich led executives to lobby for more compensation and bonuses now that such compensation would not be taxed away. This did a lot to incentivise high corporate managerial incomes and compensation packages. Questioned as to whether redistribution of wealth through taxes is sufficient to prevent wealth concentration, as opposed to other measures such as the dispersion of ownership over capital or creation of public capital or “democratized” wealth, Piketty notes that taxation would be important not only for its redistributive action, but because the process of taxing and creating categories on income and wealth types can provide critical information about the state and distribution of assets, which is essential for the making of policy on the placement of wealth.

3. Democracy’s Failed Promises

Apart from the fundamental questions of economic life which Capital seeks to answer, it also comes at a time when the promises of democracy have started seem quite hollow. In the words of Andrew O’Hehir:

“In America, democracy offers the choice between one political party that has embraced a combination of corporate bootlicking, poorly veiled racism, anti-government paranoia and a wholesale rejection of science, and another whose cosmopolitan veneer sits atop secret drone warfare, Wall Street cronyism and the all-seeing Panopticon of high-tech surveillance.”

The notion that the “promised land of real democracy” is somewhere ahead crumbles in the face of Capital’s thesis, which essentially purports that unfettered freedom in the capitalist market leads to ever-decreasing freedom for the masses. Liberty, Piketty’s formula seems to say, is opposed to democracy, and a commitment to the free market will entail disenfranchising greater and greater numbers of people from a share of the national wealth. Elaborating on the political parallels of this vision, O’Hehir notes,

“The countervailing notion that democracy and liberty are not opposed but inextricably bound together, each the essential condition of the other, is pretty much a modern heterodoxy…Democracy has a long, fraught history as an idea; one could almost interpret its current problems as ideological karma, as if the contradictions baked into the modern democratic project by slave-owning hypocrite Thomas Jefferson and the murderous zealots of the French Revolution had surfaced at last.”

4. Critical Conversations

Having quickly become the darling of liberal economic thinkers, Thomas Piketty has also unsurprisingly drawn the ire of conservatives. In one of the most critical reviews of Capital, former Secretary of the Treasury and President of Harvard University Lawrence Summers argues it would be better to treat Capital’s conclusions with a grain of salt even if it is a welcome conversation starter.

Of the book’s wickedly simple formula, Summers acknowledges, “Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.” But Summers argues there are caveats in the book’s claims, and we should not rush to proclaim Piketty a lawgiver with respect to the natural evolution of a capitalist economy. Inequality could result not merely from the increasing concentration of capital but from the greater productivity made possible through technological innovation, as artificial labor and foreign labor unwittingly collude to shrink American laborers’ incomes. Offering orthodox interpretations of why executives command great compensation, Summers optimistically argues that extraordinary creativity in a globalised world gives greater scope for capital accumulation, which is hardly a hereditary advantage (as Piketty claims capital accumulation to be). No wonder Summers is led to question whether the hard data in Capital proves anything ironclad about the causes of inequality. Concluding that global taxation is a fool’s hope, Summers instead proposes “bottom-up growth” with policies that lower barriers for workers and young people to investment, and training for skilled jobs, especially in areas such as energy production with great scope for substantial job creation.

One thing is for certain: this is Piketty’s moment. His work, in examining economic freedom’s relationship to inequality, has drawn together some of the world’s top minds in a critical, and continuing, dialogue.

Further Reading:

If you want to plumb the depths of capital, as a historical and political phenomenon, check out the following links:

Image credit: photosteve101 via flickr