Why the moderate Right should listen to Piketty

The second crisis of capitalism (part 2)

I will admit to having had two expectations when I opened Piketty’s Capital in the 21st Century. The first was that the author was a left-wing economist, possibly a neo-Marxist, the darling of the European left, and someone with whom I was likely to disagree. The second was that I expected his book to be essentially polemical in style, long on diatribe and short on evidence.  

Both expectations were demolished early in the course of reading the book.

Yes, Piketty is from the left. However, he is emphatically not a neo-Marxist, nor even a socialist in the traditional sense. He supports free markets. He is wary of intrusive government interventionism. But he believes that free-market capitalism, left entirely to its own devices, creates distortions and inequalities that need to be rectified. This, to be sure, has been the opinion of the moderate left forever, but it has also been the opinion of the moderate right for the past 150 years or so.

And Capital in the 21st Century is not a work of theory. It is first and foremost a work of economic analysis and research. It charts the amount, the nature and the distribution of capital from before the Industrial Revolution to 2012. It relies almost exclusively on government statistics for its sources. It covers as many countries as it can, but – because of the availability of such statistics over a long period of time, and the stability of the countries concerned – focuses primarily on France, Britain and the USA.

These analyses take up most of the book. And – unless one is prepared to stand up and say that his sources are unreliable – it is difficult to refute Piketty’s findings. There has been plenty of criticism of his book, much of it from American neo-liberals, but it has mostly concerned how his findings should be interpreted, and what they portend for the future. For a layman like me, it is impossible to arbitrate the intellectual arguments that swirl around Piketty. All I can say is that I found his book persuasive and see no good reason to doubt its statistical foundation, especially when the evidence of my own eyes confirms so many of his conclusions.

To do justice to such a detailed and comprehensive work in a blog is impossible, but here goes. Piketty demonstrates that, in Britain, aggregate private (i.e., non-government) wealth, expressed as a multiple of national annual income, was between 6 and 7 from 1870 to the First World War, fell rapidly to 3 by 1950 and then increased steadily to exceed 5 by 2010. The figures for France and Germany are broadly similar, and the trends are identical. The figures for America are different. The ratio was just over 4 at the start of the First World War. It fell to just over 3 by 1970 and then increased to marginally over 4 by 2010. The much greater demographic changes in America in the 20th century account for this divergence, rather than any suggestion that America is more egalitarian than Europe.

These figures, and the detailed descriptions that accompany them, reveal a number of interesting points. One is that the accumulation of private wealth is climbing back towards the level of 1914 and, on present trends, will exceed that level this century. Another is that the amount of net public wealth (the value of government-held assets less national debt) is negligible or negative almost everywhere, reduced both by privatisation and by spiralling debt – although, in relation to private wealth, it was always smaller anyway.

Another, if unsurprising, revelation is the degree to which both world wars, and the financial shocks in the intervening years, destroyed European capital. However, the post-war recovery in Europe can now be seen as an anomalous and one-off event. It was a period of catch-up, of compensating for what had gone before, not something that ever has been, or ever could be, replicated on a continuing basis. Similarly, the growth rates of countries such as China or India today will stabilise downwards to historic world levels when the period of catch-up is over.

I am still finding this information hard to digest. My generation grew up believing that net growth rates of 3 or 4% a year were perfectly normal, and that something must be wrong if those levels were not being achieved. Nothing could be further from the truth. Even during the Industrial Revolution in Britain, growth was not much more than 1% a year. Piketty believes (along, it would appear, with most other economists) that, in the future, the advanced countries can expect to grow at no more than 1.5% a year, and possibly no more than 1%.

However, as he also says, real growth of 1% a year is not negligible, if consistently achieved over time. It would amount to a total increase in national wealth of nearly 35% over the course of a generation. However, at this lower level of growth, the question of how its rewards are distributed becomes one of pressing urgency. In that context, this is possibly the most chilling passage of Piketty’s book:

“If we consider the total growth of the US economy in the thirty years prior to the crisis, that is, from 1977 to 2007, we find that the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year. These figures are incontestable, and they are striking: whatever one thinks about the fundamental legitimacy of income inequality, the numbers deserve close scrutiny. It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.”

Comparable figures for other countries are a good deal less extreme than this, but the movement is in the same direction, wherever you look. Britain is the next closest country to America, with other European countries not far behind. In all cases, there has been a redistribution of relative wealth to the rich from the poor, and especially to the extremely rich from everyone else.

Nor should this come as a surprise. Most of the super-rich are now so wealthy that, each year, they spend only a small part of the income from their investments. The rest of that income is reinvested. If they obtain a 4.5% rate of return and pay 30% in tax, their wealth is already increasing by 3.15% a year, leaving aside the fact that the value of the capital assets will almost certainly have appreciated as well. This is already well in excess of the annual growth rate of most economies.

But, in practice, they don’t obtain a 4.5% return: they obtain a higher one. And they don’t pay 30% of it in tax: they pay almost no tax. And, if they are in paid employment, their remunerations will also be vast and be growing disproportionately to the economy.

And that will be the topic of next week’s blog.