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Thomas Piketty's body blow to conventional economic wisdom


During the ordinary working of capitalism – absent the extraordinary Great Wars and Great Depression of the first half of the twentieth century – inequality, as manifested in the distribution of wealth, rose over time and promises to continue to do so.

Call that distressing result Piketty’s law. 

Elucidated in his magisterial Capital in the Twenty First Century, it hearkens back to the “laws” of classical economics from the late eighteenth century (a.k.a. the political economy of Malthus, Ricardo, Marx) to the rise of neo-classical economics in the latter part of the nineteenth century which supposedly rendered such laws and their dreary consequences obsolete.

Thomas Piketty, of course, is the previously obscure (in the Anglo-Saxon world) French economist whose name, with the help of such well-known progressive economists as Paul Krugman in the U.S. and Robert Skidelsky in the U.K., has gone viral.

Piketty and his team have established the dismal tendency of inequality to worsen by doing economics the way it should be done, but mostly isn’t. He does not begin by enunciating an abstract theory and then testing it. Rather, he collects a mass of information – the megadata of history of many countries from many sources – graphs it, and looks for patterns. In fact, they virtually leap off the page.

Note that Piketty’s emphasis is on wealth, as in Adam Smith’s Wealth of Nations, not on income, as in national income or income per capita, nor is it on national product as in GNP or GDP. Another name for wealth, as defined by Piketty, is capital as in Marx’s magnum opus. Hence Piketty’s title –with  both “wealth” and “capital” more the discourse of political economy than mainstream economics – where “capital” conjures up “power”, revives a concept neo-classical economics has long cast away and hidden from view.

What astonishes is that Piketty’s perspective, with its ancient lineage, finds contemporary relevance in the Occupy Wall Street movement. Notwithstanding all the bells and whistles, capitalism in its essence – for Piketty “the deep structures of capital and inequality” – hasn’t really changed.

At the heart of Piketty’s analysis is a mathematical relationship, simply stated but with humungous consequences:

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

Put it this way: if for any given increment in overall income a big and growing share goes to capital, then the wealthy thrive, inequality worsens, and the rule of oligarchy (think the Koch brothers in the U.S.) corrodes democracy. But note that Piketty has faith that this increasing inequality is, nevertheless, “unsustainable,” that there presumably will be a countermovement.

To cut to the chase, there is still a job to be done by outfits like the Broadbent Institute; but it’s bigger than one might think.

For those of us who are quantitatively minded, it will be evident that there is much going on here that is difficult and requires imagination, particularly estimating the rate of return on capital which depends, among other things, on the capital/output ratio which can vary substantially among sectors, over time, and between countries.  

Going back to that key quote, are Piketty’s conclusions applicable to the experience of the twentieth century and the rise of the welfare state? As was noted at the outset, three successive catastrophes (the two Great Wars and Great Depression) wiped out wealth and did thereby alter the face of capitalism, though only for a time and never its deep polarizing structure.

Piketty supplements his data with careful arguments about the case for and against inequality making the book considerably more readable and informative and good for your soul than its basis in statistics might suggest.

Piketty reminds us of something that is mostly forgotten, which is that the wealthy pass their wealth on, thereby maintaining the structure of inequality. So much for the case that wealth is a reward for present merit.  Note that the Koch brothers inherited the wealth on which they have built. The media customarily refer to their firm as “family business.” It gives a fresh understanding of the “family values” of the right.

The best policy approach to combat inequality would be a progressive global tax on capital or wealth. You cannot understand inequality as Piketty does and imagine there are easy solutions, so Piketty is not hopeful that this policy could actually happen. It has, however, the virtue of telling us how imperfect the present corporate globalization is, and how essential it is to replace that corporate version with a people’s version. In the meantime, countries and regions could work toward progressive income taxes and higher minimum wages.

What Piketty has done, by example, is open the door to more fruitful research and analysis than is on offer from mainstream economics. It is hard to change a paradigm except from within and Piketty has dealt a body blow to the conventional wisdom. Loose talk about the “productivity” of labour and the “efficiency” of labour markets will no longer suffice.

Piketty blows away the dry dust of economics and gets down to the fertile dirt of political economy. In the long run, in a world where economics has become a veritable servant of power, this could be his greatest contribution.

While it is premature to assess Piketty’s impact, the attention he is receiving both in mainstream and alternate media and from right-wing pundits who feel compelled to fight back is an encouraging sign.

Mel Watkins is Professor Emeritus of Economics at the University of Toronto.

Photo: Sue_Gardner. Used under a Creative Commons BY-SA 3.0 licence.