Who Let You In?

Charles "Gobshite" Windsor was a speaker at last week's highly exclusive Inclusive Capitalism conference in London (Vladimir Putin was not on the guest list). Presumably his qualification for the gig was simply being rich, though he can also claim expertise in the sensitive matter of negotiating tax payments. To judge from Christine Lagarde's comments, the political wind appears to be shifting towards the need for a historic compromise. The rich must be seen to to be making a larger contribution, though there will still be plenty of haggling over what should be taxed, with a wholly unsurprising preference for capital income and inheritance, which are easier to finagle, as opposed to wealth, which would have to be revealed and assessed (and its hiding criminalised).

Meanwhile, L'Affaire Piketty rumbles on, though the emerging consensus appears to be that Chris Giles and the FT did not land a telling blow, while Piketty has now come out fighting. This is hardly a shocker. For Giles to get the decision you'd have to believe that the rich had failed to take advantage of a sympathetic political environment over the last 35 years to fill their boots. I suspect the fight will shortly be stopped by the referee and awarded to the Frenchman. One reason why Piketty is probably a good bet for a Nobel prize in a few years is that he has restored political economy to mainstream debate. A concern is that the sudden fashionability of inequality risks distracting from other pressing problems, such as climate change, austerity and fragile banks, which is a testament to the agenda-setting impact of his book. The contrast with idiocy like Freakonomics could not be more pointed. Microeconomics has been eclipsed.

Some on the right have accepted that the game is up and that pretending that inequality should not be ameliorated is no longer viable, while some on the left have criticised Piketty for focusing on too narrow a definition of capital (material and financial wealth alone) and thus ignoring power and class (this was the chief criticism in France). I think this underestimates the radical implications of Piketty's focus on patrimonial wealth. As Mike Konczal notes: "Piketty believes social democratic reforms outside high taxation are incapable of changing these dynamics ... [H]e assigns no role in combating 'r > g' to the growth of the social state that ensures access to health, education, and income security. Labor unions and the regulatory state are missing or underdeveloped in his analysis". This is a major challenge to social democrats and pseudo-left neoliberals. We could double the minimum wage without noticeably narrowing inequality. The focus has to be on the top of the pyramid, not just the bottom.

Konczal also notes an implicit challenge to the right: "In Piketty’s analysis, the decline of high marginal tax rates are the main culprit in the large growth of inequality internationally since the 1980s. Since this major transfer of resources didn’t cause an increase in economic productivity, the cost of undoing it will be minimal for the economy as a whole". In other words, the failure of the trickle-down chicken may finally be coming home to roost. I'm sure the usual Laffer Curve bollocks will be wheeled out, but I doubt it will be effective. A further consequence of Piketty's work is that: "Understanding how the elite become what they are, and how their wealth perpetuates itself, is now a hot topic of scientific inquiry". After decades of focus on the underclass and their supposed failings, attention is now turning to the pathologies of the rich. This could spell the end for Hello magazine as much as Benefits Street.

Seth Ackerman notes that Piketty also presents significant challenges to the neoclassical synthesis, which unites both the progressive and conservative wings of orthodox economics, from Paul Krugman to Robert Lucas: "What has made Piketty’s arguments about wealth distribution so explosive is the central place he gives to the phenomenon of rentier inheritance". The neoclassical theory holds that the rate of return on capital (its price) should fall as capital makes up more of the economy (because its supply has increased), but this is disproved by "Piketty’s empirical demonstration that the rate of return on wealth has been remarkably stable over centuries". Instead of the euthanasia of the rentier, we have seen the steady strengthening of that class since 1979.

Ackerman continues: "Once this neoclassical story - where the relative demands for labor and capital are dependent on their relative prices - is 'debunked', to use Paul Samuelson’s contrite term, the competitive market economy no longer contains any necessary mechanism pushing the various wage rates or the profit rate to any determinate level. Rather, history and custom, as well as politics, laws and struggle, will determine who gets what. It’s a system of grab what you can". The elite goal will be to keep the 1% club exclusive and maintain its hold on politics and law, even if this means paying a larger fee. Whether this is spun as philanthropy or a fine, the ideology is fractured: just desserts revealed as the exploitation of power.

What we can be sure of, thanks to Piketty's analysis and despite Chris Giles's protestations, is that the problem of inequality will not go away and can only get worse. As John Quiggin notes: "it may be that the share of income accruing to the 1 per cent has grown so large that governments have no alternative but to tax it". In this light, Piketty's proposal for a global wealth tax starts to appear less like utopian fancy and more like a provocative opening gambit. But while property's dues to society are once more topical, what isn't up for discussion is the right of the elite to their ownership of that property, which will at least please the Duke of Cornwall,