The Political Economy of Thomas Piketty

The American economist Paul Samuelson said of J M Keynes's General Theory: "When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius." Thomas Piketty's Capital in the Twenty-First Century is a lot easier to master, and the jury is out on the genius-call, but it shares an obvious-yet-new flavour with the Englishman's magnum opus. That inequality fell after the First World War and began to rise again once the rapid reconstruction after the Second ran out of steam in the 1970s is hardly news, but Piketty provides compelling evidence that growing inequality (not stable, let alone falling) is the default state of capitalism, outside of wars and depressions, and that the twenty-first century marks a return to levels of inequality not seen since the start of the twentieth.

The received wisdom of early reviews of the English edition was that the book offered riches in its historical analysis but that its prescription, specifically a progressive annual tax on wealth, was politically unfeasible. I suspect that judgement will prove to be superficial and that the book's lasting legacy may turn out to be its methodological challenge to neoclassical economics on the one hand, and the impetus it gives to institutional reform on the other. Whether either amounts to much will have to be seen. Ultimately, Piketty's political role has been to irrefutably prove that the emperor is stark-bollock naked, rather than open our eyes to a hitherto hidden truth.

Piketty and the canon

Though neoclassical economics makes a fetish of maths, it is is ultimately (like all economics) a species of moral philosophy that makes normative claims. There are three of particular note: that once an economy develops, market forces will lead to a progressive decline in inequality (aka the Kuznets Curve); that the share of national income between capital and labour is constant over time, ruling out any theory of exploitation of one by the other; and that income inequality accurately and proportionately reflects marginal productivity, i.e. just desserts for different labour contributions. Piketty's analysis of historical data contradicts all three claims: after declining over the middle years of the twentieth century, inequality has been increasing since the 1980s; the share of national income going to capital at the expense of labour has also increased; and, outside the exceptional period of 1914-75, the returns to capital have exceeded growth (i.e. productivity).

Piketty concludes "There is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently". In saying this, he also distinguishes himself from both the pessimists of classical economics, such as Malthus, who envisaged over-population being controlled by famine, and the optimists, such as Smith and Say, who assumed a natural harmony. It is the "destabilising" insights of Ricardo and Marx, in respect of scarcity and accumulation, that Piketty thinks are more relevant to the modern world, though he disagrees with their apocalyptic prognoses, which he ascribes to historical ignorance of the declining importance of land and the increasing impact of technology.

The "inegalitarian forces" he identifies are social, specifically the privileged position of those who receive a return on capital. Consequently, like Keynes before him, Piketty identifies the rentier as the "enemy of democracy". To diminish the rentier we must "take a serious interest in money, its measurement, the facts surrounding it, and its history". He concludes: "Those who have a lot of [money] never fail to defend their interests. Refusing to deal with numbers rarely serves the interests of the least well-off". But his prescriptions, like those of Keynes, are essentially managerialist and institutional - progressive taxation by the state and inter-state cooperation - rather than the democracy of workers' control. This is then essentially a social democratic manifesto. It shows how far the Overton Window has shifted over the last 30 years that an appeal for social justice and democracy should be considered radical.

A touch of class

Though he has simplified the maths that neoclassical economists have routinely used as a veil, Piketty has not entirely removed that veil, hence class is generally obscured by reference to percentiles and deciles. Despite the focus on inequality, and his insistence that economics is properly a subdiscipline of the social sciences, this is not a work of sociology. Indeed, his widely admired use of the fictions of Balzac and Austen, among others, allows him to distance his analysis from the lived reality of the modern world.

That said, Piketty is not wholly oblivious to class. His empirical approach, showing that the growth of "supermanager" incomes is a specific Anglo-Saxon phenomenon and not tied to economic performance, is key to his case that marginal productivity does not explain inequality. He is also aware of the politics, more so than many of his critics on the left concede, noting that this growth correlates with the ideologically-driven decision to lower top rates of income tax in the UK and US in the 1980s, but he doesn't tease out the implication of this in terms of power, namely that any future wealth tax might be discounted through further gross increases in supermanager pay.

I suspect the marginal role given to class and power reflects Piketty's belief that the state is incapable of doing the heavy lifting of advancing greater equality through social investment any more, in large part because it lacks the opportunity and impetus provided by war and reconstruction. In this regard his political analysis is sharp to the point of cynicism. In sceptically answering the question Do educational institutions foster social mobility?, he notes (in reference to the founding of France's Sciences Po after the Paris Commune) that "the upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprive them of everything they owned". Allowing for the anachronistic "meritocracy", that is a sentence that would have not looked out of place in the notebooks of Gramsci.

The long march through the institutions

Piketty's book has little to say about the institutional legacy of Bretton Woods, namely the IMF and World Bank, which emphasises his concern with distribution rather than production and his focus on the developed world. But he is voluble on the European Union, believing that without supra-national coordination at the regional level, taxes on capital cannot be effectively implemented in the age of globalisation. Contrasting the more coercive control of capital in China, he makes the case for a tax as being consistent with European traditions: "The capital tax is the liberal form of capital control and is better suited to Europe's comparative advantage". Similarly, he emphasises the USA's pioneering record in introducing taxes on wealth and high marginal rates of income tax in the twentieth century, implying that the current political aversion to taxation is purely ideological, rather than a permanent cultural feature of the country.

Faced with the flaws of the Euro  (a "stateless currency" with essentially arbitrary rules on debt and deficits), Piketty proposes the creation of a budgetary parliament, distinct from the current European Parliament and made up of deputies from the various national parliaments in the Eurozone, that could provide a democratic mandate to pool public debt and collectively manage fiscal and monetary policy. He is firmly on the side of more union: "if we are to regain control of capitalism, we must bet everything on democracy - and in Europe, democracy on a European scale". This provides a potentially popular justification for greater union, far superior to the technocratic case advanced by the political elite.

His argument also gives European politicians retrospective wiggle-room, suggesting that their inadequate response to growing inequality since 1980 is the result of design errors (the ECB's narrow anti-inflation brief) and structural constraints (the lack of fiscal union and democratic oversight), which have prevented an EU-wide wealth tax being considered feasible, rather than deliberate policy. In encouraging the EU to move beyond gestures like a financial transaction tax, and by focusing on inequality of outcome, he is testing its commitment both to socially fair taxation and to democratic accountability.

_____________

Piketty is an empiricist, not an idealist, which ironically makes him more Anglo-Saxon than Continental in his method, despite nods to la longue durée and cultural theory. He observes phenomena, such as r > g, but offers no explanation as to why these arise. For example, why is r (the rate of return to capital) higher than g (the rate of growth)? He focuses on distribution rather than production, hence his work is not a critique of capital in the sense that Marx employed that word, but of simple wealth. Consequently he has little to say about class power, monopolies, or economic imperialism, which leads some critics to conclude that he has not really diverged from the neoclassical tradition: "By, in effect, objectifying capital, considering it apart from the social relationship embedded within it, he marks himself well within the economic mainstream".

This is true, but what Piketty has valuably done is show that the claims of economic theory can be proven or disproven through historical data, which actually places him closer in methodological terms to Marx than the marginalists. Piketty is a reformer, not a revolutionary. He sees no alternative to capital as the motor of the economy, but he is clear that left to its own devices, capitalism will undermine itself through growing inequality. His prescription is institutionalised democracy, but at a time when a corporate tax-avoidance facilitator has been made President of the European Commission, and we have yet to see a single UK-based banker face criminal charges for either negligence or theft, this looks like a big ask.