Monthly Archives: October 2014

Capital in the 21st Century: Chapter 10

Following upon his analysis of the inequality of income, the tenth chapter of Piketty’s Capital tackles the analogous–even, more strongly defined–disparity in capital ownership. This inequality, Piketty argues, is central, as it is precisely the radical gap in capital ownership that defined the dangerously unequal society of early 20th century Europe, and it is precisely this level of capital inequality that is beginning to reemerge today.

“In all known societies, at all times,” Piketty begins his analysis, “the least wealthy half of the population own virtually nothing (generally little more than 5 percent of total wealth)” (336). The real distinction between a radically unequal society and a (relatively) equal society, therefore, is the relation between the top decile and the next fourty percent, or even more so, the top centile and the next fourty-nine percent. In French patrimonial society, Piketty shows, “the top centile alone owned 45-50 percent of the nation’s wealth in 1800-1810; its share surpassed 50 percent in 1850-1860 and reached 60 percent in 1900-1910” (339). This growth can be attributed to the rise of industrial society, and would only decline following the shocks of the two World Wars, and the subsequent dismantling of the rentier class. A decline in capital inequality, as seen in the mid 20th century necessitates a radical reformulation of society (such as that triggered by the world wars). In fact, Piketty argues, the French Revolution, even with its rhetoric of equality, barely put a dent in rentier wealth (particularly given the “emigre billion,” the payment of 1 billion francs to the wealthiest French citizens after the revolution as compensation for the confiscation of land during the preceding century). This trajectory, Piketty’s data shows, can be largely reiterated in Britain and Sweden, and therefore cannot be conceived as a uniquely French phenomenon (343-345).

The United States, on the other hand, once again charted its own unique economic course. Most importantly, and for reasons already marked in earlier chapters (rapid demographic growth, etc.), America began on a relatively equal economic footing (roughly equivalent to Sweden in 1970 [347]). Most shocking, for the modern American, is that not only was the economic reality inverted (the US considerably more equal than Europe), but also the rhetoric was largely inverted. Rather than the myth of meritocracy common in the present political landscape, the great fear in early 20th century America was that it would turn into Europe, that is to say, into a radically unequal society (348). Yet, this relatively equal (that is, relative to the radically unequal Europe) distribution was not the only unique feature of the American 20th century economy. Most importantly, and once again the causes of this difference have been previously marked out, the decline in top incomes during the two World Wars was considerably attenuated. “The deconcentration of wealth in the United States over the course of the twentieth century was fairly limited: the top decile’s share of total wealth dropped from 80-70 percent, whereas in Europe it fell from 90 to 60 percent” (349). This moderation is not particularly surprising, given that the US did not experience the large-scale destruction of capital (through bombings, confiscations, etc.) common to the continent. The result is that contrary to Europe, the 20th century was not a period of radical egalitarianism in the US, on the contrary, we are more unequal now than at the turn of the century.

Returning to his central inequality (r>g), Piketty marks the nature of the dramatic pre-20th century growth in capital inequality to the relatively low level of growth. As it should be remembered, pre-industrializatized societies tended to grow at a miniscule .5-1 percent a year. In such a low growth society, the accumulation of “inherited wealth” becomes inevitable “for strictly mathematical reasons” (351). Of course, as Piketty repeatedly insists, the rate of return on Capital’s higher rate than growth is not logically necessary, but is strictly a historically contingent fact. Nonetheless, there are essentially no 21st century forecasts which predict a rate of growth that will outstrip the rate of return on capital. Thus, it seems, without policy change, excessive growth in inequality is an inevitability. “According to the central scenario discussed in Part One, global growth is likely to be around 1.5 percent a year between 2050 and 2100, roughly the same rate as in the nineteenth century. The gap between r and g would then return to a level comparable to that which existed during the Industrial Revolution” (355).

Given that the rate of profit exceeds growth, the obvious question that Piketty closes the chapter with is “why hasn’t inequality of wealth returned to the levels of the past?”. His answer, is multifaceted. First, the shocks of the 20th century, in particular the wars, effected the highest income levels disproportionately, and they never fully recovered. Said differently, “the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945” (372). Second, he suggests, before the Wars, taxes on capital income were essentially zero. Given the current rate of approx. 30%, this has had a significant effect of slowing the rate of top wealth growth. Third, and lastly, is the introduction of more steeply progressive tax schemes.

Capital in the 21st Century: Chapter 9

In the ninth chapter of Capital, “Inequality of Labor Income,” Piketty expands the discussion of wage developed in the previous chapter and more thoroughly unpacks the central motif introduced in chapter eight, the “supermanager.”

He begins the chapter, as is his style, by dismissing an overly simplistic paradigm that, while not entirely incorrect, fails to grasp the subtlety of the situation. In this case, it is the reduction of wage variance to a war between advancing technology and advancing education. In this paradigm, advances in technology push wages down, while advances in education drive wages up. Said otherwise, this conflict or race feeds the “supply and demand of skills” (305). This paradigm, Piketty wants to insist, is incomplete, and can’t account for certain key factors in inequality, such as the rise of the supermanager. But, it does nevertheless account for certain trends, “all signs are that the Scandanavian countries, where wage inequality is more moderate than elsewhere, owe this result in large part to the fact that their educational system is relatively egalitarian and inclusive” (307).

In order to nuance this model, Piketty then turns to the role of governmental institutions in the maintenance or compression of wage inequality. A key example of this phenomenon, Piketty suggests, is the dramatic reduction of inequality during the two World Wars. As Piketty writes, “the compression of wage inequalities that occurred in both France and the United States during World Wars I and II was the result of negotiations over wage scales in both the public and private sectors, in which specific institutions such as the National War Labor Board (created expressly for the purpose) played a central role” (308). A second key source of institutional influence is in minimum wage regulation. Yet, the minimum wage can only serve to compress wage inequality when it keeps up with inflation. But, as Piketty shows, for the United States, the minimum wage peaked in 1969 at $1.60 ($10.10, in 2013 dollars), before crashing under Reagan and Bush senior to less than $6.00 (in 2013 dollars) in 1990, and raising only marginally to $7.25 now. This reduction in minimum wage buying power for the lowest income levels can be seen as a key factor in the increase in inequality since the 1980’s. Weighing into contemporary debates, Piketty goes so far as to suggest that the current US minimum wage has fallen far enough that “it seems likely that the increase in the minimum wage of nearly 25 percent (from $7.25 to $9 an hour) currently envisaged by the Obama administration will have little or no effect on the number of jobs” (313).

In the second half of the chapter, Piketty turns to the rise of the supermanager in order to explain the dramatic rise of US inequality since 1980. It is here that he suggests the failure of the education/technology model fails most conspicuously. For, “when we look at the changes in the skill levels of different groups in the income distribution, it is hard to see any discontinuity between “the 9 percent” and “the 1 percent,” regardless of what criteria we use: years of education, selectivity of educational institution, or professional experience” (314). Simply put, the top 1%, the “supermanager” (yearly salary from 350,000-1.5 million or more), appears no better qualified than the next 9 percent (salary: 108,000-350,000) of doctors, lawyers, etc. This unexpected rise in superhigh salaries is central, because it disproportionately accounts for the rise in income inequality: “in all the English-speaking countries, the primary reason for increased income inequality in recent decades is the rise of the supermanager in both the financial and nonfinancial sectors” (315). Moreover, while this phenomenon can be seen in a number of countries–the UK, France, Britain, etc.–it is primarily a distinctly American phenomenon; even looking solely at the anglophone nations, “the upper centile’s share in the United States increased roughly twice as much as in Britain and Canada and about three times as much as in Australia and New Zealand” (316).

Supermanager

This phenomenon of American inequality is historically new. In general, the rapid population and economic growth of the US has shielded it from massive inequality. Yet, as Piketty shows, “if we calculate (somewhat abusively) an average for Europe based on these four countries [Britain, Sweden, Germany, France], we can make a very clear international comparison: the United States was less inegalitarian than Europe in 1900-1910, slightly more inegalitarian in 1950-1960, and much more inegalitarian in 2000-2010 (see Figure 9.8)” (324). More disconcerting still, is the fact that the top decile in the US now retains a higher share of national income than the average top decile in Europe during the Belle Epoque (roughly 48 percent today, versus Europe’s 46 percent in 1900).

The substantial portion of the chapter closes with a brief examination of emerging economies (specifically: India, Indonesia, China, South Africa, Argentina, and Columbia), from which Piketty derives a few key insights. “First, the most striking result is probably that the upper centile’s share of national income in poor and emerging countires is roughly the same as in rich countires” (326). Second, that Chinese inequality has risen steadily since the “liberalization” of their economy in the 1980s. Beginning roughly at Scandanavian levels, the top centile’s share of national income has more than doubled, though this still puts them below the level of inequality in other emerging nations.