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 ). 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.
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).
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.
In the eight chapter of Capital, “Two Worlds,” Piketty contrasts two major classes of the “rich.” Whereas most economic analyses depend upon the 10% as the principle category of analysis, Piketty attempts to nuance those figures, with a recognition that the 1% live radically different lives (and earn radically different incomes) than the next 9%. In fact, he will even become more specific, distinguishing the .1% (the super-rich), the small subset who still live off of income from capital.
notes, first and foremost, a decisive un-arguable decline of income inequality in France since the Belle Epoque–a period defined by massive inherited wealth–“income inequality has greatly diminished in France since the Belle Epoque: the upper decile’s share of national income decreased from 45-50 percent on the eve of World War I to 20-35 percent today” (271). Of course, he is quick to note, this should not be taken to indicate a relative equality in the present system, but quite to the contrary, to simply highlight the startling inequality of the Belle Epoque. More interestingly, this dramatic decrease in income inequality over the 20th century can be attributed almost entirely to the loss of income from capital (the destruction of the rentier class); “if we ignore income from capital and concentrate on wage inequality, we find that the distribution remained quite stable over the long run” (272-273). Or said more directly:
“the reduction of inequality in France during the twentieth century is largely explained by the fall of the rentier and the collapse of very high incomes from capital. No generalized structural process of inequality compression (and particularly wage inequality compression) seems to have operated over the long run” (274).
This decline of the rentier has led to a compression of the composition of top incomes in the highest decile (see figures 8.3 and 8.4). Whereas in the early 20th century, much of the 1% earned a majority of its income from capital, this has now largely been reduced to the upper 1000th (the .1%). Piketty controversially describes this as the rise of a society of “super-managers” in place of the society of the rentiers. Since I have been using this series to highlight prominent critiques of Piketty, particularly those of Andrew Kliman, I should here point you to a recent article concerning this designation: “Were Top Corporate Executives Really Hogging Worker’s Wages.” This distinction in income composition leads Piketty to posit “two worlds” of the top decile: “‘the 9 percent,’ in which income from labor clearly predominates, and ‘the 1 percent,’ in which income from capital becomes progressively more important” (280). Whereas the top centile is dominated by “super-managers” and the financial sector, within the next 9% “we also find doctors, lawyers, merchants, restauranteurs, and other self-employed entrepreneurs” (280). This distinction becomes particularly important when one begins to examine the decrease in income inequality. “‘The 1 percent’ by itself accounts for roughly three-quarters of the decrease in inequality between 1914 and 1945, while ‘the 9 percent’ explains roughly one-quarter” (284).
In France, these distinctions were amplified by the historical circumstances of the two world wars, the depression, and the “chaotic” interwar period. “In each war,” for example, “the scenario was the same: in wartime, economic activity decreases, inflation increases, and real wages and purchasing power begin to fall. Wages at the bottom of the wage scale generally rise, however, and are somewhat more generously protected from inflation than those at the top” (287). This push toward equality would reemerge in May ’68, following the student and social unrest. For the next (roughly) 15 years, the minimum wage would boost, almost yearly, until the 1982-83 “turn toward austerity” (289).
The United States, Piketty suggests, presents a “more complex case” (291).
“The most striking fact is that the United States has become noticeably more inegalitarian than France (and Europe as a whole) from the turn of the twentieth century until now, even though the United States was more egalitarian at the beginning of this period… US inequality is [now] quantitatively as extreme as in old Europe in the first decade of the twentieth century.” (292-293).
To a certain extent, the final portion of the chapter is an attempt to explain this development. Most importantly, Piketty wants to connect the rise of inequality in the US to the rise of the super-managers (a class who is only now beginning to take hold in Europe). The initial (relative) “equality” at the beginning of the century can be easily understood by the limited number and power of the rentier class in the United States. This (relative) equality would continue until the neoliberal revolution of the early 1980s (and thus correspond to the “turn toward austerity” in France). Offering a tacit justification of Occupy’s rhetoric, Piketty largely attributes this rise in inequality to the 1%; “the bulk of the growth of inequality can from ‘the 1 percent,’ whose share of national income rose from 9 percent in the 1970s to about 20 percent in 2000-2010” (296).
This, then, begs the question: “is it possible that the increase of inequality in the United States helped to trigger the financial crisis of 2008?” (297). To this central question, Piketty gives a definitive… “kinda.” For Piketty, it is undeniable that considerable gaps in the social sphere due to inequality would have an economic destabilizing effect. But, he does remain somewhat modest in his claim, cautioning that “it would be altogether too much to claim that the increase of inequality in the United States was the sole or even primary cause of the financial crisis of 2008” (298).
The seventh chapter of Piketty’s Capital, entitled “Inequality and Concentration: Preliminary Bearings” introduces the third major division of the work: “The Structure of Inequality.” Whereas the previous section was primarily directed toward the macro-phenomenon of the capital/income split, Piketty will here shift to the “individual level” (237), and examine the role of the World Wars and subsequent Neoliberal revolution upon inequality among individual members of a nation.
The chapter begins with an obvious distinction between income from labor and inherited wealth. In another turn to literature, Piketty shows that, for the upper class of the 18th and 19th century, labor played essentially no factor in the maintenance of wealth. Rather, through rent and the like, inherited wealth bred further wealth. The promise of equality manifest in the classic image of America emerges precisely from the ostensibly meritocratic character of income from labor, rather than income from (inherited) wealth. Of course, as Piketty rightly notes, one should not overly simplify the situation and suggest that a rejection of inherited wealth would immediately result in a meritocratic/equal society. But the power of inherited wealth does mark a certain threshold of inequality paradigmatic of the pre-20th century Western world.
Dividing his analysis, Piketty attempts to separate out the modern form of this labor/inheritance distinction, the difference between income from labor and wealth (capital). As he will subsequently show, “inequality with respect to capital is always greater than inequality with respect to labor” (244). This phenomenon can be shown in the present disparity between income inequality and wealth inequality. “The upper 10 percent of the labor income distribution generally receives 25-30 percent of total labor income, whereas the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth” (244). The present US income gap, for example, is roughly 35% for the upper decile and 25 percent for the lowest five deciles (lowest half of the population), while wealth distribution is 70% for the upper decile and 5% for the lowest half. As a point of comparison, relatively “equal” wealth distribution, as for example Scandinavia in the 1970’s, was approx. 30% for the top decile and 25% for the bottom half.
Of course, this distinction is not meant to undermine the concrete inequality of income. In fact, as Piketty notes, in the United States in the early 2010’s, “income from labor is about as unequally distributed as has ever been observed anywhere” (256). A frightening thought, coming from a study which includes an analysis of the French Ancien Régime. Wealth inequality, on the other hand, saw a historical decrease with the rise of the “patrimonial middle class” (260). “To go back a century in time,” Piketty writes, “to the decade 1900-1910: in all the countries of Europe, the concentration of capital was then much more extreme than it is today” (261). Nevertheless, as his data shows, the 21st century appears situated to quickly move into levels of inequality on par with pre-war levels.
Piketty marks two primary methods by which radical inequality can emerge. The first, which he titles “hyperpatrimonial society” is the classic method of wealth accumulation and transmission: inheritance. This structure dominated classically unequal societies such as the Belle Époque and the Ancien Régime in France and Britain, periods of record-breaking inequality. The second method of hyperaccumulation which Piketty marks, is the so-called “hypermeritocratic society” (although Piketty questions the truly “meritocratic” nature of such a society and wonders if “society of the supermanagers” might be more appropriate). In this second form of society, which is only recently emerged (principally in the US), “the peak of the income hierarchy is dominated by very high incomes from labor rather than by inherited wealth” (265). This form of hyperaccumulation is distinctive of the wall-street ethos, where excessive wealth is no longer tied to industrial or commercial enterprise, but more often than not, the highest income is generated within the financial sector.
In his sixth chapter of his Capital, Piketty investigates the evolution of the “Capital-Labor Split” throughout the 20th century. This ratio is determined by the so-called first law of capitalism–α = r * β–elaborated in the first chapter of the work. Here, α corresponds to capital’s share of national income, thus conversely, labor’s share of income can be simply determined by subtracting capital’s share from total income. That is to say, if capital’s share (α) is 35% of national income, than labor’s share of national income is 65%. The first observation that Piketty draws from his analysis of British and French data, is that capital’s share of nation income follows precisely the “U-Shaped” curve of the capital/income ratio (β), though in an attenuated form, “the depth of the U is less pronounced” (200). This attenuation, Piketty suggests, may be a consequence of the rate of return on capital (r), which, he suggests, “seems to have attenuated the evolution of the quantity of capital, β: r is higher in periods when β is lower, and vice versa, which seems natural” (200). Said otherwise–and drawing upon the second law of capitalism (β = s/g)–since growth (g) is inversely proportional to the # of years of capital stock (β), periods of high growth/low savings correspond to periods of high rate of return on capital (i.e. high profit). That is to say, you can’t have your cake [savings] and eat it too [profit].
Of course, at this point it is worth clarifying what is precisely meant by “capital’s share of income” versus labor. In general, Piketty attempts to group together all forms of non-wage income in order to determine capital’s share. In practice, this includes rents, dividends, interest, and other miscellaneous forms of profit. Of course, this figure fails to recognize non-wage labor whose return is entirely in the form of dividends or other non-wage remuneration. Piketty will offer, as an example, the time and effort put into portfolio management by managers in the financial sector. In order to compensate for this time and effort (labor), Piketty has subtracted a set portion of capital’s income to create a “pure rate of return.” “The pure rates of return obtained in this way are generally on the order of one or two percentage points lower than the observed returns” (206).
Having thus adjusted the rate of return, Piketty is able to chart historical trends. The results are startlingly stable. “In both France and Britain, from the eighteenth century to the twenty-first, the pure return on capital has oscillated around a central value of 4-5 percent a year, or more generally in an interval from 3-6 percent a year. There has been no pronounced long-term trend either upward or downward” (206). This stability (“or more likely this slight decrease of about one-quarter to one-fifth” ) will be central to Piketty’s argument later in the work, as it will constitute one of the key variables of his now famous inequality r > g, or, the rate of return on capital is higher than the rate of growth.
As a final note in this section of the chapter, Piketty next considers capital saturation. Whereas a certain quantity of capital is necessary for a functioning economy: with unlimited growth “saturation is eventually reached” (215). Simply, there is only so much land that can be worked, machinery that can be run, and houses that can be occupied. In such saturation scenarios–as predicted by the inverse relation of the rate of return (r) and capital stock (β) in his formula α = r * β–the rate of return tends to plummet. Conversely, if the rate of return on capital can be maintained during capital stock growth (or at least fall more slowly than capital stock grows) than capital’s share of nation income (α), can nonetheless grow during capital stock growth.
* * *
Shifting focus, Piketty spends much of the remaining chapter situating his theory among previous economic commentators. Most importantly, Piketty takes on the so-called “Cobb-Douglas production function.” This function supposed that capital maintained a constant share of national income (α). Piketty suggests that the popularity of this formulation may have been as ideological as it was scientific, as stability in capital’s share of income would suggest a certain level of social/class harmony. Yet, as Piketty notes, “the stability of capital’s share of income […] in no way guarantees harmony: it is compatible with extreme and untenable inequality of the ownership of capital and distribution of income” (218). Without moving through Piketty’s analysis of the various positions vis-a-vis this function, it is safe to say that his basic outlook is that economists from both side (liberal and Marxist) have failed to view capital’s share of income from a properly broad frame of reference (the consistent refrain of Piketty’s Capital).
Following Cobb and Douglas, Piketty next situates his analysis of the Capital/Labor split in relation to Marx’s theory of the falling rate of profit. Contrary to many leftist reviews of Capital, Piketty here offers a rather generous reading of this central Marxist notion. In particular, he recognizes that, for 19th century Britain, the notion of indefinite growth was unfathomable. Thus, it was only natural for Marx to posit a point when growth would flatline. Were such a flatline to occur, then Piketty’s formula–β=s/g— would predict infinite growth of capital stock–and a correlate crash in rate of return (r)–precisely the sort of apocalyptic failure that Marx predicted. But unfortunately for Marx–and fortunately for the capitalists–permanent structural growth now appears to be a very real possibility. Thus, while Marx’s thesis is mathematically sound, it nevertheless fails to account for the seemingly infinite growth potential of capitalist production. It is my hope to soon delve into Andrew Kliman’s (who you might remember from a few posts back) thoughts in this regard, who’s Reclaiming Marx’s Capital includes, among other things, a defence of Marx’s theory of the falling rate of profit. (For application to the recent economic crisis, see: The Persistent Fall in Profitability Underlying the Current Crisis: New Temporalist Evidence)
Setting up his next major section (which we will begin tackling in the next post), Piketty ends with the recognition that the West appears to be moving towards very low growth, “particularly zero or even negative demographic growth” (233). Thus, by his formulation, capital will continue to make a “comeback” in the upcoming years, easily achieving or even surpassing the capital/income ratio of 700-800%, common in the 18th and 19th centuries. “Modern growth,” he concludes, “has made it possible to avoid the apocalypse predicted by Marx and to balance the process of capital accumulation. But it has not altered the deep structures of capital–or at any rate has not truly reduced the macroeconomic importance of capital relative to labor” (234).
The fifth chapter of Piketty’s Capital, is centered around his second “law of capitalism”–rendered as β=s/g. That is to say, over the long run, “the capital/income ratio β is related in a simple and transparent way to the savings rate s and the growth rate g” (166). This is law simply says that a country which saves a lot and grows slowly will accumulate a tremendous capital stock (and thus a high β), whereas a country which saves little and/or grows at a significant rate (i.e. the post-War Western world) will maintain a relatively small capital stock (and thus a low β). Certain important considerations are important to note regarding this law. First, this “law” presents a more interesting reality than the first “law” for the simple reason that the first law is itself completely tautological. The first law merely illustrates an accounting identity. The second law, on the contrary, presents general trends which, becuase they are not a mere accounting identity, are generally less precise than the first law. It is for this reason that Piketty emphasizes that this law is only valid over a long scale. “This is an asymptotic law, meaning that it is valid only in the long run: if a country saves a propotion s of its income indefinitely, and it the rate of growth of its nation income is g permanently, then its capital/income ratio will tend closer and closer to β=s/g and stabilize at that level” (168), and “the law β=s/g does not explain the short-term shocks to which the capital/income ratio is subject, any more than it explains the existence of world wars or the crisis of 1929–events that can be taken as examples of extreme shocks” (170).
Second, growth here not only accounts for economic growth (growth in output), but also demographic growth. “Countries with similar growth rates of income per capita can end up with very different capital/income ratios simply because their demographic growth rates are not the same” (167).
Third, this law only applies to human-produced capital; i.e. societies in which naturally occuring capital (e.g. land, mineral resources, etc.) play a significant role will maintain a considerable higher capital stock (β). The fact that this law is able to map the capital/income ratio with a certain degree of accuracy, Piketty suggests, may be an indication “that pure land constitutes only a small part of national capital” (196). Of course, this is not to say that natural resources don’t play a considerable role in national income and capital, but merely that this value is mediated through human productive expenditures (e.g. irrigation, mining, etc.).
The consequences of this law can be seen with particular clarity in the Neoliberal revolution of the Western world. Since 1970, Piketty shows, private capital has seen a strong consistent comeback in the West (and Japan). Of course, this regularity is periodically interrupted by bubbles, but even when these bubbles are taken into account, the trend of the capital/income ratio is decisively positive; “or, to put it another way, [we are witnessing] the emergence of a new patrimonial capitalism” (173). In fact, not only are these nations’ capital/income ratios growing together, they are growing at an almost identical rate (viz. 1.6-2.0%, “and more often than not remained between 1.7 and 1.9 percent” ).
Noteworthy in this account, is its centralization on private wealth. Not only has public wealth failed to grow in concert with private capital, but in fact, has seen a significant decrease. Simply put, “the revival of private wealth is partly due to the privatisation of national wealth” (184). Of course, this role cannot be overstated . As private weealths growth has been considerably faster than the respective decline in public wealth. Nonetheless, as Piketty notes, “the decreaes in public wealth represented between one-fifth and one-quarter of the increase in private wealth–a nonnegligible share” (185). This effect may even find itself exasperated by an “undervaluing” of public assets in 1970, a fact which, if correct, would increase public wealth’s rate of decline during the last 45 years.
An additional factor in the growth of β in the second half of the 20th century was that “catchup” of asset prices. From 1910-1950 asset prices were strongly surpressed, and corporations and other assets found themesleves valued at historically low levels. This rebound, Picketty suggests, may account for as much as 1/4 to 1/3 of the increase in the capital/income ratio between 1970 and 2010 (191). While Piketty consistently cautions against overly optimistic or certain prediction, he does suggest that the global capital/income 21st century will likely converge on 700% percent of yearly global income (based upon an estimated growth rate of 1.5% [down from current 3%], and a savings rate of approx. 10%) (195).
In the fourth chapter of his Capital, Piketty expands the analysis of Britain and France in the third chapter, with analyses of the capital/income ratio in Germany, the US, and Canada.
In large, the German case largely parallels that of Britain and France (more specifically, the later), capital having peaked in the 1870’s at approx. 700% national income, and having seen a dramatic decrease in throughout the first half of the 20th century (bottoming out in 1950 at approx. 200%). That being said, Piketty does note four discrepancies between the German model and the French/British. First, net foreign capital plays a considerably smaller role in 19th century Germany than its two European neighbors. This difference is easily explained by Germany’s lack of an extensive colonial empire. While Germany had foreign holdings, they were nothing compared to the extensive imperial reach of Britain, for example. Interestingly, for a thinker who appears quite intent on distancing himself from the Marxist left, Piketty here makes positive (albeit passing) reference to Lenin’s Imperialism, the Highest Stage of Capitalism. A second noteworthy difference is Germany’s relationship to inflation in the second half of the 20th century. Traumatic hyper-inflation in the 20’s so deeply scarred the German psyche that it would pursue considerably more conservative inflation in the post-war period (rigidly capping inflation at approx. 2% per year). Third, mid-century Germany possessed shockingly low private capital (approx. 100-150% national income), yet since the war, has seen an extensive growth in its private sector (to a substantial 400% national income). Lastly, Germany exhibits a noteworthy gap in wealth compared to other European countries. Piketty explains this fact through two factors: to a lesser extent, Piketty marks a devaluation of German real estate, due in part to “German reunification, which brought a large number of low-cost houses onto the market” (144). More substantially though, Piketty marks “Rhenish capitalism,” with its preference for stakeholders over shareholders as a factor that continues to drive down German firms’ stock value. Nonetheless, as he notes, this stakeholder model may possess its own internal benefits. Firstly, though “the stakeholder model inevitably implies a low market valuation,” such a devaluation does not necessitate a”a lower social valuation” (146). Second, this model may also maintain a greater stability than the more common shareholder model. “Between 1998 and 2002,” Piketty writes, “Germany was often presented as the sick man of Europe. [But] in view of Germany’s relatively good health in the midst of the global financial crisis (2007-2012), it is not out of the question that this debate [between shareholder and stakeholder models] will be revived in the years to come” (146).
The United States, on the other hand, saw significantly different capital trends then its neighbors; the distinctive European “U-shaped curve” of the capital/income ratio is present in the US, but severely attenuated . No doubt this difference can be attributed to the US’s isolation from the full-scale ravages and capital destruction of the Second World War, but Piketty will also note a number of other important factors in this difference. First, capital tends to play a considerably smaller role in the US (generally between 300-500% national income). The value of capital appears, to a great extent to be held down by an extremely high growth rate in the US (both economically and demographically). As might be recalled from the second chapter, a growth in both forms tends to have an “equalizing effect,” decreasing reliance upon inherited wealth and decreasing the value of previously accrued capital. Second, the US employed “no sweeping policy of nationalization” (153) as was common following the Second World War. Lastly, the US shows almost no reliance on foreign capital, having never acquired any significant conventional colonial power. Moreover, on the inverse side, very little capital in the US was foreign-owned. “the world of 1913 was one in which Europe owned a large part of Africa, Asia, and Latin America, while the United States owned itself” (155).
Piketty’s analysis of Canada is considerably more brief, and largely uninteresting (there’s a joke in there somewhere). The most important difference in Canada is that, having remained a colony of the British crown, a large percent of Canadian capital was foreign-owned. In the late 19th century, as much as 100% of national income (roughly 20% of national capital) was foreign-owned. The 20th century has seen this percentage decrease considerably, though Canada’s net foreign income is still negative (roughly 10% of national income, or 2.5% of capital).
The chapter ends with a discussion of slavery. Piketty appears markedly uncomfortable calculating human life as capital–“to add the value of slaves to capital in this way is obviously a dubious thing in more than one way: it is the mark of a civilization in which some people were treated as chattel rather than as individuals endowed with rights” (159)–nonetheless, his analysis is enlightening. At the turn to the 19th century, capital in the form of human persons composed as much as 100% of national income in the US, 250% if the south is calculated separately.
In the next chapter, Piketty will explore the capital/income ratio “over the long run,” and introduce his second law of capitalism: β = s/g.
As part of my read-through of Piketty’s Capital in the Twenty-First Century, here, as promised, is an article from 2013 by Andrew Kilman published at the Marxist-Humanist Initiative. Here, Kliman challenges the “Piketty-Saez method” of calculating income and income-units. Enjoy.
(If the above link does not work: http://www.marxisthumanistinitiative.org/economic-crisis/%E2%80%9Cthe-99%E2%80%9D-and-%E2%80%9Cthe-1%E2%80%9D-%E2%80%A6-of-what.html)
Opening Part Two, “The Dynamics of the Capital/Income Ratio,” Piketty’s third chapter, “The Metamorphoses of Capital” tracks the development of the captial/income ratio (previously designated as β) in France and Britain, with particular emphasis upon its “U-shpaped” curve, “net foreign income” (income from foreign investments minus foreign rents, expenditures, etc.), and public vs. private capital.
Whereas both population and output growth, Piketty repeatedly insists, follow the pattern of a bell curve–increasing dramatically throughout the early 20th century, and now in the process of returning to their “natural” rate (.3% and 1-1.5%, respectively)–the capital/income ratio follows precisely the opposite pattern, falling off precipitously after the start of WWI, and only beginning a recovery following the second World War. “In short, what we see over the course of the century just past,” Piketty says, “is an impressive ‘U-shaped’ curve.’ The capital/income ratio fell by nearly two-thirds between 1914 and 1945 and then more than doubled in the period 1945-2012” (118). This data appears to track well with Andrew Kilman’s more traditionally Marxist thesis that profitability requires the destruction or dramatic devaluation of capital stock; “if, on the other hand, capital is not destroyed to a sufficient degree, there is no boost in profitability.” Capital investment can only remain profitable, Kilman suggests, if its rate of profit is managed by periodic destruction of capital (either by war, calamity, or sufficent slump), “in an economic slump, machines and buildings lie idle, rust and deteriorate, so physical capital is destroyed. More importantly, debts go unpaid, asset prices fall, and other prices may also fall, so the value of physical as well as financial capital assets is destroyed. Yet the destruction of capital is also the key mechanism that leads to the next boom” (LINK). This destruction/boom thesis, largely tracks with two key data points of Piketty’s analysis, first, what he calls the “catchup” of growth–the tendency of growth to spike following a trauma (e.g. approx. 4% global growth from 1950-1990)–and the dramatic reduction of national capital’s value (1910-1950).
Next, Piketty examines the role of “net foreign capital,” a source of capital whose effect on total national capital is shockingly low. Certainly, as Piketty notes (solely analyzing Britain and France), the imperialist reach of these two colonial powers resulted in a heyday of foreign capital during the late 19th/early 20th century–“by the eve of World War I, Britain had assembled the world’s preeminent colonial empire and owned foreign assets equivalent to nearly two years of national income, or 6 times the total value of British farmlands” (120)–but this boom was incapable of surviving the fall of colonialism in the 20th century. Rather, what Piketty discovers is that like non-colonial powers, Britain and France’s post-colonial net foreign income was largely neutral: “the net foreign asset holdings of France and Britain varied from slightly positive to slightly negative while remaining quite close to zero, at least when compared with the levels observed previously” (122).
In the second half of the chapter, Piketty shifts his focus to the question of public vs. private capital/debt. Central to this analysis is the recognition that public debt generally manifests as private domestic income. Simply put, when the government owes money, it is generally to its own population (e.g. government bonds). The importance of this fact is twofold. First, it means that government debt does not affect net national capital (the public debt is cancelled by the private income). But, second, that this debt does significantly increase the private share of national capital over and against public capital. In fact, private capital, at least in the two cases that Piketty analyzes (Britain and France) has already dominated public capital throughout their respective histories (since at least the 18th century). “Net public wealth,” Piketty writes, “is quite small and certainly insignificant compared with total private wealth” (125). So great is this difference, that public wealth only marginally affects net national capital at all. “In other words,” he writes,” the history of national capital to national income in France and Britiain since the eighteenth century, summarized earlier, has largely been the history of the relation between private capital and national income (see Figures 3.5 and 3.6)” (126). From the perspective of American politics, this revelation is central, as it challenges the myth often propogated by conservative voices that France and Britain represent socialist (even communist) nightmare regimes, where private wealth is severely penalized. On the contrary, as Piketty shows, “after 1950, France became the promised land of the new private-ownership caplitalism of the twenty-first century” (138). Even prior to the 1980’s “conservative revolutions” and their mass privatisation of public assets, the post-WWII nationalization of various institutions (auto industry, coal mining, etc.) by pro-socialist parties in France, still barely put an dent in private capital’s decisive monopoly on national capital (at that time, net private capital still roughly doubled net public capital).
In the next chapter, Piketty will shift his gaze from the French and British situation, in order to examine the development of capital in Germany and America (US and Canada). In the meantime, I will also hunt down and post a recent article by Kliman which more directly targets Piketty’s work, in order to offer an alternative perspective on capital and labor.
In the second chapter of his Capital, Piketty analyzes two distinct, though by no means unrelated conceptions of growth–population growth and productive output growth. Both of which, Piketty suggests, have been greatly misunderstood by economists, who have been biased toward the period since the industrial revolution, or even more specificially, the twietieth century. Rather then understand these periods as normative and the present “stagnation” as divergent, Piketty suggests precisely the opposite, the present stagnation (at least in the West), is, on the long scale, a return to normalcy.
This discussion of growth will be pivotal in Piketty’s argument, as it is precisely the establishment of the “natural” rate of output growth closer to 1%, rather than the often sought 3-4%, which will feed the assymetry of his central formulation: r>g. As he writes, “the central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality” (77).
The first target of analysis is population growth. Clearly, any discussion of population growth from an economic standpoint cannot help but stand in the shadow of Malthus’ infamous population pessimism. Yet, it is precisely such a pessimism that Piketty challenges. By examining population growth over the long term, Piketty suggests that the rate of growth in population should be understood, as neither static, nor increasing, but instead as a bell curve. Piketty notes that the dramatic increases in growth, particularly during the early years of the twentieth century (nearly 2%), have already begun to dramatically decline (presently approx .9%) and based upon his projections, will continue to decline throughout the ensuing century (bottoming out a little below .2%). Of course, Piketty is careful to note that his furture predictions of highly tentative. As Niels Bohr famously quipped, ” it is difficult to make predictions, especially about the future.” Nonetheless, a central point can be abstracted from his analysis. As he notes, “other things being equal, strong demographic growth tends to play an equalizing role because it decreases the importance of inherited wealth: every generation in some sense constructs itself” (83). This notion can be seen quite easily with an (overly simplistic) example. If a wealthy capitalist owns, say, 10 million dollars in capital at the time of their death and has a single child, that child will inherit 10 million dollars. Yet, if that same capitalist has 5 children (setting aside privelege for older children etc.), each child will now merely inherit 2 million dollars; 10 children, 1 million, so on and so forth. By this same principal, as larger communities increase, wealth tends to disperse more thoroughly and wealth inequality tends to decrease.
Thus, he contends, the greatest inequality of the preceeding few centuries was (at least partially) held in check by a rapidly increasing poulation. But, as this population growth reduces, perhaps not to stagnation or decrease, but certainly below the rate of output growth (.2% pop. growth, as opposed to 1% output growth), then we should see an increase in inequality over the next century.
Turning to output growth, and as I have already mentioned above, Piketty believes that the traditional neo-liberal narrative of 3-4% natural growth is wholly misguided. Quite to the contrary, Piketty contends, the rate of output gowth since the industrial revolution has been a (surprise surprise) bell curve. Much as population, though with a peak centered a generation or two later, the rate in output growth remained relatively stagnant from 0-1700, increased through the industrial revolution, and shot through the roof during post-WWII reconstruction, but has since largely settled back down to pre-war levels. In Piketty’s analysis, this fantastic growth 3-4% was a bizarre anachronism, pushed forward by the need to recover from the destruction of the war (hence, for example, the rate of growth during that period was considerably higher in continental Europe than the United States). “Past growth,” Piketty contends:
“as spectacular as it was, almost always occurred at relatively slow annual rates, generally no more than 1-1.5 percent per year. the only historical examples of noticeably more rapid growth–3-4 percent or more–occurred in countries that were experiencing accelerated catch-up with other countries” (93).
This annual growth rate of 1-1.5% Piketty thus argues, is the standard growth rate of a country on the edge of industrial and technological expansion. “The key point is that there is no historical example of a country at the world technological frontier whose growth is per capita output exceeded 1.5 percent over a lengthy period of time” (93). Nonetheless, he is also not one to belittle such growth rates. As he notes, “over a period of thirty years [one generation], a growth rate of 1 percent per year corresponds to cumulative growth of more than 35 percent. A growth rate of 1.5 percent per year coresponds to cululative growth of more than 50 percent” (95). Thus, as he cleverly puts it, even at the so-called “near-stagnant” rate of growth of 1% per year, more than a third of businesses, capital, and production will be new for each generation.
The section ends with a brief look at inflation, which as he notes, is largely a 20th century phenomenon. Drawing upon nineteenth century novels, e.g. Jane Austen and Balzac, Piketty notes that income was often used as a status indicator. This literary feature would later disappear from 20th century fiction, not because they become more “polite,” but because the income of one generation would be completely meaningless in a generation or less. One need only examine yearly income, or house prices from their parent’s or grandparent’s generation to see how meaningless such figures became under inflation. It is unclear as of yet precisely what role this analysis of inflation will play in the forgoing analyses. Certainly, inflation is central to his output growth statistics, which are themselves adjusted for inflation, but whether this disucssion merely seeks to underly his existing numbers, or whether it will reemerge in the later portions of the book is of yet unclear.
Having now moved through Part 1 “Income and Capital,” the next post will begin Section 2 “The Dynamics of the Capital/Income Ratio,” and its first chapter “The Metamorphoses of Capital.”