The Jewish people have been in diaspora since the destruction of the Temple. This is why blood sacrifices do not happen modern Judaism. But Paul writes: “Do you not know that your bodies are temples of the Holy Spirit, who is in you, whom you have received from God?” I quote this not to say “See the Jewish people are foolish! They need to be more Christian!!”‘ In fact, I deeply sympathize with the experience of diaspora, albeit in a different manner. Insofar as Christians have destroyed queer and trans bodies, they have destroyed the temples of God and forced us into a state of diaspora.
In this case, also, returning to God’s promised land–indeed, we are only promised ourselves–involves rebuilding the temples, or reclaiming them. But this will also inform how we do theology. The Christians who are in diaspora do Christian theology much differently than those Christians who are not in diaspora. The working class/poor are alienated from their labor and from themselves, African-American bodies were stolen (so their labor could be exploited), and so many more examples could be draw. These are modes of diaspora.
Might we, then, be able to learn much more from the Jewish people (not to be conflated with the modern state of Israel) than Christians have thought since the Reformation? In a word, I find a deep, yet overlooked, value in the polydoxy of Jewish tradition. Diasporic Christians have likely already taken hold of this revelation of plurality, but perhaps those who have a temple could make a blood sacrifice of their orthodoxy upon their own altars.
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).
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.
The first chapter of Piketty’s Capital is entitled “Capital and Income” and appears to serve two primary purposes. It opens by outlining a few of the terms which will be central to the forgoing work (capital, national income, global output, etc. etc.), then shifts to a discussion of the “global distribution of [capital] production,” a discussion which, to be honest, feels rather partial and disjointed. Though, he has promised a further expansion of this section in later portions of the book, so I will limit my discussion of this section of the text to a minimum.
As much as Piketty seeks to divorce himself from the 1968 style anti-capitalism of Europe and the US, his principal dichotomy appears to retrace well worn Marxist ground: that is, the antagonistic distinction between labor and capital. I find his use of this traditional dichotomy noteworthy, as it appears to forgo many of the now classic neoliberal economic suggestions that the category of labor has been largely, if not entirely subsumed under the category of the “consumer.” Piketty appears to here recognize that the labor question–i.e. the relation between labor and capital–far from having been definitively answered by the twentieth century, will continue to be a central, guiding antagonism into the twenty-first century. Piketty appears to take the definition of labor to be relatively self-evident, but spends a great deal of time in the first half of the chapter precisely delimiting his terminology in regard to capital.
Central Terms and Ideas:
National income: rather than relying upon GDP, Piketty primarily uses “national income.” The advantage of this alternate term, Piketty suggests, is that it more fully encapsulates the real wealth of a nation. To calculate “national income,” Piketty first subtracts the “depreciation of capital” (43) from GDP. That is, roughly 10% of GDP which accounts for “wear and tear of buildings, infrastructure, machinery, vehicles, computers, and other items during the year in question” (43). Next, Piketty adds “net income recieved from abroad” (44). That is, simply put, income from foreign investments, minus income paid to that nation (rent, etc.).
Capital: Next, Piketty seeks to define his central term, capital. First, he is clear to exclude “human capital” (education, skills, etc.), and instead states that:
“in this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market. Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies” (46).
Second, and this is a noteworthy derivation from Marx’s Capital (which, I should apologize for constantly referencing, but as I said last time, I am reading them simeltaneously, and I can’t avoid the comparisons), Piketty uses “capital” and “wealth” as interchangeable terms. This decision appears well founded. For, while I appreciate Marx’s reservation of wealth as a broader category which includes natural resource, Piketty rightly recognizes that:
“it is not always easy to distinguish the value of buildings from the value of the land on which they are built. An even greater difficulty is that it is very hard to gauge the value of ‘virgin’ land (as humans found it centuries or millenia ago) apart from improvements due to human intervention, such as drainage, irrigation, fertilization, and so on” (47).
Capital/income ratio: This ratio, designated as β, gives the total percent of capital relative to income (generally measured in one year). E.g. “if a country’s total capital stock is equivalent of six years of national income, we write β = 6 (β = 600%)” (50). Said otherwise, β is simply how many years of income are present nationally (or globally) or, to speak much too loosely, it could be thought to roughly describe how many “years of work” are incarnated in capital stock.
First Fundamental Law: α = r x β. That is to say, capital’s share of national income (α), is equal to the average return on capital (r) mulitplied by the capital/income ratio (β). “In other words, if national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital’s share in national income is 30 percent” (52). This concept is central, as it is precisely this share of national income which Piketty will uncover in the ensuing chapters, and which he will discover to be steadily (even necessarily) increasing (recall, from last night’s post “r > g”).
The Global Distribution of Capital:
As I indicated above, I will avoid going into substantial detail on this half of the chapter, but at least a few of Piketty’s discoveries here are worth noting. Most importantly, Piketty shows that Europe and America’s share of global GDP was dramatically increased by the industrial revolution and colonization, to the point that by 1910 the west controled an astounding 70-80% of world output. Yet, as development has moved to the south and east, this share has dramatically declined to approx. 40%, and it is likely (particularly given India and China’s meteoric economic advances) to continue to decline throughout the approaching decades. This suggests that the great disparity between the “first” and “third” world is presently closing, and that “regardlesss of what measure is used, the world clearly seems to have entered a phase in which rich and poor countries are converging in income” (67).
Nevertheless, Piketty cautions agaisnt an over-eager optimism which might claim that the “free flow of capital” necessarily results in convergence (the globalized version of the Kuznetsian curve) for two reasons. First, “the equalization mechanism does not guarantee global convergence of per capita income. At best it can give rise to convergence of per capita output” (69-70). If I might furnish Piketty’s point with an example, during British colonization, the colonies, e.g. India, saw a dramatic increase in output. Yet, because the income from this increased production was internationally owned (by Britain), India did not recieve a correlated increase in national income (this is an example where Piketty’s preference of national income over GDP is key, as GDP does not distinguish authentic domestic product from product that is generated domestically, but owned internationally). Second, from a historical perspective, “it does not appear that capital mobility has been the primary factor promoting convergence of rich and poor nations” (70). Rather, Piketty insists, it is education–that is to say, the generation of human capital–which has constituted the primary engine of convergence.
Stay tuned for the next chapter, where I will be expounding Piketty’s understanding of “growth.”
This summer I will be working through a comprehensive exam engaging the intimate link between leftist economics and liberation theology. Since Piketty’s controversial Capital in the Twenty-first Century has been the increasing center of economic, political and social debate, I couldn’t help but incorporate it into my work, even if its liberal approach sits somewhat uncomfortably within the more explicitly left/socialist work of Marxian economics and liberation thought. That being said, I am nonetheless excited to break into this powder-keg, it being (I suspect) the first piece of serious (sorry Freakonomics) economic thought to have broken into the public consciousness to this degree in decades (having reached #1 on the NYT Nonfiction Best Sellers list in early June [presently 3rd]).
With this reading in mind, I have decided to blog my way through the text, devoting a small note to each chapter of the lengthy book. My hope is that these blogs will function as “cliff notes” for those who don’t have the time (or desire) to slog through 600 pages of economic data, as well as offering bits of my own thoughts and critiques, particularly as related to the Marxian economic writings that I will be reading simeltaneously.
Today I completed the introduction, which attempts to historically situate the work within political-economy, as well as lay out the basic methodology. While distinct, these two concerns are by no means divorced from eachother. Rather, the principal critique that Picketty will level against the classic political economists–from Malthus and Young, through Ricardo, to Marx–is a failure to properly ground their work in the “data.” Data, it already seems, will be the recurring refrain of the work, a fact which is consitent with his public appearences and self descriptions as a bit of a data-phile.As he writes, “intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact” (2). Nevertheless, to his benefit, Piketty does not merely denigrate the non-empirical character of classical political-economics, and unequivocally throw it out. Rather, he recognizes the strengths in each thinker, pulling out small noteworthy pieces which will be incorporated into his overall project (e.g. the relevance of population in Malthus, scarcity in Ricardo, and the internal contradictions of capitalism and the indefinite return on capital in Marx).
Nonetheless, it is the twentieth century optimist, Kuznets, who will function as Piketty’s true spiritual forefather. For, it is Kuznets who attempted an investigation on wealth inequality methodologically centered on data; “it was the first theory of this sort to rely on a formidable statistical apparatus” (11). Ironically, for important historical reasons (the Great Depression and the World Wars), Piketty will suggest that Kuznets’ conclusions are misguided, even directly opposed to his own (Kuznets argued that inequality naturally decreases over time). Nevertheless, the methodological strength of Kuznets–even if his data was insufficient or narrow (only covering, roughly, 1920-1950)–leads Piketty to rate and regard the economist rather highly.
It is in this way that Piketty’s methodological concerns are directly tied to the historical, for it is this heavily statistical/data-oriented Kuznetsian approach that Piketty himself takes up in Capital. Drawing upon a variety of sources, most importantly income and estate tax records, Piketty charts a course of inequality inverse of Kuznets’ curve (the claim that inequality follows a bell curve, getting initially worse, then correcting itself over time). On Piketty’s account, the share of wealth among the top decile has a tendecy to expand over time, a process which was merely momentarily disrupted by the Great Depression and the World Wars, but which has, since the 1970’s, returned to its “natural” state of rapid increase.
This tendency is sumarized by Piketty in his now (in-)famous formula “r>g”. That is to say, the rate of return on capital investment is greater than the growth of GDP. Thus, if the top decile’s wealth is increasing faster than the economy is growing, than by necessity their share of total wealth will necessary increase, along with wealth and income inequality.
Since this is an introduction, and Piketty has not yet begun to lay out his thoughts in detail, I will refrain from too much critique. I will merely say that–as I am currently working through Marx’s Capital at the same time–Piketty is certainly correct that Marx makes very little use of statistics or hard-data. Though, I think that Piketty may be overstating the case to mark this as a failure of Marx’s policital-economic writings. Simply put, Marx appears, at least in my reading, to be undertaking an entirely different sort of program than Piketty, one which does not use data in the same way, but in my opinion at least, also doesn’t appear to “need” it. Marx is much more directly concerned with the internal structure of capital, a concern which appears quite well fitted to his ideological and notional analyses. But, again, it is worth noting that as uninterested in connecting his work to Marx as Piketty seems to be, he also does not seem particularly interested in disparaging him.