Where are the power relations in Piketty’s Capital?

by Miriam Ronzoni on December 11, 2015

I would like to raise two related questions to Thomas Piketty. The first concerns his repeatedly declared conviction that economic theory cannot explain trends in inequality by itself, that policies and institutions are equally important, and that economists must therefore put forward their hypotheses and explanations with this interdependence in mind. Given what I have understood Piketty’s main thesis to be, I wonder up to which point he is actually committed to that claim. The second concerns Part Four of Capital, where Piketty sketches a proposal for how to regulate capital in the 21st century. In a nutshell, my concern about Piketty’s proposal is that there seems to be a friction between the diagnosis offered in the rest of the book (which seems to draw a rather bleak picture of the power of capital in the early 21st century) and the suggested cure (which seems to rely on the optimistic hope that, once well-minded citizens will have recognized the problem, the only hurdle will be to find the right policy to fix it). To put it provocatively, both my questions are inspired by the suspicion that Piketty seems to hold on to a social-democratic optimism of sorts at all costs, whereas his findings seem to push him in a different direction. With the label ‘social-democratic optimism’ I mean two things: on the one hand, optimism about the role of policies and institutions in taming capital on the one hand; on the other, the persuasion that what politics is fundamentally about is making citizens understand what the problems are in a well-minded, reasoned dialogue, and then they will be persuaded to do the right thing.

Let me unpack the first question first. To the best of my understanding, whereas the book makes repeated gestures towards the idea that policies and institutions play a central role in explaining economic trends, and that economists should be extremely cautious to draw conclusions on the basis of their own discipline alone, there is very little politics in Capital. The book argues that our delusion, in the decades following WWII, that democracies could, after all, tame capitalism and make it subservient to public ends was largely just that – a temporary delusion. Piketty’s thesis, especially in chapters 3 to 6, is that the sheer destruction of wealth caused by WWII is the central reason why inequality seemed to be back under control for a while in the Bretton Woods era. It is that destruction which temporarily brought long term trends (the ‘fundamental laws of capitalism,’ and the capital/income ratio and r>g in particular) out of line. Although Piketty repeatedly claims that policies and institutions also played a major role, it is rather unclear, from his analysis, what that role was. The rise of the welfare state and its regulatory policies – in short, democracy’s control over capital – play only a moderate role in his historical analysis. This explains his claim that, once the effect of WWII started to wane, capital (though not its share of the pie, or at least not yet) slowly returned to its 19th century shape.

Indeed, one of Piketty’s most insightful ideas, to a lay reader like me, is his point that the internal structure of capital (the role played by land or by financial capital, for instance) then and now are very different, yet the capital/income ratio remains surprisingly constant across history with the only exception of the Trente Glorieuses. Most of the book seems to imply that, bar extreme shocks, what he calls ‘the fundamental laws of capitalism’ take the upper hand – and such laws lead to the rise of a patrimonial and largely unaccountable aristocracy. In short, the idea that the problem is capitalism period (not deregulated capitalism, not globalized capitalism, not austerity-based capitalism) seems to lurk in the background. Yet such claims are never explicitly made. General lessons are not absent. Piketty argues, for instance, that ‘progress toward economic and technological rationality need not imply progress towards democratic and meritocratic rationality’ (p. 234); or that ‘there is a set of forces of divergence associated with the process of accumulation and concentration of wealth when growth is weak and the return on capital is high’ (p. 23). Yet they are formulated with extreme caution.

My hunch, from reading that part of the book, is that Piketty’s thesis actually suggests (and, to be clear, it is a suggestion I find quite persuasive) that the policies and regulations of the post-war era were, if at all, the effect rather the cause – i.e., they were made possible by the fact that the power relationship between capital and labour had changed, but did not cause that shift in power relationships themselves. As such, they were perhaps instrumental in further slowing down the recovery of capital, not in determining it. And indeed, once the recovery of capital reached a certain level, a change in policy trends followed suit. If this is correct, such a diagnosis has a sobering effect: it means both that social-democratic politics by itself is by far not enough to contain inequality, and that it is itself only possible when a window of opportunity opens up, and it is a window of opportunity determined by extraordinary events (and events we probably would not want to see repeated any time soon). So, isn’t Piketty telling us that the long-term trends set by the ‘fundamental laws of capitalism,’ and not regulatory policies, are where the action is, after all? Now, my reading may very well be wrong; but if so, I would like to know where exactly it is wrong.

Let me now turn to my second question. It will quickly become evident, I hope, that it is related to the first. In Part Four of Capital, Piketty asks: if the dynamics of inequality are those which I have identified so far – namely, if ‘forces of divergence’ are particularly obstinate under capitalism, bar exceptional shocks – how, if at all, can we structure policy to oppose or at least mitigate such tendencies? Piketty’s answer, after the review of several alternatives, is cautiously formulated but clear: a highly progressive, global tax on capital. This, he adds, might be a utopian project in the short run (and perhaps in the long run, too), but it nevertheless constitutes the regulative blueprint we should adopt to reach any more realistic, midterm goals. Now, the question I would like to raise is very simple: given the picture that Piketty himself has drawn throughout the book, is the proposal of the optimal policy to ‘fix’ the problem an appropriate way to end it? My suspicion is that it might suggest that the kind of problem identified by Piketty is one which, once widely recognized and acknowledged, will almost automatically generate the political will to fix it. Inverting the trend is just a matter of good will – this is what I mean by ‘social-democratic optimism.’

I find this twist somewhat puzzling, and I am not alone. Other readers, whether generally more critical like Thomas Palley[^11] or overall very appreciative like Paul Krugman[^12], have also pointed out a very basic point: if patrimonial capitalism is back, then surely its determination and capacity to influence political power is, too? And if this is the case, then surely the problem is not to identify a good policy which everybody will agree to once they have understood Piketty’s diagnosis to be correct, but to think about how to harvest the sufficient counter-power to put any redistributive policy back on the agenda to begin with. In other words, we seem to need less policy and more politics: the emphasis should be more on political action and political processes than on which cure to put forward once the political power to put forward a cure at all has been achieved. Both the rise of economic elites and their capacity to use globalization in their favor (by threatening capital flight, to mention but the most obvious example) have undermined the capacity of other sectors of society to participate in democratic politics, whether through parties or unions Ð so much so that some observers today argue that we might very well live in de facto oligarchies[^13], at least in some jurisdictions.

If this is the case, the point seems to be how to reclaim some control over our democracies – how to generate the political conditions under which the right policies and institutions could be back on the agenda to begin with. To make an example, and as some have already argued, the final part of Capital would have been more in tune with the rest of the book had it concentrated on the prospects of labour as a political actor rather than on designing the optimal, if utopian, policy. I am not thereby implying that Piketty should have the solution to these problems – this is not his job and, indeed, it is very unclear whose job exactly it is. But I am puzzled by the absence of a more straightforward acknowledgment of the issue. By jumping to an exercise in admittedly utopian policy design, the book ends with an optimistic note that is in contrast with the rest of the book, for it suggests a faith in the power of well-meaning democratic politics which, if my reading of the books main these are correct, strikes me as unwarranted. I am not known for quoting Slavoj Žižek, but I must confess that I found the way he recently put this point particularly eloquent: ‘If you imagine a world organization where the measure proposed by Piketty can effectively be enacted, then the problems are already solved. Then already you have a total political reorganization, you have a global power which effectively can control capital, we already won… The true problem is to create the conditions for his apparently modest measure to be actualized.’

In a way, I would have found the book more consistent had it contained no Part Four at all, and had it admitted that our main and probably daunting challenge today is to found out how to reach a place where something resembling the content of Part Four can be put on the table at all. Such an ending, if more pessimistic, strikes me as more in line with the findings of Capital, which are very radical indeed and somewhat at odds with social-democratic optimism. Again, I could be wrong – but if I am, I am very keen indeed to understand why we have reasons to be optimistic. I would like to end that my questions might strike readers as being somewhat provocative – if that is the case, the reason why they are is that I found the book extremely insightful and eye-opening, and I am tempted to say that its implications might well be more radical than its author wishes.

Post-Scriptum: Acknowledging that the problem is in creating the political conditions for a change in policy making might entail accepting fairly high levels of political conflict. Piketty might find this highly undesirable, and this could be a key to an alternative interpretation of his conclusions, according to which what prompts his emphasis on optimal policies is not social-democratic optimism but the awareness, and the will to communicate to those who have control over policy-making, that letting inequality unravel will inevitably generate massive social and political destabilization, and that everybody (the 1% included) has a strong interest in avoiding that. Part Four is therefore not the expression of optimism, but a recipe to avoid a disaster. Again, I would be extremely interested in reading what Piketty has to say about this.

{ 66 comments }

1

BenK 12.11.15 at 3:50 pm

You stop short. If capitalism essentially recapitulates feudalism – i.e. aristocracy – then we have a unification of alternatives. It is equally obvious that socialism and communism replicate dictatorship. If dictators are somewhat tamed by a hereditary class of collaborators, they are back to being feudal.

Accepting the obvious, the problem is not at all capitalism. The problem is humanity; and communism knows how to solve that problem – mass executions.

Or perhaps everybody can return to an older problem; of how people who are equal in human dignity but perpetually unequal in all sorts of accidental material ways, can pursue their individually unique virtue best.

2

Rakesh Bhandari 12.11.15 at 4:15 pm

An insightful comment.
When social democrats and others attempted to tame or regulate capitalism, wealth had little power, and the actual power that wealth had gained in the long 19th century was not empirically well-understood. Social democratic politics, like much of our social and economic theory, arises out of unusual period in capitalist history. They are longer adequate to what capitalism has uncannily become (again).
Piketty is arguing that social democracy needs now to prioritize wealth taxes (or perhaps the democraticization of ownership shares in enterprise) over what had previously been its priorities–higher minimum wages, collective bargaining, the expansion of the social state on the basis of progressive income taxation (which, he argues, has approached its limits anyway), Keynesian full-employment policy. It is emphatically not that Piketty wants to discard most of the achievements of social democratic politics. But he is calling for a change in its priorities.
I would argue that his analysis implies that in the absence of wealth taxes or radical wealth redistribution, even the project to eliminate monopoly rents, as articulated by Reich and Stiglitz, will prove unsuccessful in preventing explosive levels of inequality.
What does Piketty think the likelihood of his proposals being adopted are? I am not sure, but one question here is if social democratic partisans had the power to impose a global wealth tax, they would probably also have the power to democratize ownership of enterprises and capital assets generally. Would they be wasting that power on just implementing Piketty’s favored proposals?
Also in the language of the insightful post, it’s not clear to me that the agenda of a global wealth tax would fire the imagination to create the counter-power needed to challenge the power of capital.

3

reason 12.11.15 at 4:30 pm

There is already a wealth tax. It is called estate duty. The problem is that like the company tax it is subject to an unfortunate process of erosion via competition between states (sometimes intra-country sometimes between countries). This makes the solution tricky because it needs international co-ordination.

4

reason 12.11.15 at 4:31 pm

P.S. There is already some international co-ordination on simple income tax, so it is not impossible.

5

bob mcmanus 12.11.15 at 4:39 pm

Interview with Piketty …in which he touches on the power politics

“First, making this tax reform possible would require a huge mobilization. This has always been the case in the past. All the big revolutions engendered a big tax reform. Take the French Revolution, the American Revolution, or World War One: although it was not a fiscal revolution initially, through the Bolshevik Revolution, it had a huge impact on the acceptance of a progressive tax regime and more generally social welfare institutions after World War One – and even more so after World War Two. These were fiercely opposed by the elite and by the right just before these shocks, so this shows that we need a big fight and sometimes violent shocks to make progressive tax accepted. It would be a big mistake to think of progressive taxation as a technocratic process that comes quietly from a minister and experts. This is not at all the history of taxation.”

I saw Piketty’s work as a in part, as the OP says above, a cautionary tale and warning, and perhaps a call for economists to take on more social responsibility:”Well, if you really want to avoid catastrophe…” But honestly, that is what economics is all about since Malthus and Ricardo.

But whether or not we are inevitably headed for some apocalypse on the scale of the Winter Palace or China Wars, or whether technologies have made it possible for a New Feudalism to entrench and perpetuate itself indefinitely has been a question since maybe 1968, and perhaps examined most closely in Italy, and France.

My position is that decent economists must choose as much social disruption as possible, not in order to make it worse then better, but worse in order to avoid worst.

6

Chris Armstrong 12.11.15 at 6:23 pm

Interesting post, Miriam. I think you’re right that there’s a disconnect between the pessimism of the description and the optimism of the prescription. One small thought: you suggest that there are two possible explanations of the dip in inequality during the 20thC: war and government redistribution. You suggest that the former is the most important, and that we wouldn’t want to repeat it. But I think Piketty emphasises three factors: war, inflation, and govt redistribution. In fact I think he gives quite a prominent role to the significance of inflation in wiping out inherited wealth, which seems quite plausible if you look at the graphs (much of the dip occurs in the 1920s and 30s). High inflation is obviously kryptonite to inherited wealth. Of course we know that govts decide, roughly at the time that inequality makes its recovery, that inflation is the great enemy and must be combatted at all costs (i.e. govts become monetarist). But that is a political choice which could be reversed. I find it interesting how little attention there has been on this theme from Piketty’s book.

7

Rakesh Bhandari 12.11.15 at 6:32 pm

@7 No, no. Piketty argues the opposite about inflation: “inflation is mainly to the detriment of the less wealthy and hence to the benefit of the wealthiest.” p. 455
Piketty argues that the wealthiest can get around the inflation tax; in fact the 1% can do so better than, say, the next 9% due to the top centile having better financial managers and intermediaries. Inflation can enhance the power of the top centile.

8

Chris Armstrong 12.11.15 at 7:07 pm

Um, yes, yes. Piketty is clear that inflation was one of the key mechanisms for redistributing wealth downwards in the twentieth century. See e.g. pp.133-4. It was a big part of the picture then – which raises the question of why it might not be such a mechanism again. But I don’t understand what you mean by an inflation tax. Do you mean an inheritance tax?

9

Rakesh Bhandari 12.11.15 at 7:24 pm

Yes look at what he says on p. 134: among people with some measure of wealth, those who own government bonds are not always the wealthiest: far from it. This is the point that he reiterates later in the pages I cited: redistribution via inflation need not disadvantage the wealthiest; in fact their relative power may increase! They can use better wealth managers to escape its consequences and increase their relative power.
On p. 134 he also makes the obvious point that lenders will eventually demand a higher nominal interest rate, so the redistribution will be short-lived.
An inflation tax is a metaphor, meaning here that inflation is often imagined to tax away the value of wealth holdings. But Piketty thinks the top centile can evade this “tax” like so many others!

10

Rakesh Bhandari 12.11.15 at 7:39 pm

It’s possible that pp. 546-7 are a direct critique of the inflation strategy that you maybe be advocating, Chris. At any rate, your comments on what Piketty says on these pages–and of course he may be wrong–would be interesting.

11

Chris Armstrong 12.11.15 at 7:41 pm

But then we have a mystery: why are our governments dedicated above all to minimising inflation? Why are those policies favoured by the elite? Why were inflation-busting policies introduced by the right-wing governments of the 1970s and 80s, and why are they still maintained now, especially by governments of the right, if inflation is no threat to the rich?

12

T 12.11.15 at 8:13 pm

Chris @12
As posted before by myself and others, here’s one explanation:
http://www.interfluidity.com/v2/5561.html

13

Rakesh Bhandari 12.11.15 at 8:13 pm

Great questions. That Piketty may be right that the top centile or so have little to fear from inflation does not mean that they see it that way. But at least the US Fed has been much less hawkish than the populist critics who claimed that it was run on behalf of wealthy rentiers thought it would always be.
There has been some discussion that central banks may be hesitant to set an inflation target at, say, 4% due to fear that they would lose credibility if they can’t reach it. Of course an aging population makes for a population fearful of inflation. Low inflation periods may be welcomed for the power that they give capital to restructure labor relations and contain the power of commodity producers. It could just be that people go with what had been working well enough (the Great Moderation). Or perhaps the political goal was to have central banks appear as technocratic and apolitical as possible as part of the project to kill off, once and for all, the Spirit of 68 and overcome the crisis of governability.
These are just guesses. I do not know the literature on the topic.

14

Layman 12.11.15 at 8:46 pm

To some extent echoing Bob @ 6, I think Piketty is issuing a warning, to the effect that r>g produces runaway effects that only end when capitalists are strung from the lampposts, unless something only slightly less dire for capitalists (e.g. The Great Depression, the Second World War) intervenes to save them from themselves. And then he suggests an alternative that any capitalist ought to prefer to those harsher remedies. It’s almost like he thinks they’re rational!

15

Peter K. 12.11.15 at 9:26 pm

@8 I have to side with Armstrong and I think Piketty may be wrong here.

Of course it’s possible he’s correct. No doubt he is correct that progressive taxation is better than inflation. He says he talks about this more when he discusses monetary policy and in that section I don’t find anything that clarifies his position.

I believe a central bank that ran a high pressure economy with 4 percent inflation and full employment would lessen inequality as labor markets tighten and workers gain bargaining power. Yes the .01 percent may able to avoid inflation’s effects via investing and keep their returns up, but they couldn’t counter the effects of increased worker bargaining and political power.

Of course there’s a lot more going on with the economy and policy: the welfare state, union and labor policy, immigration, tax policy etc.

Piketty is not a monetary economist and I believe – tentatively – that he falls short here. I believe he has some biases against monetary policy common to progressives.

What if it wasn’t monetary policy which was causing inflation, but fiscal policy and government spending? Would that be bad for small savers? (Essentially inflation is created by a combination of fiscal, monetary, and trade factors – macro factors.)

16

Peter K. 12.11.15 at 9:34 pm

The original post is thought-provoking and I agree with how Piketty’s economic history is summed up.

If things continue on as they have been during the life of Capitalism, yes there is reason for pessimism as r is greater than g except for the 30 social democratic years of exception. It does appear as if inequality, r and g are reverting to trend.

But think of political democracy. For many hundreds of years it was nonexistent until suddenly it blossomed with the Magna Carta, American and French Revolutions and the British Chartist movements etc. Up until democracy became more the norm, wouldn’t one have been correct to be pessimistic about its chances given the power of the monarchies and authoritarian systems that opposed it?

This doesn’t mean that equality and economic reason will triumph, but only that the outcome is unpredictable.

17

Peter K. 12.11.15 at 9:44 pm

@3 yes Piketty is arguing for Pigouvian wealth taxes to keep inequality at bay.

His focus in on the one percent, rather than the whole of society. That is something new. I liked Mike Konczal’s take:

http://www.bostonreview.net/books-ideas/mike-konczal-thomas-piketty-capital-studying-rich

It’s a direct challenge to the usual conservative apologetics that you can’t tax the rich enough to redistribute enough. There’s isn’t enough money there. On the contrary there’s so much money there that it’s getting increasingly and dangerously out of control.

18

Peter K. 12.11.15 at 9:48 pm

last post :D

Konczal sums up with:

“Many have tried to figure out why the rich are freaking out these days.* Their wealth was saved from the financial panic, they are having an excellent recovery, and they are poised to reap even greater gains going forward. But perhaps they are noticing that the dominant narratives about their role in society—avatars of success, job creators for the common good, innovators for social betterment, problem-solving philanthropists—are being replaced with a social science narrative in which they are a problem to be studied. They are still in control, but they are right to be worried.”

* http://nymag.com/daily/intelligencer/2014/01/perkins-compares-san-francisco-to-nazi-germany.html

19

T 12.11.15 at 9:53 pm

@15 @17
The Gilded Age lasted quite a while and didn’t end with capitalists hanging from lampposts. Inequality picked up again in the 20s before the crash. We’re already over 30 years into this cycle.

20

js. 12.11.15 at 10:34 pm

In other words, we seem to need less policy and more politics: the emphasis should be more on political action and political processes than on which cure to put forward once the political power to put forward a cure at all has been achieved.

Yes! This and CB’s post are both pretty bleak, but perhaps even more bleak is that those are the two posts I find myself agreeing with the most (so far).

21

Rakesh Bhandari 12.11.15 at 10:43 pm

OP with which js agrees: “if patrimonial capitalism is back, then surely its determination and capacity to influence political power is, too? And if this is the case, then surely the problem is not to identify a good policy which everybody will agree to once they have understood Piketty’s diagnosis to be correct, but to think about how to harvest the sufficient counter-power to put any redistributive policy back on the agenda to begin with. In other words, we seem to need less policy and more politics: the emphasis should be more on political action and political processes than on which cure to put forward once the political power to put forward a cure at all has been achieved.”

I must ask the obvious: what kind of politics do you get without a good sense of policy goals and “cures”? A volatile Sorelian politics of myth? We can’t be blind to the dangers of blind calls for action.

22

Layman 12.11.15 at 10:44 pm

T @ 20

Yes. But the examples of the French and Russian and Chinese 1% of past ages are always there, ready to be put to use. When they come with the pitchforks and the torches, the lesson will be refreshed, too late. And don’t expect that the cops will help.

Or, perhaps, tax increases on the higher marginal rates, and on capital gains. Seems like an easy decision.

23

Cassander 12.12.15 at 1:10 am

>The book argues that our delusion, in the decades following WWII, that democracies could, after all, tame capitalism and make it subservient to public ends was largely just that – a temporary delusion

There is no such thing as public ends, merely the sum of private ends. And those capitalism serves without your meddling.

>hat the sheer destruction of wealth caused by WWII is the central reason why inequality seemed to be back under control for a while in the Bretton Woods era.

Except there was no such destruction in the us.

>you have a global power which effectively can control capital,

If businessmen can buy government in a county, there’s no reason to think that it can’t buy a global government. If anything, such a government would be more corrupt and less accountable than national governments, as it would be further from the control of the voters, have more power and favors to dole out, and a less agreement about what it should do. You’re advocating an underpants Gomes theory of government.

@Chris

> why are our governments dedicated above all to minimising inflation?

You get governments that drop that priority all the time, like Venezuela, Argentina, and Zimbabwe. It rarely ends well for them.

@t

>The Gilded Age lasted quite a while and didn’t end with capitalists hanging from lampposts. Inequality picked up again in the 20s before the crash. We’re already over 30 years into this cycle.

Global poverty has never been lower, standards of living have never been higher. Billions of people left poverty in the period you mention. If this is a new gilded age, I say bring on more gilding.

24

T 12.12.15 at 1:49 am

@24
That kinda misses the point. The inequality that matters is intranational not international. Ask the Warren and the Trump supporters. When working and middle class Americans see their real incomes constant or falling for over a generation and no prospects for their kids, increasing incomes in China are of little solace. Take a look at what’s happening to the developed world’s working and middle class:
http://krugman.blogs.nytimes.com/2015/11/30/hyperglobalization-and-global-inequality/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

@23
Recent history suggests that developed countries turn hard right rather than hard left after a financial depression but I’m willing to be convinced otherwise. US terrorists predominately come from the right. So be careful when the pitchforks come out.

25

js. 12.12.15 at 2:08 am

RB @22: That seems rather uncharitable. I can’t speak for Ronzoni, but it seems to me that we have a surfeit of good policy suggestions (of which Piketty’s global wealth tax is one) and not a clue as to how to institute the kind of political configuration under which any of these good policy suggestions have a non-zero possibility of getting enacted. So it makes sense to focus on the politics.

26

Paul Segal 12.12.15 at 2:24 am

Very interesting post. I think you raise great questions, but that your doubts about Piketty’s consistency are due partly to the fact that you neglect the distinction between wealth inequality and income inequality, which are rather different. Here’s how I see it:

1) Wars and economic crises destroyed a lot of wealth 1914-45, thereby reducing wealth inequality (which by itself has only a modest effect on income inequality).

2) This reduced the political power of the economic elite, allowing the arrival of an era of social democratic policies. (I would lay more stress on the existence of communism as a backdrop, too.)

3) Those social democratic policies were by themselves sufficient to reduce income inequality by a lot, and Piketty discusses minimum wages, wage boards, income taxes, and other policies. Indeed, to the extent that they survive, they continue to keep income inequality low, as well as reducing the value of total wealth. Cross-country comparisons support this. Example from Piketty: the details of ‘Rhenish capitalism’, including worker representation and voting power on boards, help to explain Germany’s lower wealth-income ratio, as broader stakeholder representation makes capital less valuable to its owners (though not to society). Also note that the rise in income inequality in many (not all) rich countries since about 1980 is primarily due to salary inequality, not income from wealth. The rise in wealth has only a small part to play in rising income inequality.

The fact that the rich managed to regain control over policy does not imply that social democratic policies had no effect on power relations – just that the effect was not all that durable.

On your question of pessimism and optimism, I believe that Piketty is a technical policy optimist, and a political pessimist (and I agree): the technical problem of reducing inequality is not difficult (see Tony Atkinson’s recent book for a list of policies), but the politics mean that they are unlikely to be implemented without a major crisis. It follows that you are also right that the key challenge is ‘to think about how to harvest the sufficient counter-power to put any redistributive policy back on the agenda.’

27

Lawrence Stuart 12.12.15 at 2:33 am

This bi polarity in Picketty, the spread between pessimistic analysis and the optimistic prescription, is well spotted. But I don’t see it as a technical fault, or even a deficiency of the discourse. I look at is as a rhetorical compromise arising out of the need to accomplish two fairly contradictory tasks. On the one hand he’s contending with the need to make an analysis that captures the imagination of the economics community on a technical level, hence the need to emphasize the implacable movement of quantifiable processes. On the other, he is confronting the need to make the work relevant in the realm of human action. Doom may be heavy and compelling, but ultimately it’s a bit of a bore (cuz, well, whaddya gonna do anyway, right?). So policy prescriptions based on an assumption of political will help to leaven the dough.

But really, isn’t this rhetorical strategy a requirement of being taken seriously in a technical sense, and isn’t being taken seriously in this sense a requirement of being relevant to a political discussion in the current social context? I’d argue that indeed it is, and for that reason I salute Picketty for making rhetorical choices that contribute in a powerful way to a politically charged conversation about equality.

28

Lawrence Stuart 12.12.15 at 2:44 am

By which I mean to say the pessimistic description confers a necessary social gravitas on a political discussion which he initiates as a policy prescription, but which invites, or even demands, further consideration.

29

Rakesh Bhandari 12.12.15 at 2:52 am

OK I guess I do not understand what it means to have more politics, less policy or institute a kind of political configuration (as you put it) except around specified policy goals or workplace demands. I understand the questions of identifying social groups likely to identify with a broad agenda and specifying tactics. I would not fault Piketty for not taking up such questions in detail.

30

Paul Segal 12.12.15 at 3:01 am

Chris @7, Rakesh @8 and others – inflation hits the wealthy only when their wealth is in nominal assets, i.e. assets like government bonds whose prices do not rise automatically with inflation. Company shares and land, for instance, are real assets whose values are not eroded by inflation, so their owners are not hurt by inflation. However, even nominally-valued bonds will retain their real value if the nominal interest rate is at least as high as inflation, and now I get to the point about post-WW2 policy: governments tended to allow relatively high inflation at the same time as keeping nominal interest rates low, implying negative real interest rates. (The technical term for the policy mix that produces this effect is ‘financial repression’, which is misleading and even offensive, but there it is.) So it was not inflation per se, but inflation combined with low nominal interest rates that reduced the growth of wealth.

The ‘inflation tax’ refers to the fact that when governments print money, and when that causes inflation, the net effect is revenue to the government and a loss to those holding cash. So it is in effect a tax received by the government and paid by anyone holding cash. I wouldn’t call it a metaphor since it is directly equivalent to an actual tax on money. As Keynes put it in 1924: “What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit.” (NB: This analytical point does not contradict Keynes’s later finding that a deficit may increase total income.)

31

Lawrence Stuart 12.12.15 at 3:20 am

@6 bob ‘My position is that decent economists must choose as much social disruption as possible, not in order to make it worse then better, but worse in order to avoid worst.’

But suely there comes a point when sacrificing the present on the altar of the future becomes simple butchery?

https://en.m.wikipedia.org/wiki/This_is_worse#/media/File%3APrado_-_Los_Desastres_de_la_Guerra_-_No._37_-_Esto_es_peor.jpg

32

Cassander 12.12.15 at 5:18 am

@t

>The inequality that matters is intranational not international

It seems to me that a billion people not living on the edge of starvation is much more important than bill gates having 10 billion instead of 100.

>Take a look at what’s happening to the developed world’s working and middle class:

That chart shows their income growing, just not as fast as the fastest developing countries. That’s hardly a terrible story, even if you accept their calculations of income growth in rich countries at face value.

33

Brett 12.12.15 at 6:26 am

I’ve always gotten the “false consciousness” vibe from the rich when it comes to dreading growth that might bring inflation along with full employment, rather than any plan to use it to weaken worker rights. Rich capitalists think Government Can’t Do It Right, and that any government that ramps up spending to get back to full employment will go flying off into inflation (which some of them did). They very strongly believe their own bullshit about how they’re the Responsible Ones who will maintain the government along a balanced budget and in its best interests (which happen to be their own interests, but they’re rarely that self-aware).

@Cassander

It seems to me that a billion people not living on the edge of starvation is much more important than bill gates having 10 billion instead of 100.

That’s the wrong comparison. Much lower tax rates on income have precious little to do with the boom in China and east Asia, unlike trade liberalization.

34

Miriam Ronzoni 12.12.15 at 1:12 pm

Thanks everybody for the comments! I am going to write more after the weekend. For the moment I just wanted to say two quick things to Paul:
1) First, I don’t think that I neglect the difference between the two inequalities – I think I am raising a point that is internal to Piketty’s own outlook in taking inequality of income as being both a) somewhat overrated and b) something which, historically, we have been able to tackle only when inequality of wealth had been dramatically reduced by other factors. So in that sense good policies are significantly further downstream in the causal chain, no?
2) As to the optimism/pessimism – my point is one of intellectual honesty, as it were, though “honesty” is perhaps too strong a word. There should have been a more explicit acknowledgment of political pessimism, not just for realism’s sake but because political pessimism is one of the intellectual lessons of the book.

35

T 12.12.15 at 2:16 pm

@33 & Rakesh
Cassander, the issue is not about growth in China vs tax rates on the high end. The issue is about a neoliberal agenda that caused a stagnating middle class in the developed world — 30 years of flat real wages and communities decimated from the effects of the free flow of capital and goods, the deregulation of the finance industry, and other changes to the regulatory and legal framework that have concentrated income and wealth at the top 0.01%. And the vicious circle where the increased concentration of income leads to increased concentration of political power which, in turn, leads to tax/regulatory/legal changes that further concentrate income and wealth.

I agree w/the OP but also with Rakesh — you need the politics to change but you have to get the policies right too. Consider the US. The mainstream Republicans support continuing the neoliberal agenda and the mainstream Dems are for continuing the agenda but with increased transfers. The two groups that want to change the politics are the Warren and Trump camps. Both would halt the neoliberal agenda but in very different ways.

36

Lee A. Arnold 12.12.15 at 3:09 pm

Trump wouldn’t halt the neoliberal agenda in any way, shape, or form.

37

T 12.12.15 at 3:29 pm

Lee @36
His supporters are working class anti-trade, anti-immigration, and anti-Wall St nativists. What Trump would actually do is anybody’s guess. But from the base’s perspective, a populist agenda is not a neoliberal agenda.

38

cassander 12.12.15 at 4:34 pm

>The issue is about a neoliberal agenda that caused a stagnating middle class in the developed world — 30 years of flat real wages and communities decimated from the effects of the free flow of capital and goods, the deregulation of the finance industry, and other changes to the regulatory and legal framework that have concentrated income and wealth at the top 0.01%.

Well, one, I reject the notion that developed standards of living haven’t grown in recent decades. Every objective measure shows massive improvement in quality of life. more and better healthcare, massive increases in consumption of more exotic foods, bigger and more cars, the list is endless.

But let’s assume you’re right and that the neo-liberal agenda has done exactly what you say. in that case, what you’re arguing is horrifying. You’re literally saying that a process that lifted billions out of abject poverty is a bad thing because it allowed a few rich people to get richer at the expense of some, by global standards, slightly less rich people. I’m sorry, but there is no possible honest utilitarian calculus that can support that assertion.

39

Mike Huben 12.12.15 at 5:01 pm

#38: “I’m sorry, but there is no possible honest utilitarian calculus that can support that assertion.”

Until you consider that the growth would have occurred anyway even if there were wealth taxes which reduced the poverty even more.

40

Rakesh Bhandari 12.12.15 at 5:35 pm

@31. Paul, I see that your point that an inflation tax is more than a metaphor. Well-put. One of Piketty’s arguments is that it’s quite uncertain on whom exactly the tax will fall and that it is likely that the top centile will be able to evade it.

As for your @27 I would imagine that Piketty is a bit less of a political pessimist due to his being a policy optimist, i.e. were there no viable and welfare-enhancing ways to reduce inequality within existing institutions and were those institutions not open to democratic forces–this belief in reform too is the meaning of social democracy– he would think it less likely that political will could be mustered to reduce inequality.

Still, as Acemoglu and Robinson have noted, he expresses Marxist-like pessimism about modern institutions being porous enough for wealth inequality-attenuating reforms, see p. 365 when he speaks of the failure of the French Revolution and the inconsequential nature of the formal regime as to the tendency towards hyper-wealth concentration, evident in the Belle Epoque.

But perhaps Acemoglu and Robinson should not be so critical here. Their response reads to me as a non-sequitur. First, they say the French Revolution led to a decrease in inequality–of course that is Piketty’s point, but it did not prove to be durable. Second, they cite their interesting research that the French Revolution positively affected the growth paths of those countries that implemented the Napoleonic Code. But of course given the s/g ratio, all that would mean is that possibly the beta is lower in Napoleonic code areas than others, not that wealth did not become more concentrated and the alpha did not increase there too.

At any rate, wealth became almost as concentrated by the end of the 19 th century as it had been before the French Revolution. Acemoglu and Robinson don’t give us any reason to think Piketty is wrong here.

41

cassander 12.12.15 at 5:42 pm

>Until you consider that the growth would have occurred anyway even if there were wealth taxes which reduced the poverty even more.

that growth did not happen in the golden age, it has happened since. You can blame that policy regime for the change in inequality at the top, or you can say it didn’t have any effect on the inequality at the bottom, but you can’t do both at the same time, at least not honestly.

42

Layman 12.12.15 at 6:06 pm

Cassander @ 41, the second chart in C21 refutes your contention. Open up your copy, if you own one, and take a look.

43

T 12.12.15 at 6:52 pm

@38
I don’t recall either the Republicans or Democrats running on a platform to transfer nearly all gains in domestic growth to the top 10%, esp the top 0.01%; gut the US middle and working classes; increase the poverty rate; leave 40% of US female-headed households in poverty; but raise the Chinese out of poverty. My guess is that wouldn’t have played too well.

Remember, the neoliberal agenda was supported by both parties and their academic experts as a way to grow the middle class. The trade deal w/China was sold as a job and income creating mechanism. Financial deregulation was sold as a way to lower risk and increase growth. Read DeLong’s mea culpa. Much of the exercise was an elitist agenda. And it wrought Le Pen, Trump, and others. But history shows that this can go on for a very long time. And today, I’m afraid the race issue prevents the kind of coalition that FDR put together. On this last point, I’d be very interested what the OP, historians, and CR commentators have to say.

44

ZM 12.12.15 at 9:43 pm

If the question of the OP is how to make a wealth tax a popular policy idea that people would vote for – I think you would have to make it a more well rounded policy than just to decrease inequality.

One problem I can think of with a wealth tax is that countries’ national interest is to an extent tied up in wealth/ownership of businesses and property – as a small country Australia often has public debate on the benefits and disbenefits of foreign investment and foreign ownership for instance. So for Australia if one of the major parties had the wealth tax policy I think there would have to be a discussion about whether this would make it harder for Australian investment and ownership and easier for foreign investment and ownership.

(I think Piketty’s idea is that there would be a global wealth tax, but at the moment there is no institution that could do this, so it’s not immediately practicable. )

To get around these concerns, the wealth tax could, for example, be used as a national investment fund, so that the money would be used for investments, just for government ones rather than individual ones.

Since we need to act on climate change and other sustainability issues, the investment funds from the wealth tax could be used to invest in innovative green businesses and projects which would give them a start.

Doing this means the wealth tax isn’t just punitive and would be a more popular policy and could be supported by both major parties if one of them implements it to begin with.

45

ZM 12.12.15 at 9:49 pm

And I wouldn’t call it a wealth tax either. Maybe a National Investments Fund Tax or something about what it’s used for.

46

ZM 12.12.15 at 10:10 pm

And maybe a Levy instead of a tax too.

47

TM 12.12.15 at 10:32 pm

“So, isn’t Piketty telling us that the long-term trends set by the ‘fundamental laws of capitalism,’ and not regulatory policies, are where the action is, after all?”

It seems worth pointing out that Piketty’s argument not only essentializes the ‘fundamental laws of capitalism,’ but to some extent even relies on biology:

“Decreased growth – especially demographic growth – is thus responsible for capital’s comeback.” (p. 166).

Back to mercantilism, I guess.

48

TM 12.12.15 at 10:38 pm

(On the next page, Piketty points out that countries with low population growth like in Europe ought to develop higher capital-income ratios than the United States (ceteris paribus of course). But there is no empirical evidence for that nor does Piketty report inequality to be higher in Europe than the US.)

49

ZM 12.12.15 at 11:19 pm

And then the returns from the fund could be partially re-invested and partially distributed as a tax return to low and medium income tax payers, so people would come to feel they had a stake in the national investment fund.

50

T 12.12.15 at 11:20 pm

@45
The lines don’t seem to be drawn as clearly on the Dem side (mainstream v progressive) as on the Republican side (mainstream v populist), but you see a reemergence of progressives — Warren and Sherrod Brown and Sanders for example — that are against trade deals, oppose big finance and are pro-labor, pro-consumer and pro-Keynesian policies. The feeling I get from the forever triangulating Clintons is one of redistribution more than systemic change. I have not read her Wall St proposal but would be happy to hear a summary. That said, the close relationship between the Clintons and finance beginning in Arkansas (Stephens Inc. http://articles.philly.com/1993-01-17/news/25959645_1_worthen-bank-stephens-family-bill-clinton), extending to Bill”s presidency (Rubin, Altman, etc.) and further through the Clinton Foundation, doesn’t give me much faith that the Democratic mainstream is an instrument for change.

As you pointed out, it’s a very good question whether there really is a significant and separate progressive movement or it’s just the left-wing of the mainstream/Hillary Democrats. That question with respect to the populist movement has been answered on the Republican side — the loathing for Bush and the mainstream Republicans is palpable.

All this is to get back to the OP. How do you put together a political coalition to deal with inequality and plutocracy if it’s true that issues of race block the establishment of an FDR-type coalition of progressives and former Southern Democrats. In 2014, 64% of white males voted Republican. Do you need another catastrophe for change to occur?

51

ZM 12.12.15 at 11:50 pm

Plus, having a national investments fund would return public assets to the high levels of the post war era – which means the public asset / public debt ratio is better.

Except that instead of having public assets be government monopolies (which is now unfashionable, although I think it is fine for things like public transport and water and the electricity grid) , the government would be an investor like other investors , so where it invests would be like public private partnerships which are popular with both sides of politics.

52

ZM 12.12.15 at 11:53 pm

And people that worry that governments can’t run businesses would be pleased that private investors would go to the shareholder meetings and vote for the board of directors and so on, not just public servants and members of parliament.

And you could have a rule that no more than 50% (+ or -) of the board of directors could be chosen by the national investment fund representatives.

53

ZM 12.13.15 at 12:04 am

And if I were a public servant proposing this to a government minister, in Australia I would propose it to the Minister for Innovation, this is since it is our new portfolio which the Prime Minister and his wife are focussing on, and the Minister Christopher Pyne said he was not an economic liberal but is in favour of government spending.

And say how even though it is a levy on wealth – since it funds investments in green innovative enterprises, it would encourage entrpreneurs to start these businesses in Australia (I don’t know if this is true or not, but it might, so you may as well tell the Minister it will).

Anyway, this is what I would propose to the government or opposition Ministries in Australia if I was a public servant in the Commonwealth parliament and thought the government should implement Piketty’s policy idea.

I would just mention it was another side benefit that it would reduce inequality, which at too great levels is bad for democracy and health, and only mention Piketty very slightly, but everyone would know anyhow since it is such a famous book.

54

cassander 12.13.15 at 12:17 am

@Layman

>Cassander @ 41, the second chart in C21 refutes your contention. Open up your copy, if you own one, and take a look.

At most, it shows the 40-65% profiting at the expense of the 65-95%, which is to say that modern growth is MORE progressive than in the past, not less. And that’s before even getting into methodological problems with the 70-92 period, such as accounting for the nonsense that was communist economic stats.

55

Lawence Stuart 12.13.15 at 3:31 am

@ZM 54 ‘And say how even though it is a levy on wealth – since it funds investments in green innovative enterprises, it would encourage entrpreneurs to start these businesses in Australia (I don’t know if this is true or not, but it might, so you may as well tell the Minister it will).’

Which means you’d be making an argument based on growth, which means you are going to need a technical rationale that carries rhetorical weight, which is where Picketty and his tribe might come in.

In Canada we recently elected a government that ran on a frankly redistributive tax policy:

http://www.theglobeandmail.com/news/politics/how-liberals-gauged-response-to-high-income-tax-hike-explains-estimate-gap/article27678069/

The most interesting thing in that article is my PM’s defence of the policy, made in spite negative press coverage of deficit concerns:

“There have always been, throughout the campaign, many different economists with very different analyses of how much it was going to cost, how much it was going to bring in,” he said, arguing that the government is meeting the “essence” of the pledge. “We know that it’s not just good for middle-class Canadians to get more money in their pockets every paycheque. It’s also good for fighting against the income inequality that continues to be a problem for growth in Canada.”

So inequality in the context of redistributive taxation as a stimulus to growth has very much become a part of mainstream political discourse and policy making in Canada. Equality, for the first time in recent memory, trumps balanced books as the focus of economic policy. This ain’t the old ‘level playing field’ rhetoric.

It may not be the Kingdom Come, but it’s perhaps a sign, as it were, that the zeitgeist is up for grabs.

56

cassander 12.13.15 at 4:46 am

>Plus, having a national investments fund would return public assets to the high levels of the post war era – which means the public asset / public debt ratio is better.

How would that happen? A public investment fund won’t magically repeal the legal red tape that’s built up around such projects, it won’t change the left wing antipathy to such efforts, and it certainly wouldn’t reduce social welfare spending back to the past levels that made such projects affordable.

57

notsneaky 12.13.15 at 6:20 am

” the sheer destruction of wealth caused by WWII is the central reason why inequality seemed to be back under control for a while”

If I recall correctly (I’ll look it up tomorrow) for the French and to a non-trivial extent for the British, the main cause of loss of wealth was the repudiation of debt obligations by Bolsheviks. They took a big hit there.

58

ZM 12.13.15 at 6:39 am

Lawrence Stuart,

“Which means you’d be making an argument based on growth”

I was thinking it was an argument based on where entrepreneurs would like to start businesses, since I’m not in favor of growth unless it’s a sort of growth that doesn’t increase material consumption.

If there are case studies on a similar thing I would use them, but I don’t know of any countries using a levy on wealth to fund national investment in green innovation to use as an example of why it would attract entrepreneurs…

59

ZM 12.13.15 at 6:49 am

cassander,

I am not sure what you mean by “how would that happen?”

The levy on wealth would increase public assets (I’m not counting roads as public assets unless they have tolls, or anything else free to the public that is a liability due to maintenance or running costs) which would improve the public assets to public debts ratio because the public assets would increase as the government bought shares in businesses with the funds from the wealth levy.

It would not do anything to welfare spending, it’s quite separate. And it doesn’t do anything to red tape either, it’s just a levy for a national investment fund. As the fund grows bigger over time there would be a public benefit to f being greater than g (if that trend continued)

60

Rakesh Bhandari 12.13.15 at 6:55 am

@59. For Piketty it’s more complicated than that. He tries to weigh loss of foreign holdings which of course included more than debt obligations of the Bolsheviks as well as the effect of a lower saving rate–along with the destruction of capital from war, which actually accounts for less of the decline in the capital/income ratio than one may think. The OP is simply wrong about sheer destructiveness being the principal factor. Moreover, war and post-war policies depressed capital values as well.

61

Magpie 12.13.15 at 9:02 am

@Miriam Ronzoni (12.12.15 at 1:12 pm)

Very astute and insightful post. Thanks for sharing your ideas.

“As to the optimism/pessimism – my point is one of intellectual honesty, as it were, though ‘honesty’ is perhaps too strong a word.”

I think the word you are looking for is “consistency” or perhaps “coherence”.

62

Layman 12.13.15 at 11:50 am

Cassander @ 65: “… it shows the 40-65% profiting at the expense of the 65-95%…”

Serves me right for responding to your nonsense. Never mind.

63

bob mcmanus 12.13.15 at 12:43 pm

87: God, it’s all so depressing. Clinton, following Obama in 2008, is also running on “tax the rich to cut taxes for the middle class” How has that worked out 7+ years later?

How about tax the rich to provide daycare centers, or high speed rail, or single-payer healthcare, or solar farms, or…

Nope, sorry can’t afford them.

Taxing the rich to give money (tax cuts, basic income) to the middle class guarantees the rich will get that money back, with interest, through price increases in goods and services, education, health care deductibles, real estate in Canada. Neoliberalism

Population as social factory, producing desire and consumption/status preferences for a more direct source of surplus value and capital accumulation.

64

bob mcmanus 12.13.15 at 12:44 pm

66 to 57

65

Richard M 12.13.15 at 12:51 pm

the policies and regulations of the post-war era were, if at all, the effect rather the cause – i.e., they were made possible by the fact that the power relationship between capital and labour had changed,

The underlying argument seems to be here that more capital means more power. That’s seems doubtful; the power of capital is not direct, but mostly exercised via markets. So a surplus of capital, caused by leaky tax regimes, makes that capital less scarce.

If there is, globally, less capital than the economy needs for current operation plus practically-possible growth, those countries who have the most investor friendly policies will get the capital, those who don’t will be left out.

In the real world, there seems to be about 3 times as much investment capital as required to have every country in the world run a full-employment boom. So there is no ‘running-out’, the least capital-friendly jurisdiction will have all of its requirements met just as much as the most, subject only to some kind of floor where it becomes objectively worthless to invest.

In 2013, Zimbabwe received $400 million of foreign investment; it has never successfully absorbed more. Probably only North Korea remains as somewhere that’s still failing to get all the capital it could use, and even that seems to be changing.

If that is the case, the existing power relations are already sufficient to the job; the only thing required is sweep away the intellectual assumption of the capitalist era that is already past.

66

Tabasco 12.13.15 at 10:42 pm

Clearly, what’s needed to redress inequalities in wealth is another world war. The problem is that it might become the nuclear variety. Alternatively, with some imaginative thinking, the war against Islamic terror might provide the necessary pretext to raise taxes on wealth.

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