It’s the unfortunate fate of greatly influential books to be greatly misunderstood. When a book is sufficiently important to reshape intellectual and political debates, it escapes, at least to some extent, its author’s intentions. People want to latch onto it and use it as a vehicle for their own particular gripes and concerns. Enemies will distort the book further, some because they dislike the book’s message, others because they feel that they, rather than the book’s author, should have been the messenger adorned by history with laurels. The book will further be subject to the more ordinary forms of misprision and adaptation (some helpful; others less so) that all books are subject to.
These processes of reinterpretation and misinterpretation have been unusually marked for Capital in the Twenty-First Century because it is such a big and ambitious book. There are three major parts to it – a big theory, a set of major empirical claims and a (preliminary) set of policy proposals. Most earlier critics have focused on one or another of these three while occluding the others in a kind of chiaroscuro. I want to do something a little different – to separate out the first part from the others so as better to understand one aspect of its contribution, and to argue that the second and third are connected in different ways than most readers understand. Thinking about the book in this way draws out some potentially interesting insights. If the theory is taken as a contribution in itself, rather than an explanation of the observed empirics, it has interesting and important things to say about the dynamics of capitalism that emerge better when treated in isolation. If the empirics are an important contribution, it is more because they establish the social fact of inequality, which in turn has implications for the policy measures that one might propose as an interim measure.
First, the theory. Piketty’s famous inequality, r>g, stems from a style of economic reasoning that would have been familiar to the classical economists, but produces a distinct allergic reaction in many modern economists. Most prominently, Daron Acemoglu and James Robinson have argued both that this entire way of thinking about economic problems is wrong, and that it doesn’t really explain the observed facts. Acemoglu and Robinson don’t have any innate objection to enormous and sweeping historical arguments based on simple models, since that’s the business they are in too (their Economic Theory of Dictatorship and Democracy sets out to explain vast patterns of historical development on the basis of game theoretic arguments straightforward enough that an undergraduate student could grasp and reproduce them). Instead, their objection is to the particular kind of simplicity that Piketty aspires to. Piketty and Acemoglu are institutionalists, whose work explores the proposition that institutions matter in demonstrably causal ways to observed economic outcomes. This helps explain relative levels of prosperity (some sets of institutions are more conducive to economic well being than others). It also helps us understand how power relations bridge the gap between politics and economics. Acemoglu and Robinson’s most important contribution (at least from the perspective of a political scientist like me) is to provide a simple possible explanation of how different relationships between elites and non-elites help explain when we may expect democracy and when dictatorship.
Piketty’s account is quite different. It’s unfair to suggest, as Acemoglu and Robinson do, that institutions play no role in his argument. He’s clearly very interested, for example, in the role of educational institutions. However, it is fair to suggest that he doesn’t have a fully developed theory of how power inequalities might translate into, for example, differences in the rules governing economic sectors, and that he often prefers cultural explanations (to explain, for example, the shift towards higher paid managers) to institutional ones.
Even so, this critique misses out on what’s interesting – and potentially very depressing – about Piketty’s theoretical account. Standard economic arguments start from an implicit set of assumptions about the absence of power relations. Perfect competition, by definition, is a state of the economy in which no one actor is more powerful than another – all actors are price takers, not price makers. This leads to a highly fruitful set of arguments about how real life markets – let alone polities – just aren’t like that. Markets aren’t perfect. Inequalities are rife. And as people like Jack Knight, Doug North when he was wearing his former-Marxist hat and (obviously, far more modestly) me have argued, this provides the foundations for a reasonably excoriating critique of standard economic claims. To the extent that the happy assumptions of perfect competition are not justified, so that power relations matter, we have no theoretical warrant whatsoever to believe that powerful and self-interested actors will influence institutions towards socially optimal outcomes. Specifically, these theories draw attention to the distributional consequences of institutions – i.e. who gets what. Unequal power leads to unequal influence over the institutions that distribute the benefits of cooperation, which in turn means that the benefits are likely to be distributed in unequal and inefficient ways. Here, there’s a hidden theoretical connection between standard economic critiques e.g. of monopoly and left-rationalist critiques of how actually-existing capitalism works. The latter, in a sense, draw the full conclusions of the arguments of the former. Both suggest moreover that in a world where there weren’t any power disparities, so that actors were fully equal participants in markets and politics, the problems of skewed institutions and unequal distribution of gains would disappear. Bringing conditions closer to the true equality of perfectly competitive markets would largely solve the problem.
Piketty’s claim is potentially much more corrosive. For him, the fundamental problem isn’t one of flawed markets and unequal power. It’s one of markets working as they are supposed to. In Piketty’s description (p.27), ‘the more perfect the capital market (in the economist’s sense, the more likely r is to be greater than g.’ Even more bluntly, the r>g inequality (p.424) ‘has nothing to do with market imperfections and will not disappear as markets become freer and more competitive. The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion.’ If Piketty is right, institutional reforms aimed at removing market imperfections will do nothing to address the fundamental problem of economic inequality, and may, indeed, exacerbate it. The problem isn’t in the institutions but in market capitalism itself, so that efforts to reform corrupt institutions will not fix the core problem. If you’re playing blackjack, you’d prefer to be playing against an honest dealer than a crooked one. But either way, you’re going to end up losing money.
This conducts towards an account in which institutions are not the problem, but can serve as a brake on the problem. The right kind of institutions can restrain the innate and natural long run tendencies of the market to produce economic inequality. How to get to these institutions is a different problem. If one were to combine parts of Piketty’s theory with parts of the theory of his critics, one might well end up concluding that we’re all screwed. The innate tendencies towards economic inequality that Piketty describes will lead to institutional dynamics that favor the rich, so that there is no real prospect for countervailing forces. On this account, we end up in the kind of world that William Gibson describes in his novel The Peripheral (a world that I suspect owes quite a bit to Piketty’s arguments).
Second, the empirics. Plausibly, the empirical observations that Piketty (and his colleagues – the book reports some of the key results from a much larger project) – report are compatible with a wide variety of causal mechanisms in addition to, or instead of, the mechanisms implied by Piketty’s own theory. It may well be that institutional factors play an important role in generating economic inequality. It may also be in part a result of the emergence of new economic sectors. It may be the result of cultural shifts (as Piketty occasionally argues). There is prima facie evidence supporting each of these accounts, and others besides. There isn’t (as best as I can judge the debates) nearly enough evidence to authoritatively adjudicate between these different plausible mechanisms.
In a sense, however, this isn’t the point of the contribution. Piketty is an economist, but his contribution is better understood in sociological terms. As sociologists like Marion Fourcade and sociologically minded political scientists like Martha Finnemore have argued, economic knowledge doesn’t appear automatically. Instead, it’s the product of social processes of legitimation, in which socially legitimated social structures produce socially legitimated forms of knowledge that are validated in socially legitimated ways. We live in a technocratic age, which among other things means that the kinds of knowledge that appeal to technocrats, such as high quality statistical data, are likely to appear legitimate in ways that other kinds of knowledge are not. Piketty and his colleagues have engaged in slow, patient work, the boring of hard boards, building high quality data sets that appear to confound the previous technocratic wisdom that we didn’t need to worry about inequality.
This makes a vast and important social phenomenon, that might otherwise have been partly obscured, visible, salient and socially undeniable. This is not to deny that there are other things going on too. If there hadn’t been an economic crisis, the reaction would have probably been more muted. Furthermore, knowledge on its own is not a sufficient condition for successful political action (more on this below). Finally, like all statistical knowledge, it is imperfect and open to challenge and improvement. Although efforts to undermine the credibility of the project (such as the notorious Financial Times investigation) have failed, it will continue to get empirical pushback. However, this pushback is likely to further increase the salience of the problem of inequality, by making it a major object of scientific inquiry.
It also helps explain both the positive and negative reactions that Piketty’s book has received. If you (whether for principled or unprincipled reasons) don’t want inequality to be a problem that people pay attention to, and want to try and solve, then the Piketty book is likely to seem like a disaster to you. You’ll devote a lot of time and energy to trying to tear it down. Sometimes, this criticism will be useful (ideological bias is the beginning point for most serious argument, as well as most unserious argument). Sometimes it will be a form of denialism. Equally, if you are someone who believes that inequality is a real problem, Piketty’s work not only helps to validate your beliefs, but it gives you a new set of tools to understand and explain the world. This is true of activists as well as academics – the language of the 1% and the 99% provides a fascinating example of how a set of statistical findings can provide an interpretive frame to organize an entire social movement.
Finally, it helps explain Piketty’s policy prescriptions, some of which are proposed not so much to solve the problem of inequality, as to help generate the kinds of politics that might solve the problem. Piketty’s entire project could be seen as a bet – that generating increased knowledge about the actual shape of inequality will help generate the kinds of politics that can successfully address inequality. His careful gathering of data and his ingenious search for proxies where data is available (e.g. using publicly visible data on the performance of university endowments as a proxy for the returns to capital available to the merely ordinarily rich and the super rich) all try to cast light on what was invisible and occluded. So too do his policy proposals. For example, his self-admittedly utopian proposal for a global tax on capital is in part motivated by the desire to reduce financial opacity, and to make it clearer just how well the truly rich are doing. He believes that many people don’t understand this:
For … half of the population, the very notions of wealth and capital are relatively abstract. For millions of people, “wealth” amounts to little more than a few weeks’ wages in a checking account or low-interest savings account, a car, and a few pieces of furniture. The inescapable reality is this: wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities. That is why it is so essential to study capital and its distribution in a methodical, systematic way.
Yet a truly systematic understanding is impossible given currently available data. A global capital tax could help generate this data.
The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world. … it would generate information about the distribution of wealth. National governments, international organizations, and statistical offices around the world would at last be able to produce reliable data about the evolution of global wealth. Citizens would no longer be forced to rely on Forbes, glossy financial reports from global wealth managers, and other unofficial sources to fill the official statistical void. (Recall that I explored the deficiencies of those unofficial sources in Part Three.) Instead, they would have access to public data based on clearly prescribed methods and information provided under penalty of law. The benefit to democracy would be considerable: it is very difficult to have a rational debate about the great challenges facing the world today— the future of the social state, the cost of the transition to new sources of energy, state- building in the developing world, and so on— because the global distribution of wealth remains so opaque.
In part, this policy proposal doubles down on the bet that Piketty’s book embodies – it is another way to generate empirically validated knowledge that can inform democratic debate. The implication is that if we (as a democratic society, in the US, France, Ireland or some congeries of these national societies) truly understood how rich the rich were, we could do something about it, and perhaps address a number of collective challenges that otherwise seem insuperable.
Obviously, this bet is an uncertain one. Piketty has little to say about the politics through which knowledge generates political action. What one might say is that this and other proposals he makes for knowledge generation might help create a plausibly necessary but insufficient condition for political change. What more we might need than knowledge is difficult to say (I have little idea beyond broad generalities). One plausible surmise though, is that if we’re in the world of the theoretical double bind where (a) Piketty is right about the inherent tendency of capitalism to produce enduring economic inequality, and (b) his critics are right about how economic inequality generates political and institutional inequality, we’re in a very difficult position. It’s unlikely under these conditions that democracy can generate the required political action, regardless of how much knowledge is generated. We need to hope either that capitalism isn’t as prone to generate economic inequality as Piketty believes, or that this economic inequality does not translate seamlessly into unequal political power.