on 23 September 2014
Don’t be misled by this flawed masterpiece.
Piketty’s masterly work on Capital is an important and influential book. Among other things, it provides much of the theoretical framework for François Hollande’s socialist economic policies in France, make of that what you will. It should be noted from the start that the author is not only a distinguished professor of economics at the Sorbonne, but also an out-and-out socialist. What may well be rigorous economic analysis is laced heavily throughout with leftish assumptions that many people will not share, but which Piketty makes little attempt to justify or discuss.
Although his title is ‘Capital in the twenty-first century’, Piketty’s actual subject is the inequality and injustice of wealth distribution. Such injustice is as old as the hills. In a famous biblical passage quoted by George Orwell, the ancient preacher says “I returned, and saw under the sun, that the race goes not to the swift, nor the battle to the strong, neither bread to the hungry, nor yet riches to the wise…, but time and chance happeneth to all”. Piketty clearly finds time and chance upsetting and the accumulation of capital intolerable. After a long survey of economic history, he announces his own solution to the problem, one which most people will find hopelessly unworkable -a steeply rising global tax on wealth.
I am not personally qualified to comment on the validity of the economics in the book, except to note that it has been strongly criticised by other economists, notably by James Galbraith at Texas, and in the Financial Times. So I restrict my remarks to commenting on the readability of this very long work (577 pages of text plus another 80-odd of notes), and a few comments where it seems to me there are major deficiencies or unjustified assumptions that can be appreciated by a general reader.
The first thing to say is that this is a delightfully written (and well translated) work of breath-taking historical sweep, covering the economic landscape from mediaeval times onwards, and with special reference to the last 200 years or so. Piketty assembles huge amounts of data for consideration and illustrates what this can mean in human terms by references to the novels of Jane Austen, Balzac and Tolstoy. It is all very seductive, though he is not above selecting unsavoury but entirely fictional characters to rouse our ire against capitalism in general. This is not particularly helpful, for anybody can choose or create a fictional villain to reinforce their argument, but it doesn’t make it true. Also, one has to be careful about emotionally loaded language. Steeply rising taxes are described as ‘progressive’, technically correct but misleadingly reassuring; the ‘inequality’ he speaks of would be more accurately described as ‘difference’, ‘divergence’ or ‘diversity’; and where ‘inequality’, as he measures it, gets smaller for a while (which goes against his argument that things are getting worse), he shies away from the obvious word ‘reduced’ and describes it instead as ‘compressed’, which implies intensification rather than the reduction that has actually happened. But he is pretty good about explaining technical terms as he goes along. Where he doesn’t, the effect can be comical, as on page 406 where the word ‘cohorts’ appears ten times, conjuring up visions of Roman legions tramping through the pages. But it turns out that ‘cohort’ is the technical statistical term for a group of people born within the same period of time. You live and learn.
There is no escaping, of course, the fact that this is not a bedtime book, or something you pick up at the airport to flip through during the flight. It is solid stuff, and a determined reader will probably take a month or six weeks of dedicated effort to get through it, for it can only be tackled bit at a time. The extensive tables of data are fascinating and the graphs enlightening, but if data bores you and graphs make you feel ill, this isn’t your book. Likewise the maths that is presented is not at all difficult but might be horribly unfamiliar. If symbolic notation, Greek letters and a little light algebra aren’t your thing, best put this book aside before you buy it. Many people only realize afterwards, and a survey of Kindle statistics apparently indicates that most people give up round page 26.
For his analysis, conclusions and final recommendation, Piketty relies heavily on what he calls the first and second fundamental laws of capitalism. These are not like the first and second laws of thermodynamics, for example, to which no exception has ever been found; and not like a statute passed in parliament; nor even like Newton’s law of gravity, which has now been superseded by Einstein but which is still good enough for little everyday tasks like calculating the weight of the earth, or sending a mission to the moon. The first law of capital is not in fact a law at all, simply an identity, a way of rearranging quantities that are already known. The second ‘law’ relates the capital/income ratio of a country with the ratio of the savings rate to the growth rate of the economy in general. This is not a law either, but rather a tendency which takes decades to come about, and then only provided that nothing else intervenes (though it always does -natural disasters, wars, depressions, property bubbles, banking crises etc.). He describes the developing economic scene of the last two centuries in terms of these ‘laws’, and also adduces that the accumulation of capital will become more and more concentrated in a few hands when the percentage return on capital persists at a higher level than the growth rate of the economy in general. He sees this as a nightmare scenario of runaway inequality, and reserves his most particular criticism for inherited wealth.
Piketty’s grand idea to deal with this situation is a steeply increasing tax, not just on income or on inheritance, but on all one’s assets, every year, a “Global Tax on Capital”, with all the associated paraphernalia of enforcement. This includes having all one’s personal financial details automatically disclosed, and not just to one’s own government; given the international nature of capital flows, the information has to be available to every government in the world. It requires setting up a global financial authority with powers to coerce and to enforce the compliance of institutions (City of London? Swiss banks?) or countries (tax havens? oil states?) that take a different political outlook from Piketty. This will ensure democracy. Europe should lead the way with the creation of a new body, the European Budgetary Parliament.
He also touches on some other current issues, such as the recent phenomenon of stratospheric senior-management salaries. He examines the disaster of the Euro, and how governments enmeshed by it might reduce their catastrophic debt burden now that the traditional remedy of currency devaluation is no longer available to them. Piketty’s answer to this is again a heavy tax on the relatively wealthy. But unmanageable government debt is mainly caused by the inefficiency, irresponsibility, or downright corruption of the government concerned. To give such a government even more power through money taken away from people who obviously manage it rather successfully, is an unconvincing recommendation.
What are we to make of all this? Some respected professional economists have hammered Piketty pretty hard, saying the both the analysis and the conclusions are flawed. One of the objections turns on Piketty’s use of the term ‘Capital’ to lump together such diverse things as investment in plant and machinery (which depreciate at a rapid rate), real estate including one’s home, (which tends to accumulate in the long term) and financial assets (which can be widely volatile). As for the concept of a confiscatory tax on capital, everyone will recognise the truth of the comment by John Bird (founder of “The Big Issue” ) that capital will simply move somewhere else; Galbraith makes the same point rather more acidly; and in France, Gérard Depardieu has proved it by voting with his feet.
So what has one gained on reaching page 577? The first answer must be ‘quite an education’. Unless you are a professional economist of independent outlook, you are unlikely to emerge unchanged from the experience. Whether you agree with Piketty or not, the mass of factual data presented is overwhelming, valuable and instructive. It often serves to put things in perspective. A single example: public and politicians are currently preoccupied with the level of benefit payments made to the less well off, but this amounts to only about 1% of national income in developed countries, compared with 10-20% on health and education, and typically 13% on pensions. This means it is not significant as a purely economic problem.
It is a pity that Piketty does not apply this self-same approach to what he calls ‘inequality’. He is outraged by the spectacular wealth of the top 1/1000th of a percent of the population, but one thousandth of one percent, even of something spectacular, does not add up to a large amount of the economy as a whole. Even if the threshold limits are extended downwards, he estimates it will only bring in about 3-4% of national revenue. Unfortunately he is probably wrong about that. Once governments discover a principle and a mechanism to collect a new tax, they will find it hard to resist the temptation to extend both the rate and the scope of it. That is what governments do.
Surprisingly, he is not explicitly concerned about the power that extreme wealth can bring. He reserves special bile for Liliane Bettencourt, the l’Oréal heiress who, he admits, takes no part in the running of the company. But he does not mention Rupert Murdoch, for example, whose News Corporation empire has considerable influence on governments and elections. This is presumably because of Piketty’s ingrained dislike of capital per se.
Piketty is an out-and-out socialist. He does not just write about capitalism, he detests it. That comes out in many side-swipes. “The rentier is the enemy of democracy”; “Democracy must regain control over capitalism” (though it never had it). Most tellingly, his historical survey never once mentions the positive aspects of capitalism; the rôle of credit, of lending money at interest, the invention of the joint stock company and so on, in liberating civilisation from a subsistence economy, creating jobs and increasing general wealth and well-being. He explicitly admits that his wealth tax is for doctrinaire reasons -not to fund the spending needs of government, but to control capitalism.
The reader is left with many practical and philosophical questions. What exactly does Piketty see as ‘equality’? He doesn’t discuss it at all. How much in-equality is acceptable, for there will always be some? How can a civilized man possibly maintain that “unequal wealth within a nation is surely more worrisome than unequal wealth between nations” when one considers the desperate plight of the poorest in the world? How much does inequality act as a driver for the enhancement of wealth generally -is there an entropy effect? What is so bad about someone working hard in order to leave something to their children and so increase social mobility? Is inherited wealth fundamentally more reprehensible than inherited intelligence, which also affects one’s personal economic outcome? Is Piketty’s view of meritocracy perhaps a little self-serving? Is it naïve to advocate massive expansion of the social state while trusting that the organizational problems will be overcome by “efficient re-design, or structures not yet invented”? Is he serious when he suggests that the state’s largesse might extend to culture and travel? (free tickets to Bayreuth? rock festivals? football matches? free petrol? cheap flights to Ibiza?). What is the moral justification for the state confiscating large proportions (up to 80% marginal) of private property? On this last issue, Piketty’s vague appeals to 18th century declarations of equality, made in a context where there was no publicly funded education, health care, unemployment benefit and so on, carry little more conviction than the American gun lobby’s claim to be justified by that country’s founding constitution. Understand that I am by no means defending the manifest abuses perpetrated by some aspects of capitalism, simply questioning whether Piketty’s proposals could have any beneficial effect, or whether they might even distract from the search for better solutions.
Finally the biggest question of all. Does Piketty actually believe in his own proposals? Well, not whole-heartedly at least. He describes them as “Utopian…… but no more so than creating a stateless currency like the Euro”. Enough said.