2014 07 – Thomas Piketty’s Capital in the Twenty-First Century

How Piketty Misses the Miracle of the Mixed Economy

by Gwydion M. Williams

Thomas Piketty is a Classical Liberal who tries to minimise the 20th century failures of Liberal Capitalism and its successful replacement by the Mixed Economy. This is probably why he and his book Capital in the Twenty-First Century are being hyped at a time when the New Right are looking increasingly shaky.

He correctly sees that the ludicrously high incomes of the richest 1% are likely to kill the system. But he tries to explain away the massive successes of the “Golden Quarter-Century”, the successful Western growth from 1950 to 1975. You can find a much better account of these things in the work of Ha-Joon Chang, especially “23 Things They Don’t Tell You About Capitalism“.

Liberal Capitalism perished in the Great Depression. The immediate alternatives seemed to be Global Leninism and Fascism, with Fascism the pioneer of the Mixed Economy, because it would tolerate capitalism when it seemed to be serving the National Interest. President Roosevelt found a successful hybrid with the New Deal, a Mixed Economy implemented within the traditional liberal political system, but this was in danger of being suppressed before World War Two came along and changed everyone’s attitudes. The New Deal was tarnished by the US Recession of 1937–1938, but the World War justified Tax-and-Spend and new taxes. It was found that spending vast sums of money on war actually boosted the economy, so this successful method was continued after the war. One reason for the Cold War was probably that it allowed this massive spending to continue without an actual war. But that applied just in the USA and was caused by its political obsessions and lack of socialism: elsewhere a successful Mixed Economy was run without unusual military spending.

The New Right treated the Mixed Economy as an aberration. They insisted that Roosevelt had actually prolonged a crisis that would otherwise have healed itself through the operation of the Free Market. (Never mind that this notably failed to happen in the UK and other places where Liberal Capitalism remained the norm. They promised to roll back the “overgrown” state and restore something like 19th century individualism. But none of their promises have been met: the state is as big as ever, though some of its functions have been outsourced to profit-making corporations that make huge profits from government subsidies. The promised “trickle-down” from increased growth caused by liberating the entrepreneurs never happened, but almost all of the left let them quietly drop that slogan rather than continuously taunting them with it. (Most of the electorate are busy and not very clever, so a continuous rather mindless taunt will work better than intellectually sound arguments. It’s sad, and it is one reason why Representative Democracy is not such a great system, but it is also a fact of life in Europe and the USA.)

Piketty tries to ignore politics. There is no existing schema of history that would endorse Liberal Capitalism while avoiding the viewpoint of the New Right. It might be possible, but so far no one has managed it, and I rather hope no one manages to put together another False History to replace the crumbling New Right outlook.

Piketty tries to find purely technical explanations for the Mixed Economy’s success. Thus he says “By adopting the modes of production of the rich countries and acquiring skills comparable to those found elsewhere, the less developed countries have leapt forward”.[A] Which does not account for how some poor countries manage it and others fail. Why Imperial Japan was a brilliant moderniser, while both Imperial China and the Western-style Chinese Republic that existed from 1912 to 1949 achieved very little. Or why China under Mao grew at rates comparable to Western Europe’s ‘Economic Miracle’ in the same period, while China under Deng and his heirs has outgrown every other large economy.

The best part of the book is detailed evidence that the 1940s to 1970s were a period of relative equality. And that we have since seen a return to standard rates of inequality. But he is also keen to explain this in terms of economic abstractions rather than politics. He does say that the likely explanation for the change is that “these top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without clear relation to productivity”.[B] But is evasive on the key question of why they have such power. They have always had the power to set their own wages, in practice if not always in principle. But they used to be much more modest in what they took as “top people”. I’d see it as a widespread fear among the elite of both Global Leninism and a possible revival of Fascism. Piketty leaves it unexplained.

His merit is taking notice of some aspects of history. He says “to put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for theoretical and often highly ideological speculation, at the expense of historical research and collaboration with other social sciences”.[C] But he doesn’t do much of this himself, just research into incomes and not political structures. The continuous destruction of independent small property is barely mentioned, for instance. Marx insisted that this would continue indefinitely within capitalist systems, and has been broadly correct. Piketty doesn’t seem to want to know.

The growth of state power is also something he gets evasive about. In Chapter Four, he details the decline in agriculture, but tries to magic away the huge and growing state sector by comparing public assets to public debt. These do seem to balance, but this does not mean that the state has a small net impact. Instead the 20th century saw a growing role for the state, and the New Right have failed to reverse this.

Piketty wants to explain it all by differences between growth rates and interest rates. By an amazing coincidence, economic forces favouring equality just happened to come into operation when there was a strong political will to enforce inequality. By an even more amazing coincidence, economic forces favouring inequality just happened to come into operation when that strong political will to enforce inequality was missing. And when most of the left was gripped by an irrational fear of “corporatism”.

Piketty tries to minimise the importance of what he calls the “Trente Glorieuses”, presumably the French term for the period from the late 1940s to late 1970s. In his view, “the thirty postwar years were the exceptional period, quite simply because Europe had fallen far behind the United States over the period 1914–1945 but rapidly caught up again during the Trente Glorieuses. Once this catch-up was complete, Europe and the United States both stood at the global technological frontier and began to grow at the same relatively slow pace, characteristic of economics at the frontier…

“In North America, there is no nostalgia for the postwar period, quite simply because the Trente Glorieuses never existed there: per capita output grew at roughly the same rate of 1.5-2 percent per year throughout the period 1820-2012”.[D]

This is doubly wrong. First, there was and is a lot of nostalgia for the 1950s in the USA. Ronald Reagan got elected on it. Second, Piketty’s own graph shows the USA peaking in the period 1950-1970, and still growing at more than 2% per annum in the period 1970-1990.[E]

It was also not a question of backward Europe catching up with the sophisticated USA. The USA had a vast integrated market and a pattern of creating new industries from scratch, which meant that the most modern methods could be used. It had a culture that put money ahead of social values, which was only very slowly imposed on Europe and is still resisted. And European science and technology were mostly ahead, with a lot of the best US science coming from refugees from Europe, or the children of immigrants. As indeed were quite a lot of the most successful business people and famous entertainers.

It would be an interesting exercise to try to work out what the USA would have been like, had its 1850s political crisis worked out differently. There was a strong “Know-Nothing” movement that wanted to stop all future immigration, and maybe drive out those immigrants they had. It might have happened that they would have stopped further immigration while somehow resolving the slavery issue without a war. My rough estimate is that a USA without everyone who either arrived after 1860 or had at least one parent or two grandparents who arrived after 1860 would have been a USA without most of its science and a lot of its culture, including 90% of what became the Hollywood Film Industry. Something useful a university Sociology Department could do.

Europe certainly suffered damage due to the two World Wars. Some sort of bounce-back would have been expected. But France, Belgium, Italy, Germany and the United Kingdom had all exceeded their 1939 GDP by 1955, most of them achieving this several years before that.[F] The continued fast growth of Continental Europe after 1955 cannot be explained away by catch-up or recovery: it makes sense only as a benefit from the Mixed Economy and associated social policies.

During the crisis of the 1970s, there should have been a body of centre-left thought defending the ‘Miracle of the Mixed Economy’, insisting that the system created in the West after World War Two had been enormously successful. This failed to happen. The people within the Labour Party who should have done it instead hived off as the Social-Democrats and allowed themselves to be swallowed by the corrupt old Liberal Party, which currently looks to be heading for extinction after its miserable showing in its coalition with the Tories. But the Social-Democrats never had any clear idea of who they were or why they existed. They had just a vague idea of what they liked and regretted its passing, but could not explain why nor co-opt those elements of radicalism they could have co-existed with. Attributing to them the slogan ‘Keep Politics Out of Politics’ wasn’t very far from the truth.

Meanwhile Ronald Reagan floated the slogan of ‘The Miracle of the Market’, pretending that the successes of the Mixed Economy were down to pure capitalism and that everything would run better if people rid themselves of the idea that the state could solve anything. This became the dominant ideology, and is still mostly grumbled about rather than scorned as total nonsense.

The best of Piketty is his mass of detail about how the richest 1% have gained in both income and wealth. He reckons that World GDP grew by an average of 3.3% between 1987 and 2013, but average wealth per adult grew only 2.1%, while average income per adult grew only 1.4%. The big gains – over 6% per year – were made by the richest 1%.[G]

He also notes a “top 9%” immediately below the richest 1%, who have done less well but still done very nicely. “If we consider the total growth of the US economy in the thirty years prior to the crisis, that is, from 1977 to 2007, we find that the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year.”[H]

“Among the members of these upper income groups are US academic economists, many of whom believe that the economy of the United States is working fairly well, and, in particular, that it rewards talent and merit accurately and precisely. This is a very comprehensible human reaction. But the truth is that the social groups above them did even better: of the 15 additional points of national income going to the top decile [richest 10%], around 11 points, or nearly three- quarters of the total, went to ‘the 1 percent’ (those making more than $352,000 a year in 2010), of which roughly half went to ‘the 0.1 percent’ (those making more than $1.5 million a year.”[I]

One interesting extra – he notes the increase in inequality in China after Mao, but reckons it is still quite low by global standards. “Chinese inequality increased very rapidly following the liberalization of the economy in the 1980s, but according to my estimates, the upper centile’s share in 2000-2010 was 10-11 percent, less than in India or Indonesia… and much lower than in South Africa or Argentina.”[J] (“Upper centile” is another term for the richest 1%.) He also doubts that China is truly capitalist: “Are China’s millionaires and billionaires, whose names are increasingly prevalent in global wealth rankings, truly the owners of their wealth? Can they, for example, take their money out of China if they wish?” [K]

He correctly notes that most income differences are based on birth rather than merit, maybe more so in the modern USA than in Europe. “Inherited wealth played a smaller role in the United States than in Europe, and US wealth was for a long time less concentrated, at least up to World War I. Throughout most of the twentieth century, however, and still today, the available data suggests that social mobility has been and remains lower in the United States than in Europe.

“One possible explanation for this is the fact that access to the most elite US universities requires the payment of extremely high tuition fees. Furthermore, these fees rose sharply in the period 1990-2010, following fairly closely the increase in top US incomes…

“The average income of the parents of Harvard students is currently about $450,000, which corresponds to the average income of the top 2 percent of the US income hierarchy.”[L]

Yet his conclusions are modest. He wants something done about tax havens, but perhaps not much. “To be clear, the goal is not to impose a general embargo on tax havens or to engage in an endless trade war with Switzerland or Luxembourg. Protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest, provided that some countries do not take advantage of their neighbours by siphoning off their tax base.”[M]

A serious trade war against Switzerland or Luxembourg would not be endless: they would capitulate pretty quickly if the only issue was helping foreigners dodge taxes. Switzerland in particular is very nicely run for the Swiss and this should not be interfered with. But they should be stopped from being a global laundry for dirty money, some of it criminal.

As for “free trade”, it tends to favour the rich. Britain and the USA did their initial industrialisation behind high trade barriers and only opened up after they were strong. China industrialised under total state control and with US obstruction of trade – the USA asserted that the Beijing government was illegitimate and the Kuomintang exiles on Taiwan were the real China up until the early 1970s, keeping the real China out of the United Nations until then. And China still has a lot of protectionism, including very strong controls of conversions of currency. China has arrived by its own methods at the world’s very best version of a Mixed Economy. It is well placed to become more socialist as it becomes more prosperous.

Markets are about power, not freedom. Or freedom only in the sense that the biggest bully around can do much as they please. The stronger always have a big advantage. They naturally resent it when someone even stronger steps in, either to take unfair advantage or to balance power in favour of the weak.

Speaking of “free markets” is a convention: there are always regulations. People who find the regulations suit them deny this is a limit on freedom. The actuality we have seen since the 1980s is that those with market power have boosted their incomes way beyond their actual contribution to the wealth of the society.

Pro-market economists have a belief in “Immaculate Mammonism”, that whatever people get in open economic competition is a fair return for their work and talents. Which if taken literally would suggest that top bosses in the 1950s and 1960s were 30 times better than the average worker, while their modern equivalents are at least nine times better than their equivalents from the 1950s and 1960s. Is this plausible?

Generally the New Right avoid this awkward matter and look instead at cases of shirking and poor work, which undoubtedly do exist. But does not explain why ordinary hard-working people get much less than their bosses. (In the USA, the working mainstream have made no progress since the 1970s, yet still vote for more of the same.)

Piketty is useful in exposing details of the inequality. But that is really all he is useful for.

[A]              Capital in the Twenty-First Century, by Thomas Piketty. Translated by Arthur Goldhammer. Harvard University Press 2014. Page 21.

[B]              Ibid, page 24.

[C]              Ibid, page 32

[D]              Ibid, pages 96-97.

[E]               Ibid, figure 2.3

[F]               See The World Economy: Historical Statistics by Angus Maddison for the exact figures. It lumps West Germany and East Germany for the period they were separate.

[G]              Capital in the Twenty-First Century, page 435, Table 12.1.

[H]              Ibid, page 297

[I]               Ibid, page 326

[J]               Ibid, page 327

[K]              Ibid, page 535

[L]               Ibid, pages 484-5

[M]              Ibid, page 523.

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