A peep into a powerful treatise that people in the free market movement need to ponder over
THE LAST WORD | ANDREW M. MWENDA | Few books have gripped me as did Thomas Piketty’s economics blockbuster, Capital in the Twenty First Century. Published in 2015, I took long to read it in large part because everyone was praising it; and I am always suspicious of popular things. But also the first time I opened it, its pages were littered with many equations that turned me off, mistaking the book to be filled with econometric abstractions that mean little in reality. But finally, the devil got into my head and I sat to reading it last year and been re-reading it (actually studying it) these last few weeks.
This is not a review of the book but an attempt to highlight its core message. It is a book that stands most economics teaching on its head. This is largely because Piketty, himself a professor of economics, is very critical of modern economics as is taught in schools. He thinks that in an attempt to construct economics as a science, economists have made economics mathematical. This has divorced it from other subjects like history, politics, sociology and anthropology that influence individual decision-making and public policy.
The most striking thing about it is the depth and extent of his research on income across time and geographic space – largely focusing on the USA and Western Europe. The book therefore makes little reference to other authors because Piketty relies largely (but not entirely) on primary research. Then there is the sweep of history, that unveils many assumptions about how Western societies developed. The breadth of perspective is breathtaking and the analytical depth impressive in terms of its intellectual neatness.
The central message of the book is that capitalism inherently creates income and wealth inequalities – but this can only be observed over the long term. He argues that this is largely because the rate of return on capital tends to grow at a faster rate than the rate of growth of the economy. This process tends to concentrate incomes and wealth to the top, thereby accentuating inequality over time. Now, some economists dispute this; but none of his critics has produced counter evidence. All the criticism I have read relies on theoretical abstractions, not history. But that is debate for another day.
Piketty’s point is that in the absence of major shocks – such as the two world wars of the 20th century, capital will keep growing and concentrating in a few hands. He shows this process in Britain and France from 1800 to 1914 (on the eve of the first world war), when the wealthiest 10% owned almost 90% of all the wealth in these countries. The shocks of the first and second world wars destroyed capital in massive ways and thereby created the first trend of equalising wealth and income. But since the end of the World War 11, there has not been any major war in the rich countries. So the process of concentration has been building up again.
Piketty shows that the USA has the highest income inequality of all the rich countries. One of the main reasons is that while the U.S. fought in both world wars, it did not suffer destruction of its capital because the wars were never fought on her soil. So it avoided this equalising opportunity. Yet USA used to be more egalitarian than Europe. Piketty argues that this was because of land abundance. Migrants had easy access to free land (capital or wealth) as it expanded westward. As expansion ended, this source of capital/wealth was exhausted, so the process of wealth and income concentration began.
On this basis, Piketty proceeds to expose a lot of myths we hold about modern liberal democratic capitalism. There is a belief that liberal democracies are built on economic and professional meritocracy. The institutions that ensure this are the market and education; the agents are entrepreneurs and human skill. Piketty shows that today, like in 1910, most wealth in the world, in some cases up to 90%, is actually inherited, not earned. And it is those with high incomes and wealth that send their children to the best schools and universities. This privilege reproduces itself thereby accentuating inequality.
For Piketty, the wealth and incomes of pioneering entrepreneurs like Bill Gates and Jeff Bezos, Steve Jobs and Mark Zukerberg are actually small compared to the wealth that is inherited. Secondly, he argues, even innovative entrepreneurs like Gates stopped working at the companies they founded long ago, yet the rate of growth in their capital has increased in their absence. This means that they are not earning because of present effort or innovation but because of past contributions. He calls this kind of income rent. So today we have few entrepreneurs and many rentiers. He calls this “patrimonial capitalism” and its agents, a “patrimonial middle class.”
Why did modern society think liberal democratic capitalism was egalitarian, leading to the reward of merit as opposed to inherited advantages? Piketty argues that WW2 destroyed capital in Western Europe. Most people lost their capital and their children had little or nothing to inherit. Economic reconstruction led to unusually high rates of growth between 1945 and 1980. Rapid growth tends to reduce income and wealth inequalities.
Piketty’s concern is that concentration of income has political implications. The rich may eventually own the countries they live in or even “buy” others that need their capital. They may use their money to control politics and undermine democratic aspirations. They will increase their influence on parliaments, control the mass media and universities so that legislation and the production of knowledge reflect their particular interests. And their interests may conflict with the social good. This, Piketty argues, may make reform impossible; thereby making revolution inevitable.
What is his solution? Piketty calls for a tax on huge sums of capital and extremely high incomes. He believes this tax can only make sense if it is internationally organised, for this is the only way to stop the rich from hiding their money in offshore accounts. He even predicts that it is possible that without such a policy (heavy taxation of extremely high incomes, huge reserves of capital and a huge inheritance tax and tax on gifts, extreme concentration of income in a few hands may lead to political agitation for expropriation.
Even though he avoids mentioning Karl Marx, and I think this was a smart political as opposed to academic decision, Piketty makes similar warning as the father of communism. Perhaps he feared that quoting Marx a lot would pollute the air and obscure his message. His data, his analysis and his predictions need to be taken seriously.
