Much Ado About Something
People are pretty impressed with Thomas Piketty, author of Capital in the Twenty-First Century—if we leave aside right-wing pundits and congressmen who have denounced him for Marxism (in fact, his book has nothing in common with the one by Marx except the first word of its title). From the Times’s Nobel-winning economics columnist Paul Krugman (“masterly”) to Left Business Observer’s Doug Henwood, reviewing the book for Bookforum (“enormously important”), pretty much everyone agrees on the great significance of the work.
It’s easy to see why. Piketty’s Capital is a serious, thoughtful book, loaded with facts, and resolutely determined to understand the real world, not model some fancifully reconstructed part of it, like most academic economics. Although its 650 pages may well put it alongside Stephen Hawkings’s A Brief History of Time in the category of Times bestsellers more often acquired than actually read, its prose is far from forbidding and refreshingly free of fancy mathematics. Piketty wants to contribute to a discussion of how the economy could be made more just: the book’s guiding ideal is “the interests of the least well-off.”
Plus its topic—the unequal distribution of wealth and income—long noted by left-leaning scholars, has impressed itself on public consciousness by its vertiginous rise in recent decades, achieving immortal expression in Occupy’s assertion of the interests of the 99% against the 1%. Even the Republicans have had to come up with a plan to reduce inequality—by shifting funds from the poor to “job creators,” of course. On the liberal side, the range of concerns is well represented by the essays included in Divided: The Perils of Our Growing Inequality, edited by D.C. Johnston and featuring introductory matter by no less than Barack Obama and Elizabeth Warren. The hour produced the book: Piketty brings to the discussion the resources of economic science, mixing the neoclassical theory basic to academic economics with massive amounts of data mined from government statistics, primarily in the U.S. and Europe.
Alas, it is precisely economic science that blocks Piketty’s impressive empirical work from accomplishing very much. To go to the heart of the matter, the study of inequality focuses here, as in most studies, on the division of national income between labor and capital. But what are these, exactly? He writes that capital “includes all forms of wealth that individuals (or groups) can own and that can be transferred or traded through the market.” Thus, for Piketty, capital includes stocks and bonds, factories, machinery, and raw materials, and also land, homes, and the furniture in them. It includes post-offices, national parks, and highways, too. Such a definition is so ahistorical—despite Piketty’s ambition to combine economics with history—that it makes no distinction between feudal landed property and industrial business ownership: for Piketty the French Revolution marked not a change in the form of society but the replacement of land by industry and finance as the main forms of capital. Within this framework, since capital has ever been (and so, presumably, must ever be), he is able to calculate the “return on capital” from the days of ancient Rome to the present: for him, forms of social life in which money played almost no role for the vast majority of people are no different from ours, in which the production of goods for sale at a money profit shapes the daily existence of nearly everyone, those who do the producing as well as those who seek to reap the gains.
This historically unspecific conception of capital is a crucial problem, as the “return on capital” is the key to Piketty’s central idea, that capitalism naturally breeds inequality as a result of the fact that the rate of return to capital is higher than the rate of growth of national income as a whole. This “return” is the money that flows to the owner of capital; because he defines capital so broadly, it includes such disparate things as interest on a bond, business profits, the price of stamps, and the rent that a home-owner would have had to pay had she rented instead of owning capital in the form of an apartment. Piketty has not made this up, of course—this is part of how government data-mongers calculate the National Income. The problem lies with the readiness of economic theory to count payments for government services, financial and other business profits, and non-existent, theoretically imagined income as versions of the same thing.
Where does the money constituting the return on capital come from? Piketty gives only the sketchiest account: basically, the return on capital is the amount of money that using your capital allows you to generate over the amount you would get for some thing or service without it. His example is the additional quantity of food a farmer can produce with a tool, compared to the amount producible without it. This measures the “productivity” of the tool, and is the return for the money laid out to buy it. Apart from the weirdly animistic concept of a tool possessing an innate productivity, as if the plow and the farmer produced side by side, each contributing what it can to the effort, it’s far from obvious how to extend this idea to other kinds of “capital,” from money in the bank to houses or public parks. Piketty proceeds cheerfully as though these bizarre ideas are the obvious ones to use in analyzing our social system. But he’s hardly alone in this: a careful analysis of neoclassical economics, such as that conducted by the philosopher Daniel Hausman, shows that “economists possess no good theory of capital or interest” (his term for the return on capital); in fact, “economists do not understand” these phenomena (see Hausman’s fascinating Capital, Profits, and Prices of 1981) in any normal sense of the word “understand.”
The other main source of income, “labor,” is an equally strange concept in Piketty’s hands (and again, his usage is just the default of economic science). Actually, he never defines the category, but it includes such disparate kinds of activity as working in a fast-food joint, playing the stock-market, and running a multinational corporation. How odd this concept is can be seen in the curious problem Piketty encounters in calculating the return on capital: what about “the labor, or at any rate attention, that is required of anyone who wishes to invest?” It takes time to manage a portfolio, and more generally he thinks we must consider “entrepreneurial labor” as earning money according to its productivity. Piketty estimates the “remuneration” this “labor” must earn, subtracting it from profit to calculate the “pure return on capital.” Abiding by this definition, surely the job-seeking of a waiter must be equally productive, and should likewise receive remuneration, along with the networking of junior professors, but Piketty leaves such issues undiscussed.
As these central examples suggest, economics is a science that, despite its mathematical sophistication, tends to take its terms as it finds them in the everyday usage of modern society—never challenging the fundamental structure or categories themselves. Thus Piketty expends many pages on “income inequality,” by which he means primarily the fact that the lion’s share of salary income goes to C.E.O.s, financiers, and other high-level managerial “workers.” He traces the rise of the “labor share” of high incomes, relative to the “capital share,” to the “managerial revolution” (famously analyzed by James Burnham in his 1940 book of that name) that saw family-owned businesses give way as the dominant model to manager-led mega-corporations. But it doesn’t occur to him that the money claimed as “salary” by the C.E.O.s running the new form is the same money that used to appear as “business income” when the firm was run by its founder. Such elementary mistakes allow Piketty to note that the highest “salaries” go together with large “returns to capital” to decisively skew total income to the 1%, and in fact to the 0.1%.
Of course, reality makes itself felt despite the built-in obfuscation of economic concepts; there are moments when Piketty’s data bring clarity to something we generally think of in vaguer terms. Thus his analysis of wealth distribution in the leading capitalist countries over the last century or so shows that for the bottom 50 percent of the population nothing has changed in all this time: Today as before, “the least wealthy half of the population owns virtually nothing; the top decile of the wealth hierarchy own a clear majority of what there is to own (generally more than 60 percent); and the remainder of the population (by construction, the 40 percent in the middle) own from 5 to 35 percent of all wealth”. The big change that occurred in the course of the twentieth century was what Piketty calls the rise of a “patrimonial middle class,” meaning that wealth and income were distributed downward from the top decile to the 40 percent below it in the form of high salaries for technical and administrative labor, which allowed them to buy homes and fancy furniture, and even to invest a little in stocks and bonds. (This is the “professional-managerial class” identified by John and Barbara Ehrenreich, following C. Wright Mills and others, in the 1970s.) This he explains, not unreasonably, was due to three factors: First, the increasingly large role of scientific technology in the economy, which required an expanding group of university-educated workers (in line with neoclassical theory, he takes for granted that such labor is more “productive,” thus “earning” its higher remuneration); second, to the need for an army of lower-level managers and administrators to run the huge and complex modern corporation; and, third, to the expansion of government economic activity provoked by two world wars and the intervening Great Depression, which produced an ever expanding field of government functionaries. The latter required a vast expansion of the tax bite on capital income, which governments around the world, from “conservatives” like Reagan and Thatcher to “socialists” like Mitterand, have succeeded in rolling back steadily since the 1980s, thus restoring the earlier pattern of across-the-board inequality natural to capitalism.
Piketty finds the likelihood that this disparity will continue to grow “terrifying,” apparently because it threatens “democratic societies” and “the values of social justice on which they are based.” It is unclear, to put it mildly, what it means to say that societies whose normal function produces massive levels of inequality in wealth and income—not to mention the power differences inherent in class relationships, which neoclassical theory is unequipped to think about—are based on social justice. At any rate, Piketty concludes, the only way “to regain control of capitalism” is to “bet everything on democracy.” Although he acknowledges that every government covered by his survey is bent on containing the state’s encroachment on the “return to capital” by imposing austerity on the 99%, he can think of no other path to social justice than a “global tax on capital,” to be imposed by those same governments. How the quantity of democracy needed to accomplish this is to be instituted, he does not explain. The immense quantity of information he has collected contains much that is stimulating and inviting of further thought, once allowance is made for the defective terms in which it is organized. It is due to the nature of those terms that Piketty’s mountain of data has given birth only to this well-meaning mouse.