Capital In The Twenty-First Century
by Thomas Piketty
(Harvard University Press, £29.95)
CAPITAL In The Twenty-First Century by the French economist Thomas Piketty has recently received a great deal of attention, not only in academic publications but in newspapers too.
Those reviews, generally positive, contain some criticisms and the same applies here.
Of the book’s many strengths, two stand out. The first is its methodologically concise, but not overly technical, exposition of the huge growth in income and wealth inequality in recent decades.
Piketty provides a wealth of data not only as regards the uneven dispersion of wealth across different sections of the population but also the massive and obscene degree of concentration of wealth in the hands of a vanishingly small number of people.
To take just one example Piketty provides, the wealth held by the world’s richest 225 people rose from an average of $1.5 billion in 1987 to one of $15bn in 2013 — a sum greater than the annual output of most countries.
The second major strength of the book is its policy conclusion that governments should impose stricter taxes on wealth to secure its more equitable distribution.
Mindful of criticisms that such a proposal would be extremely difficult to implement, given the fierce resistance it is likely encounter, Piketty goes out of his way to emphasise the point that governments should co-ordinate their wealth tax policies rather than try to implement them in a piecemeal, go it alone, manner.
Of the book’s weaknesses, two stand out. One is that it contains no detailed explanation of the economic, as opposed to social or moral, impact of global wealth concentration.
This omission is serious because it makes even more daunting the already difficult task of persuading governments to adopt the kind of co-ordinated wealth taxes that Piketty so correctly calls for.
An easy way to rectify this omission is to show how the world’s super-rich have been instrumental in causing the recent financial crisis by virtue of the downward pressure on US bond yields they helped to exert, a development which in turn led to the mass creation of the US high-yield toxic securities that were at the epicentre of the crisis.
The other major weakness of Piketty’s work is its take on the central driving force behind the growth of income and wealth inequality in the current era.
While identifying several important enabling factors, such as the marked shift towards neoliberal economic policies on the part of the leading Western governments, Piketty argues that the main cause of rising inequality boils down to the fact that the rate of return on capital currently exceeds the rate of growth of output.
Piketty is certainly right to point to the close statistical correlation between historical trends in inequality on the one hand and the historical trends in economic growth on the other.
But correlations in themselves tell us nothing about the order of causality. Piketty has the order running from growth to inequality but any Marxist economist would have the order running in the reverse direction, from inequality to growth.
This difference centres on the sharply contrasting definitions of capital.
For Piketty, capital comprises all non-labour assets. Virtually any individual owning just about any income generating asset, whether it be non-financial ones such as real estate or machinery or financial assets such as equities or bonds, is classified as a capitalist.
But for Marxists, capital is a distinct class category — capitalists are those who deploy labour power together with the means of production to generate profit.
It is only after a surplus has been generated through the exploitation of labour power that there is then a redistribution of this surplus to other sections of the non-wage earning population.
It is this crucial distinction between the production of a surplus and its distribution, which Piketty does not make, that explains why Marxists see the rate of exploitation as the key driver of inequality, with the rate of growth being the key transmission route linking the two.
It is the fact that workers in the aggregate are paid far less than what they produce that explains the contradiction between the capitalists’ ability to extract massive profits on the one hand and their inability to fully realise these profits on the other.
Unable to plough all of these profits back into investments for productive purposes — due to the tightening spending constraints on wage earners, an inability that then accounts for continuing low growth — capitalists are instead redistributing these profits among themselves.
That has been witnessed by the huge growth of CEO pay and managerial bonuses, also the case with other owners of the claims on the surplus output produced by the world’s working population.
In sum, Piketty’s book has serious weaknesses yet they are not enough to outweigh its considerable strengths and that is why it must be read by anyone seriously concerned about the global human condition in the 21st century.
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