This is the first in a two-part review by Fred Thompson of Thomas Piketty's book: Capital in the 21st Century. The second part will be posted tomorrow.
Thomas Piketty’s Capital in the 21st Century is a marvel without
precedent: serious economic scholarship – a dynamic model of economic growth
and the distribution of wealth – that is also a runaway best seller.
Piketty’s basic conclusion is that capitalism
is biased in favor of capitalists – no big surprise there. His model consists
of an identity, two mechanisms, and a mathematical inequality (the same as the
modern Darwinian synthesis, probably our best known dynamic model). The
identity links the stock of capital (K) or wealth to the flow of income (Y).
The stock of capital includes all forms of explicit or implicit return-bearing
assets: housing, land, machinery, financial capital in the form of cash, bonds
and shares, intellectual property, etc. The identity is expressed by the ratio
between K and Y, or β. The share of capital incomes in total national income
(α) is equal to the rate of return, in real terms, on capital (r) multiplied by
β.
The mathematical inequality links the rate of
return (r) and the rate of growth of the economy (g) to income inequality – if
r>g, which Piketty argues is the natural state of things, then α increases
by definition, driving up the share of capital (wealth) in national income. As
Nobel Laureate Robert M. Solow observes: “This is
Piketty’s main point, and his new and powerful contribution to an old topic: as
long as the rate of return exceeds the rate of growth, the income and wealth of
the rich will grow faster than the typical income from work.” Consequently,
Piketty concludes that in the long run the economic inequality that matters
won't be the gap between people who earn high salaries and those who earn low
ones, it will be the gap between people who inherit large sums of money and
those who don't.
Over the long span of history surveyed by
Piketty, the only substantial period in which g>r was between 1910 and 1970
(in the U.S., 1933-1973, the period Goldin and Katz call the “Great
Compression”). Piketty ascribes this to the destruction and high taxation
caused by the two world wars and the Great Depression. He is dismissive of
deliberate policies: “Neither the economic liberalization that began around
1980 nor the state intervention that began in 1945 deserves much praise or
blame. The best one can say is that they did no harm.” Consequently, he is
indifferent to most of the literature on the political economy of this era,
with its attention to regimes of (capital) accumulation and modes of regulation
(the institutions, policies, and practices governing the operation of
accumulation regimes). Moreover, the French case matches up with his
formulation quite nicely. Capital-income ratios held steady at about seven from
1700 to 1910, fell sharply from 1910 to 1950, reaching a low of a bit less than
3, then began to climb, by 2010 to about 6. Furthermore, Piketty provides
pretty compelling evidence that in France increased wealth led increased income
inequality.
Certainly, recovery from war and depression, as
well as deep structural factors related to demographics and technology, help
explain the burst of rapid economic growth following World War II.
Nevertheless, it is a mistake to account for the mid-20th Century period of shared growth exclusively
in terms of large, impersonal economic forces. Politics and institutions also
mattered. Indeed, I would argue that the political and economic arrangements of
the postwar era were qualitatively different from those that preceded and
followed it and that this distinctive set of policies profoundly influenced the
pace and content of economic development and the subsequent distribution of
income, consumption, and wealth.
This view of the postwar era assigns a key role
to organized labor, which was then at the apex of its power, not only in the
social-democratic states of Northern Europe, but throughout the industrialized
West. Organized labor was politically decisive in its support the welfare
state, Keynesian full-employment policies, high inheritance and income tax
rates, heavy reliance on payroll taxes, and capital and foreign exchange
controls. The upshot of these policies included a vast expansion of mass
production and consumption, widely-shared wage gains and “profitless growth” – what
Michel Aglietta calls the Fordist regime of capitalist accumulation in A Theory of Capitalist
Regulation: The US Experience (2000).
Mass production thrives on economies of
scale. Consequently, as Robin Marris explained in The Economic Theory of Managerial Capitalism (1964), under mass
production, most output is supplied by a smallish number of large enterprises,
usually publicly held corporations, where managerial control is separate from
ownership. Marris argued that in the immediate postwar era managers exercised considerable
discretion, which they used primarily to grow their enterprises rather than to
maximize shareholder wealth, since they generally got higher salaries and
greater status from running bigger businesses – hence, profitless growth. He
also argued that this was socially desirable: growth-seeking firms make
countries grow faster (g up, r down).
Obviously the postwar boom couldn’t go on
indefinitely. Declining population growth, satisfaction of long stifled wants,
and catch-up on the part of Europe’s capitalist economies and Japan to the
technological frontier would have probably curbed economic growth in any case.
The problem of integrating baby boomers into a workforce, which was already
beginning to shed manufacturing jobs, further stressed the Fordist system of
accumulation, leading to wholesale changes in its characteristic modes of
regulation: fiscal policy was subordinated to monetary policy or, perhaps more
accurately full employment subordinated to price stability, inheritance and
income tax rates slashed, capital controls eliminated, and exchange rates
floated.
Arguably, the demise of the Fordist
accumulation regime followed, in part, from its success. Increasing mechanization
and computerized production hollowed out the blue-collar workforce in the
industrialized West and led, thereby, to the marasmus of labor movements. Mass
production shifted to the developing world where wages are low and
environmental quality standards lax. Both developments reduced political
support for policies aimed at broad-based gain sharing. Moreover, activist
investors, especially in the English speaking world, increasingly found ways to
use the market for corporate control to discipline hired managers and stock
options and bonuses to align managerial interests more closely with theirs –
away from growth and toward maximization of shareholder wealth. As Solow put
it, in his respectful review of Piketty’s book: “It is pretty clear that the
class of super-managers belongs socially and politically with the rentiers, not
with the larger body of salaried and independent professionals and middle
managers.”[1]
[1]
One ought not push this conclusion very far, however. At any point in time
there are only 500 Fortune 500 CEOs
in the U.S., 0.5 percent of the 0.1 percent.
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