On the path to in­equal­ity

The Weekend Australian - Review - - Books - Christo­pher Croke

Cap­i­tal in the Twenty-First Century By Thomas Piketty Belk­nap Press, 696pp, $59.95 (HB)

WHAT do we re­ally know about how wealth and in­come have evolved since the 18th century and what lessons can we take from that for cen­turies to come? For Thomas Piketty in Cap­i­tal in the Twenty-First Century, one les­son is clear: in­equal­ity is self-gen­er­at­ing within a cap­i­tal­ist sys­tem.

Cap­i­tal, a mag­nif­i­cent 650-page work, first ap­peared in France late last year and al­ready looms, in Paul Krug­man’s eyes, as ‘‘the most im­por­tant eco­nom­ics book of the year — and maybe of the decade’’. It is im­por­tant be­cause in­equal­ity is emerg­ing as what Barack Obama re­cently called ‘‘the defin­ing chal­lenge of our time’’.

Piketty, whose work on in­come in­equal­ity helped in­spire the Oc­cupy Wall Street move­ment, is par­tic­u­larly well placed to an­swer these ques­tions. He is a bit of a strange crea­ture in mod­ern eco­nom­ics: as much an eco­nomic his­to­rian and arche­ol­o­gist as a num­ber-crunch­ing the­o­rist.

An aca­demic at one of France’s elite grandes ecoles, Piketty has spent the past 20 years not only seek­ing to come to grips with eco­nomic in­equal­ity but also to make his con­clu­sions di­gestible for pub­lic con­sump­tion.

Af­ter a pe­riod at the top Amer­i­can uni­ver­si­ties in the 1990s, he re­turned to France con­vinced Amer­i­can eco­nom­ics was in­fused with a ‘‘child­ish pas­sion for math­e­mat­ics’’ and was merely a fo­rum ‘‘for purely the­o­ret­i­cal and of­ten highly ide­o­log­i­cal spec­u­la­tion … pre­oc­cu­pied with petty math­e­mat­i­cal prob­lems of in­ter­est only to them­selves’’. In Cap­i­tal, Piketty has surely avoided that.

This is ac­cord­ingly a very French sort of a book. In the mid-20th century, French his­to­ri­ans rev­o­lu­tionised his­tory by seek­ing to show how events and in­sti­tu­tions evolved over the long term. Mem­o­rably de­rided by Clive James as the ‘‘bean-count­ing’’ tra­di­tion of French in- tel­lec­tu­als, the com­mit­ment to iden­ti­fy­ing the en­dur­ing rhythms and pat­terns of his­tory through painstak­ing tit­bits of data was am­bi­tious, worth­while and too of­ten for­got­ten. It is from within this tra­di­tion that Piketty em­barks. He and his col­leagues have dug out and as­sem­bled de­tailed data­bases doc­u­ment­ing pat­terns of eco­nomic growth and dis­tri­bu­tions of wealth and in­come in more than 26 coun­tries.

Piketty’s the­sis is straight­for­ward. Armed with 200 years of taxation re­ceipts and other eco­nomic in­dices from de­vel­oped coun­tries (mainly France, Bri­tain and the US) he shows there is one eco­nomic law that ap­proaches a con­stant: the rate of re­turn on cap­i­tal (r) is usu­ally higher than the rate of eco­nomic growth (g). Through time, the re­turn on cap­i­tal (de­fined to mean ba­si­cally any as­set) is about 5 per cent and growth av­er­ages 1 per cent to 2 per cent. This means in the long run people who have cap­i­tal are des­tined to get richer faster than the econ­omy grows. In­equal­ity is in­evitable.

Why is this ap­par­ently sim­ple in­tu­ition such a novel con­clu­sion? For some time the eco­nomic or­tho­doxy has been that as economies grow, in­equal­ity shrinks.

Si­mon Kuznets, the No­bel prize-win­ning econ­o­mist more fa­mous for his work on mea­sur­ing gross do­mes­tic prod­uct, the­o­rised that most economies would fol­low what be­came known as the Kuznets curve: a roughly bell curve-shaped pat­tern that re­flected in­equal­ity ris­ing as people left farms to work in fac­to­ries, then fall­ing as they de­manded gov­ern­ments re­dis­tribute the ben­e­fits of in­dus­tri­al­i­sa­tion.

Writ­ing in the mid-1950s, Kuznets cor­rectly noted in­equal­ity had se­ri­ously de­creased in first half of the 20th century. But his mis­take was to think this was due to in­dus­tri­al­i­sa­tion. In fact, world wars and the ac­cu­mu­lated bud­getary and po­lit­i­cal shocks of the in­ter­war pe­riod saw low sav­ings rates, col­lapses in for­eign cap­i­tal and fi­nan­cial chaos.

At the same time, gov­ern­ments adopted re­dis­tribu­tive poli­cies that served to com­press in­come and wealth dis­tri­bu­tions. The French govern­ment launched a one-off levy on as­sets in 1945 to fund re­con­struc­tion. In­come tax rates in the US and Bri­tain went as high as 80 per cent on the high­est in­comes. For­tunes were wiped out ac­ci­den­tally and de­lib­er­ately.

But by the late 70s things started to change. Roar­ing eco­nomic growth ground to a halt and the con­sen­sus on fis­cal re­dis­tri­bu­tions be­gan to frac­ture. The sub­se­quent di­ver­gence in in­comes and wealth is marked. To­day most Western coun­tries look more like they did in 1910 than 1960.

There is no clearer in­di­ca­tion of this than the shift in Amer­i­can wages in the past 30 years. The top 0.1 per cent of house­holds have in­creased their share of na­tional in­come from 2 per cent in 1980 to al­most 10 per cent to­day. Three-quar­ters of the rise of the top 10 per cent of in­comes comes from a rise in the in­comes of the top 1 per cent. By one es­ti­mate, 58c of ev­ery dol­lar of real in­come growth gen­er­ated be­tween 1976 and 2007 went to the top 1 per cent of house­holds.

This skewed dis­tri­bu­tion of in­come from labour is, Piketty con­tends, prob­a­bly higher than any­where else in hu­man his­tory. Even in colo­nial In­dia or apartheid-era South Africa, top earn­ers earned less rel­a­tive to the low­est earn­ers than do Amer­i­cans to­day.

What is be­hind it? Piketty’s pri­mary cul­prit is the ‘‘rise of the su­per­man­ager’’: the in­creased re­mu­ner­a­tion flow­ing to top ex­ec­u­tives and fi­nanciers who dis­pro­por­tion­ately com­prise the top 1 per cent of in­comes (there are many more Jamie Di­mons than JK Rowlings). And he is scep­ti­cal of any ar­gu­ments that they de­serve it. Piketty’s ear­lier work has shown the most gen­er­ous pay in­creases usu­ally track ex­ter­nal mar­ket con­di­tions rather than in­ter­nal com­pany per­for­mance. Rather than be­ing a re­flec­tion of the mar­ginal pro­duc­tiv­ity of a new hy­per-mer­i­to­cratic man­age­rial class, higher pay is due to ex­ec­u­tives’ greater per­sonal in­cen­tives to seek raises once in­come tax rates were re­laxed.

In France, the trend has been more muted but still real. In the first decade of this century, the share of wages go­ing to the top 1 per cent in­creased by al­most 30 per cent, a star­tling rise in an en­vi­ron­ment of neg­li­gi­ble growth.

Nor has Aus­tralia es­caped these shifts. The Pro­duc­tiv­ity Com­mis­sion re­ported in 2009 that the chief ex­ec­u­tives of ASX 100 com­pa­nies had seen their an­nual com­pen­sa­tion rise from an aver­age of $1 mil­lion in 1993 (rep­re­sent­ing 17 times aver­age earn­ings) to $3m in 2009 (42 times aver­age earn­ings). The chief ex­ec­u­tive of BHP in the late 70s earned roughly six or seven times the aver­age Aus­tralian earn­ings but to­day would earn closer to 250 times.

In­equal­i­ties of in­come are only part of Piketty’s story about ris­ing in­equal­ity. Wealth mat-

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