Piketty’s miss­ing ren­tiers

Most reviews of Thomas Piketty’s book Cap­i­tal in the Twenty-First Cen­tury have al­ready been writ­ten since its startling rise to the top of best­seller lists in April. But I thought it wise to read the vol­ume in its en­tirety be­fore of­fer­ing my thoughts. It

Financial Mirror (Cyprus) - - FRONT PAGE - By Jef­frey Frankel

To be fair, whereas very lit­tle of what Marx wrote was based on care­fully col­lected eco­nomic statis­tics, and much of it was bizarre, much of what Piketty writes is based on care­fully col­lected eco­nomic statis­tics, and very lit­tle of it is bizarre.

In the United States, in­come in­equal­ity by most mea­sures has been ris­ing since 1981, and by 2007 had ap­prox­i­mately re-at­tained its early-twen­ti­eth-cen­tury peak. The same is true in the United King­dom, Canada, and Aus­tralia. In th­ese coun­tries, in­come in­equal­ity de­clined sharply from 1914 to 1950, as it did in France, Ger­many, Ja­pan, and Swe­den. But in the lat­ter group, the in­come dis­tri­bu­tion is now far more egal­i­tar­ian than it was at peak in­equal­ity a hun­dred years ago.

Econ­o­mists, at least in the US, have fo­cused on sev­eral causes of the in­crease in in­equal­ity. First, there is the wage dif­fer­ence be­tween “skilled” and “un­skilled” work­ers, de­fined ac­cord­ing to their ed­u­ca­tional at­tain­ment. Here, higher wages are of­ten agreed to re­flect the eco­nomic value of skills ap­pro­pri­ate to an in­creas­ingly tech­no­log­i­cal econ­omy, and the ques­tion is how to im­prove work­ers’ skills.

Sec­ond, there is the high com­pen­sa­tion of cor­po­rate ex­ec­u­tives and peo­ple in fi­nance. The fi­nan­cial cri­sis of 2008 left many ob­servers un­der­stand­ably doubt­ful of claims that this com­pen­sa­tion is a re­turn to so­cially valu­able ac­tiv­i­ties.

Third, there is the win­ner-take-all character of many pro­fes­sions. In a so­ci­ety that can iden­tify the best den­tist in town or the best foot­ball player in the world, rel­a­tively small dif­fer­ences in abil­i­ties win far big­ger dif­fer­ences in in­come than they used to. Fi­nally, there is “as­sor­ta­tive mat­ing”: highly ac­com­plished pro­fes­sional men now marry highly ac­com­plished pro­fes­sional women.

Piketty fo­cuses on none of th­ese sources of in­equal­ity, all of which are re­lated to “earned in­come” (wages and salaries). Rather, his cen­tral con­cern is what he re­gards as a twenty-first-cen­tury trend to­ward in­equal­ity of wealth, brought about by the steady ac­cu­mu­la­tion of sav­ings among the bet­ter off, which are then passed down, with ac­cu­mu­lated in­ter­est, from one gen­er­a­tion to the next.

It is true that cap­i­tal’s share of in­come (in­ter­est, div­i­dends, and cap­i­tal gains) rose grad­u­ally in ma­jor rich coun­tries dur­ing the pe­riod 1975-2007, while labour’s share (wages and salaries) fell, a trend that would support Piketty’s hy­poth­e­sis if it con­tin­ued. Piketty de­serves credit for point­ing out the lack of a foun­da­tion sup­port­ing as­ser­tions that cap­i­tal’s share will nec­es­sar­ily re­vert to a long-run con­stant.

But in­ter­est rates have been at all-time lows in re­cent years – vir­tu­ally zero. And the claim that in the long run the in­ter­est rate must be sub­stan­tially greater than the eco­nomic growth rate is ab­so­lutely cen­tral to Piketty’s book.

That said, Piketty’s vi­sion is fo­cused squarely on the truly long run: cen­tury-long trends, not decade-long fluc­tu­a­tions. For ex­am­ple, the re­cent global fi­nan­cial cri­sis runs counter to his ul­tra-long-run hy­poth­e­sis: his statis­tics clearly show a dis­crete fall in in­equal­ity and in cap­i­tal’s share in 2008-09, be­cause as­set prices plum­meted. But, from the per­spec­tive of his anal­y­sis, this is a his­tor­i­cal blip.

Three cen­tury-long move­ments con­sti­tute the essence of the book: a rise in in­equal­ity in the nine­teenth cen­tury, a fall in in­equal­ity in the twen­ti­eth cen­tury, and a pre­dicted re­turn to his­tor­i­cally high in­equal­ity in the twenty-first cen­tury. Piketty ar­gues con­vinc­ingly – not just with statis­tics, but also with ref­er­ences to Honoré de Balzac and Jane Austen – that the first in­crease in in­equal­ity in France and Bri­tain, mostly from 1800 to 1860, took the form of cap­i­tal ac­cu­mu­la­tion. A small group of rich ren­tiers lived off their in­ter­est; the rest had to work for a liv­ing.

The most dra­matic move­ment in Piketty’s graphs is the sec­ond one, the sharp fall in in­equal­ity in the pe­riod 1914-1950. This is at­trib­ut­able to the de­struc­tion of cap­i­tal – owing to two world wars, the 1929 stock­mar­ket crash, and in­fla­tion – as well as an his­toric move to­ward big gov­ern­ment and pro­gres­sive tax­a­tion.

What is sur­pris­ingly



Piketty’s data is ev­i­dence that the third move­ment – the re­newed up­swing in in­equal­ity that started around 1980 – is due to a shift from labour back to cap­i­tal. The share of cap­i­tal in­come in the UK and France re­mains far lower than it was in 1860. The in­creases in var­i­ous mea­sures of in­equal­ity since the 1970s have had more to do with shifts within labour’s share (be­tween dif­fer­ent cat­e­gories of earned in­come) than with wealth. To­day’s rich work, un­like those in the Balzac-Austen era.

Thus, Piketty’s hy­poth­e­sis is more a pre­dic­tion of the fu­ture than an ex­pla­na­tion for the past or an anal­y­sis of a re­cent trend. It is a pre­dic­tion that in­ter­est rates will rise sub­stan­tially above the growth rate, cap­i­tal will ac­cu­mu­late, and the rich will get richer through in­her­i­tance and cap­i­tal in­come, rather than through out­landish salaries and stock op­tions. For all of Piketty’s im­pres­sive his­tor­i­cal data, his pre­dic­tion is based mainly on a pri­ori rea­son­ing: in­come dis­tri­bu­tion must tend to in­equal­ity be­cause sav­ings ac­cu­mu­late.

But one could just as eas­ily find a pri­ori grounds for pre­dict­ing that coun­ter­vail­ing forces will emerge if the gap be­tween rich and poor con­tin­ues to grow. Democ­racy is one such force. After all, the rise of pro­gres­sive tax­a­tion in the twen­ti­eth cen­tury fol­lowed the ex­cesses of the Belle Epoque.

A few years ago, the US re­duced fed­eral taxes on cap­i­tal in­come and phased out the es­tate tax, ben­e­fit­ing only the up­per 1% – moves widely viewed as demon­strat­ing the po­lit­i­cal power of the rich. But imag­ine that in the fu­ture we lived in a Piketty world, where in­her­i­tance and un­earned in­come fu­eled strato­spheric in­come in­equal­ity. Could a majority of the 99% still be per­suaded to vote against their self-in­ter­est?

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