Thomas Piketty’s, Capital in the Twenty-First Century, is a sensation—an economics textbook, translated from the French, that has been on the New York Times best-seller list. It is an important work. If you ignore more than one hundred pages of notes, it is still a long but easy read.
Piketty, a prominent French economist and social scientist, uses rigorous logic and reputable statistics to dismiss the mainstream claim that capitalist markets are based on individual equality, and that great wealth is a fair reward for individual contributions to general wellbeing. He shows that capitalism in its logic and observable practice actually widens disparities between the super rich and everyone else.
The title of the book conjures images of Karl Marx’s Capital. But Piketty says he is not a Marxist; he does not call for the abolition of capitalism. He is a social democrat who explicitly rejects the top-down centralized state ownership of the twentieth century USSR. He looks to a more democratic alternative, arguing that economics, which he prefers to call political economy, should refocus on how best to meet human needs. He looks to cooperatives, community ownership, and more democratic control of workplaces.
The two Capitals have distinct starting points. Marx began with the commodity. He makes the case that exchange value is determined by labor time embodied in commodities, and that the wealth and power of capital come at the expense of labor. Although Marx grumpily dismissed campaigns to abolish market exchange as utopian, his focus on the commodity convinced many of his readers that opposing capitalism meant opposing commodity exchange.
Piketty’s analysis is focused on the distribution of income and wealth. He begins with a logically indisputable proposition: when the rate of return on capital is greater than the rate of economic growth, capital increases its share of total income. He then tests this hypothesis with historical statistics. These show that national growth rates usually range from one to two percent; the return on capital is usually around five percent. Without deliberate public intervention the share of income going to capital must grow.
Piketty’s focus on income distribution is a more direct and convincing critique of capitalism. To be fair, Marx was writing in the 1860s. Credible income statistics did not become available until governments adopted income taxes to pay for World War I. Marx’s critique was necessarily more abstract, more a criticism of capitalist market theory than of capitalist practice.
Piketty, born in 1971, knows that twentieth-century attempts to replace market exchange with top-down state direction required unacceptably heavy and intrusive repression. The USSR’s disadvantages have been well documented, but capitalism is hardly the utopia of equal opportunity its supporters claim. In France, the U.K., and the U.S., the share of total income currently appropriated by capital is thirty percent. The top 0.1 percent of income earners own twenty percent of wealth. The top one percent own 40 percent. The top ten percent own 80 to 90 percent. The bottom 50 percent own a mere five percent of wealth.
Mainstream economics justifies great fortunes in a few hands by claiming these are just rewards for successful work, innovation, and merit. In fact sixty percent of great fortunes are inherited. Piketty shows that capitalism continues to be a system of patrimonial wealth. Even for those few wealthy individuals who are or were innovators, it does not take long before the income earned from their past capital exceeds the income from their work. For countries with reliable statistics, annual income from capital now accounts for thirty percent of total income. Privately-held wealth equals 600 per cent of annual national income.
Nonetheless, governments, electoral parties, and the corporate media insist that the main problem facing economies is public debt. Actually public debt in most countries ranges between thirty and seventy percent of GDP. In the nineteenth and twentieth centuries, the governments of major capitalist countries had debts that reached 200 percent of their GDP. Past governments reduced debt by cutting public spending, by allowing inflation to rise, and by increasing taxes.
Austerity is the most damaging way to reduce public debt. Government cutbacks increase unemployment, reduce working-class income and consumer purchasing power, aggravating market stagnation. Inflation does reduce the real value of debt, but largely at the expense of the investments of middle income pensioners. The most benign way to reduce public debt is to increase taxes on great wealth and on the highest top incomes.
Piketty argues that marginal tax rates on income over $500,000 could reasonably be raised to 80 percent and that progressive inheritance taxes should be instituted or raised. In addition, he calls for an annual tax on all private wealth including real property, stocks, bonds, bank balances, and assets held abroad. This annual wealth tax could be one percent on wealth from $1 to $5million; two percent on wealth over $5 million; and 5 to 10 percent on wealth over $1 billion.
Piketty concedes that such taxes in the present political climate appear utopian and could lead to capital flight, if not coordinated among numerous countries. Still people should begin discussing such taxes. Once widely implemented by the international community, public debt could be quickly eliminated. Public spending to meet human needs and to sustain consumer markets could be increased. The tendency of capitalists to appropriate more and more income would be reversed. Democracy would be strengthened as information on private wealth become more transparent. Such taxes could also provide the public with the means to respond to climate change. Massive investments are required to move away from dependence on fossil fuels: if private capital does not take the initiative, taxes on wealth could provide the public with the revenues needed.
Capital in the Twenty-First Century, Thomas Piketty, The Belknap Press of Harvard University, 2014, 685 pages