Capital in the Twenty-First Century by Thomas Piketty, translated by Arthur Goldhammer (Belknap 2014), 696 pages.
The basic phenomenon that Thomas Piketty devotes this book to describing is simple: “When the rate of return on capital significantly exceeds the growth rate of the economy…, then it logically follows that inherited wealth grows faster than output and income.”
His historical account of wealth accumulation, the mass of statistical evidence he musters in support of it, and his analysis of present-day trends are all an excellent read. His weakness lies, not in his description, but in his prescription: his analysis of the root causes of the concentration of wealth and the remedies he proposes.
In every case Piketty ignores the extent to which the rate of return on land and capital is influenced by state intervention in the market. If there’s truth to his indictment, it’s an indictment against corporatism, not free markets.
For example, he argues that the tendency of rent to exceed growth has nothing to do with market imperfections. He largely ignores the dependence of rates of return on property on the legal structure; he writes that the growth of inequality in France after the Revolution paralleled that in England, despite the Civil Code’s having “abolished all legal privileges” and “guaranteed absolute equality before the laws of property as well as freedom of contract….” In so arguing, he misses Henry George Jr.’s fundamental distinction between “equality under the law” and “equal laws.” “Equality of rights and opportunities” is insufficient without regard to what rights and opportunities are equally held. We’ve all no doubt heard Anatole France’s observation that “the law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”
Piketty is much concerned with the return to capital, but a major share of things that count as part of the capital stock on which “rent” is received would not even count as property in a genuine free-market regime. Human slaves were one such form of “property,” with an enormous capital valuation on the market, until 1865 in the United States. Today rents on property whose title originally traces to the enclosure of vacant and unimproved land, and rents on the “ownership” of ideas, fall under the same heading.
Like Marx, Piketty accepts neoliberal (state) capitalism as the largely spontaneous result of the market. Marx devoted a major part of Capital, vol. 1, to the history of the expropriation of peasant land in England, which vastly reduced opportunities for comfortable subsistence and self-employment and increased the size of the labor force competing for work, and thereby drastically shifted bargaining power from workers to owners of capital; nevertheless he still argued that surplus value was inherent in wage labor as such.
For all his delving into 19th-century French and English literature, Piketty pays precious little attention to the origins of those big fortunes off which the rentier classes lived. According to no less a literary figure than Honoré de Balzac, great fortunes are founded on great crimes. From the late Middle Ages on, the peasantry was robbed of its customary property rights in most of the land of England — first by the enclosure of the open fields for sheep pasturage, and then by Parliamentary Enclosure of common pasture, wood, and fen in the 18th century. And the origins of many great American fortunes, as Michael Hudson points out (“Piketty’s Wealth Gap Wake Up,” Naked Capitalism, April 25), are the same as those of the post-Soviet kleptocrats today: fraud, bribery, and enclosure or political “privatization” of the commons.
“The diffusion of knowledge”
Piketty argues that the main force for international convergence in standards of living is “the diffusion of knowledge”: poor countries catch up by adopting the technologies and skills of the developed world. But he fails to mention the extent to which state policies promoted by the developed world deliberately impede that process. The extended terms on general-purpose technology patents under the Uruguay Round of GATT mean that western corporations can maintain a legal monopoly on the latest generation of production technologies in many cases, and relegate Third World countries to supplying labor and raw materials for western-owned facilities. And when native populations do have access to ownership of the latest technology, western corporations can still dictate terms by using trademarks and patents to enforce a monopoly on disposal of the product (as is the case, e.g., with the way trademark law enables Nike to outsource actual production of their sneakers by independent factories for a few bucks a pair, and then mark up the price a hundredfold in western retail chains).
Piketty also neglects the tendency of overaccumulation to lead to crises of surplus investment capital and falling rates of profit, absent Hamiltonian state policies to artificially increase the need for capital. He does note in one place that large public debts can affect returns on private wealth, and elsewhere that “too much capital kills the return on capital,” but he doesn’t acknowledge it as part of a larger phenomenon by which the government employs surplus capital that would otherwise remain idle.
He claims that Marx’s prediction of a falling direct rate of profit “turned out to be quite wrong,” despite Marx’s himself having listed a number of state policies in the section on monopoly capitalism in Capital, vol. 3, that might counteract that tendency. Absent direct government subsidies to the corporate bottom line, subsidized production inputs, direct government expenditure to absorb surplus capital and idle industrial capacity, subsidies and other promotions to artificially capital-intensive forms of production, and regulatory cartels and administered pricing that enable the extraction of superprofits from the consumer by means of the exchange process, the real rate of profit left over would arguably be far lower than at present.
And of course all the tendencies toward surplus capital, overproduction, and underconsumption that 20th-century economists such as Keynes remarked on are the result, not of the action of an unfettered market, but of state intervention.
As Piketty notes, increased productivity and technological progress can counteract the tendency toward accumulation of wealth. That’s not to say they always will, of course. The outcome hinges on how easily the increased productivity from new technology can be enclosed, that is restricted by the government, as a source of rent. Historically, since the rise of the first class systems and states, there has been an arms race between the technologies of abundance and enclosure.
Today the main direction of technological progress is ephemeralization — the rapid cheapening of capital inputs required for a given form of production. Piketty seems to overlook that change. The effect is to radically reduce the overall need for investment capital, and greatly increase the ratio of capital stock to profitable investment outlets. The natural outcome is an increasingly decentralized economy of small-scale production, in which the means of production are affordable to ordinary people producing for each other in small shops, and the great mass of the population can comfortably meet its subsistence needs without dependence on the rentier classes’ capital.
The rentier classes attempt to counter this natural tendency through the state, using artificial property rights and artificial scarcities — patents and copyrights, for example — to enclose the technologies of abundance as a source of rent.
Perverse incentives
One outstanding feature of Piketty’s book is his analysis of the changing composition of the incomes of the top 1 percent. The top 1 percent, which in the past got most of their income from returns on property, now get it from managerial and professional salaries; today you have to go to the top 1/10 of a percent to find a group of people who live mainly off rents and investments. It’s not so much the super-rich propertied classes whose increased income has come at the expense of ordinary wage earners, but the upper stratum of the salaried managerial classes. According to David Gordon in Fat and Mean: The Myth of Management Downsizing, managerial and supervisory salaries went from around a quarter of total labor compensation in the 1970s to 40 percent in the 1990s. That means that if management salaries returned to their share of total labor income as it stood in the 1970s, the wages of production workers could be increased by about a third.
The state-enforced corporate form enables management, by appealing to the myth of shareholder ownership, to act as de facto residual claimants and expropriate the value and productivity gains contributed by other stakeholders such as production workers, whose distributed knowledge, skills and social relationships constitute “human capital” that often adds more to total firm equity than physical capital. As a result, management has perverse incentives to grab a larger slice of a smaller pie, by gutting human capital and other long-term productive assets in order to maximize short-term returns and game their own compensation. The irony is that, by using “shareholder value” as a legitimizing ideology for their own power, they actually hurt the long-term interests of shareholders as well as workers.
So managerialism is at least as responsible as increased returns on land and capital for the lower quintiles’ shrinking share of the economic pie. The irony is that the panacea of educationism and universalizing college attendance — favored by the center-left and neocons alike — is one of the chief factors exacerbating managerialism. The main effect is simply to inflate formal educational requirements for doing anything and everything.
Piketty is most famous for his policy prescription of more progressive taxes on high incomes and a tax on wealth to counter what he sees as a natural tendency toward concentration. But as we have already seen, concentration and accumulation of wealth are not “natural tendencies” at all, but the result of massive and ongoing state intervention to facilitate the extraction of rents from society by privileged classes.
Even at the height of industrial gigantism and capital-intensiveness in the mid 20th century, most of the returns on land and capital depended on state enclosures and state-enforced monopolies of various sorts. Simply voiding all artificial titles to vacant and unimproved land or ideas, repealing all regulatory cartels, entry barriers, monopolies, and so forth would have destroyed the great bulk of the returns on land and capital. And today, arguably, the technologies of abundance are making such monopolies unenforceable regardless of whether states formally repeal them. What file-sharing, encryption, and the cracking of DRM (digital rights management) have already done to the music and movie industries, open-source micromanufacturing and intensive horticulture techniques such as Permaculture, which make intensive use of capital and land, will do to the industrial monopolists.
Piketty’s proposed wealth tax is a secondary intervention to correct the evils resulting from the primary state interventions that redistributed wealth upwards in the first place. It amounts to a Ptolemaic epicycle, or an extra step in a Rube Goldberg machine. The logical answer to artificially high rents on property and the concentration of wealth is to abolish the state-enforced interventions that create those rents in the first place, and let unrestricted competition drive them to zero and break up illegitimate concentrations of wealth.
Rather than adding new layers of government intervention to ameliorate evils created by government in the first place, let’s eliminate the original interventions that created those evils.
This article was originally published in the December 2014 edition of Future of Freedom.
