The Piketty pessimist

April 25, 2014

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This chart comes from the World Economic Forum’s 2014 Global Risks Report, which came out just before Thomas Piketty’s book started becoming the topic of discussion in economic and plutocratic circles.* You can clearly see what you might call the rise of inequality-as-an issue: before 2012 it’s nowhere to be found, but since then it’s been consistently in the top spot. My prediction is that in 2015, thanks to Piketty, the WEF will start talking less about income inequality, and more about wealth inequality.

The big question, though, is whether inequality is really much of a risk at all. After all, from the point of view of the average billionaire WEF delegate, inequality would seem to look much more like a reward.

Chrystia Freeland has a hopeful thesis. “Piketty’s work,” she says, “and the wider shift it surely portends, poses a new, powerful, existential threat to the plutocrats.” Her argument in a nutshell: politicians across the political spectrum, but especially on the left, have historically used the language of criminality to rail against the rich. (See, for instance, how the WEF said that “corruption” was the third-most-likely global risk in 2011.) In other words, capitalism itself is generally assumed to be a pretty good thing, which works well for everybody so long as everybody plays by the rules. But Piketty has challenged that assumption, by showing that even if everybody plays by the rules, inequality is very likely to increase to obscene levels. It’s not the corrupt and venal robber barons who are the problem, it’s rather that unless we make a concerted effort to impede capitalism’s natural tendencies, the entire middle class is likely to get hollowed out.

Freeland limns this debate well: on the one side are the likes of Matt Taibbi and Michael Lewis, always on the hunt for villains; on the other side are people looking at a broader historical sweep, and saying that if you go around blaming individuals you are always going to miss the bigger picture. Piketty, of course, is in the latter camp, but so are people like Erik Brynjolfsson and Andrew McAfee, who see success in the future accruing increasingly to a small group of high-level “ideators”, while the jobs of much of the present middle class become automated.

If the broad public stops being angry at individuals and starts understanding that the entire system is constructed so that it benefits the few at the expense of the many, then that system itself will start looking unsustainable and ripe for dismantling.

Freeland herself concedes that this is unlikely to happen any time soon: “The only thing worse than having plutocrats is not having them,” she writes. “San Franciscans may be rising up against their tech billionaires, even blockading the Google bus, but the rest of the world, from Moscow to Malaysia, is trying to replicate Silicon Valley.” On top of that, as Paul Krugman explains in his masterful NYRB review, the forces described by Piketty are more likely to be self-reinforcing than they are to carry the seeds of their own destruction:

Falling tax rates for the rich have in effect emboldened the earnings elite. When a top manager could expect to keep only a small fraction of the income he might get by flouting social norms and extracting a very large salary, he might have decided that the opprobrium wasn’t worth it. Cut his marginal tax rate drastically, and he may behave differently. As more and more of the supersalaried flout the norms, the norms themselves will change.

Which means that ultimately I have to disagree with Freeland. Her syllogism runs something like this:

-Capitalism has survived this far because it delivered strong, widely-shared growth.
-If capitalism fails to continue to deliver strong, widely-shared growth, then it will fail and die.
-Thanks in part to Piketty, the leaders of the major western democracies — both the politicians and the plutocrats — now understand this.
-Therefore, they will, of necessity and of self-interest, alter the structure of society to preserve (what’s left of) the middle classes.

This starts off well, but becomes increasingly improbable as it goes on. As Piketty shows, capitalism can continue indefinitely with obscene levels of inequality. Politicians and plutocrats are not focused on what’s going to happen decades from now; instead, they’re engaged in a constant battle to maximize their own personal power, even — especially — if that means amassing enormous quantities of wealth for themselves. And finally, for all that it’s the job of politicians (including Freeland) to campaign on the basis that they can change the world in effective and predictable ways, there’s precious little evidence that really they can. Just as the forces of capitalism are bigger than any individual robber baron, so are they bigger than any individual politician or political party.

The many reviews of Piketty’s book are surprisingly unanimous on one point: that the weakest part of the book is the final part, where Piketty moves away from diagnosis and starts attempting to formulate a solution. Piketty’s rather French idea of a global wealth tax isn’t getting nearly the same amount of acclaim as the rest of the book is, and is very unlikely to happen: countries will always compete with each other to attract the stateless rich by not taxing them.

Which means that my reading of Piketty is ultimately pessimistic. The dynamics of the world economy are bad, and they’re getting worse; inequality is natural in human history, and right now we’re reverting to a state of affairs which is highly unfair but also both sustainable and, in its own way, unsurprising. Piketty has diagnosed a nasty condition. But I don’t think there’s a cure.

*Le capital au XXIe siècle was published in French in August 2013, and the WEF is based in francophone Geneva, so it was hovering in the background of Davos 2014 somewhere. Certainly there was some buzz about the book in the Alps this year, even among those of us who don’t read 970-page books in French, thanks to Branko Milanovic’s definitive 21-page review, which came out in October.


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