Assets and equality: ‘a willed blindness to the logic of contemporary dynamics’

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Thomas Piketty’s book, Capital in the 21st Century, is attracting considerable attention, on both sides of the Atlantic. It has a striking central thesis, namely that historically the rate of return on assets has been consistently higher than the rate of the growth, thus generating and reproducing substantial inequality.

In an important interview for the New Left Review, Piketty expounds on his argument:

‘Throughout most of human history the growth rate was zero, but there was still a return on assets – typically, an average return of 4–5 per cent from ground rent. Indeed this was the foundation of the social order, since it enabled a group of people, the landowning aristocracy, to live off that revenue. The fact is that the rate of return on assets has been consistently higher over the long term than the rate of growth; that doesn’t pose any logical problems, but it does raise the question as to whether the reproduction and reinforcement of inequality that such a ratio creates is acceptable, in a democratic context.’

Crucially, he argues that the reduction of inequality in the 20th century was an historical aberration:

‘The lessening of income inequalities between 1914 and 1945 was due both to the shocks of the world wars, and to the policy responses that followed. Radical political changes – the rise of progressive taxation, social security, organized labour, and so on – did play an enormous role. My point is simply that these changes, including of course the Bolshevik Revolution and the resulting threat in the East, were largely products of the shocks induced by the wars and the Great Depression. Prior to 1914, there was no natural tendency toward the reduction of inequality. The political system was formally democratic, but it didn’t really respond to the high and rising level of wealth concentration. The reduction of inequality during the 20th century was largely the product of violent political upheavals, and not so much of peaceful electoral democracy. I think this helps to explain the fragility of the consensus on which some of the earlier institutions were built, and why they’ve come under serious attack since the 1970s–80s.’

Piketty denies that growth and competitive markets eliminate rent seeking and reduce inequality:

‘… the fact that returns on capital are higher than the growth rate has nothing to do with monopolies, and cannot be resolved by more competition. On the contrary, the purer and more competitive the capital market, the greater the gap between return on capital and the growth rate. The end result is the separation of owner and manager. In this sense the very goal of market rationality runs counter to that of meritocracy. The aim of market institutions is not to produce social justice, or to reinforce democratic values; the price system knows neither limits nor morality. Indispensable as it is, there are things that the market cannot do, for which we need specific institutions. It is too often believed that the natural forces of competition and growth will by themselves ceaselessly reshuffle individual positions. But in the 20th century it was primarily wars that razed the past to the ground and dealt the cards anew. Competition in itself will not guarantee social and democratic harmony.’

He goes on to argue against ‘two great illusions about inequality’ that emerged from the trente glorieuses:

‘The first is the “war of generations” approach which holds that, with the rise in life expectancy, assets have become a way of transferring income from work to retirement. When you’re young, you’re poor, but you then accumulate income which you consume when you retire. This offers a reassuring view of wealth inequality, since it suggests that everyone will be poor and then rich in turn, which would be legitimate enough. But it accounts for only a tiny part of the accumulation and concentration of wealth: in reality, wealth inequality is almost as great within generations as between them; in other words, the generational war has not replaced the class war. One reason for this is the cumulative dimension of concentration: wherever you have accumulation and inheritance of wealth, concentration accelerates. To give a concrete example, it is easier to save – and so to accumulate wealth – when you have inherited a flat and don’t have to pay rent. Pay-as-you-go pensions may add to this, in the sense that they help to preserve accumulated wealth, since people don’t need to consume their capital in retirement.

‘The second illusion is the theory of “human capital”. It’s based on the idea that with technological development, human skills would take precedence over industrial plant, buildings, machinery and so on; there would be more and more need for individual expertise and less and less for non-human capital – real estate, material and financial assets. According to this hypothesis, shareholders would be replaced by managers. Well, this hasn’t happened. If skills have progressed, so has non-human capital, and the relation between the two hasn’t changed that much. One could even envisage a 21st-century robot economy, in which human capital’s share of national income would decline. This is not to say that the worst is bound to happen, but that the market has no automatic correction mechanism. We need to create institutions that can play this corrective role. I argue that a progressive tax on private capital would be one such mechanism.’

Piketty argues that his book:

‘… stems in large part from the fear that, little by little, social structures are irremediably changing, without us taking account. The dynamics are not readily intelligible, and there’s a real risk that we will wake up to find a society even more inegalitarian than that of the 19th century, because it will combine the arbitrariness of inherited inequalities with a meritocratic discourse that makes the “losers” responsible for their situation – because their productivity is too low, for example … More generally, collective faith in progress and rising living standards mean that there’s a refusal to imagine a modern world as unequal as that of the 1800s. Of course, we’re not there yet, and I don’t want to fall into catastrophism. But under certain conditions, it could happen; there’s a willed blindness to the logic of contemporary dynamics.’

These are big arguments, buttressed by a substantial body of empirical research, historical analysis and theoretical deliberation. They are certain to stimulate lots of debate in the UK.

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