Enjoy the analysis, ignore the advice

 The last 300 years have been a strange time, notwithstanding the fact that we call them home. Some of the most arresting graphs in Thomas Piketty’s impressive, provocative study of the sources, growth, and distribution of global wealth plot the growth rates of output from antiquity to the near future.  The line hugs the base of the graph until 1700, when all at once it shrugs off gravity and soars upwards. After tens of thousands of years of more or less just getting by, with the arrival of the Industrial Revolution men and women began producing and accumulating more — much, much more. Piketty’s book traces the contours and implications of this change, and asks searching questions about the future direction of public policy in the light of its likely continuance and acceleration.

The richness, scope and detail of Piketty’s analysis means that it is impossible to summarise it without losing much of the vibrancy which makes it such an exceptionally gripping read. But an executive summary of his argument might run like this. The apocalyptic future for capitalism predicted by Marx (whose Das Kapital is obviously echoed in Piketty’s title) did not arrive. But this was not because Marx was essentially wrong about the intrinisic instability of capitalism. Rather, it was the unpredictable circumstance of two world wars which postponed the Marxist apocalypse. 

The fiscal and social adjustments required to maintain the fabric of society in the aftermath of the global conflicts of the 20th century meant that capitalism went into a muted or benign phase: “the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war.” Wealth had been liquidated on a vast scale, populations had been ravaged, plant and infrastructure destroyed. Postwar reconstruction demanded exceptional social cohesion. Men and women responded impressively, generating high rates of growth and at the same time launching capitalism into a phase which seemed to suggest that (contra Marx) its forces of convergence were stronger than its forces of divergence. 

Piketty argues that this benign or muted phase of capitalism masked its essential nature (which was correctly diagnosed by Marx, notwithstanding the slender evidential base of his theories), and misled economists such as Simon Kuznets into the belief that income inequality would automatically decrease in the later phases of capitalism, no matter what policies were pursued by governments. Moreover, this benign phase is now over. Seventy years of peace have re-created the conditions for the true nature of capitalism to reveal itself once more. 

What is the true nature of capitalism?  For Piketty it is, as Marx intuited, a system in which capital will tend to accumulate without ultimate restriction, because the rate of return on capital under normal conditions tends to be larger than the rate of growth (r > g). The special conditions for growth created by the two world wars have now evaporated. The forces of convergence are in large measure spent, and the forces of divergence are in the ascendant. Capitalism is reverting to type. This economic process, Piketty says, is morally and politically blind, like all others: “Progress toward economic and technological rationality need not imply progress toward democratic and meritocratic rationality. The primary reason for this is simple: technology, like the market, has neither limits nor morality.” The first three parts of Piketty’s book are devoted to describing and analysing this transition. They represent a brilliant, mesmerising re-statement of technical matters for a non-specialist readership. Here Piketty’s achievement is superb. The fourth part, “Regulating Capital in the Twenty-First Century”, prescribes policy responses to these developments, developments that Piketty regards as menacing — of which more in a moment.

There is a huge amount to admire and welcome in this book. In the first place, it is impossible not to warm to Piketty’s scorn for the mathematical turn in economics, which he skewers pitilessly as a chosen rhetoric, rather than an instrument of inquiry or analysis:

. . . the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. . . . This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.  

As if to underline his impatience with the mathematical mode of economics, Piketty refers to his book as a work of history, and he illustrates his points by using literary examples. Piketty is of course aware that novels are not data. His references to Austen and Balzac are really just grace notes, although they do signal his admirable desire to move economics away from barren technicalities and back towards what it was in the hands of David Hume and Adam Smith, that is to say part of the intellectual interests of a normal educated person.

Second, Piketty’s assiduity in collecting data and thus putting the argument on an entirely new and more secure evidential footing, even though it is inevitably the product of collaboration (which Piketty generously and scrupulously acknowledges), is deeply impressive. That labour of data collection unfolds its implications in two directions. On the one hand, it shifts the point of discussion away from theory and towards fact — always a helpful move. On the other, it validates Piketty’s bona fides as a public intellectual. At a number of points in this study Piketty states that his purpose is to stimulate a well-informed debate on the trajectories of global wealth accumulation and the policy options which should respond to it. As he says in his conclusion, “all of my conclusions are by nature tenuous and deserve to be questioned and debated. It is not the purpose of social science research to produce mathematical certainties that can substitute for open, democratic debate in which all shades of opinion are represented.” More writers make these kind of statements than actually mean them, but in Piketty’s case they are transparently sincere, and his labour of data collection vindicates them, as does his eschewal of polemical narcissism.

Assuming Piketty is right in his diagnosis that the world is moving towards something like the economic state it was in just before the First World War, in which capital had reached very high and increasing levels, one might ask the question: What would be wrong with such a world? Why does it require correction by means of public policy?

Piketty has a number of answers. In some ways the most interesting is one derived from American experience in the early years of the present century. In the years leading up to the crash of 2007-8, Piketty suggests, growing income inequality led directly to financial instability. The mechanism for this was that those on lower incomes were induced to take out loans they could not afford to boost their standard of living.

But Piketty does not lay heavy emphasis on such specifically economic answers to the question of why the present tendency of capitalism is alarming and requires correction. The centre of gravity of his belief that diverging levels of wealth are socially menacing is to be found in moral and prudential considerations. The moral concern is that such a world of material inequality would be ethically affronting. The prudential concern is that such a world would provoke social resentment on an intolerable scale, and that, in the resulting disorder, everyone would be worse off. Gross inequalities in the distribution of capital lead to “powerful political tensions, which are often difficult to reconcile with universal suffrage”. If inherited wealth were to grow faster than output and income for a sustained period, then — so Piketty says — “the concentration of capital will attain extremely high levels-levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies”. It is hard, he says, to “imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups”.

Is that true? It doesn’t seem that the capital-rich European societies of the period just before the First World War were socially unstable — quite the reverse. Piketty’s forebodings seem to be that the social fabric will tear if disparities of private wealth become too large. That might be so were the same families just to become ever richer. But, with a few exceptions such as the Rothschilds, families seem not to be able to sustain a position at the apex of wealth for more than one or two generations. Another way of putting this is to note that aggregated statistics (which is what Piketty has assembled) can mask considerable volatility at the level of individual fortunes. The typical model extends over three generations: the entrepreneur accumulates a fortune, the managerial sons consolidate it, and the effete grandchildren, raised in conditions of affluence, dissipate it on cultural pursuits. The textbook literary illustration of this is Thomas Mann’s Buddenbrooks (a novel not mentioned by Piketty, although absolutely on the subject of his book). A real-life example would be the wealth of the Gibbon family.  Gibbon’s grandfather made a fortune as a government contractor and then as a director of the South Sea Company: at its peak it totalled some £160,000, a very considerable fortune in the early 18th century. When that fortune was confiscated in the wake of the bubble, he went on to make another fortune, almost as large. In the hands of Gibbon’s father the family wealth gently subsided, but was still considerable.  The historian was able to maintain his literary and scholarly life on the remnants of his inherited wealth, but at his death his net worth was only in the region of £26,000. 

So it may be that r is greater than g, but the ability of children to burn through inherited wealth tends to be greater even than r. And even if later generations are not spendthrift, the process of inheritance will tend to divide family wealth into smaller piles, even in times of zero population growth. Over two generations under such conditions a family fortune will have been divided into four parts. Each of those parts will of course be larger than one quarter of the original fortune, as a result of the intervening years of return on the original capital. But unless marriage has introduced new sources of wealth into the family, each of the four parts will probably be less than the original fortune. Even the Rothschilds, though still exceptionally wealthy, are not today as comparatively wealthy as they were in the 19th century. This instability in the location of private wealth diffuses resentment at a social level, and also mitigates the moral point that Piketty levels at 21st-century capitalism.

Piketty is troubled by the accumulation of capital in private hands, but he is by contrast relaxed about the accumulation of public capital. Sovereign wealth funds, which are by far the largest heaps of capital in the modern world, are given brief (five pages — less than 1 per cent of the book) and quite indulgent treatment: yes, they may in the medium term pose political problems, but there is no need to worry overmuch about that now is the gist of what Piketty says on that subject. 

This equanimity is striking. Its root cause finds expression also in Piketty’s preferred remedy for the “globalised patrimonial capitalism” he has diagnosed, namely a progressive global tax on capital. Piketty admits that this expedient is not imminent:

A global tax on capital is a utopian idea. It is hard to imagine the nations of the world agreeing on any such thing anytime soon.  To achieve this goal, they would have to establish a tax schedule applicable to all wealth around the world and then decide how to apportion the revenues.

One would like to think that “utopian” there was a slip for “dystopian”. Does the prospect of the governments of the world getting their hands on a pot of money as large as the yield of this tax not make your blood run cold?  For Piketty, however, the only problems a global tax on capital poses are the irritating technical challenges of compiling the schedule and then dividing up the spoils. The prospect of the world becoming a single dreary fiscal prison is, it seems, not a problem. No sane person ever denied either that freedom has its pains, or that servitude has its comforts. Piketty’s disposition appears to incline him away from the former and towards the latter.

Nevertheless, like the radicals of the 1790s, who toasted Edmund Burke in gratitude for the fundamental debate his writings on the French Revolution had provoked, even those who find Piketty’s remedies unpalatable and in some ways worse than the disease he is trying to cure should nevertheless applaud his industry, his acuity, and his humane commitment to the ideal of rational, temperate and informed public debate.

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