Capital in the Twenty-First Century
The Belknap Press of Harvard University Press, Cambridge MA, 2014. 696pp., $39.95 / £29.95 hb
Reviewed by Hans G Despain
Hans G Despain is Professor of Economics and Department Chair at Nichols College, Massachusetts. He encourages your correspondence: firstname.lastname@example.org
Capital in the Twenty-First Century is a most impressive book that deserves great attention. Piketty insists that social scientists generally, and economists in particular, must confront and examine “facts” (574-5). This is what he sets out to do in his momentous nearly 700 page text.
The title suggests the book may be offering homage to Marx’s nineteenth-century Capital. Let us be clear from the beginning it is not. Nonetheless, this book will be appreciated by Marxian political economists, while at the same time a frustratingly theoretical disappointment.
Piketty’s book is nothing short of revolutionary in establishing flows of income over time. He establishes that there is a tendency toward the hyperconcentration of wealth, and the rise of a new “supermanagerial” class (315-21). Piketty leaves no doubt that it is class that matters and structural “class warfare” predominates in twenty-first century capitalism (246). Crucial to Piketty’s studies of capitalism is that there exist no economic laws determining distribution of income and wealth (274, 292-4, 361-4). This is an enormously important point, and a return to classical political economy with a vengeance, especially to Marx whereby distribution is a function of series of institutional power relations, rooted in production relations. These summaries will surely, and should, excite Marxian social theorists. However, Piketty’s definition of capital as a financial measure of physical equipment, money, financial assets, land, and other valuables will discourage Marxian social theorists. I will come back to these crucial points.
The primary problem with the book is an underdeveloped social theory and normative philosophy. Consequently, Piketty’s policy recommendations are impressively anemic and aimed at perpetuating exploitation of the economically vulnerable populations. In the end Piketty wants to take the ‘hyper’ out of hyperexploitation and reestablish good old-fashion exploitation with higher minimum wages, taxes on capital, progressive income tax, and limits on inheritance.
With emphasis, Piketty defends the strengthening of the “social state” or the historical development of public education, healthcare, social security, unemployment compensation, and income support for the poor (471-92). Moreover, he maintains that deficits are not bad in-and-of-themselves, but must be spent wisely and should not be paid for with fiscal “austerity” but by means of central-bank-generated-inflation and/or a tax on capital (540-70). This defense of the “social state” and federal deficit pushs Piketty into the area of (political) philosophy, social ethics, and morality. Piketty is well-aware of this (479-81). He recognizes that the so-called “science of economics” is more accurately political economy that generates enormous normative philosophical implications (574).
This gets well ahead of our story and the details of Piketty’s book. The essence of the book is remarkably straight forward and is intended for a popular audience. Piketty brilliantly succeeds on this account and should be duly praised. The essential argument is that capitalistic economic growth inevitably slows. As the rate of economic growth diminishes, the past accumulated “capital”/wealth gains in importance (233), and indeed allows past wealth “to devour the future” (378). Piketty calls this a “fundamental law of capitalism” (166).
This fundamental law of capitalism means that the “return on capital” (r) is greater than the economic growth (g): r > g. As a prosperous and industrialized capitalist economy begins to stagnate, past wealth becomes more important and powerful and inequality begins to increase rapidly (572). Thus, one of Piketty’s main goals “is to understand the conditions under which such concentrated wealth can emerge, persist, vanish, and perhaps reappear” (262).
According to Piketty, the primary mechanism (25) causing inequality is the fact that the rate of return on capital is 3 to 5 times greater than the rate of growth (233). Thus, the structural tendency of capitalism toward stagnation and 4-5% rate of return on capital means that markets and competition do not reduce inequality (370). It is in this sense that there is a “logic of accumulation,” based on the divergence between the rate of return on capital and economic growth (22-7), that accounts for the very high concentration of wealth throughout capitalist history (377).
Piketty is especially anxious to distance himself from Karl Marx, even if it means creating a caricature of Marx. Piketty claims that Marx assumed long-term increases in productivity would be zero, so “capitalists accumulate ever increasing quantities of capital, which ultimately leads inexorably to a falling rate of profit” (228). Put simply, Piketty is wrong. Marx did not assume productivity increases would be zero. Secondly, Marx well understood the countervailing tendencies to the decline in the rate of profit (DROP), including especially the processes of concentration and centralization. On the dynamic structural tendencies of capitalism Piketty is much closer to Marx than he realizes.
This should not be surprising. Marx’s political economy was driven to explain two primary phenomena: (1) the regular manifestation of economic and financial crises, and (2) the ubiquitous presence of poverty and unemployment in the midst of affluence, i.e. inequality.
Marx further demonstrates that DROP was only a short-term manifestation. This is because there are several ways to reverse it. First, technological change and an increase in productivity; second, the economic power through concentration and centralization to resist the supply/demand price mechanism of adjust; third, by means of the sales effort, marketing, and branding of a commodity; fourth, through political and legal avenues to block competition, or “rent-seeking” activity.
Piketty’s empirical data impressively confirms the Marxian processes of concentration and centralization (see volume one chapter 25 of Capital). However, although Piketty acknowledges the importance of the normative dimension of social being in politics and philosophy (480), he nonetheless lacks the philosophical depth and sociological insights of Marx.
Piketty’s definition of capital is highly problematic. Piketty defines capital as all physical equipment, land, housing, money, financial assets, and other valuables. To his credit he excludes so-called “human capital.” To count and aggregate these heterogeneous capitals Piketty estimates market prices. Thus, for Piketty capital is strictly monetary and financial. This definition is useful to demonstrate distribution flows throughout history. However, it fails to capture the deeper issues involved for social being. This is why Marx attempted a far more philosophical definition of capital as value. Marx’s notion of value captures the philosophical, moral, sociological, psychological, political economic, and monetary and financial aspects of capital. In this definition, capital is a social relationship that establishes the relations of production. This places Marx’s argument purposefully in the sphere of production. Piketty’s definition leaves his argument in the sphere of distribution. As a consequence Piketty’s policy recommendations remain geared toward issues of redistribution, with no attention toward production relations.
Marx’s more esoteric definition is difficult to make empirically operational. In this sense, Piketty’s attention to the exoteric phenomena can be justified. But he lacks the context of production relations and the historical transformations of these production relations that could add far greater depth to the valuation of financial assets, income flows through time, wealth formation and concentration through time, and the passing of wealth concentration through inheritance.
Piketty need not accept the Marxian notion of exploitation. However, it is striking that not once does Piketty address the so-called “principle-agent” problem (to employ neoclassical economic terminology) of how to get workers and managers, as “agents,” to carry-out the orders and interests of the supermanagerial and rentier classes of stockholders and financers as “principles.” But he does assume that the rentier-class receives 4-5% return on their capital.
Piketty successfully resists (actually rejects) the idea that income and wealth distribution is primarily determined by forces of supply and demand and price adjustments. Instead it is determined by relative power of agents and other institutional forces, which according to Piketty determines the rate of return on capital (212).
It is here that Piketty runs into a major problem. What determines the rate of return on capital? Piketty does not say. Piketty needs a more philosophical and sociological orientation provided by Marx’s theory of surplus value.
What is it that rentiers do to get 4-5% return? How does wealth generate greater wealth? Marx’s attempt to theorize the esoteric dimension of capitalism in chapters 1-9 of Capital, Volume One, provides a far more penetrating answer than Piketty’s. Nonetheless we can certainly embrace Piketty’s book for its demonstration of concentration of wealth as primarily a structural phenomenon. He is correct to underscore that market mechanisms will not reverse income and wealth inequality, but instead generate, reinforce and compound it in capitalistic development (424). Likewise, he maintains that greater access to education will not add to or subtract from historical patterns of inequality (304-10). This is because inequality is a structural economic problem of economic and political power, not one of education and knowledge per se (484-7).
The book is not directly about capital, at least not capital in the Marxian sense. Rather the book concerns the accumulation of wealth and financial assets. Piketty is interested in how this wealth becomes concentrated in fewer hands and is finally passed on through inheritance. Nonetheless, indirectly this book is about (Marxian) capital. When Piketty assumes a rate of return on capital, he is simply assuming what Marx called in Volume Two of Capital, “value in process.” In this sense the book is tacitly about the commodification of the ability to exploit and create passive income streams through financial markets.
Piketty has historical warrant to assume a rate of return of 4-5%. If the working class does not challenge the relations of production, the embeddedness of capitalist relations will pass on all increases in productivity (what Marx called an increase in relative surplus value) to the managerial class (what Marx called the functioning capitalists). Marx argues in Volume Three of Capital that interest-bearing capital will become increasingly important. Of course interest-bearing capital constitutes for Marx the so-called rentier class, or the class that earns its income from either loaning money hoards or other financial activity.
Effectively, the rentier class of interest-bearing capitalists no longer exists. The key here is Marx’s notion of value-in-process. Production relations are so stable that instead of making long-term loans, individuals and institutions with money hoards buy and sell financial assets. For the buying and selling of financial assets to replace interest-bearing capital, the money holder must be very secure in the ability of functioning capitalist to exploit at will. I propose they can. As such Piketty’s assumption of a 4-5% return on (abstract) capital is justified on the Marxian notion of value-in-process. Moreover, this helps explain the activity of central banks as institutions of mass redistribution (550). As such there is urgency for all social scientists and citizens to begin to better understand money as a social institution and a power-relation (577).
Again Marxian theory helps make sense of the analysis of Piketty’s. Piketty argues that “the primary reason for increased income inequality in recent decades is the rise of [a class of] supermanager[s] in both the financial and nonfinancial sectors” (315). These “supermanagers” are super for two reasons. First, as identified by Piketty, their pay scale is extremely high. Second, not identified explicitly by Piketty, they are carry out activity that assures financial markets will be highly lucrative for financial market participants. In other words, they keep the rate of exploitation high. Piketty correctly challenges the idea that the pay of supermanagers is based on the “marginal productivity” of their effort (330-3). They do not necessarily increase productivity or production. However, what they assure financial investors is that the rate of surplus value will be high enough for all financial participants to receive income flows. For this they are compensated accordingly for their ability to maintain high rates of surplus value. Their success as a class is that they stabilize value-in-process. The stability of the value-in-process assures predictable rates of returns in financial activity.
Importantly Piketty points out the historical rise of a “patrimonial middle class.” This is a class of middle class individuals that are making salaries above (sometime well above) the median income. This class emerges from “accidental” transformations following the world wars and the Great Depression, or from other institutional arrangements. This “patrimonial” or propertied class is able to accumulate enough wealth in a lifetime to pass on a financial inheritance of some significance.
The use of the term “accidental” transformations of world wars and the Great Depression is quite revealing. Marxist social theorists believe that crises are immanent to and necessary structural shifts of capitalism. Likewise, World War I and II are often understood as direct manifestations of international power relations between powerful nations concerning anti-humanistic capitalistic imperialism.
Nonetheless, following these non-accidental capitalistic global transformations, a wide middle-(Kuluk-like) patrimonial class emergences with crucial importance. Piketty demonstrates that the magnitudes of wealth and income inequality are historically speculator. However, according to Piketty “the key issue” is not the magnitude of inequality, but the “justification of inequalities” (264). The emergence of a widespread patrimonial middle class, of approximately 20-50% of the population, gives rise to what Piketty calls “hypermeritocratic society” (265) The ability for petty patrimonies to be generated for a wide portion of the population provides ideological justification for the superincomes of the supermanagers and the justification of highly concentrated wealth. In other words, it gives the appearance of a meritocracy. Piketty does not claim that twenty-first century capitalism is necessarily meritocratic (265), but that the historical emergence and extension of a patrimonial middle class give rise to at least the appearance of meritocracy as the ideological justification of inequality in twenty-first century capitalism.
The wealth of the patrimonial middle class (and often of the supermanagers) is achieved through time on their own labor contribution to society. This wealth is invested, usually a home (real estate) and various financial investments for retirement. For the patrimonial middle class these modest hoards of wealth are, or felt to be, earned from participation in production relations. Wealth hoards then become jealously protected by the patrimonial middle class as a symbol of ‘blood, sweat, and tears’ of labor and enduring decades of exploitative relationships within the production process.
To be sure there is a difference between the superwealth of the 0.001% wealthiest individuals (50,000 individuals in France, or 200,000 in the U.S.) and the petty patrimonies of middle class. Piketty is earnest to demonstrate this fact. However, according to Piketty, it is a very small ideological step in the justification of inequality between small wealth hoards and massive superhoards.
Piketty’s policy recommendations can be described as hyperliberalism. He supports a significant increase in minimum wage, progressive tax on income, progressive inheritance tax, a global tax on capital, a strengthening of the public institutions of the social state (education, healthcare, social security, unemployment relief, and income supports) and justification for federal deficits spent wisely, along with a critique of fiscal austerity.
Piketty defends the democratization of capital control (569-70), and well understands that the financial/rentier-class is ominously antagonistic to democratic politics (422-4). Nonetheless, there is no acknowledgement that democracy should be extended into the totalitarian workplaces of capitalism. He theorizes an entire chapter on the “utopian” notion of a progressive “global” tax capital as at least a reference point for more practical policy (515-39). Why not offer a gesture toward democratizing the workplace for income distribution? Why not acknowledge the self-directed worker enterprises, such as the Mondragon Corporation of Spain, have successfully reduced inequality between employees?
Above, I complained that for Piketty capital is strictly monetary and financial. This leaves his theory highly incomplete, but nevertheless urgently important. His final plea is not policy oriented but to “all citizens” to “take a serious interest in money, its measurement, the facts surrounding it and its history” (577). We need to begin to understand how the financial classes can “profit without producing” (Lapavatis 2013), and how previous accumulated wealth “devours” the future (378).
This is an important book that will be the reference point for political debates in the twenty-first century. Much of it can be embraced and praised. However, the structural dynamics and power-relations of the political economy of capitalism and the philosophical dimension of social being, albeit acknowledged by Piketty as important, are substantially underdeveloped in his book. Nevertheless, this book is intended as a call to action, not just to policymakers, but especially for citizens. Economics cannot be left to economists and policy makers. It is radically normative and requires attention and input from social philosophers and especially all citizens (577).
30 April 2014