This is a VIB – very important book. Nearly everyone agrees
about that. But the reasons for its importance have changed in the months since it was published. At first it was important because it was a big book on a big subject: a book of grand ambition about inequality, written not by the latest "thinker" but a respected academic economist with real numbers to go with his theory. We hadn't had anything like that in ages. This was the "Piketty as rockstar" phase, when the book was an "improbable hit" and people wrote breathless articles about the modern successor to Marx who could crunch the numbers but also quote Balzac, The Simpsons and The West
Wing. Writing a bestselling economics book is usually a good way to make
other economists hate you. But at first even they heaped praise on Thomas
Piketty for casting fresh light on inequality – an area where the
official statistics are notoriously weak. Say what you like about the theory,
the argument went, you had to thank him for the numbers. At this point you
didn't need to read it to have an opinion about it. Indeed for some, not having
read it was a badge of pride. Ed Miliband unashamedly told people he hadn't got
beyond the first chapter – and kept on saying that for several weeks. Maybe he
has now. Or maybe he's just decided that the debate about the book is more
important than the book itself. That's certainly the conclusion I have come to,
and not just because several of its central arguments have now been questioned.
There are many claims in the 700-odd pages, but let me highlight some of the
important ones, before moving on to whether – and why – any of this matters.
Claim one is that income inequality has increased sharply
since the late 1970s, with a particularly dramatic rise in the share of total
income going to the very highest earners. The most quoted Piketty statistic
here is one that no one, to my knowledge, has questioned: that 60% of the
increase in US national income in the 30 years after 1977 went to just the
top 1% of earners. The only section of the US population that has done better
than the top 1% is the top 10th of that 1%. The top 100th of the 1% have done
best of all. These are remarkable numbers. Uncovering and bringing together
this data for the US and a handful of other countries using tax returns is a
major achievement, which some say merits a Nobel prize on its own.
Piketty goes on to show that this dramatic rise in income inequality hasn't
happened in all rich economies, and, oddly, does not really have much to do
with capital. Even in the US, it has been driven by soaring salaries at the top
end of the pay scale, not rising incomes from capital.
That rather large complication to the story does not stop
Piketty focusing the rest of the book on capital, which he says has also become
more unequally distributed since the 1970s, not just in the US but in Europe too. He
believes this trend toward greater wealth inequality is very likely to
continue, because the returns from capital are likely to grow faster than the
economy itself, and faster than the owners of that wealth are likely to be able
to spend it. This is the "central contradiction of capitalism", which
he summarises with a Marxian turn of phrase: "the entrepreneur inevitably
tends to become a rentier, more and more dominant over those who own nothing
but their labour. Once constituted, capital reproduces itself faster than
output increases. The past devours the future." This is where things get
tricky, not just for Piketty but for the general reader, who simply wants to
know whether he's right. Let me cut to the chase and say that the evidence for
rising wealth inequality is not nearly as clear as the evidence for rising
inequality of incomes. Further, even some of Piketty's biggest fans in the
academic world have their doubts whether the forces pushing the economy in that
direction are as strong as he suggests. Most would agree that the developed
economies are likely to grow more slowly as their populations get older.
This might have the "terrifying" consequences for wealth inequality
that he suggests, but it's also possible that slower growth will be as costly
to the owners of capital as it is for everyone else. Their share of the total
pie might even decrease. That is actually what has happened in the UK recently.
In the boom years after the mid 90s, the owners of capital took a larger share
of national income, and the labour share tended to decline. But the trend reversed
itself when the economy hit the skids in 2007, and the labour share is back to
where it was in the early 70s. Income inequality has also fallen slightly over
this period, at least in the UK. So, whatever terrible things have happened to
our economy in the past five years, they haven't followed the long-term path
sketched out by Piketty. Rather the opposite. There is some evidence that the
top 10% in the US is sitting on a higher share of total wealth now than in the
70s. But it's difficult to draw similar conclusions about Britain or France because the data is
so patchy. From what we can tell, the share of total wealth held by the top 1%
– and 0.01% – hasn't changed much at all.
Piketty has some interesting analysis demonstrating that
wealth begets more wealth: the richer university endowments, for example, tend
to earn the highest returns on their investments, not just in absolute but
percentage terms. This rings true and also has some economic logic to it. The
more money you have to invest, the more – in cash terms – you can afford to
spend on finding the best opportunities, without materially cutting into your
returns. As a force for rising wealth inequality this makes sense and probably
merits a book of its own, given that individuals across the developed world are
increasingly having to take greater responsibility for saving for their
retirement. It matters if small investors are going to be systematically
disadvantaged in making these long-term investments. But the concentration of
wealth at the top doesn't seem as inexorable as all that. As the economist and
former US treasury secretary Larry Summers has pointed out, most of the people
on the list of 400 wealthiest Americans in 1982 would have had enough to money
to qualify in 2012 if they had simply earned a return of 4% a year. But fewer
than a 10th actually did so. The proportion of the top 400 who inherited their
wealth has actually been falling – not rising, as Piketty's theory would also
suggest.
Given what has been happening to incomes at the top, you
would expect to have seen more concentration of wealth than we can find in the
data. That might be – as Piketty suggests – because rich people are good at
hiding their money from the taxman. But it might also be because they are very
good at spending their money, and their children even more so. I was at a
conference recently for advisers and trustees to family estates, and was amused
to hear speaker after speaker assert that the "biggest threat"
to a family fortune was "not the taxman or the markets but the family
itself". Say we agree with Piketty, and conclude that wealth has become
more concentrated, his own numbers show this is a fairly recent phenomenon. As
he admits, the single most important structural change in the distribution
of wealth in the past 100 years has been in the other direction. That
is the emergence of a new "patrimonial class", somewhere between rich
and poor, owning 25%-35% of the nation's wealth. He describes the emergence of this class in the middle years
of the 20th century as a transformation that "deeply altered the social
landscape and the political structure of society and helped redefine the terms
of distributive conflict". That may well be true. But for me, what's more
interesting about this shift is not what it might or might not have done for
"the terms of distributive conflict", but what it did for households
– and the broader economy. Piketty really doesn't go into that at all, which is
a shame because if you don't have a clear understanding of the benefits of
broader capital ownership it's difficult to explain why it's so
"terrifying" if things are now moving back in the other direction. The
latest official survey of UK household incomes and wealth shows that around
a third of all UK households has either negative net worth – debts greater
than their assets – or net financial assets worth less than £5,000. I am
more worried about that lack of wealth at the bottom and in the middle of the
income scale than about the squillions being amassed by a very few. We know
that families with that little to fall back on are much more likely to fall
into long-term cycles of dependency and poverty. We also know – and if
we didn't know we could learn from reading the Daily Mail that Piketty's
"patrimonial middle class" feels more squeezed these days, whatever
might have happened to the financial value of their home. He seems to
assume that all these things are connected, that the greater income
flowing to the 1% is making things worse for everyone else. But he never really
makes the case. That is remarkable omission for a book of such magisterial
sweep.
When I was first learning economics in the late 80s and 90s,
the UK was just getting used to the free-market idea that higher incomes at the
top did not have to mean lower incomes at the bottom. To ensure growth in the
economy, the message went, you had to give the "wealth creators" the
incentive to increase both the pie and their slice of it. Economists still
believe that, up to a point. But in the wake of the financial crisis there
has been broader acceptance of the view that very high levels of income
inequality can increase the risk of such crises, and so hurt the economy.
We also have evidence – from the IMF, of all places – that in unequal
economies, more redistributive taxes might promote faster growth. As with most
things, it's a matter of degree. This all helps to explain why Piketty's book
has been such a smash. Many people are worried about the slow rate of growth in
the developed economies since the financial crisis in 2008. Many are also
worried about rising inequality. At first glance, Capital seems to
offer an elegant way to explain both. But, by his own admission, the world is a
lot more complicated than talk of a "central contradiction to
capitalism" might suggest. So is the relationship between capital
accumulation and growth.
Like Miliband, Piketty sees a clear difference between the
wealth creators and the asset strippers – between the fat cat
"rentier" capital that devours the future and the more socially
useful capital of the entrepreneur. But his own broad definition of capital
doesn't really help us draw that kind of distinction. It's all thrown in
together, along with all of our houses, and everything else with
a financial value that can be bought or sold. That's a pity because if
there's one thing that policymakers around the world are looking for
it's a way to channel a bit more money into productive investment – and a
bit less into house prices and stocks and shares. Piketty deserves huge credit
for kick-starting a debate about inequality and illuminating the distribution
of income and wealth. But when it comes to the forces driving growth and wealth
accumulation in our modern economy what he has probably done most to bring out
into the open is our collective ignorance and confusion.
This Review was by Stephanie
Flanders is chief market strategist for Europe, JP Morgan Asset
Management. The Original Link is here
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