Thomas Piketty's new book on the history and future of capitalism (
Harvard University Press)
is a bold attempt to pick up where Marx left off and correct what he
got wrong. While there is much that is useful in this lengthy and
well-written book (Piketty and his translator Arthur Goldhammer can
fight over credit), it owes too much to the master, and not in a good
way.
For backdrop, economists and social scientists in general
have a huge debt to Piketty. His work with Emmanuel Saez has advanced
enormously our understanding of income distribution at top end. The
World Top Income Database
that they constructed along with Facundo Alvaredo and Anthony Atkinson
is an enormously important source of data that economists are just
beginning to analyze. This book is a further contribution in providing a
wealth of information about historical trends in income distribution
and returns to capital over large parts of the world.
Piketty
begins his book by dissing the unnecessary complexity of economics.
While the theoretical excursions of the last four decades have been an
effective employment program for economists, they have done little to
advance our understanding of the economy. The book itself is laid out in
a way that makes it easy for the non-expert to understand, with the
mathematics kept to a bare minimum.
Based on his analysis of
capitalism's past, Piketty has a grim picture of the future. The story
is that slowing growth will lead to a rise in the ratio of capital to
income, which we have already seen throughout the world with the rise in
stock and house prices. This is turn will imply growing inequality as
wealth distribution is hugely unequal and there is little reason to
believe that the market will somehow reverse this inequality. Piketty's
remedy is higher income taxes on the rich and wealth taxes, solutions
that he acknowledges do not seem to have good political prospects right
now.
While the book presents this story with the sort of the
determinism that many have seen in Marx's theory of the falling rate of
profit, there are serious grounds for challenging Piketty's vision of
the future. First, there are many aspects to the dynamics that have led
to the redistribution to profit and high earners in the last three
decades that are likely to change in the not too distant future.
The top of my list is the loss of China as a source of extremely low cost labor. According to the
International Labor Organization,
real wages in China tripled in the decade from 2002-2012. While these
data are not very accurate, there is little doubt that wages in China
are rising rapidly. While Chinese wages still have a long way to go
before they are on a par with wages in the United States or Europe, its
huge cost advantage is rapidly disappearing. Manufacturers can look for
other low-wage havens, but there are no other Chinas out there.
The loss
of extreme low wage havens is likely to enhance the bargaining power of
large segments of the workforce.
However, perhaps a more
fundamental objection to Pikettys' grim future is the fact that a very
large share, perhaps a majority, of corporate profit hinges on rules and
regulations that could in principle be altered. My favorite example is
drug patents. This industry accounts for more than $340 billion a year
in sales (@ 2 percent of GDP and 15 percent of all corporate profits).
The source of its profits is government granted patent monopolies.
Suppose
the government weakened patent rights or allowed low-cost generics from
India to enter the country, profits and presumably the value of
corporate stock in the sector would crumble. Is there a fundamental law
of capital that prevents this from happening? The same could be said
about the patents that provide the basis for enormously profitable tech
companies like Apple. Are we pre-destined never to take steps to weaken
these laws which lead to enormous corruption and economic waste?
Another
big profit sector is cable and telecommunications where we seem to have
unlearned the lesson from intro-econ that monopolies are supposed to be
regulated to prevent them from gouging consumers. Obviously the
monopolists won't like to see their profits eroded, but allowing near
monopolies to operate without regulation does seem like an aspect of
capitalism that can be altered in the future as it was in the past.
The
financial sector has gone from accounting for less than 10 percent of
corporate profits in the 1960s to over 20 percent in recent years. Is
there a law of capitalism preventing us from instituting financial
transaction taxes like the UK has had on stock trades for more than
three centuries or breaking up too big to fail banks?
Piketty is
not just pessimistic when it comes to profit shares. He also tells us
there is little hope that improved corporate governance will put a lid
on CEO pay. Is it really implausible to believe that shareholders will
ever be able to organize themselves to the point where they can do
something like index CEO stock options to the performance of other
companies in the industry? This means the CEO of Exxon doesn't get
incredibly rich by virtue of the fact that oil prices rose. Is it a law
of capitalism that shareholders will forever throw money in the toilet
by giving unearned bonanzas to CEOs?
These and other areas might
be viewed as important institutional details that get short-shrift in
the book. To take another example, in an analysis of returns on
university endowments Piketty attributes the extraordinary returns to
the endowments of Harvard, Princeton, and Yale to the fact that they
could afford top quality financial advisers. This is another source of
inequality for Piketty; the rich can buy good financial advice, while
the average person has to rely on their brother-in-law.
Harvard,
Princeton and Yale undoubtedly have sophisticated financial advisers,
but many equally sophisticated advisers don't consistently produce above
market returns. An alternative explanation is insider trading. The
graduates of these institutions undoubtedly could prove their alma
maters with plenty of useful investment tips.
I have no idea if such
insider trading takes place, or if so whether it is a major factor
explaining above average returns, but it would provide an alternative
and more easily remedied fix for this particular source of inequality. A
few years in jail for some prominent perps would do much to curtail the
practice.
Rather than continuing in this vein, I will just take
one item that provides an extraordinary example of the book's lack of
attentiveness to institutional detail. In questioning his contribution
to advancing technology, Piketty asks: "Did Bill [Gates] invent the
computer or just the mouse?" (To be fair, the comment is a throwaway
line.) Of course the mouse was first popularized by Apple, Microsoft's
rival. It's a trivial issue, but it displays the lack of interest in the
specifics of the institutional structure that is crucial for
constructing a more egalitarian path going forward.
In the past,
progressive change advanced by getting some segment of capitalists to
side with progressives against retrograde sectors. In the current
context this likely means getting large segments of the business
community to beat up on financial capital. This may be happening in the
euro zone countries where there is considerable support for a financial
speculation tax - although the industry is fighting hard.
In
terms of drug patents, India's generic drug industry is a natural ally
for progressives everywhere who care both about public health and want
to stop the upward redistribution to drug barons. In the United States,
public options for both health care insurance and retirement savings
accounts could be a boon not only to workers who use them, but also
small businesses who lose valued workers to larger employers who offer
better benefits.
The list of options could be extended
considerably, but the point is that capitalism is far more dynamic and
flexible than the way Piketty presents it in this book. Given that we
will likely be stuck with it long into the future, that is good news.
Read more: Capital in the 21 Century: Still Mired in the 19th (See correction) | Dean Baker
