This Emperor Has No Clothes: Picketty & Reality Economics

Capital in the Twenty-First Century - Thomas PickettyISBN 978-0674430006. “Capital in the Twenty-First Century” by Thomas Piketty was published by Harvard University Press in 2014. Here it is – the book that everyone seems to know about. A book so important that it has spawned its own minor publishing boom of critiques & summarisations. You have a choice of which ‘Summary’ book to buy – this on the assumption that everyone should read this and, secondly, that most of us will be too busy to trawl through over 500 pages of economics history. Order the original Piketty hardback and certainly it looks a daunting prospect – a meaty doorstopper of a book designed to scare-off all but the most determined reader. However, never fear, they printed it in large font, on thick paper, and those pages are littered with graphs… So you might find yourself getting through it quicker than you imagined. So, if you do attempt this, what is in store for you? Is there any real value in this? What does it mean and why is it so important?

As you can imagine, “Capital in the Twenty-First Century” is no ordinary economics textbook. This one work has propelled its author into being a household name, indeed, no one seems even to describe the book by its title. It simply is “Piketty”. Say it and everyone knows what you mean. By way of introduction we probably should go back to the work of Economist Steve Keen who in his 2001 work “Debunking Economics” appealed to his profession to return to what he described as “reality economics”. Simply put; economics should turn away of pretty models of reality and, instead, actually study reality.

The empirical approach to economics fell out of fashion in the neo-liberal boom of the 1970s and 1980s when suddenly dogma was the style. It no longer mattered if your economic theories didn’t match reality. If you just believed in them hard enough then you made your own reality. Economics lurched from being a dismal science to serving the needs of the elite. Establishment power found the economics profession all too willing to prostitute itself to their needs. Greed was good and they could prove it – well, in a test-tube at least. Vast social inequality no longer mattered as long as 1% were fabulously rich. You could march down that road to serfdom in the name of freedom. But it was not to be a freedom for all. The economics profession fawned at the altar of the market and all fell into line to praise this new god. Non-believers were expelled to the fringes. Economics practice now resembled old black-&-white B Movies of Professor Frankenstein stoking life into flesh and bone with a lightning bolt. It was all flash, bang and magic. It worshipped the theoretical and favoured the fantasy of what it has created. “Its alive!” the professors would cry and their students gasped in wonder & awe at the new efficient-market theories.

Piketty’s work does not confront this directly however it is clear that he is personally uncomfortable with how his profession re-invented itself. He recalls how his post-graduate work in the United States was pushed firmly into the direct of theoretical economics. Nobody wanted to know about the statistics of the past. Years later Piketty has risen in stature and, thankfully, was able to fulfil his ambition to test the theories of economics against the historical record. This study focusses on over 100 years of statistics gathered from countries all over the world. It was an enormous task and the author credits quite a large team who helped him in this work. The numbers they gather track how incomes and capital wealth have risen and fallen down the years. It sounds pretty dreary but Piketty spices up the text with cultural references to classic works of fiction that cover the period. You will be enlightened here about economics history from the works of Jane Austen and the movie “Titanic” (believe it or not). No, this is no ordinary work of economics.

Piketty himself describe his work as filling a void. Economists turned their noses up at studying statistics that reach back many centuries. They regarded it as a study of history whilst the historians ignored it on the basis that they believed it to be in the field of economics! Between the two professions they ignored what was obvious for all to see. What impresses you immediately is the broad scope of what has been achieved here. Piketty can track the fortunes of great empires as they have waxed and waned through periods of famine and feast. The period of the two great world wars comes under particular attention as they proved to be quite an earthquake in our economic affairs. Piketty has given us a sweeping view that stands so far back it gives you completely new perspective. It gives you a dimension that few of us really think about because it extends beyond a single human lifetime. We think of economic policy as being a matter for politicians and four-year Parliaments. In truth the success of failure of economic policies is as much directed by mega-trends as they are by the wishes of Nations’ central banks and Treasury departments.

The post-war period is a good example. World War Two cast a shadow over the European economies that lasted thirty years. A time-span so great that it includes a chunk of my own childhood. It came to an end when the post-war consensus collapsed with the termination of the Bretton Woods agreement. Hence those who wish to assign economic success or failure down to the brilliance (or otherwise) of the Politicians in charge are in for a rude awakening. There is indeed a much greater force at work: history. We may believe now that the failure of neo-liberal economics or the 1970s stagnation can be attributed to specific policy. It is not that simple. Indeed the period 1900 to 1970 could be seen as one of unprecedented growth, not doubt fuelled by the explosion of fossil fuel usage. If that growth is slowing down it may simply be returning to it historical “norm”. Such norms are driven by resources and demographics over periods of centuries.

“Growth can of course be encouraged by investing in education, knowledge, and non-polluting technologies. But none of these will raise the growth rate to 4 or 5 percent a year. …there is ample reason to believe that the growth rate will not exceed 1 – 1.5 percent in the long run, no matter what economic policies are adopted.”

“…growth cannot be achieved [..] unless new sources of energy are developed to replace hydrocarbons, which are rapidly being depleted.”

It makes you feel small doesn’t it? Suddenly your politicians are powerless in the face of the tsunami of history. Well, not quite. The true lesson here is that we have been too short-sighted. We have been looking at very narrow examples from the recent past to decide economic policy for the future. If you take a step further back and ignore the dogma of the last thirty years then it sheds new light. With the right perspective we can see our small place in history. Yet with the fullness of this information we can make our economics reality-based to design policy for the future that might actually lead to long-term sustainable prosperity. Piketty has given us the view from where we can see that all our current economic Emperors are under-dressed.

Buried behind the history lesson is/are Piketty’s big idea(s). These are the policies that have got him noticed in the highest realms of modern European and North American political power. His work is polemic-free yet this epic possesses such authority that few in the echelons of power have resisted it. This is a remarkable achievement because the message here would traditionally be regarded as left-wing. However it has flown under the radar because it is couched so strongly in the terms of economics. This in itself is a lesson. Much in the way that a powerful woman has to be better than men in order to succeed then slightly leftish economics has to be demonstrably better than the status quo neoliberal consensus for it voice to even be heard.

So, what are these big ideas? He has found a new form of economic language to explain to people (who might otherwise disregard such things) that inequality will only get worse not better. Piketty represent a statistical repudiation of the “Kuznets Curve” that was an economic theory coined in the 1950s that suggested that unfettered capitalism would lead to less inequality. This idea was based upon limited data and a misunderstanding of what was happening in the data.

“Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact.”

A greater historical perspective allows to understand why we see only widening inequality today. This inequality will lead to instability hence it is not in the interests of our nations to let it go unchecked. His prescription is a progressive annual tax on capital the revenue from which needs to be used to cancel debt.

“A progressive tax on capital is a much more appropriate policy in terms of both democratic transparency and real efficacy.”

“The progressive tax is indispensable for making sure that everyone benefits from globalisation, and the increasingly glaring absence of progressive taxation may ultimately undermine support for a globalised economy.”

“Historical experience shows that such immense inequalities of wealth have little to do with entrepreneurial spirit and are of no use in promoting growth.”

Piketty goes as far as stating that such rent-seeking is “economically useless”. Wealth accumulates more wealth because the rate of return on capital is always greater than the rate of economic growth. Put it simply – capitalists will always earn more from their capital than the rest of us earn from rising incomes in a growing economy. Or, to put it in its colloquial form: the rich get richer and the poor get the picture.

“…pure and perfect competition cannot alter the inequality r > g (return on capital is greater than growth) which is not the consequence of any market “imperfection”. On the contrary. Although the risk is real, I do not see any genuine alternative: if we are to regain control of capitalism, we must bet everything on democracy…”

By which Piketty means that we need the institutions to be formed that allow the social and fiscal policies he recommends to be introduced and governed. This is a highly oblique reference to the takeover of current governance bodies by an establishment elite hell bent on entrenching its dominance. Such an elite is in the thrall of neoliberalism because it is a tune that serves to strengthen their position. This is not the democracy Piketty is suggesting.

“The nation state is still the right level at which to modernize any number of social and fiscal policies and to develop new forms of governance and shared ownership intermediate between public and private ownership, which is one of the major challenges for the century ahead.”

Or in other words we must learn from the past to inform the future. And we must learn the right lessons. Free market fundamentalism will not deliver a utopia. It can only asset strip the “social state” in a race to the bottom where nations vie with nations to have the lowest taxes. Our institutions cannot remain stuck in the past and need to be “reinvented again and again“. This is a clarion call for a renewal of capitalism based upon the evidence of what it demonstrably can and cannot do. This is a call for a return to reality economics. Or, at least, for a return to an open-minded discussion about the facts free of Left-wing versus Right-wing political stubbornness.

Piketty has a clear vision of what the those “major challenges” are “for the century ahead“: climate change and resource depletion. It may not dominate the narrative but he does sprinkle casual mention through out the text of the need to renew our energy systems from fossil fuels to renewables. He treats this as an uncontroversial matter-of-fact. He discusses the economics of climate change in his conclusion at the rear of the book. He writes that the techno-optimism of Lord Stern’s critics is “not very convincing” and “seems to sidestep the central issue“. This issue being that ending the dominance of fossil fuels is a win-win for energy security, climate and the economy. This was the belief of the “Green New Deal” concept that appeared a few years back although Piketty make no mention of it here. This is true of so much of his work. You see so many echoes from so many previous efforts yet he manages to package them all in completely new way. He has sweetened the pill. He advises governments to adopt green stimulus packages:

“This strategy is particularly tempting because many governments are currently able to borrow at very low interest rates. If private investors are unwilling to spend and invest, then why shouldn’t governments invest in the future to avoid a likely degradation of natural capital?”

Unfortunately since these words were written the UK and European banks attempted more and more quantitative easing and such green stimulus remains gathering dust within the manifesto of the Green party.

Piketty also calls for greater transparency in economic affairs. Again he doesn’t chose words that you and I might use as he delivers this message carefully. His point remains the same: we are unable to deliver a 21st century taxation system because the banking system is so opaque. Or to put it another way people hide their money in tax havens. This use of dodgy fiscal methods to avoid paying tax has been cited in the UK as a reason NOT to raise taxes. Yet this is exactly what Piketty is suggested we tackle head-on. It is time to remove the tax havens and to force democracy upon the banks. If we are to have a modern capital tax then we have to know what capital people have. Hence Piketty explicitly states the need for “democratic governance and participation“. Company finances are obscured inside books that are totally inadequate for anyone to make informed judgements about them. He avoids going on to make the obvious point that out establishment engineer these accounting structures precisely so that corporation can hide their crimes and avoid tax. They tend to get what THEY have paid for. And public scrutiny is not one of those things.

There is also a clear anti-austerity message here too. No doubt the words of Piketty are well known to many inside the Syriza coalition that seized power in Greece on an anti-austerity ticket. The author is clear that our monetary debts are great but we must not forget just how wealthy we are in Europe. “Private wealth rests on public property” he reminds us. Debt must be reduced as quickly as possible in order that we do not waste money on interest charges.

“..debt often becomes a backhanded form of redistribution of wealth from the rich to the poor, from people with modest savings to those with the means to lend to government (who as a general rule ought to be paying taxes rather than lending)..”

Our establishment takes it for granted that they must make money from other people’s misery. The option that they should be taxed seems not to enter the equation. Piketty does not list austerity as an option for paying back debt. It is either inflation or a capital tax. It is for our democracies to decide. Sadly they have chosen the option that he so utterly rejects.

“..many dangerous illusions have arisen in regard to government debt and its relation to social redistribution. These illusions urgently need to be dispelled.”

Who is listening? Greece is. If we didn’t have a handle on why austerity is the WRONG choice then we do now. The trouble is that austerity suits the purposes of those with capital and THEY ARE IN CHARGE. Austerity doesn’t harm them. Hence the redistribution of wealth and Piketty’s call for a return to transparency and democracy. Clearly our current system is not fit for purpose if we wish to retain the social state.

What is great about this work is how Piketty has avoided the obvious clichés and occasionally praises some of the central tenets of free market capitalism. He is all for free trade just as long as this is not a race to the bottom to the lowest tax area. He also supports the freedom of movement of people which so many in our establishment seem to reject yet is a fundamental free market principle. It calls to mind the old saying about free markets for the poor and socialism for the rich. Piketty roundly rejects this kind of conclusion with the words:

“Has the US political process been captured by the 1%? This idea has become increasingly popular among observers of the Washington political scene. For reasons of natural optimism as well as professional predilection I am inclined to grant more influence to ideas and intellectual debate.”

Such lofty ideals may seem naïve to many of us yet his professionalism has given Piketty a voice few others have raised. But at times this has not stopped Piketty describing a spade as a spade. He is particularly pointed in his criticisms of sky-high executive salaries. His research shows that these remunerations had more to do with luck than talent.

“It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously, or at the very least be rather optimistic in gauging their own marginal productivity. To behave this way is only human, especially since the necessary information is, in objective terms, highly imperfect. It may be excessive to accuse senior executives of having their “hands in the till”, but this metaphor is probably more apt than Adam Smith’s metaphor of the market’s “invisible hand”.”

In essence it has everything to do with greed not ability. The impossible rise in “super-manager” pay is associated with those countries where the higher rate of income tax has been lowered significantly. Yet letting the super-rich put their hands in the till didn’t make them any better at their jobs.

“…the reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to the predictions of supply-side theory) or at any rate did not stimulate productivity enough to be statistically detectable at the macro level.”

We already have seen this idea promoted elsewhere but Piketty reaches the same conclusion. There is no justification for enormous income disparity. It is economically useless, inefficient and is sapping the economy. There is a better way. So how did we end up living in such a fairy tale? The end of the post war economic consensus in Britain and America was driven by the idea that these countries were falling behind. Piketty points out that this was an impression only. In fact other countries were simply catching up with historical norms. Nations fell behind because of the shocks of the two World Wars. These events destroyed the wealth based upon capital and boosted the incomes of the working classes. The post-war period saw a massive drop in inequality.

Inequality is rising again now, maybe not to the levels seen maybe in 1914 because we have a more progressive tax system than 100 hundred years ago, but rise it will. Perfect free markets cannot reduce inequality. Only the state can do that. And the state seriously needs the money. There has been way too much borrowing and way too little in the way of tax receipts. The setbacks for the very wealthy seen in the post-war period have come to an end. What is happening today is simply history catching up with itself. There will be no return to the sorts of equally spread prosperity seen in the 1950s and 1960s until the state builds new taxation models to tame the wild beast that is capitalism.

“…Europe in the period 1945 – 1974. People felt that capitalism had been overcome and that inequality and class society had been relegated to the past. ..Europeans had a hard time accepting that this seemingly ineluctable social progress ground to a halt after 1980, and […] they are still wondering when the evil genie of capitalism wil be put back in its bottle.”

“…the wealth hierarchy is not just about money; it is also a matter of honour and moral values.”

…which we take to mean that these outcomes are not inevitable. We have choices. We chose a path in 1979 that was one based upon a misunderstanding of the past. Our path can be corrected with the full knowledge of what actually happened. Will we chose wisely? Have we learnt anything? Why do the rich get richer? Because of inheritance. As the generations go by money is passed in an un-earned fashion between the generations until it accrues to a level such that it becomes self-perpetuating. Once invested those who own it can simply live off the rents forever. Given enough money invested in capital then capital will accrue more money than the owners need in income hence the surplus is re-invested. And so-on. In the end capital will own the whole world squeezing the incomes of everyone out of existence. Welcome to the serf society. This was Marx’s believe – that capitalism would destroy itself. He wasn’t wrong, although his prescriptions for the cure are roundly rejected by Piketty – as he should. Socialism and Communism are not answers, yet they proved salutary lessons for us all. That does not mean we need accept unfetter capitalism because that too is as flawed as the other economic extremes. All lead to serfdom. So, what is to be done?

“Over the long run, education and technology are the decisive determinants of wage levels.”

Government must invest if its society is not to fall behind. The social state is the answer to the crisis of capitalism. The best schools tend to favour students from privileged social backgrounds – another reason why wealth creates wealth to the exclusion of all others. This depresses the wages of a majority who thus get into debt. Large-scale debt leads to instability and collapse. It is in no one’s interest to allow such circumstances to be propagated. Beyond that simple observation Piketty has this value judgment to add:

“It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.”

He cannot imagine the return to a serf-based economy. He assumes there is no way back. Something will have to “give”. He is optimistic that some revolution will naturally correct the imbalance. He actually does write this:

“…a revolution will likely occur..”

It may not be bloody or involve the proletariat storming the gates but it will be a revolution nevertheless.

No review can really to Piketty justice. It is a big long book densely packed with ideas and evidence. I have just picked out a few obvious themes than are the important ones for us at the end of the age of extreme capitalism and the age of non-renewable energy supplies. This history of these two have gone hand in hand as each exploited the other yet each must fade and die in time to be replaced by more equitable and sustainable governance and energy systems. Their time has passed. We are only left to ask: what is to come of us? How do we plot a path away from energy poverty and economic serfdom? How do we build a world worth living in? Piketty talks of revolution but his pages are packed with common-sense ideas that can be implemented if we chose to to – if we can conjure up the political will power. This will only happen when we speak truth unto power and in this Piketty has spoken a truth so loud and so clear that few have not felt its warmth. It makes a change from the icy blast of fossil fuel driven austerity and the economics of those without imagination.

“There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.”

Reading Piketty fills you up with a vision that there is a calm and reasonable way forward that yes, does require a revolution. It need not be a bloody one but change has to come. We are using the old ideas to try and solve problems those very ideas created in the first place. Until we have transparency in our economic institutions we cannot make change happen. We cannot hold wealth and power to account. Piketty rarely terms this as a moral or ethical decision but his intended implications are clear: there is no future for the economy our elite has attempted to build for itself. Such a self-serving edifice is build upon the shifting sands of history and it will be washed away as other great empires have perished in the past. We must reinvent ourselves upon the rocks that we know are there to be utilised…

…but we have to chose and thus far out choices have been poor. The choicemakers thus far have not had it in their interests to supply the full range of options to those who vote. It has always been in their interest to obscure the truth from us because the truth would set us free – yet freedom is not an economic goal for the establishment. Freedom for the majority means slightly less freedom for a minority – and that remains quite beyond the topic of polite conversation. The elite is only interested in its own economic sphere of influence – ITS freedom, not ours. Yet it is their freedom that must suffer before the reins of control are loosened and the true choices are laid before us. It remains as yet unclear what train of events could so threaten the status quo that such a governance revolution can happen.

But happen it must.

About post-carbon-man

A passionate advocate of a peaceful transition to a sustainable political-economy, Mark hails from a working class farming background. Today he is a Company Director and Chairman of the Low Carbon Chilterns Co-operative. Whilst at University (Engineering Masters) he was active in Conservative Student politics but has had no affiliation since. He has travelled widely on business covering the USA, Europe, Middle East and Central Asian Republics. In 2007 Mark founded Post-Carbon-Living and a year later co-founded Transition Town High Wycombe. He lives with is wife & daughter in a home they retrofitted to be carbon-neutral. Today he blogs about surviving politics on a shrinking planet and is passionate in his rejection of Nationalism.

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