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Monday, March 31, 2014


One more example of the U-shaped curve, about which I have been talking for several days, this time with respect to what Piketty calls "the annual inheritance flow."  In France [which, as usual, is his primary focus], we find that from 1810 until 1920, the period of remarkable stability in European capitalism, amounts of capital equal to between a fifth and a quarter of national income were passed on as inheritance each year from the dead to the living.  During the first world war, this annual passing on of capital plummeted to 8%, and by of the second world war to 4% of national income, an astonishing change.  This amount of capital being passed on from one generation to the next then recovered, so that by 2010, it had risen again to about 15%, and gives every indication of continuing to climb.  Once again, those of us for whom the post-war period was the reality of our early years formed an impression of the fundamental fairness and openness of modern capitalist society that is simply wrong for the long run.  Living during an anomaly, we naturally viewed it as the new normal, unaware that it was passing into history even as we grew up.  At what level and when will the inheritance flow stabilize?  Piketty explains that the answers to these questions depend on g and r, which is to say on the growth rate and the return to capital.  He offers two scenarios, based on different guesses about the future of these two magnitudes, which suggest that the inheritance flow by the year 2100 is likely to stabilize somewhere between 16% and 23%.  This in turn will determine just how patrimonial the capitalism of the future becomes.

Piketty has one way of representing the temporal evolution of this concentration of wealth that I had never seen before.  It is a trifle tricky but very striking.  Let me explain.  He looks at each French age cohort [i.e., all the people born in France in the same year] and at the lifetime wage earnings of the bottom fifty percent of the working population of France.  Then he asks this question:  What fraction of each age cohort receives, as inheritance, an amount equal to the lifetime earnings of someone in the bottom half of the society?  For example [using American magnitudes to make things more perspicuous], suppose that an American worker in the bottom half of the workforce earns on average in 2014 dollars $30,000 a year for a working lifetime of 45 years [age 10 to age 65].  That is total lifetime earnings of $1,350,000.  Then ask, what fraction of this worker's age cohort inherits at least that much -- $1,350,000?  [Just to be clear, the median wage for full-time workers in the U.S. 2013 was $776 a week, which works out to more than $1,800,000 for a fifty-two week year over forty -five years.  But "median" means that all of the full-time workers in the bottom half of the workforce are below that amount.  My figure of $1,350,000 is a guesstimate of the average of all lower fifty percent workers.]

Well, the answer for France is this:  Way back in 1790, 10% of the age cohort inherited as much as a worker in the bottom half made in a life time.  That proportion of the age cohort dropped, first slowly, then rapidly, until in 1920, it hit 2%.  After WW I, only 2% of French heirs inherited as much as someone in the bottom half of his or her age cohort earned in a lifetime of working.  Then the proportion of these heirs began to rise [the same U-shaped curve again!] so that by 1990 it had reached more than 13%.  After a slight dip as a result of the Great Recession, which wiped out a good deal of inheritable capital in the form of the value of shares of stock, the proportion resumed its upward march.

Just stop and think for a moment about what this means [I assume the figures are not much different for Britain or America].  We are a society of two entirely separate and different worlds.  Half of us labor day after day [if we are lucky] for a lifetime, managing, let us suppose, in all that time to earn on average more a million and a third dollars, which we use to pay taxes, pay for health care, pay for housing and food and clothing and education.  And 12-14% of us inherit that much in one lump sum simply by having the brains and gumption to be born in to the right family.  In a country the size of America, that endowed 13% is more than forty-million people.  They loom so large in the public discourse and public consciousness that they define what it is to be an American.  Meanwhile, 165 million men and women slog on, never seeing anything remotely like the life lived by the fortunate forty million.

This is perhaps the right time to turn our attention to the truly revolutionary consequence of the period of les trente glorieuses, the Boom Years -- the emergence of an elite group of corporate executives and financial executives whose income, albeit earned income or wages and not income from capital, has made them multi-millionaires and billionaires.  These people often own enormous portfolios of shares, frequently in the companies they manage, as was true of corporate magnates in earlier times.  However, there is this important difference:  the size of their ownership in the companies they run is a consequence of their positions as managers, not a condition of their positions.  They own shares because they are managers [through stock options, for example].  They are not managers because they own shares.

This has been the subject of an considerable public discussion in America in recent years, as well as of a dramatic series of organized protests [the Occupy Wall Street movement], so I need not say a great deal about it by way of introduction.  Piketty offers statistics aplenty on the wealth of the one percent, the one tenth of one percent, the one one-hundredth of one percent, and even, believe it or not, the one one-thousandth of one percent, and they are precisely as chilling as you might expect. 

"Broadly speaking," Piketty tells us, "the rise of the supermanager is largely an Anglo-Saxon phenomenon."  [p. 315]   The charts tell the story.  In 1910, the top1% of society was receiving 18% of national income in America, and 22% in Great Britain.  With jogs up and down because of the Great Depression, this sank in 1970 to 8% in America and 6% in Britain.  But then the curves turned upward again [the very same U-shaped curve].  This time, however, thanks to the emergence of the supermanagers, America took off like a rocket, reaching 18% in 2009, before the Great Recession.  Already, however, that slight dip has been reversed and the share of national income going to The One Percent is again rising.

The standard academic economics explanation for the stratospheric salaries and bonuses being paid to the supermanagers is the theory of marginal productivity.  Those supersalaries are not the result of inherited wealth.  They are a measure of the value that the supermanagers add to the corporations for which they work.

As the old saying goes, don't get me started.  If anyone is interested, when I return from my safari, calm, collected, in touch with nature and my inner primate, I will undertake to say a few well-chosen words about the theory of marginal productivity.  But I do need to say something here.  First of all [as Piketty knows full well], the magnitude of the supersalaries paid to the top corporate and financial executives varies considerably by country, although there is simply no ground for supposing that American corporate executives contribute a greater marginal product than French or German or Japanese corporate executives.  Even if we were to grant that

top executives make very large contributions indeed to the profits of their companies, the cross-national comparison certainly suggests that as much marginal product could be wrung from the sweaty toil of American CEOs in return for markedly smaller pay packages.

But there is another point that needs to be mentioned, though I am afraid I cannot put numbers on it in a way that one would need to in order to make it stick.  Purely from an accounting point of view, the salaries and bonuses paid to top executives are costs of doing business  Like the wages paid to less well-remunerated workers, as well as the costs of raw materials, energy, and so forth, they must be subtracted from gross receipts before one can calculate the profits of the firm.  In this way, those supersalaries differ from the dividends paid to shareholders, which truly are distributions of profits.  In the good old days, when companies were run by their owners, one could, if one wanted to, break out the total take of the owner into a sum representing the wages of management and a sum constituting the return to capital.  But we are a long way from those good old days, and by and large [Bill Gates and Jeff Bezos and Mark Zuckerberg notwithstanding] no identifiable owners of big corporations in the executive suites.  I suggest that accounting practices to the contrary notwithstanding, much of what is received by corporate managers these days is actually a distribution to them of a share of the profits of the corporation.  Strictly speaking, they have no right to that portion of the profits, for it far exceeds, in most cases, what they might be permitted to claim as a return on the shares of stock they own.  It is a form of legalized theft, in which the Boards of Directors collude by authorizing the enormous pay packages.  Marx understood that profit manifests itself in many guises, but unfortunately Marx is no longer on the required reading list for up and coming American students of Economics. 

Piketty exhibits a curious ambivalence toward the theory of Marginal Productivity and the ideological rationalization it provides of the enrichment of the corporate elite.  On the one hand, he scatters caveats and qualifications throughout his book, clearly aware [with a depth of understanding that I doubt I can match] of its theoretical limitations.  On the other hand, he clearly thinks that a world of unequal earned income is greatly to be preferred to a world of unequal unearned income.  It is not a future ruled by supermanagers that alarms him.  It is the prospect of the return of patrimonial capitalism.



Jerry Fresia said...

Thank you. This is the most comprehensive review I've read. In fact, I need to re-read your four posts. Tell us, how does race figure into this and do you think Piketty is vulnerable with regard to race given the US history?

David Goldman said...

A small question about the inheritance numbers—I don't have the book handy—is the 13% number a proportion of the entire age cohort? Or 13% of heirs (of those who inherit anything)? I ask because the 40 million number seems pretty large to me (from the armchair, which is how empirical research ought to be conducted).

Robert Paul Wolff said...

David, it is 13 percent of the age cohort. Remember that we are talking about all the people who inherit houses and land and such as well as stocks and bonds.

David Goldman said...

Ah—that makes more sense to me.

Seth said...

Turns out the specter haunting Europe -- and America -- is aristocracy. And its victory is historically inevitable, right? According to Piketty, I mean. Or nearly so, given the odds against reform.

"I tremble for my country when I reflect that God is just."
-- Thomas Jefferson

History ain't over. Not sure that's a good thing ...

Ken Winkler said...

Hi Bob. Thanks for your comments on Piketty, whose book you've persuaded me to read. I was discussing his views on academic economists with my wife, Susan Meyer, who was reminded by them of a passage in George Eliot's Daniel Deronda—a comment on the character Sir Hugo. He tends, Eliot says, to "undervalue birth" — meaning that he tends to underestimate its causal influence — "as men after dining will often agree that the good of life is distributed with wonderful equality."

Enjoy your trip,

Ken Winkler