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Thursday, April 17, 2014


During the five days that I was writing my review of Piketty, I was very much buried in the minutiae of the book, struggling to render it for my readers in a fashion that was comprehensible.  Since that time, I have taken a holiday in Africa that included two very lengthy plane trips.  This has given me some time to step back from the rich detail of Piketty's account and think more generally about the significance of his discoveries.  In this post, I begin a discussion that I hope will provoke some of you to thoughtful reactions.

To my way of thinking, there are two large facts that stand out from Piketty's exposition.  The first is that the bottom half of the population in modern capitalist societies has a net worth of zero.  The second is that the historically very high concentration of inherited wealth in the hands of the richest 1% or 0.1% or even 0.01% of the population, a concentration that diminished markedly between the two world wars and the boom years of the post-war period [les trente glorieuses], has now been reestablished and threatens to become even more markedly unequal in the remainder of the twenty-first century.

How on earth can half of the population of a country like America own nothing?  Don't they have stuff?  Clothing, dishes, TV sets, cell phones, cars?  Good grief, don't many of them own their own homes?  Of course they do, but they also owe a great deal.  They have mortgages;  They have unpaid credit card balances; they have student loans; they owe on their cars.  And of course, many in the bottom half do not even have mortgaged homes or indentured cars or student loan debts.  They live from paycheck to paycheck, barely making ends meet.  Collectively, on balance, subtracting their debts from their assets, they own nothing.  We are not talking about a relative handful of the very poor.  We are talking about one hundred sixty-five million Americans.

Piketty gives us the figures but does not spend much time at all talking about the significance of this astonishing fact.  In the richest nations on earth, nations whose collective wealth dwarfs that of the grandest kings, emperors, and oligarchs of the past, half of the people are worth nothing at all [measuring worth, as is appropriate in a capitalist society, by net asset value, not by  intangible spiritual or moral possessions of the soul.  These one hundred sixty-five million men, women, and children no doubt have many very fine qualities, but the market value of those admirable traits is zilch.]

The asset-less fifty percent may not own anything, but they work, and their work is essential to the lives of the asset-rich.  Later this morning, I will walk across the street to the local Harris-Teeter supermarket to buy some things for dinner.  The supermarket is stocked with fruits, vegetables, meats, fish, and an endless variety of canned foods.  All of that food was grown, processed, packed, shipped, laid out in the store, and will be sold to me by members of the asset-less fifty percent.  If they do not do their jobs, if they do not soldier on, assetless as they may be, then I starve, unless I can somehow manage to hunt and gather in Chapel Hill in the fashion of my ancestors.  All of us in the asset-rich upper half depend on the work of the assetless to survive.

To be sure, I and my fellow upper fifty-percenters offer invaluable goods and services to the assetless in return.  It may be that without them, I could not eat.  But without me, they could not understand Immanuel Kant.  One might wonder:  in a post-Apocalyptic America of the sort so beloved by film makers, would one rather come upon someone who knew how to grow corn or someone who could explicate the Critique of Pure Reason?  Judging from the reward structure of American society, it would seem that the consensus gentium finds for the Kant scholar.  I was paid, during my long career, vastly more than those who grew my food, made my clothes, built my home, delivered my mail, or even gave me flu shots and performed MRI's on me as needed.

Income inequality is not so lopsidedly severe as wealth inequality, of course.   Those in the bottom half must have some income, for they must eat and wear clothes and live somewhere or they will not be able to look after the needs of the asset-rich.  But as Piketty and many others have noted, even income inequality is getting worse at an astonishing rate.

The concentration of wealth at the very top of American society [and French, German, Italian, Japanese, and Chinese society, of course] is truly hard to grasp.  The richest 1% of America is some 3,300,000 men, women, and children.  They own roughly 30% of all the wealth in the country.  But half of all American wealth is in the form of housing, and in the portfolios of the rich, housing does not loom large, even though they may own McMansions.  It is no exaggeration to say that the rich own most of what there is that is not nailed down.

In thinking about this extraordinary inequality in the distribution of wealth, it is very important to distinguish between capital and capitalists.  Does society need capital?  Of course it does.  Capital is simply the accumulated and unconsumed product of previous cycles of production.  Capital is buildings, it is tools, it is raw materials for production, and it is intellectual property -- patents, copyrights, etc.  Life at anything beyond a scavenging subsistence requires capital.  If a farmer did not set aside part of her crop as seed corn, she would be unable to plant the next year's crop.  [At just this point in my writing of this series of reflections, I followed a link to Paul Krugman's review of Piketty for the New York Review of Books and read what he has to say.  I strongly recommend it.  It is an intelligent and very generous review, and is worth reading.  To continue.]  Piketty estimates annual depreciation globally at 10% [rather higher than I would have guessed], so simply replacing what wears out requires setting aside a substantial proportion of each year's annual product, and that quantity of output set aside is capital.  Economic growth, of course, requires even more to be set aside and accumulated as capital.

But although society definitely needs capital, does it also need capitalists?  Does it require that there be an identifiable [small] subset of the population that owns the social capital?  Picketty never asks this question, and despite his European left-wing political self-identification, it seems not to be a question he wishes to raise.  He seems to view this question as having been settled by the disaster that was the Soviet Union, much as militant anti-Catholics consider the Inquisition to have settled for all time the merits of Christianity.  [Side note:  Serious atheists like me do not make the mistake of blaming Jesus for those who acted in His name.  I wish serious religionists would accord Karl Marx the same courtesy.]

There are, I think, three arguments justifying the existence of capitalists.  The first is what we might call the Max Weber or Protestant Ethic argument:  to initiate the explosive economic growth characteristic of the earliest stages of capitalism one needed individuals who were driven essentially by religious motives to engage in endless, obsessive accumulation and re-investment.  These individuals became very rich very fast, along the way expanding the productive capacity of society in ways that benefited everyone and gave us the modern world in which we live.

The second argument is what we may call the Steve Jobs or Creative Genius argument.  The endless expansion of modern economies is driven by creative geniuses whose brilliance, imagination, and unrelenting industry yield new products [the electric light, the automobile, the computer, the cell phone] or new modes of production [the assembly line] without which the world as we know it now would not exist.  These individuals convert their ingenious inventions into the ownership of huge enterprises worth unimaginable amounts of money, along the way providing all of us with the fruits of their creativity.

The third argument is what we may call the Marginal Product or Competitive Advantage argument.  Modern economies are organized into vast productive assemblages of labor and capital that require skillful management by individuals who possess scarce and immensely valuable abilities.  Competition for their indispensable services results in astronomical salaries which they earn by guiding the companies they lead to hitherto unachievable heights of productivity and profitability.  Inevitably, these individuals over time accumulate huge stores of wealth, which wealth they then make available to the world as capital by investing it rather than consuming it.

[I omit a fourth argument, due to free market fundamentalist libertarians of the Ayn Rand stripe, who claim that the rich have acquired what they own by legally free and uncoerced exchanges in a sunlit market, and hence have an absolute and unchallengeable right to everything they own.  Bob Nozick to the contrary notwithstanding, this is a dopey argument, and not worth discussing.]

I am happy to concede the first argument, since it is purely historical, and offers no justification for the continued private ownership of the means of production [a.k.a. capital].  The second argument I am also willing to concede.  Far be it from me to take a single penny from the late Steve Jobs, from Bill Gates, or even from the egregious Mark Zuckerberg.  I happily grant that they deserve every dollar they have.  However, there is no reason that their children or other heirs should share in this wealth.  They did not create it.  So far as I can see, capitalism would function quite efficiently with a 100% inheritance tax after an initial exclusion -- say half a million dollars, or less -- to allow parents to pass something on to their children.

The third argument, as Piketty indicates, and as many have argued, is simply nonsense.  There are no theoretical or empirical grounds for supposing that highly paid "supermanagers," as Piketty calls them, are paid an amount equal to their marginal product.  I am happy to grant that the managers of large enterprises should receive substantial salaries.  If we were to return to the sorts of salaries that were common fifty years ago, when capitalism was doing quite nicely, that would be a great victory indeed.  And of course it goes without saying that these well-compensated executives ought not to be allowed to pass on to their children whatever portion of their large salaries they fail to spend during their lifetimes.

What would be done with the enormous accumulations of capital taxed away on the death of those who had accumulated it?  One natural response is that the income generated by it could be used to improve the level of compensation of that propertyless bottom fifty percent.  And who would own this capital, once it had been taxed away from the estates of the original accumulators?  The obvious answer is, society would own it.  Which is to say, each generation would pass on its accumulated capital to the social fund of capital.  It would still be managed by well-compensated executives, and there would certainly be a pyramidal distribution of wealth and income, but the pyramid would be dramatically flattened and its base would be raised up.

It seems to me that this is the natural direction in which Piketty's arguments lead, once we give up the unexamined assumption that society requires capitalists in addition to capital.  Would talented and driven individuals choose to innovate, like Jobs, or manage, if they could not pass their gains on to their children?  That is a question of fact, not answerable by mere speculation, but there would be many ways in which to investigate it with interim measures designed to reduce, but not eliminate, the transmission of capital assets to children who had not in any sense earned them.

It will be very interesting to see whether Piketty's book, which is having so big an impact in some economic circles, leads some theorists to raise these questions.

Who knows?  Socialism may not be dead yet.



Unknown said...

Well said Professor!

"The asset-less fifty percent may not own anything, but they work, and their work is essential to the lives of the asset-rich."

I'd even go so far as to argue that the asset-rich owe something to the asset-less fifty percent....

Unknown said...

Another thought - I have to wonder if Professor Piketty - like Jean-Jacques Rousseau did in his Discourse On Inequality - burried any explosive suggestions in his footnotes.......

Robert Paul Wolff said...

I am embarrassed to confess that I did very little reading of the footnotes. I will sit down and plow through them and see.

Musing Marxist said...

"[C]apitalism would function quite efficiently with a 100% inheritance tax after an initial exclusion -- say half a million dollars, or less -- to allow parents to pass something on to their children."

Is your view that, absent the initial exclusion, capitalism would not work efficiently or is there some other value that you think the initial exclusion would promote?

Robert Paul Wolff said...

I am very conscious of the enormously powerful, and in my view admirable, desire of parents to make some provision for their children. Such a desire ought to be compatible with any defensible economic system. It is not that impulse that produces the inequalities and exploitation of capitalism.

Seth said...

The obstacle to socialism has never been the theory, always the practice. How do you manage socialized capital for the benefit of the broad citizenry without losing control of it to the leaders? This is sometimes called the "agency problem" -- how do you ensure (positively) the selection of trust-worthy agents and (negatively) the removal of badly behaved agents?

Democratic socialism is the glib answer to this question, but it begs the question. How do you sustain active participation by a broad enough population when specialized knowledge and focused attention is required to manage any particular part of the socially owned enterprises?

The Polanyi brothers are a neat pair of bookends on this subject: Karl stating the social and political problem elegantly ("The Great Transformation") in its historical context, and Michael expressing the difficulty of solving it ("Personal Knowledge") given the need for specialization and reliance on others' expertise even in epistemological/scientific matters, without even getting into the sort of decision-making required of business managers.

Piketty is perhaps feeding some oxygen to the dying embers of political economy as an academic subject, but we need something more than theory. You have expressed frustration at the prospect of leaving this world before real progress can be made in these matters. I'm a good three decades younger, yet worry that my *grandchildren* will not see this resolved either.

Kent Schenkel said...

That oligarchs can perpetuate dynastic wealth is, I think, one of the big drivers of what you refer to as "the inequalities and exploitation of capitalism." Jeffrey Winters' description of the "civil oligarchy" that he says we live in is pretty convincing. The oligarchy would not stand for confiscatory taxation. It won't happen without global revolution.

Piketty is proposing a solution that takes the economic system we have as a given. His claim is that his patient (modern global capitalism) has a disease that he is sure will continue to produce unwanted symptoms (dominance of inherited wealth) and he elects to treat those only those symptoms (his proposal for a moderate tax on wealth). It is like prescribing a statin drug to a heart attack candidate. Your proposal, on the other hand, is aimed more toward the root cause that is producing the symptom. It’s more like forcing the patient to exercise and stop overeating. Just as I would guess statin drugs have better odds of effectiveness (few patients will change their habits and lifestyle) Piketty’s solution is the more pragmatic. After all, one of the genius moves of liberalism and modern capitalism has been to associate “freedom” with “property rights.” That is to say, private property rights. And in the liberal imagination, property rights include the freedom of disposition (in the jargon of lawyer, rights of alienation). By this thinking, because confiscatory taxes eliminate freedom of disposition they are therefore a direct attack on “freedom.”
What’s encouraging about Piketty’s proposed solution is not that it's brilliant or novel. It might not even prove effective. But if his predictions gain credibility (and they might, given the attention his book is getting), there is at least some possibility that a moderate tax on global capital could become a reality.

Kent Schenkel said...

Here's a new article in the Chronicle of Higher Education that mentions his parents' participation in the student protests of 1968:

I think you were looking for reference to this fact in an earlier post.

Kent Schenkel said...

One of my favorite quotes from the book is excerpted in the Chronicle article:

For far too long,"economists have sought to define themselves in terms of their supposedly scientific methods. In fact, those methods rely on an immoderate use of mathematical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content. Too much energy has been and still is being wasted on pure theoretical speculation without a clear specification of the economic facts one is trying to explain or the social and political problems one is trying to resolve."

Robert Paul Wolff said...

Right. I loved that one. There are many nice moments in the book. I am now reading the footnotes, and there are a few nice moments there as well [report to come].