A Fable of The Piketty Goose

Paul Gaugin 'Breton Boy in a Landscape with Goose' (1889)

Two great problems today in the advanced nations that we are compelled to call upon economists to help solve, are (a) how to restore and sustain economic growth and (b) how to minimise, and become adaptively ready and steady for, any future crisis like the one in 2008. Unfortunately a new economics book which has received more immediate public attention than any other economics book in recent memory does not respond to either of those challenges. 

We speak of Thomas Piketty’s Capital In The Twenty-First Century. Many reviewers -- critics and supporters alike -- respectfully note that Piketty’s principal scholarly contribution lies in the economic history of wealth inequality. Piketty may, in addition, have produced an innovation by positing r > g (the rate of return on investment or capital is larger and faster than the rate of economic growth). There is lively disagreement about the veracity of the definitions, assumptions, and methods Piketty used to arrive at the r > g conclusion, and experts will bat this one back and forth for a while.

Although there have been thoughtful reviews, the most comprehensive and balanced I have read are those by The Economist (rumoured to have been penned by Zanny Minton Beddoes) and Tyler Cowen (in the journal Foreign Affairs). Broadly I agree with them. There is one sentence in the latter review that especially sticks in my mind - “If wealth keeps on rising relative to income, but wages also go up, most people will be happy.” Cowen observes that this is one among other factors that Piketty cannot throw light on.

My response to Piketty focuses on related, relevant things he does not say. The omissions seem just as important as the inclusions. Additionally I revisit from a Schumpeterian perspective the possibility that what Piketty does say is likely -- given the unprecedented attention the book has received -- to make current prospects for improvement worse. 

What Piketty says, or what he claims to say

Thomas Piketty would have us believe that wealth concentration is the ugly face of capitalism. Great fortunes nearly always originate in some combination of labour, luck, and theft, he declares. The problem with all large wealth is that it becomes patrimonial, i.e. it is inherited. When returns on capital accelerate the velocity of inequality over and above the rate of economic growth, as they necessarily must (this is the pre-ideological scientific dimension of Piketty’s book), labour drops out of the picture. All that remains is the luck. The original crime, the original sin, is perpetuated through generations. That is how we can know that inequality has become “excessive”, “nasty”, “unpleasant”, and... immoral. 

Piketty is not an extremist. It is important to recognise that he does not regard wealth inequality as economically inefficient. He does not claim, for example, that wealth inequality slows down the capitalist engine or brings forth capitalist crises. But he clearly does think wealth inequality is politically inefficient. The practical consequence of the growth of the rentier class, says Piketty, is the damage it causes to democracy. Piketty does not define either democracy or capitalism. Yet he is quite certain about the link between wealth inequality (associated with something dubiously dubbed “patrimonial capitalism”) and a looming political crisis. 

What we find, then, is an intoxicating juxtaposition of reality and unreality. The principal and deserved success of Piketty’s book lies in the documentation of cyclical upswings and downswings in the rate of inequality. Nevertheless, as sometimes occurs in the discipline of economic history, the interpretation derived from that data is much less impressive. 

If the present rise in inequality continues, and if “growth slows” at the same time that “return on capital increases”, Piketty says, “I believe that would lead to significant political upheaval”. He believes, as well, that “our democratic institutions can be captured by the top groups much more easily when you have such an extreme concentration of wealth”. 

The book got our attention initially because it is securely evidence-based in the historical dimension. We are disappointed upon finding that Piketty provides no evidence and no simulation model to support his attention-grabbing normative argument about what he believes will or should happen in the contemporary or predictive dimension. 

Nor does Piketty adequately consider other possibilities. He does not admit that institutional failings which directly enable the wealthy to “capture” politicians -- e.g. the much-studied money politics, cronyism, and rent-seeking -- can all be set substantially right without an attack on wealth. Nor does he acknowledge that the more likely underlying cause of political unrest in the near future is painful structural reform introduced during recovery from a financial crisis and in the hope of averting future crises. The causes of the crises that cause the structural reforms are obviously not unrelated to how capital is stored, regulated, and utilised, but they (categorically!) do not relate to wealth inequality per se. Protestors, and Piketty to an extent, thus scapegoat wealth inequality.  

What Piketty does not say

What if Piketty had predicted something much nastier and had done so more believably in his extrapolation of trends from the data? It would be of concern to everyone if even one of the following problems had been demonstrated with factual authority to possibly exist: 

1. For a significant period of time the rentier economy of conservative income has been crowding out the entrepreneurial economy of revolutionary income, directly and measurably to the detriment of general economic dynamism and growth; 

2. For a prolonged period of time the disparities of wealth -- which possibly were accentuated by rentier income -- actually slow or retard the secular elimination of poverty and the general rise in living standards; 

3. The concentration of rentier wealth (as opposed to another factor) undermines democracy. And/or wealth inequality is measurably reducing established equalities of economic opportunity. And/or wealth inequality is diminishing existing standards of social equality before the law. 

Capital In The Twenty-First Century demonstrates none of these things. It cannot tell us that wealth inequality is bad for society or for the economy in efficiency terms. The book attempts to show that wealth inequality (beyond an undefined point) might be morally or politically unacceptable. However, Piketty provides no measure of the moral or political bad of inequality. 

To be clear about my main point: Piketty has not demonstrated (nor has he intended to demonstrate) that the decline in capitalism’s general health is related to r > g or wealth inequality. Quite possibly, capitalism’s current slowdown and rising wealth inequality do share the same underlying cause. Although Piketty’s book might spur us to greater endeavours in searching for that cause, of itself the book is of little or no help in discovering the cause. My concern is that the ‘crowd psychology’ of talk about wealth inequality is a distraction from the task of mending capitalism and creating wealth anew. 

After weeks of sensational coverage in the media and on the blogs, the final process of digesting Piketty’s message has reminded me of the girl in the song who sees a fire, then sees a circus, then falls in love, then faces death, and each time she asks herself in an intelligent way - “Is That All There Is?”.

Tax Redux

Taxation is Piketty’s final solution to all of the very poorly understood problems of capitalism. And the blunter the tax instrument, the better to blunder. Plainly he regards swingeing Wealth Tax as a practical utopia, and intends it to gain future policy traction. There are well-rehearsed practical arguments today against wealth tax as compared, for example, with consumption tax. But we should not let the argument rest there. 

I turn to Joseph Schumpeter for more general insight relevant to the dismal politics of taxation that Piketty has made reappear in the Rabbit Hat of populist public policy. Piketty, who mentions him only once, seems to believe that the Soviet Union’s success was the reason why Schumpeter believed socialism might triumph over capitalism. 

Nothing could be further from the truth. In 1942 Schumpeter was concerned that proposals exactly like those that run excitedly through Piketty’s book would slowly ruin capitalism and smuggle socialism in by the incremental back door. 

Schumpeter was only too familiar with the ideas so often repeated today about wealth inequality-as-problem and taxation-as-solution. He was the leading exponent of entrepreneurial capitalism, and yet it is telling that he took a relaxed attitude toward the rentier. He was, on the other hand, consistently anxious about what he considered to be the unsustainable fiscal strain placed on the ‘tax state’ (Piketty calls it the ‘social state’, most people call it the ‘welfare state’). 

In the following passages Schumpeter brilliantly describes measures that could lead to socialism without the business class even being aware of what is happening. 

“[The] scheme of values of capitalist society, though causally related to its economic success, is losing its hold not only upon the public mind but also upon the 'capitalist' stratum itself. Little time, though more than I have, would be needed to show how modern drives for security, equality, and regulation (economic engineering) may be explained on these lines.”

“The best method of satisfying ourselves as to how far this process of disintegration of capitalist society has gone is to observe the extent to which its implications are being taken for granted both by the business class itself and by the large number of economists who feel themselves to be opposed to (one hundred per cent) socialism and are in the habit of denying the existence of any tendency toward it. To speak of the latter only, they accept not only unquestioningly but also approvingly: (1) the various stabilisation policies which are to prevent recessions or at least depressions, that is, a large amount of public management of business situations even if not the principle of full employment; (2) the 'desirability of greater equality of incomes', rarely defining how far short of absolute equality they are prepared to go, and in connection with this the principle of redistributive taxation; (3) a rich assortment of regulative measures, frequently rationalised by antitrust slogans, as regards prices; (4) public control, though within a wide range of variation, over the labor and the money market; (5) indefinite extension of the sphere of wants that are, now or eventually, to be satisfied by public enterprise, either gratis or on some post-office principle; and (6) of course all types of [social] security legislation. I believe that there is a mountain in Switzerland on which congresses of economists have been held which express disapproval of all or most of these things. But these anathemata have not even provoked attack.” 

“All I wish to emphasise is the fact that we have traveled far indeed from the principles of laissez-faire capitalism and the further fact that it is possible so to develop and regulate capitalist institutions as to condition the working of private enterprise in a manner that differs but little from genuinely socialist planning.”

Schumpeter then observed the power of ideology: Why is Piketty-style political moralising about inequality “not simply laughed out of court”? Why do “intelligent men who have no stake in a political program involving government expenditure or equalisation of income [still] feel concern on this score”? 

Schumpeter explained, also, why administrative bureaucracy which grows gigantic and fearfully complex in order to struggle with wealthy people over every dollar of their capital revenue eventually reaches a stage of justifying and protecting its own existence as its principal operational rationale. 

Furthermore, Schumpeter linked trends in political responses to wealth or income distribution to the periodic “stagnation” of the capitalist economy:

“Though there is nothing to fear from people’s propensity to save, there is plenty to fear from other factors. Labor unrest, price regulation, vexatious administration and irrational taxation are quite adequate to produce results for income and employment that will look exactly like a verification of the stagnationist theory and may indeed produce situations in which public deficit spending imposes itself.”

As can be seen, Schumpeter usefully surveyed the disutility of excessive or inappropriate taxation in the context of broader economic difficulties which are similar to ones in evidence today. A combination of very high and progressive taxation will impact negatively on effort and capital formation, and, as the fable tells, risks killing the precious goose that lays the golden eggs. The latest in a long line of silly 'gooses' who would clumsily abort the golden egg is none other than Monsieur Humpty-Piketty.

The unprecedented economic dynamism of the nineteenth century was one cause as well as one consequence of massive and concentrated wealth accumulation, particularly in Great Britain. Schumpeter understood this. He was disappointed that leading economists in the 20th century turned away from 19th century Gladstonian principles of finance that had previously encouraged saving and investment, taxing most efficiently for revenue rather than taxing morally or politically in order to “correct” an income distribution.

The larger question is how Schumpeter might have proposed to restore growth today, or specifically how and why Schumpeter’s ideas for improving and sustaining capitalism for the equal benefit of all people can be seen to differ so radically from Piketty’s unequal tax “fix”. It would be a good topic for a future post. 

Regular readers, rest reassured that another pending topic -- ‘The Good Rentier’ -- is pleasurably wending its way to completion.

I think it fitting to conclude with a modified extract from Lewis Carroll’s long fable Alice Through The Looking Glass:

Alice said - "I don't know what you mean." 

Humpty Piketty smiled contemptuously - "Of course you don't, till I tell you. There's a nice knock-down argument for you! When I use a word it means just what I choose it to mean, neither more nor less." 

Alice said - "The question is whether you can make words mean so many different things." 

Humpty Piketty said - "The question is, who is to be master, that’s all."

Michael G. Heller ©2014