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Rock-star economist Thomas Piketty— tough on inequality, soft on elitism

May 26, 2014, Vol. 19, No. 35 • By CHRISTOPHER CALDWELL
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Piketty has been a bit overpraised for these Balzac and Austen allusions. Their import stretches only to accounting matters. Piketty does not have a great literary style, as, for instance, John Kenneth Galbraith did. But he has a clear one. His book has been excellently translated by Arthur Goldhammer, translator of Tocqueville and the historians Jacques Le Goff and Emmanuel Le Roy Ladurie. Goldhammer also writes, from Cambridge, Massachusetts, a well-informed and biting blog on French politics.

Where inflation is dangerous, so is debt. Many Americans have a vague feeling that there is something progressive and generous-hearted about permitting the government to take on debt. It allows us to go behind the backs of the greedy rich and do something for the poor. When inflation is high, it may work this way, but not in the nineteenth century and not now. Piketty—and here is another place he resembles Marx—takes a very dim view of government debt. When governments want to spend more, they have a choice. They can raise money through taxes. Or they can incur debt by issuing bonds. Doing the latter will entitle bondholders to an enduring claim on a country’s assets. We are returning to a world in which the state pays out regular tribute, even if it is disguised by the way we keep economic statistics. Italy, for instance, has borrowed $2.8 trillion. Recent figures show private wealth growing in Italy. But a quarter of that growth was in government bonds, Piketty notes, meaning it was not so much an asset as “a growing debt that one portion of the Italian population owed to another.”

Piketty presents us with interesting ways of conceiving of property, vital for thinking about inequality. One of these is “Tobin’s Q,” named for the economist James Tobin. The measure compares the market value and the book value of assets, including companies. U.S. firms tend to be worth more than 100 percent of the sum of their parts, German firms less. This, Piketty asserts, is because German firms have, by law and custom, obligations to various “stakeholders” that limit and condition their prerogatives. A large part of the increase in inequality since the war has been an increase in the depth and security of private property rights. In 1948 in most Western countries, an efficient factory might have looked like a target for nationalization or punitive taxation. Now it is to be idolized and wooed with deductions and subsidies. The privatizations of industry in the wake of the Soviet Union’s collapse are notorious to us. But sometimes the change in property rights is so slow that it nearly escapes notice. “The privatization of national wealth in the developed countries since 1970,” Piketty writes, “can be regarded as a very attenuated form of this extreme case.”

Polemics around inequality have won attention for Piketty. But his book is ultimately more interesting as a meditation on history. Piketty, born in 1971, has said he wants to “put the two world wars into proper perspective.” Many things that a quarter-century ago looked like “laws” of history now appear like overeager generalizations from two atypical episodes. He calls the aftermath of World War II a “reconstruction,” in a way that recalls Francis Fukuyama’s discussion of the redeployment of “social capital” in his 1999 masterwork The Great Disruption. Piketty prompts us to ask whether the inequality he describes—through some historic channel we have ignored in our focus on European imperial politics—might somehow have caused the wars of the twentieth century. This is a subtle, serious, and thought-provoking book.

That does not mean that Piketty is a particularly astute or subtle historian. Interviewed in the New Left Review about the mid-twentieth-century history he describes, Piketty seemed to have little interest in the question of whether communism, through public opinion or otherwise, had placed pressure on the capitalist West to make concessions to the working classes and the poor. He misrepresents something the economist Simon Kuznets said in a 1955 talk. Kuznets described certain countries as being “within the orbit of the free world.” Piketty ascribes to him a desire “to maintain the underdeveloped countries ‘within the orbit of the free world.’ ” Piketty offers a partisan narrative of the Socialist/Communist government of François Mitterrand in France after 1981, attributing its capitalist turn to a series of privatizations undertaken by conservatives in 1986, not to Mitterrand’s own surrender after his economic program’s failure in 1983. In establishing the common European currency, the euro, the European Union did not “neglect” taxation and debt in favor of currency. It pursued the euro because it lacked the legitimacy to pursue taxation and debt.

The very best review of Piketty’s book to have appeared is the one the MIT economist Robert M. Solow wrote in the New Republic. Naturally—Solow shaped the modern way economists think about growth. For him, the great achievement of Piketty’s book is its unity. Other explanations of inequality—technology here, globalization there—seemed “a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces within modern industrial capitalism.” For this reason it will be good to fix Capital’s merits in one’s mind. It is likely to become a political weapon in the hands of those whom the historian Jacob Burckhardt called, in 1889, “terribles simplificateurs.”  

Piketty has not exactly tried to dodge this outcome. He lauds radicalism and activism. He is full of admiration for the packet of “confiscatory” taxation on top earners passed by Franklin Roosevelt in 1937, even if “by its very nature, such a tax brings in almost nothing.” At such moments the United States was in the world’s left-wing vanguard. He notes that the country had top income-tax rates of 80 percent at a time when no country in the West had seen anything like it before. In the same spirit, Piketty proposes his own innovation: a Europe-wide, and eventually a worldwide, annual tax on capital. It would start at 1 percent for fortunes from $1.4 million to $7 million, and 2 percent for bigger ones. He wants to publish detailed accounts of corporate holdings, because “the accounting data that companies are currently required to publish are entirely inadequate for allowing workers or ordinary citizens to form an opinion about corporate decisions, much less to intervene in them.” Intervene how?

Piketty is right that there is no technical reason why such a tax could not be put into place. In fact, it could fit seamlessly into the regime of financial surveillance that the Obama administration has urged—and many politicians of both parties have abetted—both in broadening sanctions against Putin’s Russia and in forcing an end to bank secrecy in Switzerland. It is democratic politics at the national level that makes such schemes unworkable. Who would get to build the new international system of taxation? The people who know the most, and care the most, about international taxation. That means the people most subject to it. To take nation-states out of the business of revenue collection might actually be giving the wealthy what they’ve sought all along. Piketty seems insufficiently mindful of the risk of regulatory capture.

Or is he ambivalent, even conflicted, in his own attitude towards elites? On one hand, Piketty worries about the way “modern meritocratic society, especially in the United States, is much harder on the losers.” He takes aim at yuppie elites who think that modern capital has somehow “become more ‘dynamic’ and less ‘rent-seeking.’ ” On the other hand, he talks this way himself sometimes, calling our society “hypermeritocratic,” to distinguish it from “hyperpatrimonial” societies. Although he admits there can be overlap, this sounds more like a defense of Western capitalism than a condemnation. 

Piketty seems to draw his own ethics of inequality from Article I of the 1789 Declaration of the Rights of Man and of the Citizen, which he quotes several times in the course of the book. “I have no interest in denouncing inequality or capitalism per se,” Piketty writes, “especially since social inequalities are not in themselves a problem as long as they are justified, that is ‘founded only upon common utility.’ ” He keeps finding different ways to say this. “Democratic modernity,” he says, “is founded on the belief that inequalities based on individual talent and effort are more justified than other inequalities.” Whose democratic modernity? Ayn Rand’s? And then: “I want to insist on this point: the key issue is the justification of inequalities rather than their magnitude as such.”

There is a Christian distrust of wealth that you can find in the Gospels and R. H. Tawney. There is of course a Marxist case against exploitation. But it gets harder to justify an all-out expropriation once you are, as they used to say in France, without Marx or Jesus. Amartya Sen and John Rawls, whom Piketty invokes in passing, are poor substitutes. In the end, it would help to know more about the ethical basis for Piketty’s argument against inequality—especially since a depression and two doses of world war seem to be the only proven antidote for the ailment he has diagnosed.

Christopher Caldwell is a senior editor at The Weekly Standard.

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