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Mainstream, VOL LII, No 31, July 26, 2014

On the Current Contradictions of Global Capitalism

Saturday 26 July 2014, by Eddie J Girdner

BOOK REVIEW

Capital in the Twentyfirst Century by Thomas Piketty; Harvard University Press, London; 2014.

This important book is in the tradition of the classical political economy of Adam Smith, David Ricardo and Karl Marx. It is based upon fifteen years of research by the author, a French economist, who teaches at the Paris School of Economics.

In recent decades, too much of economics has been based upon abstract theory and mathe-matical modelling without looking at the trajectory of capital accumulation in the last century. In America, the Austrian School of Friedrich Hayek and Ludwig von Mises has had undue influence. The Chicago School, Milton Friedman and others, and the Virginia School founded by James Buchanan have virtually taken over the field of emerging new political economy. Emphasising the problem of rent-seeking behaviour, the Virginia School of Public Choice is highly ideological. The state comes to protect the interests of capital over society. In America, a portion of the underclass has been hoodwinked into buying into the ideology of the free market in such capital-funded “grassroots” movements as the Tea Party.

In this ideological approach touting free-market dogma, the market is seen to solve all problems. In the real world, it is not so.

Similar to Karl Marx, Piketty has set out to understand the “laws of motion of modern capitalism society”. This is essentially the same enterprise pursued by the classical political economists. However, they lacked the empirical data to understand the long-term trends of capital accumulation. Today this is no longer a problem at least for the last three centuries.

Adam Smith understood that left to their own devices, businessmen were likely to become rentiers and kill the goose that laid the golden egg. It is a myth that he opposed all government controls on capital. Ricardo saw the problem as one of increasing rents on land as the population increased. This problem would disappear as capital tied up in land was converted to industrial capital in the nineteenth century. Marx was the most perceptive in seeing the accumulation of capital rising to ever higher levels under the logic of capitalism but could not envision the actual political trajectory of the twentieth century. In fact, at the beginning of the twentyfirst century, the process which Marx analysed is emerging. That is, a system of patrimonial capitalism, where the very rich live on rents and a large portion of the population own no property at all. This is the situation which is emerging in the old slow-growth mature capitalist societies of Europe and the United States. This is creating greater and greater inequality.

For Piketty, this dynamic is the central contradiction of capitalism today. Simply, the rate of return to capital is higher than economic growth by a factor of three to four times. For example, the typical return to capital is four to five per cent while the growth rate is not likely to exceed one to one-and-a-half per cent annual growth in the twentyfirst century. This is the critical problem for Piketty which, if left unchecked, will inevitably lead to greater political tensions in society both inside nations and on a global scale. Piketty wonders just how long people with some notion of a democratic society will actually put up with it.

On the other hand, technically, there is a simple solution to growing inequality of wealth produced by the dynamics of capitalism. This is a global tax on capital. Politically, of course, establishing such a tax is terribly problematical, not least because the neoliberal gospel of free markets has come to have such crushing ideological hegemony.

Piketty takes the reader through the dynamics of three centuries of the accumulation of capital. Most of the focus is upon the period from the end of the nineteenth century to the present. The dire predictions of Marx did not come to pass, at least not yet, mainly due to the economic and political turbulence of the twentieth century. Particularly crucial were the three great shocks to society, the great depression, and the two world wars which resulted in what Keynes called “the euthanasia of the rentier”. Great fortunes were wiped out in Europe between l914 and 1945, only to re-emerge at the present time. The rentier is back. Given enough time, the successful entrepreneur always turns into a rentier.

The decline of inequality in Western Europe and the United States in the middle of the twentieth century was due to the catastrophe of the two world wars. It became necessary for nations to devise a progressive system of income taxation. But much of this tax on the rich has been wiped out since the l970s.

The basic structural change in mature capitalist countries, such as France, was to shift about a third of the wealth from the old capitalist rentier class to a new middle class just above the fiftieth percentile of society. Today this class owns about a third of the wealth in Western Europe and Britain. This structural change was the result of the world wars. While the French Revolution had virtually no impact on reducing inequality, the catastrophe of these wars did.

But at the beginning of the twentyfirst century, the rentiers are back with a vengeance. The old unequal structure of society has finally been restored by the dynamics of capitalism. European society has recovered from the twentieth century shocks. All of these dynamics are illustrated with many graphs and tables throughout the book.

Inequality has grown by leaps and bounds since the gospel of Hayek and Friedman has become the orthodoxy of neoliberalism since l970. This is particularly true of the top ten per cent of the rich and even more so for those in the top one per cent.

Few know what real wealth is. The wealth of the rich will make the tongue of the poor tired, according to a Turkish proverb. It should be left to the reader to explore the obscene levels reached by inequality in mature capitalist societies today. Piketty lays it all out beautifully.

Perhaps more depressing are the tens of trillions of euros of wealth hidden in offshore tax havens today which do not even appear in the data. The number of billionaires in the global population has officially passed 1400. Typically, the bottom half of the population owns essentially nothing at all, less than five per cent of the wealth of society. At the top of society, one can look at wealth inequality in Britain and the United States in 2010. In Britain, the top ten per cent owned 70 per cent of wealth, while the top one per cent had 30 per cent. In the United States, the top ten per cent again had 70 per cent of the wealth, while the top one per cent had raked in 35 per cent. This is what we call the world’s leading democracy. The envy of the whole world. The shining city on the hill and so on.

These countries now have a system of patrimonial capitalism and America has started looking more like old Europe at the end of the nineteenth century. With powerful forces for even greater divergence between the rich and the common people, political tensions in society are certain to increase. Drinking the Tea Party poison cool-aid is clearly not the way to go. Piketty has unveiled a wealth of insights by looking at the numbers on record. The book deserves to be read carefully by all economists and others in the social sciences. Economists must not rely alone upon their mathematical models but must look at the numbers. This is true, even though the late Milton Friedman said that it did not matter whether the empirical evidence was predicted by the economic model.

Here Piketty’s research is instructive, having worked with other scholars for fifteen years to collect the empirical data. The book enlightens one about the trajectory of capital over the last three centuries. Piketty shows that wars and political policies can change this trajectory in ways that mathematical models cannot predict. This has happened for both good and bad over the twentieth century. This book is surely a necessary read for all those who wish to understand the dynamics of society and the current contradictions of global capitalism.

Eddie J. Girdner lives in Fethiye, Turkey.