economic theory

All of this also dramatises the inability of neoliberal elites to offer any effective leadership, or to manage any strategy more complex than “hold on tight and cross your fingers”. The tentative criticisms of neoliberalism made at the start of the current crisis by isolated elite members have had no real implication beyond the narrowly technical (“quantitative easing”, and so on.) There is no significant dissent within elites – political and financial, or their allies in academia and journalism – about the proposal that the only way forward is more austerity, more neoliberalism, more privatisations.

We are increasingly in a zombie-like phase of capitalist development (Peck 2010b), in which elites are incapable of solving contradictions through new hegemonic projects. This signals the onset of the twilight of neoliberalism...

Many of these aspects of the crisis are closely associated with popular movements: Latin American struggles, revolts in the Arab world, the anti-war movement, protests against the security state, the global justice and anti-austerity movements, and ecological movements for climate justice. This does not mean, however, that movements will necessarily be the beneficiaries of the crisis: as our historical account shows, it is one thing to make a particular hegemonic alliance politically unsustainable but another thing altogether to be able to create a new alliance capable of charting a new direction.

These processes of external struggle, internal learning and alliance-building are what matter most, and there is no short-cut (in universities, parties or shouting at the computer screen) that can usefully avoid them.

any attempt to shortcircuit the slow development of popular agency, whether through opinion politics or intellectual critique which discuss structures in isolation from the kinds of agency which sustain them – and the kinds of agency needed to overcome them – is doomed to failure. The most effective orientation for change is one which starts from dialogue with practically situated struggles – those that people have to engage in to sustain their lives – and supports their extension in alliances across space but also across the social world, into far-reaching projects for change which are grounded in a wide range of different situations.

This is the triumph of Capital in the 21st Century: nothing about the book is more impressive than the range and richness of its statistical information. (Piketty excuses the inaccuracy of Kuznets’s theory on the basis of the incomplete data, going back only a few decades, at his disposal.)

One merit of the book is that it both insists on the importance of data and, at least where modern societies are concerned, highlights the uncertainties involved in its collection.

On the one hand, the law is indisputable: if capital grows faster than output, the proportion of wealth to income necessarily rises. Only a dip in the rate of return, broader capital ownership, or the destruction of capital might retard or reverse the process. But what does the formula explain?

The exceptional character of the period between the First World War and the 1973-74 recession becomes the more striking when Piketty emphasises that his second law of capitalism held long before capitalism: ‘The inequality r>g has clearly been true throughout most of human history, right up to the eve of World War One, and it will probably be true again in the 21st century.’ In a chart graphing the rate of return against ‘the growth rate, at the world level, of world output from Antiquity to 2100’, r hovers between 4 and 5 per cent until 1820, by which time the Industrial Revolution has spread beyond England. It plummets nearly as low as 1 per cent around the outbreak of the First World War, and then undertakes a steep climb throughout the 20th century before adjusting to a moderate slope that stretches up to and past our time into the indefinite and enduringly capitalist future. Across the same stretch of history, the global growth rate g ascends a gentle gradient until the mid-18th century, after which new summits beckon.

Piketty’s theoretical troubles may start with his definition of capital as wealth in general.

In his conclusion Piketty promotes r>g to the status of ‘the central contradiction of capitalism’. The phrase is meant to evoke Marx and the theory to better him.

At a distance Piketty’s central contradiction resembles Marx’s. Here too capital, ‘more and more dominant over those who own nothing but their labour’, overaccumulates relative to labour. But at least in formal terms, Marx’s theory is clearly superior. It proposes a genuine contradiction – capital accumulation undermines itself – and entails a mechanism specific to capitalism: the drive for profits through the exploitation of wage labour. Piketty’s r>g is not, by contrast, the ‘fundamental logical contradiction’ that he claims. Capital accumulation, left to outrun economic growth indefinitely, would create ‘an endless inegalitarian spiral’ threatening less to profitability than ‘to democratic societies and to the values of social justice on which they are based’.

Large fortunes would come to represent recent entrepreneurial feats more than the dumb luck of inheritance, and revenue from the tax could address public purposes neglected by private investors. Piketty hazards his ‘utopian idea’ as contemporary societies approach what he sees as a fork in the road. One way leads to concentrations of wealth incompatible with liberal democracy, the other to a redomesticated capitalism supporting ‘a social state for the 21st century’.

A recent study calculated that in the US the top 10 per cent of the income distribution enjoys an effect on political outcomes 15 times that of the remaining 90 per cent. Other countries are plutocratic to similar degrees. How are the executive committees of the ruling class in countries across the world to act in concert to impose Piketty’s tax on just this class?

But even without it, a rising capital/income ratio would no longer automatically deepen inequality. The notion of such a revolution – first in one country, then gatheringly international but not yet universal – is fanciful right now. But is it more so than a global capital tax requiring the co-ordination of virtually all nations? The longer global capitalism goes unreformed the more likely nations and regions are to reject it.

Piketty, ‘vaccinated for life against the conventional but lazy rhetoric of anticapitalism’ by the fall of the Berlin Wall, might consider such speculations an ideological relapse. He wants his tax on capital to ‘promote the general interest over private interests while preserving economic openness and the forces of competition’, and has said in interviews that the indispensable role of markets in complex economies justifies the persistence of capitalism.

Visions of a postcapitalist future, from Alec Nove’s Economics of Feasible Socialism (1983) to David Schweickart’s After Capitalism (2002), have more often been forms of market socialism. (Schweickart folds ‘a capital assets tax’ much like Piketty’s into a comprehensive transitional programme.) The private accumulation of capital would no longer drive the economy, even as the market still facilitated much private consumption and guided much public investment. Piketty might reject the idea in any or all varieties. For now he shows no awareness of it. The blindspot isn’t surprising in a writer who has boasted to the American press, perhaps not entirely disingenuously, of his unfamiliarity with Marx’s writing, and who in his book excuses his indifference to Marxist work generally by complaining that ‘one sometimes has the impression’ in reading Sartre, Althusser or Badiou that ‘questions of capital and class inequality are only of moderate interest to them.’ He would have done better to consult historians and economists than philosophers.

But the familiar equation of markets with capitalism lacks a historical or theoretical basis. It ignores the extensive markets in many precapitalist societies and the strong element of monopoly and state interference with markets throughout the history of capitalism.

Piketty’s appetite for and command over data, for one thing, are worth emulating. And surely if intelligent economists start reckoning with Marxian thought not as a historical curio but as a long and living tradition, they won’t simply ratify propositions about which Marxists don’t agree themselves. Investigated rather than ignored, Marxist ideas would be variously confirmed, refined or rejected. For the moment, however, mainstream economists, including the hero of the hour, seem reluctant to press their discoveries beyond the borders of the respectable. Their journalistic counterparts are if anything more timid.

The book is more exciting considered as a failure than as a triumph. Piketty has bid a lingering goodbye to the latter-day marginalism of mainstream economics but has not yet arrived at the reconstructed political economy foreseen at the outset. His theoretical reach fumbles where his statistical grasp is sure, and he leaves intact the questions of economic value, distributive justice and capitalist dynamics that he raises.

The empirical core of Piketty’s book is about the distribution of income as revealed by tax records in a handful of rich countries—mainly France and Britain but also the United States, Canada, Germany, Japan, Sweden, and some others. Its virtues lie in permitting a long view and in giving detailed attention to the income of elite groups, which other approaches to distribution often miss.

Early on, Piketty makes a claim to be the sole living heir of Simon Kuznets, the great midcentury scholar of inequalities. He writes: Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s land, too historical for economists and too economistic for historians. That is a pity, because the dynamics of income inequality can only be studied in a long-run perspective, which is possible only if one makes use of tax records. The statement is incorrect. Tax records are not the only available source of good inequality data. In research over twenty years, this reviewer has used payroll records to measure the long-run evolution of inequalities; in a paper published back in 1999, Thomas Ferguson and I tracked such measures for the United States to 1920—and we found roughly the same pattern as Piketty finds now.

Under President Reagan, changes to U.S. tax law encouraged higher pay to corporate executives, the use of stock options, and (indirectly) the splitting of new technology firms into separately capitalized enterprises, which would eventually include Intel, Apple, Oracle, Microsoft, and the rest. Now, top incomes are no longer fixed salaries but instead closely track the stock market. This is the simple result of concentrated ownership, the flux in asset prices, and the use of capital funds for executive pay. During the tech boom, the correspondence between changing income inequality and the NASDAQ was exact, as Travis Hale and I show in a paper just published in the World Economic Review.

The lay reader will not be surprised. Academics, though, have to contend with the conventionally dominant work of (among others) Claudia Goldin and Lawrence Katz, who argue that the pattern of changing income inequalities in America is the result of a “race between education and technology” when it comes to wages, with first one in the lead and then the other. (When education leads, inequality supposedly falls, and vice versa.) Piketty pays deference to this claim but he adds no evidence in favor, and his facts contradict it. The reality is that wage structures change far less than profit-based incomes, and most of increasing inequality comes from an increasing flow of profit income to the very rich.

It is a book mainly about the valuation placed on tangible and financial assets, the distribution of those assets through time, and the inheritance of wealth from one generation to the next. Why is this interesting? Adam Smith wrote the definitive one-sentence treatment: “Wealth, as Mr. Hobbes says, is power.” Private financial valuation measures power, including political power, even if the holder plays no active economic role. Absentee landlords and the Koch brothers have power of this type. Piketty calls it “patrimonial capitalism”—in other words, not the real thing.

With this passage he makes a distinction that he previously blurred: between wealth justified by “social utility” and the other kind. It is the old distinction between “profit” and “rent.” But Piketty has removed our ability to use the word “capital” in this normal sense, to refer to the factor input that yields a profit in the “productive” sector, and to distinguish it from the source of income of the “rentier.”

Piketty’s further policy views come in two chapters to which the reader is bound to arrive, after almost five hundred pages, a bit worn out. These reveal him to be neither radical nor neoliberal, nor even distinctively European. Despite having made some disparaging remarks early on about the savagery of the United States, it turns out that Thomas Piketty is a garden-variety social welfare democrat in the mold, largely, of the American New Deal.

But would it work to go back to that system now? Alas, it would not. By the 1960s and ’70s, those top marginal tax rates were loophole-ridden. Corporate chiefs could compensate for low salaries with big perks. The rates were hated most by the small numbers who earned large sums with (mostly) honest work and had to pay them: sports stars, movie actors, performers, marquee authors, and so forth.

If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.

In sum, Capital in the Twenty-First Century is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world’s wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin—or at least include—a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest.

It was exciting to find a strong refutation of the long-held mainstream view that the share of capital and the share of labor in GDP were stable. Workers and investors would split the economy’s bounty according to some unknown law of equality. Now Piketty was saying not so. Historically capital did much better. This is darned important.

The simple question is: Why doesn’t r fall as returns necessarily diminish? Piketty’s mainstream answer is that new technologies, broadly defined, keep creating new profitable opportunities. This leaves me at a loss. Pure free markets create r that is always greater than the growth rate of GDP? Fortunately, Lance Taylor, formerly at MIT and now emeritus of the New School, shows pretty clearly that the capital proportion can rise, fall or persist under varying conditions.

If a rising capital ratio is inevitable (as his history empirically suggests), and capital markets work the way the neoclassical models says they do, then taxes are the only tool available.

In the long run, I think Piketty’s work will indeed prove seminal. It will force economists to deal with the remarkably wide range of issues he raises. But he hasn’t replaced Marx with a more well-founded model of capitalism’s unfairness. For me it is not capital that is power alone. Piketty’s persistently high r, a wonderful discovery, is likely a reflection of the power of wealth not of natural economic forces. With his empirical work we can begin to find solutions about how to constrain the power. But let’s follow his example in regard to income inequality and understand more fully the market failures in capital markets. A global tax would be a wonderful addition to the list of potential tools to bring down r. So let the arguments begin.

And he gives a thoughtful defense of inheritance taxes, progressive taxation and a global wealth tax as possible (though almost certainly not politically viable) antidotes to the further concentration of wealth and power.

The law is the law and that is that. Marx would obviously have attributed the existence of such a law to the imbalance of power between capital and labor. And that explanation still holds water.

As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.”

“All told,” he writes, “over the period 1932-1980, nearly half a century, the top federal income tax in the United States averaged 81 percent.” And this did not in any way dampen growth (another piece of Piketty’s evidence that rebuts right wing beliefs).

After 1980 top tax rates came down and capital gains – a major source of income for the ultra-wealthy – were taxed at a much lower rate in the US, hugely boosting the flow of wealth to the top one percent. But the impact on growth, Piketty shows, was negligible. So “trickle down” of benefits from the rich to the rest (another right wing favorite belief) does not work. None of this was dictated by any mathematical law. It was all about politics.

Piketty’s formulation of the mathematical law disguises more than it reveals about the class politics involved. As Warren Buffett has noted, “sure there is class war, and it is my class, the rich, who are making it and we are winning.” One key measure of their victory is the growing disparities in wealth and income of the top one percent relative to everyone else.

The whole of neo-classical economic thought (which is the basis of Piketty’s thinking) is founded on a tautology. The rate of return on capital depends crucially on the rate of growth because capital is valued by way of that which it produces and not by what went into its production. Its value is heavily influenced by speculative conditions and can be seriously warped by the famous “irrational exuberance” that Greenspan spotted as characteristic of stock and housing markets. If we subtract housing and real estate – to say nothing of the value of the art collections of the hedge funders – from the definition of capital (and the rationale for their inclusion is rather weak) then Piketty’s explanation for increasing disparities in wealth and income would fall flat on its face, though his descriptions of the state of past and present inequalities would still stand.

Restricting the supply of capital to new investment (a phenomena we are now witnessing) ensures a high rate of return on that capital which is in circulation. The creation of such artificial scarcity is not only what the oil companies do to ensure their high rate of return: it is what all capital does when given the chance. This is what underpins the tendency for the rate of return on capital (no matter how it is defined and measured) to always exceed the rate of growth of income. This is how capital ensures its own reproduction, no matter how uncomfortable the consequences are for the rest of us. And this is how the capitalist class lives

Very often, the judgments by ordinary citizens may be better than those by professional economists, being more rooted in reality and less narrowly focused.Indeed, willingness to challenge professional economists and other experts is a foundation stone of democracy. If all we have to do is to listen to the experts, what is the point of having democracy?

Since money is a veil that hides the urge to truck and barter, removing it would not affect production except for some efficiency costs due to the “double coincidence of wants” problem.  Therefore, money is a neutral veil that only obscures the market relationships behind it.  Economists thus ought to conduct a “real”, as opposed to “monetary,” analysis.

What is important for the paper is that the above analysis shows how intrinsically connected are the ideas of barter, money neutrality, “real” economic analysis, “exogenous money,” inflation, money scarcity, and “loanable funds theory.”  These theoretical tools then allow the orthodox economists to conduct “correct” monetary and fiscal policies.  To recapitulate, monetary policy determines price levels while fiscal policy negatively affects private investment.  Hence, the solution is to target a stable money supply and to run balanced government budget as long as possible.  It is therefore that the myth of barter is crucial in the orthodox theorizing. 

First, these research shows that money existed prior to market.  

Second, the nature of money is a credit-debt relationship that can only be understood in institutional and social contexts.

The liability of the central authority becomes the standard unit of account because the central authority has the sufficient power to impose liabilities on its population in the forms of fines and taxes.  This is the essence of Chartalism, “Modern Money,” “Tax-Driven Money,” and “Money as a Creature of the State” (Lerner 1947, Knapp 1973, Keynes 1930, Goodhart 1998, Wray 2001, Forstater 2006).

Third, the role of money was initially an abstract unit of account and means of final payment and later as medium of exchange.  This means that money as unit of account precedes its roles as medium of exchange and store of value. 

Therefore, money originated as a byproduct of social relations based on debt and realized its standard form through the need of the central authority, as opposed to private individuals, to establish a standard unit of account to measure debt obligations or production surplus.  Our analysis also implies a hierarchy of money (debt pyramid), with the liability of the state sits on the top and the liability of individuals sits on the bottom (Bell, 2001).  It should be clear that the entire debt pyramid is effectively money/IOUs.

In short, the endogenous money approach reverses two causalities proposed by orthodoxy: 1) reserve creates deposits; and 2) deposits create loan.  On the contrary, the endogenous money holds that loans create deposits that then create the need for the central bank to accommodate with reserve.  In other words, banks first make loans, and then seek reserves to meet central bank regulations. 

Such debt obligation is ultimately reflected at the central bank’s balance sheet as the private bank enables Henry’s IOUs to be denominated in the state money of account.  Therefore, the central bank is simply a scorekeeper of the economy (Mosler, 2010).  The reserves at the central bank, created by keystrokes, simply serve an accounting purpose for the economy. 

It is important to note that bond sales do not finance government spending.  Reserves and bonds are both the liability of the state.  The only difference is that bonds earn interests while reserves do not.  This also means that the myth of the national debt indebting our future generation should be abolished.  Government liabilities, including reserves and government bonds, are effectively private wealth by accounting identity. 

But the paper argues that before reaching full employment, it is unlikely that deficit spending would necessarily be inflationary.  In essence, involuntary unemployment indicates a permanent loss in production since the federal government could always have hired the unemployed to achieve public purposes.  Hence, the right to employment ought to become a basic human right guaranteed by any sovereign government.

Even with the quantitative easing, the central bank is merely performing asset management as opposed to money creation.  Indeed, the heterodox theory of the nature of money implies that money creation has to be endogenous, which gives support for conducting expansionary fiscal policy till full employment.