Thursday, January 30, 2014

Democracy versus capitalism

"I believe that oligarchy follows next in order. And what manner of government do you term oligarchy? A government resting on a valuation of property, in which the rich have power and the poor man is deprived of it."
--PLATO, The Republic, Book VIII

There’s some talk about an extraordinary book soon to come out in America. The book, like so many important things, was originally published in French by economist Thomas Pinketty. Here's a summary by Thomas B. Edsall:
Piketty, a professor at the Paris School of Economics...contends that capitalism’s inherent dynamic propels powerful forces that threaten democratic societies.

Capitalism, according to Piketty, confronts both modern and modernizing countries with a dilemma: entrepreneurs become increasingly dominant over those who own only their own labor. In Piketty’s view, while emerging economies can defeat this logic in the near term, in the long run, “when pay setters set their own pay, there’s no limit,” unless “confiscatory tax rates” are imposed....Conservative readers will find that Piketty’s book disputes the view that the free market, liberated from the distorting effects of government intervention, “distributes,” as Milton Friedman famously put it, “the fruits of economic progress among all people. That’s the secret of the enormous improvements in the conditions of the working person over the past two centuries.”

Piketty proposes instead that the rise in inequality reflects markets working precisely as they should: “This has nothing to do with a market imperfection: the more perfect the capital market, the higher” the rate of return on capital is in comparison to the rate of growth of the economy. The higher this ratio is, the greater inequality is.

According to Piketty...[T]he six-decade period of growing equality in western nations – starting roughly with the onset of World War I and extending into the early 1970s – was unique and highly unlikely to be repeated. [T]hose halcyon six decades were the result of two world wars and the Great Depression. The owners of capital – those at the top of the pyramid of wealth and income – absorbed a series of devastating blows. These included the loss of credibility and authority as markets crashed; physical destruction of capital throughout Europe in both World War I and World War II; the raising of tax rates, especially on high incomes, to finance the wars; high rates of inflation that eroded the assets of creditors; the nationalization of major industries in both England and France; and the appropriation of industries and property in post-colonial countries.

At the same time, the Great Depression produced the New Deal coalition in the United States, which empowered an insurgent labor movement. The postwar period saw huge gains in growth and productivity, the benefits of which were shared with workers who had strong backing from the trade union movement and from the dominant Democratic Party. Widespread support for liberal social and economic policy was so strong that even a Republican president who won easily twice, Dwight D. Eisenhower, recognized that an assault on the New Deal would be futile. In Eisenhower’s words, “Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear from that party again in our political history.”

The six decades between 1914 and 1973 stand out from the past and future, according to Piketty, because the rate of economic growth exceeded the after-tax rate of return on capital. [That period, Piketty suggests, represented an exception to the more deeply rooted pattern of growing inequality.] Since then, the rate of growth of the economy has declined, while the return on capital is rising to its pre-World War I levels.

“If the rate of return on capital remains permanently above the rate of growth of the economy – this is Piketty’s key inequality relationship,” [Branko] Milanovic writes in his review, it “generates a changing functional distribution of income in favor of capital and, if capital incomes are more concentrated than incomes from labor (a rather uncontroversial fact), personal income distribution will also get more unequal — which indeed is what we have witnessed in the past 30 years.”

The only way to halt this process, he argues, is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies....The Piketty diagnosis helps explain the recent drop in the share of national income going to labor and a parallel increase in the share going to capital.

Piketty’s analysis also sheds light on the worldwide growth in the number of the unemployed. The International Labor Organization, an agency of the United Nations, reported recently that the number of unemployed grew by 5 million from 2012 to 2013, reaching nearly 202 million by the end of last year. It is projected to grow to 215 million by 2018. Piketty does not treat worker ownership as a solution, and he is generally dismissive of small-bore reforms, arguing that they will have only modest effects on economic growth worldwide, which he believes is very likely to be stuck at 1 to 1.5 percent through the rest of this century. Piketty joins a number of scholars raising significant questions about how the global economic system will deal with such phenomena as robotics, the hollowing out of the job market, outsourcing and global competition.

His prognosis is extremely bleak. Without what he acknowledges is a politically unrealistic global wealth tax, he sees the United States and the developed world on a path toward a degree of inequality that will reach levels likely to cause severe social disruption. Final judgment on Piketty’s work will come with time – a problem in and of itself, because if he is right, inequality will worsen, making it all the more difficult to take preemptive action.
Capitalism vs. Democracy (New York Times)

Here's Brad Delong's summary:
If I had to summarize the lessons that I drew from Piketty’s book powerpoint presentation for his Helsinki Lecture, I would say that they are four.

First, that inequality is driven by the dynamics of capital (and more broadly, wealth–wealth includes land and also rent-extraction position as well) accumulation–the capital-to-output ratio and the capital share of income–and by the dynamics of wealth distribution. A society with a high savings rate and a low growth rate will have a high wealth-to-income ratio and a high capital share in income. A society with multiplicative dynamics–in which the return on wealth are such that wealth makes more wealth rather than wealth getting taxed or stolen or bombed or consumed away–will be one with an unequal distribution of what wealth there is. A society with both of those things will be an unequal society.

Second, from roughly 1930 to 1980, the North Atlantic had neither of these. Rapid productivity and technology population from the Second Industrial Revolution coupled with the population explosion of the demographic transition era raised the denominator of the wealth-to-income ratio. Wars, progressive taxation to finance wars, the sticking of progressive taxation even after the wars were over, and a popular demand for social democracy and social insurance inhibited multiplicative dynamics by which more was given to those who had.

Third, meritocracy? Make me laugh. In my view meritocracy does not produce inequality. Rather, true equality of opportunity produces relatively small income differentials because there is always somebody almost as good eager to bid for your high-paid job. Inequality emerges either (i) when this generation’s human capital is last generation’s wealth, or (ii) when other non-meritocratic factors are creating jobs that are the equivalent of covering yourself with glue, standing outside at a corner in Canary Wharf, and watching the money stick to you as it blows by.

Fourth, now with the end of the demographic transition era and with the possible slowing of technological progress, we face a world with a much higher capital share of income than over 1930-1980. And multiplicative dynamics are back with a vengeance–largely, I think, because unequal wealth poisons politics and creates a powerful class interested in making sure that multiplicative wealth dynamics persist.

But what does Piketty say?

In his Helsinki lecture, Tomas made six major points:
  1. As growth rates decline in the Old World (Europe and Japan), we will once again see the dominance of capital: a greater proportion of the wealth of society will be held in the form of physical and other non-human-skill assets, and inheritance and position will matter more and individual effort and luck less.
  2. In fact, given relatively high average rates of return on capital and thus a large gap vis-a-vis the growth rate, wealth concentration is likely to reach and then surpass peak levels seen in previous history as the superrich become those who started wealthy and benefitted from compound interest and luck.
  3. America remains an exceptional puzzle: it looks, however, like it is headed for an even more extreme distribution of wealth than is the Old World.
  4. Remember, however: the evolution of income and wealth distributions is always political, chaotic, unpredictable–and nation-specific: not global market conditions but national identities rule wealth distributions.
  5. High wealth inequality is not due to any “market failure”: this is a market success: the more frictionless and distortion-free are capital markets, the higher will wealth inequality become.
  6. The ideal solution? Progressive global-scale wealth taxes.
With that as a guide, let’s jump in…
Tomas Piketty: Capital in the Twenty-First Century/Inequality and Capitalism in the Long Run: The Honest Broker (Equitablog)


Last Year Was the 4th-Best Year Ever for the Top 1 Percent (Atlantic)

Pinketty’s work is more of a bombshell that it may seem. While, many of the arguments he puts forth might be familiar to readers, it is unusual for a respected professional member of the economic elite (albeit a French socialist one), using the tools of capitalism, to conclude that capitalism inexorably allocates wealth to a smaller and smaller slice of the population leaving the vast majority behind. His argument flies in the face of neoliberal free-market fundamentalism, concluding that this is not some “flaw” in the system in need of correction – that this is how the system is designed to function! He-who-must-not-be-named made this argument in the nineteenth century, but it’s had to be strenuously ignored and refuted ever since. His claim that massive concentration of wealth is a threat to popular democracy is also remarkable.


The more money you have, the more opportunities you have to make money, thus it becomes a snowball effect. Many of the Internet billionaires were rich venture capitalists who could come up with massive sums to exploit the new technologies. Look at all the Harvard Grads and venture capitalists who invested in Facebook. Jeff Bezos of Amazon was a Hedge fund guy. The Google billionaires were at Stanford. Basically, there's a tiny sliver of places to be to get wealthy available only to elites. The new inventions of the future just make the existing investor class even more money which they also use to buy up the world's common resources and turn them into revenue streams.

One argument I often hear is that inequality is not important – that it’s the absolute living standards of the poorest people in a society that matters, and even the poorest people have indoor plumbing and heating, sneakers, cell phones and the like. Some points:

1.) This has less to do with capitalism as it does with mass production and energy surplus. When you can produce enough cars for everyone in the U.S., of course they're going to get cheaper and more people are going to have them under whatever economic system you have - capitalism, socialism, whatever. The same goes for cloth, durable goods, furniture, computers, iPods, whatever. That's part of the natural progress of human invention regardless of the economic system. It's one place where trickle-down really is true. After all, even the rich can only consume so many houses, cars, clothes, etc.

2.) Absolute living standards for the poorest people are now starting to decline in absolute terms. Life expectancy, far more valuable than any durable good, is now falling for the poorest members of society. Homelessness is rising, as is child poverty. The last ten years have seen no significant gains.

As I've pointed out before, for the vast majority of people, their lives actually got worse under capitalism until about 1870 (Marx wrote the Communist Manifesto in 1848 - a year of revolutions across Europe). Widespread government intervention after that time began to improve living standards (clean water and sanitation measures, closing debtors' prisons, outlawing child labor etc.). The Great Compression you see above is due almost entirely to government intervention, as well as the historical forces mentioned above. As David Brin has put it, "...most of the West has lived a miracle for half a century - in societies wherein the well-off and empowered Middle Class has - for the first time in human history - actually outnumbered the poor." Is that ending?


Interesting to note that according to the above, the slowing of the growth rate is a critical factor in all this. Although not mentioned, we know that the slowing of growth is caused by 1) Reduced net energy - energy return on energy invested, 2) Maximum fossil fuels per capita as the developing world tries to industrialize along the Western model 3) Stabilizing or decreasing populations in developed countries and overpopulation in poor countries 4) Limits to resources such as fresh water, phosphorus, rare earths and the like, combined with the costs of pollution (including climate change) 5) Falling rates of education in the developed world, and the reduction of people in the work force, 6 )Diminishing marginal utility of new inventions as the low-hanging fruit is harvested first. Slow growth and debt are two sides to this coin - symptoms rather than causes.

As the economic elite becomes more powerful, two additional things are happening – they are becoming an international wealth class, able to transfer their money anywhere in the world, and they are finding ways to sabotage democratic governance to lock in their gains and make change impossible. I've noticed that failing capitalism is tending to look a lot like failing communism - a tiny, unaccountable, gated elite holed up in the dachas surrounded by mass poverty. Ever more strident and hysterical propaganda to try and keep people from suspecting the system is failing. And the construction of a mass surveillance state, the persecution of whistleblowers, and the intimidation and silencing of the citizenry who don't like the state of affairs.

I think the central question is, will the social progress of the twentieth century be preserved as we return to the wealth disparities of the eighteenth century? And will reform be impossible - is this tyrannical system now essentially permanent?

P.S.: One of the comments to the Edsall article mentions this book: Monopoly Capital: An Essay on the American Economic and Social Order

1 comment:

  1. Nothing is permanent there will never be a time when humans say
    "oh this is nice lets just keep it like this".

    Concentration of power is a fragile situation. Look at petty dictatorships as a model all the of power in the hands of one man. It can topple in a fortnight. Democracies for their squabbling are long lived.

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