The heart of the argument sounds like a simple one:
- If the real return to capital is higher than the real growth rate, then the share of national income that accrues to capital will increase over time.
- Since capital is concentrated, this also means a steadily increasing concentration of wealth.
- For most of human history, real growth was low, and therefore there was a steadily increasing concentration of wealth.
- The period from World War I through the 1970s was an exception to this trend, as capital experienced a series of extraordinary shocks (World Wars I and II, the Great Depression, the end of colonialism and the expropriation of capital that followed, etc.) that resulted in massive redistribution of wealth.
- The developed world is now in the process of returning to the historical norm of low real growth, with the result that capital’s share of income continues to rise, which, in turn, will result in ever-widening gap between the wealthy and the rest of the population.
- This is not a market failure; indeed, the more efficient the market is, the more rapid this concentration will proceed.
I’m somewhat puzzled why this process is attributed to “capitalism” since, if you think about a pre-capitalist economy, it matches that description pretty well. When capital is overwhelmingly tied up in agricultural land, and the land is largely held by a small group of people willing to deploy violence to maintain their title, then returns to capital will certainly be higher than the negligible economic growth rate. The serfs will remain as poor as ever while the landowner retains virtually 100% of the surplus of their labor (though a percentage will accrue to artisans, soldiers, and others hired by the landowner to provide a value-added service which gives them some negotiating leverage). And, in feudal times, that’s pretty much what happened, with possible evolutionary consequences as the landed classes had a higher birth rate than the un-landed.
Or take a look at the description of the political economy of the Roman Republic in the early books of Livy. It’s an endless cycle in which the Senators, owning most of the land, reduce the plebes to debt peonage, then the plebes begin to revolt, there’s some debt reform, and the cycle begins again – until the Romans got the brilliant idea of conquering the rest of Italy and letting the whole population, plebes and Senators, live off the surplus generated by the conquered peoples.
Is there any reason to think we’re headed back to that kind of economy of scarcity? Here are some preliminary thoughts I have:
- The components of real growth are growth in productivity (output per worker) and growth in population. Growth in population in the developed world is low to negative. Productivity growth, meanwhile, has taken a different form than it did during the industrial revolution. A big component of productivity growth these days involves outsourcing functions to lower-wage countries. This makes the remaining employees in the developed country more productive, but it’s not actually comparable to the application of capital so that one laborer can do more in a given hour.
- However, that same process is part of what is driving a dramatic increase in productivity in countries like China. Is inequality actually even increasing on a global scale? I’m doubtful. China and India are very large, and are growing more wealthy at a rapid rate. Those societies are becoming more unequal – but because they started off so poor, I would expect the Gini coefficient of the world as a whole to be going down. As China’s wealth burgeons even as its population growth stalls and begins to decline, and as India follows suit several decades behind, it will be interesting to see whether this dynamic in the developed world changes. Predicting a reversion to the pre-industrial mean seems like a pretty bold move when so many large variables are still in flux.
- The other big wild card is Africa, where population growth continues to be very high and where productivity growth has only just begun to take off. By the end of the century, according to the U.N.’s medium population projection, nearly 40% of the world’s population will be African. The productivity growth of the African population is the main unknown variable that will determine the global Gini coefficient at century’s end.
- We’re still actually in the early stages of the information revolution, and so it’s too soon to say whether the kinds of broad-based, huge increases in labor productivity we associate with the industrial revolution will be replicated with the information revolution. I don’t think anyone knows the answer to that question.
- Notwithstanding what happens to “true” productivity growth in developed societies, Low population growth has an effect on the value of assets that depreciate rapidly. When the population is growing, it makes sense to spend money now on physical plant to serve growing demand, and on physical infrastructure to house and move people, even if you expect that plant to deteriorate quickly or that infrastructure to need to be replaced. When the population is stagnant or shrinking, it doesn’t make sense to invest in rapidly-depreciating assets. Instead, it makes more sense to invest in assets that will retain their value or even appreciate. Cathedrals rather than tract houses, say.
- Piketty proposes a global tax on wealth to restrain the growth of inequality. One objection to such a tax is that the incentives for a given state to cheat are simply too large – any state that had a lower tax on wealth than the cartel would attract enormous inflows of capital. But there’s another objection: Piketty implicitly assumes that such a tax would be used to restrain the growth of inequality within the developed world. But why would the developing world go along with such a scheme? It’s one thing if Switzerland or the UAE cheats. It’s quite another thing if India does. North-South dynamics should completely overwhelm the internal dynamics within the developed world, as well as the problems of coordinating between developed countries.
- On the other hand, if you wanted to impose a wealth tax within the developed world, the way to do it would be to eliminate physical cash and impose a negative overnight interest rate on savings. This is something we’re going to have to be able to do anyway before too long in societies with a negative population growth rate, because those societies will periodically experience a negative rate of economic growth. But it will also be necessary to prevent capital from capturing an outsized share of national income during such periodic recessions. I suspect that such a system would be much more effective at achieving Piketty’s objectives than a tax, because of the limited liquidity of “cheater” currencies.
Rest assured, I expect to return to this topic again.