Abbott, Piketty and the Spirit of the Times
In bringing down a budget distinguished by inequity, is the Abbott government running with or against the spirit of the times? Given the backdrop of the neo-liberal era, most would probably say the former. But if the success of Thomas Piketty’s new book, Capital in the Twenty-First Century, is any guide, the answer may well be the latter. The book has stimulated widespread concern about the need to rein in the growing inequalities in capitalist economies worldwide.
Capital in the Twenty-First Century was published in the United States on 28 March of this year. The book rocketed up the charts to become the biggest selling book at Amazon and the biggest selling work of non-fiction on the New York Times list. Across the Atlantic, where the book was launched shortly afterwards, it also shot up the British charts. All this action sent the book back up the charts in France, where the work was first published last year.
In other words, it’s safe to say that Capital in the Twenty-First Century is probably the biggest selling non-fiction book in the English and French speaking world right now, and Japanese, Chinese and Indian translations are in preparation. The idea of a ‘rock star economist’ is an oxymoron if ever there was one, and yet this is how Piketty is now commonly described in the world’s media.
The book claims to define the ‘central contradiction of capitalism’ which generates strong and persistent tendencies towards greater inequality. It is useful to summarise the argument. First, it must be understood that Piketty generally uses ‘the words “capital” and “wealth” interchangeably, as if they were perfect synonyms’ (p. 47). Unlike the economics of production, which classically separates the returns from land, capital and labour, Piketty’s book is about the economics of distribution. From this perspective, ‘capital’ is anything that can be sold in a market, and thus refers to all non-financial and financial assets, less liabilities.
Using this definition of capital, Piketty derives capital-income ratios for up to 30 countries that stretch back one or two centuries (or even more in some cases). He does this by dividing the value of the stock of national capital (i.e., wealth) by the annual flow of national income, using the currency of the time. This gives him a universal yardstick for comparisons, solving countless measurement issues across time both within and between countries in one blow.
What Piketty presents, then, is a narrative of world history covering the full modern period, seen through the prism of the stock of capital. Does it matter if the value of capital is equal to twice the annual income, or a filthy rich ten times? Yes, it does. The book makes a strong argument that social inequality grows whenever the capital stock grows, i.e., inequality is a function of the empirical fact that the rate of return on capital (r) generally exceeds the rate of income growth (g). Strictly speaking , inequality doesn’t have to grow as the capital stock increases - it wouldn’t if the capital were owned equally by everyone in the society. However, because the ownership of capital is everywhere concentrated among the few, its expansion always creates more inequality, unless restrained. Hence Piketty’s summary proposition - inequality grows when r>g.
This might seem like stating the obvious, but the significance of Piketty’s work is in proving the point and offering possible solutions. Let’s look at a selection of his evidence.
Piketty’s figure 1.2 shows the capital-income ratios for the United Kingdom, France and Germany from 1870 to the present.
Note the U-shape during the century after 1910. After the two world wars, the U bottoms out in 1950, when capital stocks were equal to 2-3 times annual income and inequality was relatively low. Since 1980, during the neo-liberal decades, the ratio has shot up to 4-6 years’ income and inequality is rising rapidly. This is shown in Piketty’s figure 5.3 which tracks the eight richest (per capita) countries in the world — including Australia, where the ratio has rocketed up from three to five times.
Piketty argues that we’re probably heading back to the ratios that were common in what is remembered as the ‘Belle Époque’ (the ‘beautiful era’) before the Great War, which was marked by extreme inequality. If we want some idea of what the future holds, he thinks we should look at 1914, not 2014, and especially not to the anomalous 1945-1980 era.
Piketty's figure 10.10 shows the full sweep of the relationship between r and g for the whole world from Antiquity, and includes interesting, but not infallible, projections to 2100
Note the anomalous period from the Great War to the end of the Second World War, when r actually fell below g, for the only time in history. This goes to the optimism of Piketty’s work, for it shows that r doesn’t have to be higher than g, i.e. inequality does not always have to increase. The anomaly was due to much wealth being destroyed in big shocks (the world wars and the Great Depression) that were followed in turn by strong catch-up growth in a context that featured more progressive taxes on income and capital. Although r cannot rise forever, the limit is unclear and, if unrestrained, inequality will likely continue to grow to extremities that will exceed any seen before in history.
Yet Piketty’s message here is that there are any number of ways of dealing with this awesome prospect. He thinks a modest tax on capital (globally, or effectively globally) should do the trick.
What brings us back to the Abbott budget is the fact that Capital in the Twenty-First Century is not just an interesting piece of work; it’s a publishing phenomenon. No book becomes a blockbuster unless it resonates with the spirit of the times, especially not a serious 685 page work of economics. Piketty’s book has come to the surface on a rising tide of concern about inequality in the wake of the GFC. It’s no coincidence that Barack Obama has made reducing inequality his main theme and that the IMF has just produced a report showing that inequality offers nothing to aid economic growth. Even the Pope recently tweeted that ‘inequality is the root of social evil’.
This is the broader context in which the Abbott government is trying to implement the most unfair Australian budget in living memory. True, inequality is more extreme in the US than Australia. Yet the trend is the same and Australia’s idea of itself has a stronger strain of egalitarianism. The local response to Piketty’s book has so far been muted, but the rebellion against the budget suggests that we might be witnessing the same social blowback. If so, if the Abbott government is indeed running against the spirit of the times, its destiny may already be sealed.
*Note: All graphs are from Thomas Piketty, ‘Technical appendix of the book’ [online], Capital in the Twenty-First Century (Belknap/Harvard University Press), March 2014.
About the Author
Christopher Sheil is the President of the Evatt Foundation and lecturer at Boston University. This opinion is adapted from his ‘Capital in the Twenty-First Century: Review article’, which can be read in full on the Evatt website.
Disclaimer: Dr Sheil did not receive any funding from institutions, public or private, in the preparation of this post, and the views expressed are his own and do not necessarily reflect those of the Journal of Australian Political Economy, the Evatt Foundation or the University of Sydney.
