Monday, 23 June 2014

Piketty, or “Just the Facts”

“Just the Facts, Ma’m” is the catch phrase credited to Sergeant Joe Friday of the LA Police Department in Dragnet, the US television series of the 1950s. Friday wanted the facts because they would lead to a cycle of purposive effective action with arrest leading to conviction and detention of criminals who should be afraid when Sergeant Friday is onto their case. Professor Thomas Piketty of the Paris School of Economics also offers us the facts, in this case on the history of income and wealth inequalities. But these facts fit into a different kind of cycle of guaranteed inaction whereby society can recognise the problem of growing inequality without any prospect of effective redress so that the rich can sleep soundly in their beds

This is our explanation for the  bestselling success of Capital in the 21st Century (here after Capital), the English translation published of Le Capital au XXI siècle, published last year by Editions de Seuil (Piketty 2014). This is a prolix and inelegant 700 page doorstop of a book, published by an American university press and written by a little known author. It garnishes the facts on the historical development of income and wealth inequalities in twentieth century France, Germany, Sweden, Japan, the UK and the US with some musings on fictional inequality in the world of Balzac and Austen.

This book which failed to gain attention when published in French, has suddenly become a global must read. It has been on the top 100 non-fiction bestseller list of Amazon for thirteen uninterrupted weeks and on the New York Times bestseller list for nine weeks, topping the list for three of those nine weeks. Capital has been lauded by at least two Nobel-laureates (Krugman and Stiglitz) as the most important book in economics since the Wealth of Nations (1776) (Krugman 2014), has been reviewed by every serious economist and has been deconstructed and reassembled in hundreds of economic blogs.

While other economics professors grade essays, Professor Piketty has toured two continents as if he was a true rockstar, has been received for a private tête-a-tête at the White House by Obama himself, has talked to the great and good from the worlds of global finance and politics, has been invited to talk to the Dutch parliament and has earned enough in the form of royalties, according to his own assessment, to buy a piece of prime real estate in the 16th arrondissement of Paris – which easily amounts to four, five million euros.

The central exhibits in his text are U shaped curves of the shares of wealth and income claimed by upper groups. While the U shaped curve of wealth distribution is new (and now challenged in the FT), his curve which shows income inequality returning to pre-1914 levels is not new because (in one form or another) it has featured in a series of academic publications by Piketty and his associates since the mid 2000s. The central finding is also no surprise. Income and wealth inequalities since the 1970s in most developed economies have increased to levels typical of the ‘patrimonial capitalism’ of the late 19th century. But Piketty himself has been arguing this since 2003 (see Piketty 2003), alone or together with his compatriot Emmanuel Saez (see Piketty & Saez 2003). The doyen of comparative inequality studies, Tony Atkinson, has been ringing the warning bell for at least two decades (see Atkinson 1996). The web site with their data, the World Top Incomes database, has been public for at least three years.

This raises the question why Capital has become such a big success, and especially: why now? Our answer is that Piketty’s fact-led discourse suits mainstream thinkers in the present conjuncture.  Before 2008 distributional problems were covered up by growth figures artificially beefed up by debt-driven asset inflation, especially in real estate; after the outbreak of the crisis in September 2008 nobody can deny that financialized capitalism rewards the few and simply does not deliver for the many. Financialized capitalism is a benefit for multinationals and elites but a disaster for citizens and the masses. And this verdict is no longer radical critique from the Occupy movement, Los Indignados or a few elderly socialists, it is endorsed by economists like Paul Krugman, Joe Stiglitz and Larry Summers.

In the background, the high priests of neoliberal liturgy like the IMF, the World Economic Forum and the OECD have recently voiced grave concerns over the political effects of rising income and wealth inequalities in developed economies (see IMF 2014). Under the banner of inequality threatening the legitimacy of capitalism, the IMF has even bracketed its traditional aversion to cross border capital controls (IMF 2012). An even starker illustration of the concerns raised by increasing inequality among the global financial elite is the May 27 London conference on ‘Inclusive Capitalism’. Organised by an heir to the Rothschild fortune, the conference allowed the great and the good such as Martin Wolf, Christine Lagarde, Prince Charles and Mark Carney to lament increasing inequality (see Lagarde 2014).

Against the back ground of disaffection with main stream politics, it is hardly surprising that the great and good are now recognising that they have a problem about the legitimacy and attractiveness of financialized capitalism. While bankers’ bonuses in the City and on Wall Street are back at the level of 2008, ordinary households in the US and the EU are still facing declining disposable incomes, resulting in pretty severe cost of living crises on both sides of the Atlantic. The stock markets are at record highs with  price records being set again on art markets and in markets for prime real estate in New York, Paris and London. The unconventional monetary policies which central banks hoped would beat the ‘great recession’ have instead benefited the wealthy by boosting asset prices.

Led by Amazon and Starbucks, and advised by para-financial accountants and lawyers, large firms have succeeded in paying an ever smaller share of overall taxation, and hoard ever larger amounts of cash which is not invested. Households by default have to bear the brunt of both the austerity policies enacted throughout the EU and through higher prices or taxes pay for investments in the renewal of material and immaterial infrastructure (roads, rule of law, education) on which large corporates depend. Corporate lobbyists with trade narratives shield politicians and confuse citizens who nevertheless by majority in countries like the UK typically support policies like renationalisation of utilities.

Enter Thomas Piketty: a French economist with a reassuring CV that includes a PhD from the LSE and a stint as economics Prof at MIT. On the basis of carefully assembled historical data and an impressively sounding law of capitalism ( R > G ), Piketty warns that ceteris paribus we are returning to the  patrimonial capitalism of the late 19th century. Capitalism is an inequality machine because the return on capital (R) in a context of demographic decline will always be three to four times larger than overall economic growth (G), implying that income and wealth inequalities due to the forces of compounded interest and multiplication will by necessity grow. Mid twentieth century equality is according to Piketty an anomaly based on unrepeatable historical contingencies including war, destruction, financial repression, inflation, the rise of mass democracy and redistributive welfare states.

The strength of Capital lies in its careful presentation of the historical facts. As Piketty writes in the Acknowledgement: ‘this book is based on fifteen years of research devoted essentially to understanding the historical dynamics of wealth and income’ (p. vii). No more, no less. Thence the 18 Tables and 97 Figures, that have to prove beyond reasonable doubt that the phase before 1914 was capitalist normality, that the period between 1914 and  1970 was capitalist exception, and that in the past thirty years we have embarked on a trajectory which will bring us irrecoverably back to that earlier normality.

The book derives its unmistakable political seductiveness from it’s a-theoretical, empiricist factuality. Although Karl Marx figures prominently in Capital, the spirit in which it is written is one of classical (not radical) political economy. Piketty’s devices include accounting identities, economic laws (‘the first fundamental law of capitalism’) and echoes of classical demographic arguments; Capital resembles Thomas Malthus much more than radical theorists like Karl Marx who employed the labour theory of value of Adam Smith and his ilk to critique the exploitative nature of industrialized capitalism and predict its ultimate demise through crises of over accumulation.

The reader looks in vain in Capital for Marxist or Marxisant theoretical explanations around class and accumulation or bourgeois radical explanations around business  models, agents, power relations and politics. Piketty asserts R > G as an explanation for growing inequalities, but it is of course no such thing. One section poses the crucial question as to why the return on capital should be greater than the growth rate (p. 353 ff); but this section does not contain any answer other than a summary of the historical record. Growing inequalities are inherent to capitalism au naturel, that’s just the facts.

And facts have a value which is enlightenment. ‘Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact,’ writes Piketty in the Introduction where he explicitly refers to Kuznets and his Whig expectation that economic progress would bring less not more inequality. Thus the main aim and the huge success of Capital (p. 2). This is the book which brings light where darkness reigned – not to debunk or demythologize or accuse, but to put the political debate on inequality on a more secure, empirical footing and (implicitly) when we know the facts, will we be able to assess, judge and act. Piketty hence subscribes to the positivistic view of science which colours to this day the self image of economics: positive economics is about facts not values, the technical facts not the political choices.

Piketty is the samurai hero of positive economics who lays about him with fearless sword play. Progressive readers can only cheer his skewering of the marginal productivity explanation for the rise of supermanagerial rewards since the late 1970s (p. 330 ff.). As Piketty contends, increased bargaining power does a much better job in explaining rising income inequalities than any other explanation. Yet this line of argument is not connected with the political economy and political science by scholars like Wolfgang Streeck (2014), Colin Crouch (2004) and Peter Mair (2013),on the increasing malfunctioning of democratic policy making in the late 20th century. The political backdrop for the return of patrimonial capitalism is never explored.

From this point of view, our core problem is disconnect between the median voter and his representative. This is explicit in the Eurozone troika countries, indirectly in the excessive deficit countries of the Eurozone, implicitly in all the other representative democracies. Everywhere it has created a democratic vacuum in which large banks and multinationals have been able to push through a silent coup. Just as the rise of mass suffrage marks the beginning of the great anomaly period of increased equality in the 20th century, so the end of mass democracy and the rise of post-democracy marks the back to the future return of income and wealth inequalities. But all this is never explicitly discussed in Piketty who simply avoids any kind of political explanation for the phenomena he describes.

In our opinion, this political reticence explains Capitals phenomenal success. In a conjuncture when capitalism is malfunctioning politically and economically, Piketty lets the undeniable facts speak for themselves. Thus, Piketty has succeeded in making his message about increased inequality palatable to an audience of important people who would have bridled at anything that smacked of contrarian leftism which in Marxist and Social Democratic  forms has always sought to organise politically on the basis of its economic analysis. Piketty does not offer an activist ideology; he deals in facts. No wonder that Larry Summers and Paul Krugman have claimed to see in Capital the birth of a new style of empirical economics. Away with models! Away with ideology! Away with theory! Here come the facts!

That is why Chris Giles launched his attack on Piketty in the Financial Times of late May and why it appeared so threatening to Pikettyites (Giles 2014). What if all those carefully assembled, speaking-for-themselves facts were wrong? What if the facts had overstated real inequalities? Would that not suggest that ideology lurked behind Piketty’s a-theoretical, a-political empiricism? If the facts did not speak for themselves and instead required political interpretation maybe there was nothing self-evident about Piketty’s facts? Inevitably, Piketty responded to Giles attack by claiming empiricist virtue: his work was transparent because ‘all Excel-sheets are available on Internet’; it was necessarily incomplete because ‘more data and more collaboration are needed’; and the adjustments were not biased because ‘colleagues have looked at off shore centres, suggesting that real inequality is larger rather then less’ (Piketty 2014a).

So far Piketty has done enough to see off Giles and other positivist economic critics who have until now only disputed the facts about the problem of wealth inequality and cannot find gross errors of the kind which the Amherst team found in Reinhart and Rogoff’s This Time is Different (see Herndon et al. 2013).  But, given his style, Piketty cannot do enough to see off political critics who would instead focus on his recommended solutions as the point of weakness.

When it comes to fixes for inequality, in Chapter 15 Piketty presents his widely discussed ‘useful utopia’ of a global progressive wealth tax and is the first to acknowledge that politicians are unlikely to implement a wealth tax due to insurmountable collective action problems. Piketty can then present himself as the high intellectual in a low political world: ‘for reasons of natural optimism as well as professional predilection, I am inclined to grant more influence to ideas and intellectual debate’ (p. 513). Or, as we would put it, the more a-political, a-theoretical and empiricist the analysis, the less likely it is to have credible fixes as corollary.

The fixation on a global wealth tax is however revealing.  If the problem of capitalism is R > G, merely analytically there are at least two different economic pathways and one more political pathway out of the predicament of increasing inequality. One could choose to structurally limit the return on capital, by means of an estate tax for example. That is Piketty’s preferred solution: < R. Alternatively, one could also choose to ensure that growth increases, either through investment, re-framing management and redefining economic activity.  An alternative economic solution is > G  through massive investments in infrastructure, managing the sheltered foundational economy through social licensing and innovation and redefining what goes into GDP

Finally, one could choose to change the distribution of rewards between capital and labour ( R : G ). This is a political solution because the means to do so are labour union renaissance and new modes of corporate governance with a stronger say for labour and other stakeholders. The aim would be to encourage demands for higher wages by recreating the bargaining power which organised labour had in the mid twentieth century and deny capital the gains it has made since the late 1970s when liberalisation loosened up the exit options of capital.  As Thomas Frank has argued, if we strengthen labour against capital, the market will deliver the outcome which Piketty seeks through progressive taxation (Frank 2014).

Piketty’s preference for the pseudo technocratic fix of progressive taxation is revealing of his rationalist concept of management which again helps to explain his brilliant success. Progressive taxation is the rationalist solution because the logic of the ratios and aggregates is countered by an adjustment to the one element of government taxation which finance ministries can vary (but never will with the present balance of economic forces in high income countries). But this helps smooth the reception of his book amongst elites and opinion formers who market the book to a much wider circle. Piketty has a seminar room solution for inequality which is economically thinkable but not politically possible and the importance of his book is that it allows us all to acknowledge the problem of inequality without danger that we might be endorsing or licensing any effective solution. Read Capital and demonstrate your concern while doing nothing.


Atkinson, A. (1996) Income Distribution In Europe and the United States, Oxford Review of Economic Policy 12(1): 15-28.
Crouch, C. (2004) Post-Democracy (Oxford: Polity Press)
Frank, T. (2014) The problem with Thomas Piketty: “Capital” destroys right-wing lies, but there’s one solution it forgets, Salon, May 11,
Giles, C. (2014) Data Problems with Capital in the 21st Century, May 23,
Herndon, T. et al. (2013) Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff, Cambridge Journal of Economics, doi: 10.1093/cje/bet075
IMF (2012) The liberalization and management of capital flows; an institutionalist view, November 14, 2012,
IMF (2014) Redistribution, Inequality and Growth, IMF Staff Discussion Note, February 2014,
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Lagarde, C. (2014) Economic Inclusion and Financial Integrity—an Address to the Conference on Inclusive Capitalism, May 27,
Mair, P. (2013) Ruling the Void: the Hollowing of Western Democracy (London: Verso)
Piketty, T. (2003) Income inequality in France, 1901-1998, Journal of political economy 111(5): 1004-1042.
Piketty, T. (2014) Capital in the 21st Century (Harvard: Harvard University Press)
Piketty, T. (2014a) Rebuttal,
Piketty, T. & E. Saez (2003) Income inequality in the United States, 1913-1998, Quarterly journal of economics 118(1): 1-39.
Streeck, W. (2014) Buying Time: the Delayed Crisis of Democratic Capitalism (London: Verso)

Dyfal Donc & Dutchman