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Book of the Week: economic salvation is at hand, possibly

As the world faces the threat of financial crisis, Max Rashbrooke looks for answers in the new book by revolutionary economist Thomas Piketty.

Already we can see the very rich using their wealth to enjoy a more luxurious and less disruptive coronavirus lockdown, while the poor struggle with a sudden dose of economic uncertainty. Our government, fortunately, recognises this reality: finance minister Grant Robertson’s coronavirus package this week contained $2.8 billion for beneficiaries. The Winter Energy Payment will be doubled, work tests for those seeking tax credits will be eased, and the dole and other core benefits will be permanently raised by $25 a week. But the Covid-19 burden will still fall hardest on those at the bottom.

Thomas Piketty would say there is nothing surprising about any of this. His latest book, Capital and Ideology, out this month in English after appearing in French last year, argues that most societies throughout history have been fissured by inequality. And it is only by examining the justifications for this inequality that we can truly grasp what has happened, and begin to make plans for a fairer future.

Piketty, a 48-year-old French economist, burst onto the scene in 2014 with Capital in the Twenty-First Century. It was an intellectual sensation, unexpectedly selling 2.5 million copies in the process. Piketty presented a painstaking account of economic inequality across several millennia. His new book seeks to explain the ideas that have sustained that inequality. But will anyone read it?

His first book drew on previously unpublished data going back several millennia to explain just how profoundly unequal human societies have typically been. Its central contention, encapsulated in the formula r > g, was that if you already have accumulated or inherited wealth, it will passively grow at 4-5% a year, whereas people actively generating new fortunes – by working and starting businesses – will only see their wealth grow at 1-2%. This divergence dramatically widens inequality until wealth concentrates at the levels seen in Victorian England, unless societies deliberately take another course.

But although Capital in the Twenty-First Century changed the inequality debate forever, sparked what some commentators called “a Piketty panic”, and sold millions of copies, it’s doubtful how much of its 700-page analysis of long-run wealth inequality people actually read. Statistics from Kindle users, whose every move can be tracked, suggest that Piketty’s tome took over A Brief History of Time’s position as the book that readers most quickly set aside.

Such considerations will apply even more strongly to Capital and Ideology, which weighs in at a staggering 1200 pages. (Fortunately, it contains a capsule summary of Capital in the Twenty-First Century, so you don’t need to have given up quickly on Piketty’s first book to give up quickly on this one as well.) Where the earlier work provided the ‘what’, Capital and Ideology gives us the ‘how’: the stories which societies have told themselves in order to sustain such large imbalances of wealth and income.

“Each human society must justify its inequalities,” Piketty tells us on the first page. “They must find reasons, otherwise their entire political and social edifice risks falling down.” The book delves deep into these justifications, starting with the “tri-functional” societies divided into priests, warriors and labourers, moving through the proto-capitalist (“proprietor-based”), colonial and slave-owning societies, onto the twentieth century’s social-democratic and communist regimes, and concluding with the “hyper-capitalist” or “neo-proprietor” societies of the present day.

Ranging widely across economics, history, sociology and countless other disciplines, Piketty pulls out a couple of key lessons. The first is that inequality has often been justified by appeals to a “natural” order that ensures stability. In the tri-functional societies, for instance, each caste was told it had a vital role in a harmonious regime: priests educated, warriors defended, labourers produced material goods. The second lesson, a corollary of the first, is that any attempt to reduce inequality will be met by claims that it risks creating chaos.

It’s startling to see how often this accusation re-occurs. Yet there’s a twisted, self-interested logic to it. Inequality often resides on purported property rights, or claims to certain assets. These claims may prove impossible to defend, as did the supposed right of feudal lords to own their serfs. But if those property rights are challenged, where does it end? Wind far enough back in history, after all, and you will find virtually all assets have been acquired illegitimately, through force, conquest and other violent means.

It's no reason to give up on addressing the inequalities that are within our grasp, of course. But the rich have often made this argument sound plausible. Want to redistribute the nobles’ estates after the French Revolution? You’ll create chaos. (Indeed, so successful was this argument that barely any redistribution took place, and inequality was higher in France in 1914 than it had been in 1789.) Want to free slaves without compensating their owners? You’ll create chaos. (Indeed, so successful was this argument that the abolition of slavery was followed by the payment of billions of dollars … to the slaveowners.)

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Such analysis occupies around two-thirds of the book, and is coherent and compelling, if daunting in scale. The remainder takes quite a different turn. Why have centre-left parties become so unpopular?, Piketty asks. The conventional answer is that their traditional working-class voters have become more right-wing, especially on immigration, and will not come back into the fold unless the parties themselves also shift right.

Piketty, however, amasses a startling amount of polling data to tell quite a different story. Centre-left parties are now the parties of the intellectual elites, he argues. (Centre-right parties, meanwhile, represent the wealthy and business-based elites.) But they have been on that same path, appealing less and less to lower-educated voters, ever since the 1960s – well before immigration became salient and the world went populist.

In other words, it’s not that centre-left parties have been abandoned by their voters, but rather that their traditional voters have felt abandoned by them. For Piketty, that sense of abandonment came about because centre-left parties failed to renew and strengthen their struggle for greater economic equality, focusing instead on things like the expansion of university education, largely to the benefit of existing intellectual elites.

This in turn suggests that the way to win back voters is to promise a new assault on economic inequality, in the form of a “participatory socialism”. This would rest on three key pillars: sweeping taxes on the largest fortunes, inheritances and incomes, levied at rates as high as 90%; staff representatives making up half the board of directors of large firms, building on existing German and Scandinavian examples; and a massive universal capital grant for everyone reaching adulthood, to ensure wealth is spread evenly. Ideally, much of this would be marshalled at the global level.

Piketty, incidentally, understands perfectly well why twentieth-century, Russian-style socialism failed, in large part because of its obsession with “state property”, the ownership of assets by government. Instead, he argues, there needs to be a greater focus on “social property”, as when workers help govern firms, and ‘temporary property’, as when large fortunes are broken up (through taxes) and circulated widely (through universal capital grants).

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So what might we make of all this, here in New Zealand? Capital and Ideology won’t have the same impact as Piketty’s first volume, and not just because of its length. There’s no insight on a par with r > g, and his analysis of working-class disenchantment can be contested: the revolt against centre-left parties may have had less to do with disappointment on the redistribution front, and more to do with unjustified white male resentment about policies that sought to improve the position of women and ethnic minorities.

There is still resonance here, though. When reading claims of the supposed chaos that will come from redistributing property, it is hard not to be reminded of the situation at Ihumātao. The protesters’ demands have often been met by accusations that they will open Pandora’s box, because to contest that settlement is to reopen every Treaty settlement, or so the argument runs. But knowing how often this line has been used to suppress justice in previous centuries is yet another reason to not take it seriously in this one.

The book also poses questions for Labour and the Greens. While the New Zealand data on voting trends only goes back two decades, it tells the same story of those centre-left parties becoming the home of the educated elite. They now get a higher vote share among the one-tenth of most educated voters than they do among the remaining 90%. Whatever the reasons for that shift, it should prompt some hard thinking on the centre-left.

A country that can’t even get a capital gains tax over the line, however, is hardly about to adopt the sweeping taxes on incomes, gifts and wealth that Piketty proposes. Nor does he make an entirely convincing case for them. While he exhaustively – and fascinatingly – details past justifications for inequality, he is a little light on the current “hyper-capitalist” ones. They do rest on strong claims to property, as he acknowledges, but also on narratives of the value of risk-taking, the moral virtues of the rich, the corresponding moral failings of the poor, and so on, none of which he tackles in depth.

Piketty does point out that, astounding though it now seems, from 1940 to 1980 both the US and the UK had top income tax rates of around 80%, and taxes on the largest inheritances of around 70%. That this was also the greatest period of economic growth the world has ever known helps rebut the claim that reintroducing such taxes would deter hard work, damage the economy or lead to some kind of chaos. But it is still hardly a full answer to the forceful present-day defences of inequality.

Nor is it clear how his brave new world might come into being. Piketty is very good on the history of ideas, but not on the struggles and movements – the suffragettes, the trade unions, the anti-slavery campaigners and countless others – that helped promote such ideas and make them reality. That, admittedly, is not his job: covering this ground would have turned a very large book into an absolutely unmanageable one.

Articulating ideologies, though, is the task he sets himself. Yet his account of the ideas that would underpin ‘participatory socialism’ is surprisingly light. Mostly it derives, as he admits, from the American philosopher John Rawls’s enormously influential 1971 book A Theory of Justice. Rawls argued that if people were designing an ideal society but did not know what position they would have in it (they were choosing, in other words, from behind ‘the veil of ignorance’), they would build this society on two key principles.

Each person would have as many basic liberties as possible (without infringing on the liberties of others), and inequalities of income and wealth would be permitted only if they benefited the worst off. Now, the two principles Rawls espouses are fine, as far as they go – but he was clearly a liberal, rather than a socialist of whatever stripe. So this seems a pretty thin justification for ‘participatory socialism’.

In the end, most people will probably feel that Piketty has done either too much work or not enough. For many New Zealanders, a platform of taxes on everything, power-sharing between bosses and workers, and big dollops of cash for all 25-year-olds will seem hopelessly radical. For those who are tempted by that sort of thing, much more justification would, in all likelihood, be needed. Many readers, one fancies, might have expected ‘socialism’ to involve rather more than just some higher taxes and the sort of corporate governance the Germans have practised for decades.

Moreover, if participatory socialism is even a good idea (which seems doubtful), what is a more complete philosophy that might sustain it? And would all societies regard ‘temporary’ property as a good thing, including Indigenous peoples that often see the permanent and collective ownership of land as central to their identity?

There’s no doubting Piketty’s ambition. In some ways he’s produced a spectacular book, one that engages with thinking well beyond his own discipline of economics and displays a startling level of historical detail. If his first book was sweeping, this is sweeping squared. And it is not the purpose of such ambitious books to be right in every detail, rather to provoke debate and reset some basic ideas. But if they cannot be perfect, they must at least be solid – and this one simply has too many holes in it to be entirely convincing.

Capital and Ideology by Thomas Piketty (Belknapp Press, $82)

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