Thursday, June 12, 2014

Thomas Piketty IV

In conclusion, Capital in the Twenty-First Century is an important and impressive book. Chief among its virtues is Piketty's commitment to a broad cross-disciplinary approach to his subject, economics, which he sees as a sub-discipline of the social sciences, along with history, sociology, anthropology and political science. Most people are fully justified in their lack of interest in economics, because it is usually presented as a narrow, technical field that doesn't relate directly to other subjects. In contrast, Piketty writes like an Enlightenment thinker who is concerned about important issues such as the future of mankind, not just little things such as U.S. GDP growth next year. In short, he is a big thinker, whereas Paul Krugman, Joseph Stiglitz and probably even Milton Friedman, comparatively speaking, are not.

Even so, I don't necessarily recommend that you read Capital unless you are particularly interested in policy discussions related to economics. It is a long, thorough and detailed book that touches on many topics, but the central message is quite simple. It is that the current state of the world is such that the wealthy are likely to become wealthier and the poor are likely to become poorer. As a believer in social justice and the responsibility of governments to maintain an acceptable level of equality, Piketty recommends that permanent new taxes on wealth be instituted globally. He also suggests that one-time taxes on wealth could be used to eliminate or reduce national debts. The latter would be preferable to decades of austerity, which has little effect on the wealthy but places a heavy burden on the poor.

Much of the book is devoted to showing how wealth inequality grew up until 1914, when it collapsed, and how it took off again during the recovery after 1945. His thesis, which he amply documents, is that the 1914-1945 period was a historical aberration. The wars and the Great Depression wiped out most of the prior wealth inequality, and the surge in economic growth after 1945 temporarily allowed the less-wealthy to advance economically. Now, Piketty argues, we have resumed the long-term trend in which the return on capital exceeds the return on labor. People who are wealthy now will become wealthier from their investments while the rest of society will languish indefinitely with little chance of making economic progress. Enormous wealth is accumulating in the top .1% of the population. The number of billionaires and multi-billionaires is growing, and even large private university endowments are growing faster than those of smaller universities. The largest endowments grow at the highest rates because the universities have the resources necessary for the best investment research. For example, Harvard, with an endowment of about $30 billion, spends about $100 million per year to manage its assets and gets a real return of about 10.2%, higher than that of all other universities except Yale and Princeton. In this environment, ordinary workers will never catch up with the wealthy and small, private universities will never catch up with Harvard, Yale and Princeton.

The parts of the book that I found most refreshing involved Piketty's critiques of the U.S. He debunks the idea of American exceptionalism, saying that current information suggests that social mobility is lower in the U.S. than in Europe. He attributes much of the wealth inequality in the U.S. to overpaid executives. He speculates that low top income tax rates have encouraged U.S. executives to bargain harder for higher compensation, since they can keep more of their earnings than they would otherwise. If higher top-level income tax rates were reinstituted, executives would have less incentive to demand higher pay and American wealth inequality would be reduced. Courageously, he goes on to say: hypocrisy is too great when economic and financial elites are obliged to defend their interests-and that includes economists, who currently occupy an enviable place in the US income hierarchy. Some economists have an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest. Although data on this are sparse, it also seems that US politicians of both parties are much wealthier than their European counterparts and in a totally different category from the average American, which might explain why they tend to confuse their own private interest with the general interest. Without a radical shock, it seems fairly likely that the current equilibrium will persist for some time. The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century's globalized economy.

In full disclosure, I must say that I have some sympathies with wealth inequality. Historically, extreme wealth has often led to good art as a result of attempts by the wealthy to differentiate themselves. When the Italians were wealthy we got Botticelli, Michelangelo and Titian. When the Dutch were wealthy we got Bruegel, Vermeer and Rembrandt. When the French were wealthy we got Flaubert, the Impressionists, the Post-Impressionists, Debussy and Proust. The arts tend to flourish when there are rich people throwing money around. On the other hand, I can't say that wealthy Americans have much to show for their artistic interests unless you include bad taste (The Queen of Versailles comes to mind). Secondarily, also on the positive side, although I'm not rich, I'm wealthy enough that the book affirms that if I manage my investments properly, not only am I unlikely to experience financial difficulties, but my wealth will probably increase during the remainder of my life, thanks to the backward political process here and the absence in the U.S. of useful public intellectuals like Piketty.

At the conceptual level, I consider Piketty to be the responsible adult that few Americans seem able to be. Why didn't an American economist write this book? As Piketty politely refrains from saying, this is a narrow-minded, materialistic culture all the way up through the intellectual ranks. The policies he recommends should already be under consideration, but whatever headway they make will meet tremendous opposition at each step. It is possible that by following Piketty's guide and publicly debating the issues discussed in his book the state of society could be improved significantly. To me, this is a more serious approach than what has been brought up by either liberals or conservatives in recent decades. I wish Piketty's ideas the best of luck, but still hold fast to the view that humans ultimately are not sufficiently rational to organize themselves in an equitable and sustainable fashion. As I have said earlier, I don't believe that either capitalism or democracy is essential to human life, and this book does not look that far into the future.

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