Piketty, Capitalism, and Progressive Taxation

One of the most important graphs in The Golden Calf is taken from Wilkinson and Pickett (The Spirit Level, 2009) and shows the widening gap between the richest and poorest in America in income, between 1975 and 2004. It’s the second half of my life. The first part of my life, beginning in 1949, was the “good news” part, when the economy worked well, and a worker with one job could buy a home and raise a family and send kids to college. This was followed by the “bad news,” economism or neoliberalism, especially under Reagan starting in 1980, when income stagnated for the lower and middle classes and virtually all the new wealth was snapped up by the top few percent. By this picture, economism was a bizarre development, and one was hard pressed to explain why such a thing should have occurred.

Thomas Piketty, Professor at the Paris School of Economics, has now cast considerable new light on these developments (Capital in the Twenty-First Century, trans. Arthur Goldhammer, Cambridge: Belknap Press of Harvard University Press, 2014). As he points out, until modern computers, economics tended to be light on facts. It’s only within the past couple of decades that the available data have been recorded and investigated, to allow those familiar with them a reasonable peek at the actual history. And history, in fact, is what economics should be concerned about; Piketty takes a dim view of American neoclassical economics and favors a collaborative view of the economist as one of the social sciences.

Piketty offers data on capital and income between 1800 and the present for Britain and France, and going back to the late 1800s for the United States and other major countries. He focuses a good deal of the basic equation, r > g, meaning that the rate of return on capital virtually always exceeds the growth rate of the economy; the former tends to be 3-5 percent and the latter runs from less than 1 percent to 1.5 percent. Piketty notes that this is basic to the whole idea of civilization—it allows people to be engaged in something besides pure subsistence.

When Piketty graphs the history of the relationship between the after-tax rate of return to capital and the growth rate of world output, as best as is known from the year 0 to the present, capital return always exceeds the growth rate except at one point—the years 1913-2012. So the data that informed my standard way of thinking between 1949 and 1975-80 turns out to be wildly out of sync with the norm.

Piketty describes what he considers most important, capital/income ratio, roughly as follows. For Europe, inequality was very pronounced, until the shocks of the twentieth century, in the years 1914-1945. Then income inequality rose again. The major change was that before the twentieth century, there were a small number of rich people who had almost all the wealth, and the vast majority of laborers who had virtually none of it. Now there is a middle class which collectively holds a significant amount of wealth, one-quarter to one-third of the total; while the extreme upper class, especially the top 1 percent, now holds around 60 percent of the wealth.

The United States presents a different picture. The middle class was establishing itself all along. However, during the Gilded Age, income inequality rose in America as well. It then decreased during the world wars and depression, but America was spared the extreme trials of Europe. Since 1975, income inequality has risen even higher in the U.S. than in Europe.

Piketty talks then of the future of the remainder of the twenty-first century, and finds increasing income inequality to be an unstable factor, so he is hopeful that something can be done about it. His favorite is a progressive tax on capital. He favors a modest plan that would produce maybe 2 percent of GDP, but argues that the capital tax is more important than the amount raised, since it carries an important message. In particular, for it to work at all, it would require that data be gathered in a way that it is not currently, and particularly that international tax havens be opened to scrutiny. On Piketty’s plan, everyone would know everyone else’s wealth, throughout the world. He admits that this is a nearly-utopian goal and will require many stages of development.

Piketty speaks of the future as if everything will be smooth and there will be no more “shocks” equivalent to the World Wars. He admits that he cannot predict what would happen if shocks supervene.

Returning to my own views, it’s discouraging to find that the time that one had thought of as the halcyon days when everything was most fair and reasonable (the era 1945-1980 roughly) was a brief, highly atypical time period. It is, by contrast, encouraging to find that progressive taxation can so effectively reverse the worst of the trends. The only problem will be gaining the political will to succeed in such a mission in the US. Piketty’s own guess is, “Without a radical shock, it seems fairly likely that the current [state of affairs in the US] will persist for quite 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. [514]”

How Can You Expose What’s Already in Plain Sight?

Many of the recent posts on this blog have been book reports. Maybe I am just getting book fatigue, but I wanted to explain why I do not plan to read a new book that’s being recommended by none other than one of my usual heroes, Paul Krugman:

http://www.nytimes.com/2014/04/25/opinion/krugman-the-piketty-panic.html?partner=rssnyt&emc=rss&_r=0

Krugman praises a new book by the French economist Thomas Piketty, Capital in the Twenty-First Century. Piketty apparently goes over a lot of old ground, explaining the worsening income inequality in a world sold on the ideology of economism. What he then does especially well, says Krugman, is documenting the fallacy of the idea that somehow, the One Percent have earned their incredible wealth through hard work and smarts. He shows that just as the rich in the pre-World War I era were overwhelmingly those born to wealth and privilege, today’s wealth is gained much more by inheritance than by anything resembling “earnings.”

Krugman is so big on Piketty’s book apparently because it has gotten the knickers of the right-wing pundits in a knot. The usual response to income inequality from the economism-friendly think tanks is first to deny the data, saying that the rich are poorer and the middle class are wealthier than it seems. Once they get over that lost cause, the next chestnut they pull out of the fire is how the rich made all their money because they are such brilliant entrepreneurs (as we all know, they are not wealthy, they are “job creators”). For some reason which I’d presumably find out if I read the book, Piketty makes it much harder than in the past to trot out this rationalization. So the right-wingers are reduced to name-calling, accusing Piketty of being a Marxist—which presumably you are these days if you believe that social classes or income inequality exist.

I can’t quite bring myself to get excited about reading this book because, just as Krugman admits that previous authors have already “done” income inequality, I had thought that it’s already been pretty widely shown that the rich-are-better ploy is a crock as well. Of the books that I cite in The Golden Calf, Thomas Frank’s One Market Under God first comes to mind here, but other authors have certainly also addressed the question.

It cannot be very hard to show that the wealth of the super-rich cannot possibly be explained in this manner. If the really rich were 10 or 20 times richer than me, then I’d be willing to grant that they may well be 10 or 20 times smarter or work that much harder than I do. But when they are 300 times richer than me, or more, it is really hard to argue that it must be a matter of pure merit.

If, on the other hand, we are in the throes of economism, and cling to a quasi-religious faith that the rich are rich because it’s God’s will and they are the subject of divine favor, then I suppose it all makes perfect sense.  Too bad the right-wingers can’t say out loud what they believe in their hearts; it would same them a lot of mental gymnastics.

The Rise of Economism in the US: The Business Side

I recently posted about Daniel Stedman Jones’s book, Masters of the Universe, a history of the rise of economism (which he terms neoliberalism) in the US and the UK since the 1940s. Stedman Jones has a bit of a burr under his saddle about Marxism, and he appears to interpret any historical account that stresses how the wealthy supported economism-type policies out of their own self-interest as a Marxist account. So he stresses the growth of economism as a set of ideas, promulgated by think tanks. He has to admit that these think tanks relied upon the financial support of sympathetic capitalists, but as far as he is concerned, that’s more of a footnote.

In connection with other research, I had my attention directed to the book by historian Kim Phillips-Fein, Invisible Hands: The Businessmen’s Crusade Against the New Deal (New York: Norton, 2009). It seems to me that this volume makes a nice bookend with Stedman Jones. Phillips-Fein is most interested in why the US business community (she does not address the UK) found it in its interests to support conservative counterattacks against the New Deal from the 1930s up to the eventual triumph of conservatism (and economism) with the election of Reagan in 1980. Where Stedman Jones focuses on the ideas and the think tanks, Phillips-Fein focuses on the organizing and proselytizing among the businessmen to raise the money to support these ideological and political movements. I would suggest that between them they provide a more thorough history of the US part of this story than either volume would by itself. (Phillips-Fein talks about Hayek, von Mises, Friedman, and the Mont Pelerin Society, but does not mention the terms ‘neoliberalism’ or ‘economism’—just another clue as to how the terminology issue continues to vex.)

In reading Phillips-Fein’s narrative, two themes especially struck me. First, if one looks at the later years of the conservative movement, one can find among the grievances of the business leaders specific instances of overreaching among labor unions and government regulators, for which the businessmen might be forgiven for thinking that the free enterprise system was under serious attack. However, in the very early years, before either unions or government had amassed that much power, we still see a core of conservative capitalists viewing the New Deal as an unmitigated disaster. As Phillips-Fein analyzes their thinking and quotes from some of their letters and speeches, what emerges appears to be a very basic sense of entitlement to rule. These white male business leaders seemed to think that they were, in fact, those chosen to run America, and they expected to be deferred to. The very idea that anyone else should demand an equal right to be heard, much less to guide public policy, was treated by them as a fundamental affront to their status. While various other segments of the population came along and joined the conservative bandwagon as it picked up steam in the 1960s and 1970s, these capitalists were at the center of it from the start.

Second, Phillips-Fein obviously exercised a lot of control over the quotes that she selected, but a rather surprising number of the quotes from these conservative capitalists, again reaching well back into the 1930s, are frankly racist. In keeping with the idea that they are the natural leaders and deserve deference on all sides was the further idea that minority groups had better stay in their place. As the conservative movement started to make headway, and as more politically-minded business leaders realized the need to form strategic alliances, the main groups this core of business leaders reached out to along the way were those that in various ways were opposed to integration and civil rights. Here Phillips-Fein’s poster child is the late Sen. Jesse Helms of North Carolina. To a person like me, raised in the North as a self-ascribed liberal, Helms was nothing but a racist demagogue, pure and simple. Phillips-Fein shows that in fact Helms was much more clever and original than that. He was actually a master at reframing Southern segregation into the language of freedom and free enterprise. For example, he agreed that to the extent that a lunch counter was a public service, blacks had just as much right as whites to sit down and be served. The only problem, he was quick to point out, was that a lunch counter was not properly viewed as a public service at all; a person owned the lunch counter and it was his private property. To demand that he serve black customers in the South was to demand that the Federal government could come in and dictate to private property owners what they could do with their property. Helms was shrewd about avoiding attacks against blacks and always changing the subject to freedom and opposition to Federal government power over local communities and private individuals.

In short, the political success of the conservative movement that ultimately enshrined economism as the common-sense political discourse of the US would never have succeeded had the movement not been willing to ally itself at every step with racism and segregation, while at the same time denying that it was racist and segregationist.

In one other passage, Phillips-Fein contributes to our list of logical inconsistencies within economism by going back to the core ideas of Friedrich Hayek and Ludwig von Mises. She notes the irony of their views of the free market and their need to protect it from any outside interference and efforts at regulation. On the one hand they were in awe of the power of the marketplace, “the spontaneity of the economy, a complex system that came into existence without forethought or planning.” Yet at the same time they saw the market as “a terribly fragile entity” which could be destroyed by even a little bit of government interference or regulation. As she notes, they never confronted or admitted, let alone explained, just how the marketplace could be so robust and all-powerful on the one hand and so delicate and vulnerable on the other.

Masters of the Universe: An Alternative History of the Rise of Economism?

A colleague kindly referred me to this book review—

http://www.salon.com/2013/03/09/the_world_according_to_milton_friedman_partner/

--of Masters of the Universe by the British barrister and historian Daniel Stedman Jones. (Both the review by Michael Clune of the Los Angeles Review of Books, and Stedman Jones’s book, refer to what I call ‘economism” as neoliberalism, so I will use “N” for short to refer to that terminology.)

Stedman Jones’s book can be read simply as another historical treatment of the rise of N during the era 1940-1980, in both the US and the UK, and as such it seems a reasonable and thoughtful volume. However, according to both the author and the reviewer, the agenda is more ambitious. Stedman Jones wishes to argue as to the inadequacies and indeed errors of other works, notably David Harvey’s A Short History of Neoliberalism, which some of my historian and social science colleagues treat as a standard reference on the subject, and Naomi Klein’s Shock Doctrine, upon which I relied considerably in writing THE GOLDEN CALF. So it naturally interested me to see how well Stedman Jones could defend his case as to the errors of those other authors.

Before that, what does Stedman Jones have to say? Very briefly, he argues that the route from N as a fringe philosophy held by a small number of thinkers in the late 1940s, to its triumph under Thatcher and Reagan in the 1980s, was not at all the slam-dunk that right-leaning thinkers now believe, nor was it the result of an organized conspiracy among capitalists as he thinks that Harvey argues. It was a long, slow slog that could easily have turned out differently. Stedman Jones places a lot of weight on what happened in the 1970s with economic doldrums and “stagflation,” which discredited in many politicians’ minds the long-standing Keynesian orthodoxy. First it’s important to note that just as Freud’s reputation was trashed at the hands of many Freudians, among the worst enemy of Keynes’s reputation were the Keynesians. While Keynes himself was quite cautious as to the ability of economics to predict and control events precisely, his followers grew fat and sassy and promised much more than their theories could deliver. Hence they were easy to discredit when supposedly Keynesian remedies failed to restore economic prosperity during those years.

Enter monetarism—Milton Friedman’s own theory of what to do in difficult economic times. The review stresses that monetarism and today’s N are quite different species of animal; N rejects government interference with the economy while monetarism is a method of government interference in the economy. Accordingly, the left-center governments in power in the UK and US in the late 1970s thought they could adopt monetarist policies without buying whole hog into anything like N. But because of both the economic doldrums and other events such as the Iran hostage crisis, these folks were then voted out of office and replaced by more extreme ideologues who bought the whole N deal—even though by today’s standards Reagan’s brand of N was considerably more moderate than the going ideology, and usually has to be spruced up with some revisionist history so that today’s N devotees can properly worship Reagan.

OK, so that’s the history, and knowing more about its ins and outs is certainly valuable. What about the criticisms of Harvey and Klein?

Harvey’s besetting sin, according to both Stedman Jones and Clune, is apparently being a Marxist, or at any rate what they consider to be a Marxist, which presumably translates into soft-headed. Looking into the details as to exactly how this invalidates Harvey’s historical writings, Clune offers the observation that Harvey apparently believes in a Marxist theory of labor that has long been discredited. I cannot recall, in my reading of his history, that whether he believed that theory or not made much difference for most of the book.

More to the point, Stedman Jones apparently wishes to attribute to Harvey’s Marxism, and not to a correct reading of history, the role that capitalists played in the rise of N. Stedman Jones’s account, as one would expect, is big on the role of N think tanks. And being a decent historian, Stedman Jones relates just who footed the bills for all those think tanks. And it was not the poor. So it’s not clear to me how Stedman Jones can on the one hand admit the crucial role of many capitalists, presumably following their own self-interest, to fund these N think tanks, and then turn around and say that capitalists had nothing to do with N’s eventual triumph.

What about Klein’s theory of the shock doctrine, which she attributes to Milton Friedman and his followers in the Chicago School of Economics? Well, Klein’s idea, as I understood it, was that the so-called “Chicago Boys” saw their opening whenever a nation suffered a crisis. They then showed up with their monetarist policies as a way to get the fiscal crisis under control. At first the offering seemed modest—a nation could adopt these monetarist policies without having to abandon whatever other political policies they wished to espouse. But then as soon as the technocrats took over, they used their opening to institute a wide range of “reforms” that completely instituted an N program, and that effectively repealed all the existing policies, especially any that favored organized labor. I don’t see much difference between such a program and what Stedman Jones says actually occurred under Thatcher and Reagan. Certainly one could quibble about details but the outline seems valid.

In short, Stedman Jones’s attempt to separate his own book from previous work seems more of a marketing ploy than a sober assessment of what he actually has on offer—and what he has on offer seems to be useful in its own right, and not in need of any such trumpeting.

Daniel Stedman Jones, Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics. Princeton University Press, 2012.

It’s All about Freedom—Only Not That Way

I generally ignore op-ed columns by Jonah Goldberg, who claims to be a conservative columnist but who appears actually to be an anti-liberal columnist—whatever liberals believe, he’s agin it. I happened to catch sight of a passage in his column in the January 8, 2014 Houston Chronicle, however, that seems to offer an instructive commentary on economism vs. progressive/liberal thinking.

Here’s what Goldberg has to say:

One of the wonderful things about America is that both the left and right are champions of freedom. The difference lies in what we mean by freedom. The left emphasizes freedom as a material good, and the right sees freedom as primarily a right rooted in individual sovereignty.

Goldberg then goes on to attack such horrible liberal folks as the Soviets and Franklin Roosevelt for assuming that freedom meant showering you with all sorts of material goodies.

Well, let’s have a look. With regard to the first part of Goldberg’s statement, I entirely agree—to the extent that I had intended to call the book that I thought about writing, as a sequel to The Golden Calf, Visions of Freedom. (I may yet get around to writing it but that’s another matter.) I completely agree that at the root of the difference between economism and progressive thought lies in alternative views of human freedom.

Predictably, however, Goldberg then immediately goes off track. Let’s take his ideas in reverse order. He suggests that for the right (i.e., economism), freedom is “a right rooted in individual sovereignty.” As I have shown both in this blog and in The Golden Calf, this is a partial truth. Economism recognizes exactly one form of “sovereignty” and “right,” which is to be a buyer and seller in the so-called “free” market, which does not in actuality exist anywhere. When push comes to shove, no other “right” is important, and all other so-called rights must give way to the all-powerful market and its high priests.  So to argue that it’s the left that has confused freedom with mere material things is at best a highly selective view of what’s really going on.

Next we come to the claim that for the left, “freedom” means one thing only, freedom from material want, the solution of which is a nanny state giving each of us stuff, and so robbing us of our (real) freedom and responsibility. Let’s look at this in two stages. First, the much-maligned FDR, in his “four freedoms” speech that included “freedom from want,” made the point that still seems valid—that a person who is in some theoretical sense free, and yet is starving, or naked, or homeless, or lacks basic medical care, is in no real sense free. This person is a slave to material deprivation. Without some basic set of the material conditions necessary for a minimal human life—not everything imaginable, not wealth, but a very basic minimum—a person cannot be “free” in any meaningful sense of the term.

That’s hardly a complete philosophical theory of what freedom might mean in a world that has broken loose from the ideology of economism. The next stage, therefore, is to ask which thinkers have taken us the farthest in recent years toward fleshing out what Roosevelt apparently had in mind, in a way that represents a defensible and justifiable framework for a decent and just society. That theory, in my view, is the capabilities approach developed by philosopher-economist Amartya Sen and philosopher Martha Nussbaum. Perhaps the most accessible account is in Nussbaum’s Creating Capabilities: The Human Development Approach (2011).

On the Nussbaum-Sen account, what makes humans truly free is having certain capabilities that are consistent with a life of human dignity. Some of these capabilities, such as rights of political participation, require mostly that people leave us alone and not interfere with our free exercise of our capacities. Other capabilities require that we have at least minimal levels of material goods provided for us—such as the capabilities that require nutrition, shelter, health care, and education. On a capabilities approach, human dignity is a multi-faceted idea, and it’s arbitrary to say that the only rights worthy of the name are “negative” rights (much beloved by conservatives) merely to be left alone, or “positive” rights (presumably, much beloved by leftists) to get stuff given to you. Depending on the specific human capacity, both positive and negative rights are important.

The fleshing out of such a theory requires first that we explain what human dignity requires, and we see that material wealth, or all sorts of material goods, are hardly included; we only need a basic minimum. The next requirement is that we ask what a just, fair, and decent society is obligated to do toward providing each citizen with these basic rights and needs; and again there could be a lot of argument about what’s required, from and for whom, and why. I don’t have space here to try to develop such an account (hence the need for the book). But the bottom line, contra Goldberg, is that such an account can be given; it’s intellectually rich; and it cannot be adequately captured in caricaturish attacks on Soviet Communism or the usual bogeymen of the right. (And yes, by the way, the right to buy and sell in the market—real markets, not fake ones—to try to advance one’s own economic position, is included by Sen at least as a critical human capability, but only one of many.)

I’m quite confident that if the American public could be presented with two basic accounts of freedom—the capabilities approach suitably worked up and fleshed out, and the economism version presented honestly—the capabilities approach would win.  If I’m wrong, so be it. The whole purpose of my work on economism is to earn the alternative views a fair hearing.