One of the great merits of Thomas Piketty’s blockbuster book, Capital in the Twenty-First Century, is to have shifted our focus not just to the issue of inequality, but to Capital.
My own view, for what it’s worth, is that Piketty inappropriately combines different forms of wealth—land, financial investments, physical equipment, and real estate—into a single term he refers to as capital. The problem, as I see it, is that Piketty’s capital obscures what we mean when we refer to the capital share within contemporary economies.
The real issue is the share of net income that is appropriated by Capital, some of which is retained within enterprises as profits while the rest is distributed to other claimants, such as the owners of equity capital (in the form of dividends), executive officers of corporations (as salaries), financial institutions (as interest payments), and so on.
In any case, we are now focusing our attention on Capital, which we simply weren’t doing before.
We can see this shift in Tony Atkinson’s presentation of twelve policy proposals [pdf] “that could bring about a genuine shift in the distribution of income towards less inequality.” He makes a key point about technology: the capital share depends in part on technology (as neoclassical economists see it) but technology can’t be taken as given (as neoclassical economists generally assume). Atkinson then offers an alternative view:
Not only the extent of technological progress, but also its direction, is endogenously determined. . .This brings us to a crucial issue of positional power and control over economic decision-making.
What this means is, the next time someone invokes the Solow growth model and the Cobb-Douglas production function, the appropriate question is: to what extent does Capital control the technology and thus the returns to capital and labor?
A similar concern appears in another response to Piketty: Shi-Ling Hs’s “The Rise and Rise of the One Percent: Considering Legal Causes of Wealth Inequality.” His view is that the “capital-friendly bias in legal rules and institutions”—such as financial deregulation, oil and gas subsidies, and “grandfathering” (that is, regulations that exempt existing regulatory targets)—”have inflated returns to private capital and driven it well above the rate of economic growth, exacerbating economic inequality.”
Piketty, his supporters, and his critics are all missing a huge piece of the puzzle: the role of law in distributing wealth. . .
That something is a system of lawmaking that, with good economic intentions, is biased towards the formation of certain forms of capital. This capital bias has produced a set of legal rules and institutions that has increased returns on certain forms of private capital without inducing a concomitant increase in economic growth, and in some cases retarded economic growth. In the parlance of Piketty’s r > g relation, the law has been much more effective in boosting r than it has been in boosting g. This is understandable, because inflating and propping up r is easy—government subsidies, favorable tax treatment, and legal protections from regulatory interference are just a few of many ways that lawmakers have boosted or propped up returns to certain owners of private capital—the ones powerful enough to ask for them. It is not nearly as easy to figure out how to make economic growth keep pace. Inducing economic growth is a matter on which leading economists differ sharply, to say nothing of an ideologically divided Congress. The world is an extremely complicated place, made more so by globalization, and ensuring economic growth has been much more art than science. Moreover, in modern times, the political salience of “trickle-down” theories of economics have held enormous influence over American policymaking, such that many lawmakers are strongly inclined to believe that boosting private returns to capital (Piketty’s r) is tantamount to boosting economic growth generally (Piketty’s g). Taken together, these factors have caused lawmakers to mostly take comfort in boosting returns to private capital and rationalize their indifference to economic growth by throwing up their hands and just hoping that private wealth will somehow also stimulate economic growth.
The problem, of course, is that while both Atkinson and Hs both direct our attention to worrying about processes that favor Capital (for example, in terms of the direction of technological change and the making of new laws), neither actually suggests taking the obvious next step: to eliminate the role of Capital in our current economic institutions.
That’s why Chris Dillow’s discussion of democratic Keynesianism is so useful. Relying on Michal Kalecki (which I, too, have done, on many occasions), Dillow argues that
“Democratic” policy-making cannot serve the public interest, because it is subverted by capitalists’ interests. This represents a challenge to naive social democracy, which thinks that governments can do the right thing if only they have the will and courage.
More generally, what Dillow clearly understands, and what many sympathetic commentators on Piketty seem to miss, is that the state and civil society are not separate entities. If they were, then of course, it would be possible to suggest the state could adopt policies and laws that serve to lessen or eliminate the grotesque inequalities that have arisen within contemporary civil society. However, that well-intentioned project of addressing inequality becomes difficult—if not impossible—when capitalists’ interests are paramount within both the civil society and the state.
And that idea is as valid for Capital in the twenty-first century as it was in previous centuries.