'The risk of a drift towards oligarchy is real and gives little reason for optimism". So says Thomas Piketty, the French economic historian. His new book, Capital in the Twenty-First Century , dealing with wealth and inequality has been described by an influential reviewer from the World Bank as "one of the watershed books in economic thinking".
Piketty’s interest in the evolution of wealth accumulation and distribution led him away from the theoretical mathematical modelling so favoured by most economists, who are convinced their methods are more scientific than sociology or history. He says their “science” is often highly ideological and idealised the market after the fall of the Berlin Wall.
With collaborators, he has built a database of the world’s top income and wealth data back to the 18th century, a remarkable portrait of assets and who owns them.
It shows how the distribution of wealth has changed in the major capitalist economies over these two centuries of growth, empires, wars, revolutions and democratic transformations.
Without countervailing action the long-term tendency of returns on capital assets to accumulate faster than economic growth systematically benefits the most wealthy.
Piketty believes equality must be promoted politically if democracies are to protect themselves from oligarchical rule. He makes instructive and ironic comparisons between Europe and the United States to illustrate these tendencies.
Wealth inequality was even more extreme in Europe than the US early in the 20th century, but over its course that picture was reversed.
The gains made by the richest Americans since 1980 have returned income and asset inequality there to 1920s levels. This fundamentally changed the egalitarianism introduced in the 1930s and maintained till the 1970s by high wealth taxes, and copied by the creation of welfare states in western Europe after the second World War.
The numbers game
The average income of working-class Americans around 1920 doubled in real terms by 1955 and tripled by 1970. In the four decades since 1970, there has been almost no improvement on average for the lower 90 per cent of American households.
By 2007, the top 1 per cent of households had almost five times the real income they had in 1920; the top 0.1 per cent had about six times; the top 0.01 per cent nearly 10 times.
Piketty’s research shows similar tendencies in Europe and elsewhere in the world.
US critics of these developments reach readily now for the term oligarchy to characterise their emergent politics. They include economists such as Simon Johnson and Paul Krugman and the political scientist Jeffrey Winters, the author of a good book on the subject, who all analyse how the rich have captured the political process, making necessary taxation and redistributive reforms virtually impossible in a dysfunctional Washington.
Oligar
chy and democracy
Winters uses these statistics to warn that "oligarchy and democracy operate within a single system, and American politics is a daily display of their interplay . . . But full political equality, even in the most liberal democracy, is impossible as long as concentrated wealth places grossly unequal political influence in the hands of a few citizens".
He explores the “income defence industry” comprised of lawyers, accountants, wealth management consultants, revolving-door lobbyists, think-tank debate framers and key segments of the insurance industry whose sole purpose is income defence for America’s oligarchs.
Piketty makes the same point about European countries that value the rule of law and an open liberal economic order, as distinct from authoritarian ones like Russia and China which fence oligarchs in with capital controls and jails.
He calls for a global progressive tax on individual net worth. It would require international co-operation, similar to the work now going on at OECD level to rein in the low international corporate taxation that benefits the rich through equity holdings and incomes. This echoes demands for a financial transaction or activities tax at EU level, inspired by a similar need for fiscal capacity to fund redistribution and public goods.
Such a demand on the current round of transpacific and transatlantic trade talks might be seen as fanciful or utopian. But they too are heavily loaded in capital’s direction. Piketty’s warning – that without some such radical moves to reverse these oligarchic trends, many may turn against globalisation – should be heeded.
The egalitarian turn from the 1930s to the 1970s could otherwise prove to be an interlude reversed. Nationalist and isolationist populism is, after all, oligarchy’s natural enemy if the left fails to find a convincing alternative.
pegillespie@gmail.com