Apolitical Economy: Democracy and Dynasty

Inequality and its corrosion of the body and the soul of capitalist societies has been the hottest topic among respectable liberal economists and political analysts in the United States since the crisis of September 2008. To be sure, Left economists have been tracing the twin scourges of flatlined real wages and widening inequality since the mid-1970s. But it took a major economic shock to move the most prominent and acute liberal pundits finally to bring the issue to the front of the line. Widely read liberal economists have over the last four years written books on the evils of inequality: Joseph Stiglitz’s The Price of Inequality, James Galbraith’s Inequality and Instability, Robert Reich’s Aftershock, and its theatrically released dicumentary replica, Inequality For All, and Paul Krugman’s End This Depression Now! are only the most conspicuous of the outpourings of lamentation over what is now perfectly evident as inequality on the move – the gap between the very wealthy and the rest is entrenched and continuously widening. The embedded and worsening nature of capitalist inequality, and the kind of society it is creating, is one of the major foci of Thomas Piketty’s much-heralded book, Capital in the Twenty-First Century.

Before the new book, Piketty was known mainly by scholars as the co-compiler, with Emanuel Saez of Berkeley, of the most reliable and widely accessed stastistical data on the distribution of income in the United States. Piketty’s first major solo outing has been a phenomenal smash. Astonishingly, it currently ranks as Amazon’s number one seller, and is sold out. It’s at the top of The New York Times best-seller list. Branko Milanovich, former senior economist at the World Bank, described the book in The New Yorker as “one of the watershed books in economic thinking.” In The New York Times Krugman lauds the book’s “serious, discourse-changing scholarship,” and in The New York Review of Books he calls it a “magnificent, sweeping meditation on inequality… sheer, exhilarating intellectual elegance… Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to.” Wow.

What elicits my “wow” is not so much Krugman’s exhilaration, but the huge disconnect, apparently unnoticed by Krugman and other impressive left-liberal economists, between Piketty’s analysis and the kind of Keynesianism that Krugman and his cohorts see as the only path to rescuing American capitalism from a future of persistent austerity and declining democracy. Piketty’s liberal champions seem to think that he has vindicated their critique of inequality by providing a rigorous methodology pinpoint appropriate to the subject matter and demonstrating conclusively that inequality is not only the most disturbing feature of capitalism, but that it is far more severe than previously imagined, and portends a future more revolting than any of us dared imagine.

Piketty has indeed accomplished all this, but the argument by no means confirms the fundamental approach of respectable liberal economists. On the contrary, their bread-and-butter orientation, Keynesian fiscal policy, is seriously undermined by Piketty’s analysis. And what Piketty recommends as the only effective remedy he also correctly describes as “utopian,” virtually impossible under the existing economic system. The book is profoundly pessimistic, and its author seems to know this. If the existing economic system makes Piketty’s prescription -a global tax on wealth- virtually impossible to realize, why does he not question the system itself, and describe the outlines of a workable alternative? Because Piketty’s conception of the most discussed alternative, democratic socialism, is inexcusably narrow. He identifies socialism with Soviet Communism, a model long discarded by all of the participants in the inquiry into what a workable, desirable form of democratic socialism would look like.

While I contend that Piketty’s overall analysis is seriously flawed, I do not slough his book off as merely another usefully informative but essentially wrongheaded piece of predictable, orthodox neoclassical analysis. To be sure, Piketty leans throughout on neoclassical methodology, but never on its essentially apologetic assertions, the big ones that count: that the market allocates resources efficiently, employs all available resources and that its rewards, the income it distributes to “factors of production” (capital and labor), reflect the recipient’s work, her contribution to production. One of his main contentions is that an increasingly disproportionate amount of national income accrues to the wealthy who make no contribution whatever to the production of output. What is rewarded is their ownership of assets, increasingly assets they have inherited, not earned – and ownership by itself is not a productive activity. The argument does not proceed along typically neoclassical lines. Piketty’s case leans as heavily on a wealth of backgound knowledge of history, politics and even literature as it does on charts and tables. This kind of intellectual range is almost entirely absent from the best mainstream contributions. Like Marx, Piketty shows how, for example, the world’s great literature can figure into the development of a consequential political-economic analysis.

This book is important and sometimes profound. But most interestingly, and behind its own back, the book tells us more about the unique historical juncture at which capitalism now stands than it knows. And much more that its enthusiasts know.

I want briefly to sketch Piketty’s most important arguments, and then to spell out what I take to be their so-far-unacknowledged import for our understanding of the current crisis, and of the realistic options available to us.

The Main Arguments

Piketty has identified not merely an empirical trend in the historical development of capitalism. He has pinpointed a tendency, a dynamic movement inherent in the nature of the capitalist market itself. He argues that increasingly disproportionate concentration of income at the top, and the widening inequality that goes along with it, is integral to the system and a consequence of “the central contradiction of capitalism,” (Capital, 571) his counterpart to Marx’s law of the falling rate of profit. Piketty’s core theoretical concept is expressed in the formula ‘r>g’, where ‘r’ represents the return on capital/investment, and ‘g’ the rate of growth of the economy. (25-27) In an interview with The Guardian (April 13, 2014) he sums up the theory: “[C]apital, and the money that it produces, accumulates faster than growth [of production and total income] in pikettycapitalist societies.” Accordingly, income from the ownership of assets will increase faster than income deriving from real contributions to production, from, for example, wages and salaries of working people. Capital’s share of total income (which is the money value of total national product) will rise. Because capital can consume only a small portion of its income, the lion’s share will be reinvested. The return on each additional investment further increases capital’s share of national income. The very class for whom Keynes recommended merciful “euthanasia,” rentiers who garner huge rewards for doing nothing, gets ever-wealthier and smaller in number. The result is built-in inequality. This condition is thus not static; the disparity will continuously widen and concentrate increasing wealth in fewer hands.

This dynamic is the way capitalism has to work. There is no question of policy “mistakes” or a malfunctioning system. Growing inequality ‘is not the consequence of any market “imperfection”.’ (Capital, 573) Once capital is in place, it must expand itself faster than output and total income increase. Piketty makes it clear throughout the book that while this tendency can be and has been intensified by political agency such as tax reductions for the wealthy and deregulation, ‘r>g’ represents the logic of unfettered capital itself. With capital necessarily concentrated at the top, not only will income continue to be driven upwards, but an ever-increasing percentage of income will congeal in the hands of the very few. The wealthy need not move a muscle to accomplish this. Inequality will increase forever because capital is capital. So much for meritocratic conceptions of how capitalism distributes its rewards. The wealthy have not earned their pleasures or their advantage over the 99.9 percent. Because they have done nothing to merit disproportionate incomes -to merit any income at all?- they do not deserve their incomes. The chief justification for capitalism’s growing inequality dissolves, with the clear implication that capitalism’s defining property arrangements are unjust. (Capital, 264)

Like Keynes, Piketty sees this as more than a question of ethics. Many of those who read Keynes and Piketty are unmoved by being told that they have transgressed some principle of morality or justice. For the very wealthy, accumulating capital is itself a moral imperative. Recall Lloyd Blankfein’s boast that Goldman is “doing God’s work.” Keynes worried, more practically, that protracted poverty and inequality can breed popular hankerings for revolution. Pikkety forecasts that “we will all be poorer in the future in every way and that creates crisis… the present situation cannot be sustained for much longer.” (Guardian interview)

Piketty understands that the situation is especially critical in the United States: “What primarily characterizes the United States at the moment is a record level of inequality of income from labor (probably higher than in any other society at any time in the past, anywhere in the world…)” (Capital, 265) Could it get any worse? One of Piketty’s most important original contributions is his demonstration that yes indeed it can and will get worse. That’s because of one of capital’s most cherished institutions, inheritance.

Growing Inequality + Inheritance=Dynastic Rule

If capital’s growing share of total income and total production grow faster than the economy, and that fortune can be bequeathed to capital’s heirs, the tendency will be for an ever-larger share of the nation’s wealth and income to be in the possession of not merely “wealthy households,” but dynasties. That is, the predominant form of wealth becomes inherited wealth. The heirs are in the catbird seat. B inherits wealth from A, and in turn bequeaths it to C. But what B bequeaths to C is greater in value than what he inherited from A. Likewise, what C bequeaths to D will be greater than what was passed on to him by B. The series goes on infinitely. And keep in mind that we are talking not merely about absolute stores of economic value, but shares, ever-larger shares, of total national income/output.

Inheritors of what will have become dynastic wealth will resemble the rulers of nations like Kuwait and Saudi Arabia, where the nation is in fact a fiefdom, the private property of a family. The heirs become rentiers on stilts. That great wealth is earned, that its owners have done something to deserve their fortune, becomes transparently preposterous. The justificatory notion that the rich have what they have because they, in Piketty’s words, “work harder or more efficiently than the poor” becomes patently false. (Capital, 264) It becomes apparent, not an inference from good theory, not the conclusion of a “powerful moral argument,” that America is ruled by rentiers, the contemporary counterparts of kings and queens. While it is now a truism that financial oligarchs dominate American politics, the appearance of a separation of political and economic power persists. When all great wealth is inherited, which Piketty suggests will occur, if current tendencies persist, by 2030, the appearance of political and economic power as two separate spheres will vanish. There will of course remain the separate institutions of private and public wealth; the categories ‘privately owned’ and ‘government-owned’ assets will not be erased. But the relation between private wealth and political power in capitalist societies being what it is, these formal separations will constitute a distinction without a political difference.

We are heading, Piketty argues, toward a “hyperpatrimonial society,” the historical reincarnation of the Belle Epoque, the Ancien Regime or the American Gilded Age. In such an order, the realities of class rule are part of common sense and uncontroversial. Piketty claims, strangely, that this is not what capitalism “should” be about. But he has shown that left to its own devices capitalism produces outcomes regarded as revolting by all but the super-rich. Hasn’t he shown that in fact capitalism and democracy are not compatible, and that the system in actual effect exists in order to enrich the wealthy at the expense of the rest? After all it’s called Capitalism, not Laborism or Workerism. The idea is to expand The Wealth of Nations (to coin a term). Wealth is not income; by nature it belongs to the few.

Piketty has brought to bear on his thinking about capitalism values which are external to capitalism. Under the regime of capital, equality is equality before the law. This is entirely compatible with gross material and political inequality. Bankers are happy to be, along with beggars, equally forbidden to sleep on park benches. Piketty’s stance is a bit like that of a statutory inferior under feudalism complaining that under the manorial system there is no equality before the law. But feudalism is essentially about statutory inequality; otherwise it wouldn’t be feudalism. In the Guardian interview Piketty claims “I have proved that under the present circumstances capitalism simply cannot work.” Work for whom? Of course it doesn’t work for workers. What Piketty has shown, behind his back, is that capitalism is not meant to work for workers. It does what it is meant to do, not what humanitarian ethical theory says it should do. Capitalism has worked very nicely for the plutocracy. They have never done so well, never had greater riches and never before had virtually complete control of the State. And Piketty himself has underscored that this is not due to the system’s malfunction. In generating the outcomes Piketty deplores capitalism is merely, as the song goes, “doing what comes naturally.”

I want to suggest that Piketty is confused here, and that the confusion stems in large part from his misconstrual of the conditions that make for equality.

The Politics of Equality

Piketty demonstrates convincingly that the twentieth century exhibited a secular tendency toward continuous and widening inequality. Almost continuous, that is. Three catastrophic events external to the workings of capitalism depressed briefly the steady growth of wealth and reduced inequality. These were the two World Wars and the Great Depression. (Capital, 136-7, 148, 275) Here the discussion gets murky. Did not Keynesian social democracy bring about the reduction of inequality, and in the United States were not the New Deal and the Great Society brought about by major labor struggles and a wave of unionization, which scared the pants off the ruling class? Wasn’t the gross inequality of the 1920s due to wages falling far behind productivity gains, and wasn’t the relative equality of the Golden Age   -the “Trente Glorieuses”- due to organized labor’s ability to keep wages rising with productivity? Social democracy and organized labor merit only fleeting mention (136-7) in Capital in the Twenty-First Century. But in Piketty’s earlier work he and Emmanuel Saez provide hard data that is not given due attention in Capital. (“The Evolution of Top Incomes: A Historical and International Perspective,” American Economic Association: Papers and Proceedings, 96,2 May 2006, pp. 200-205)

From the 1930s to the 1970s the share of total income of the top 1 percent declined steadily. Each decade saw a greater decline. During the New Deal years their share declined from 23 to 17 percent, then down to 13-15 percent in the 1940s, down further in the 1950s and 1960s to 10 or 11 percent and finally to 9 percent in the 1970s. With the defeat of the New Deal and the Great Society, the wealthy began to regain what they had lost during the only period in American history that saw an accelerating 40 year decline in the wealthiests’ share of national income. In the 1980s their share rose to 11-14 percent, in the 1990s to 15-19 percent, to over 21 percent in 2005. By 2007 their share equaled the previous 1928 peak of 23 percent. Recall that 1928 and 2007 were each followed by a financial crash.

What accounted for this remarkable period when Americans enjoyed the highest standard of living they had ever experienced, and capital experienced its greatest defeats? Why this outbreak of relative equality? Militant labor, extensive unionization, ongoing additions to government programs and aggressive black activism were essential factors.

It began during the very first decade that saw downward income distribution. Up until 1934 Roosevelt’s recovery efforts were tepid and barely effective. The New Deal recovery began in earnest in 1935, only after the greatest labor actions in U.S. history up to that time broke out in 1934. Among these was a general strike of longshoremen from Seattle to San Diego, which shut down San Francisco and paralyzed shipping on the West coast. This is the kind of activism that forces egalitarian legislation.

It was this kind of activism that elicited the National Labor Relations Act (NLRA, the “Wagner Act”) of 1935, which marked the first time the federal government unambiguously guaranteed to workers their right to organize and bargain collectively. The Act declared without qualification labor’s right to join unions and bargain collectively. Correspondingly, companies were prohibited from forcing workers to join a company union and from interfering with union organizing. Nor could they harrass or fire activists for attempting to organize workers, and they were forbidden to refuse to participate in collective bargaining with unions.

 

Government was forced by labor to enact this legislation. During the debate preceding the passage of NLRA Roosevelt had refused to give the proposed legislation his strong approval. He remained aloof until it was clear that Congress was about to pass the Act. As usual during Roosevelt’s first term, Congress was more responsive to popular sentiment than was the aristocratic and fiscally conservative president. In a fiery speech in the House, one representative warned “You have seen strikes in Toledo, you have seen San Francisco, and you have seen some of the Southern textile strikes… but you have not yet seen the gates of hell opened, and that is what is going to happen from now on…” if NLRA is not passed.

The reduction of inequality persisted through the 1970s only because unions remained strong enough during those years to keep wages rising in step with productivity increases, militant labor actions occurred intermittently and black militancy in the inner cities broke out at the same time that strike actions temporarily ebbed. The inbuilt tendency to inequality analyzed by Piketty was countered. Profits rose at the same rate as wages during this period.

After the Second World War American workers were determined not to allow their victories to be reversed. When Washington attempted in 1945 to extend the wartime “no strike” pledge, the response was a national wave of strikes. At least 650,000 auto workers, teamsters, machinists and workers in lumber, coal and petroleum walked off the job. Elites’ fears that the end of the war would be followed by the same large-scale labor actions as had erupted after the First World war were well founded. The earlier strikes had been roundly defeated with the result that the 1920s featured a small and powerless labor movement and stagnant wages.

The labor movement after the Second World War had not forgotten the earlier defeat and was determined to prevent its recurrence. Militant labor actions persisted into 1946, one of the most strike-torn years in American history. One and a half million electrical workers, steelworkers, miners and meatpackers struck. The year ended with a two-day general Strike in Oakland, California. These actions were correctly perceived by government and business as warnings.

The unparalleled equality of the years 1946-1973 was sustained by continuous labor militancy and black insurgence, and would not have been achieved without it. Militancy waxed and waned, but the throughline was consistent. The U.S. topped the OECD table in strikes per worker in 1954, 1955, 1959, 1960 1967 and 1970. And surely the dramatic increase in strikes between 1967 and 1971 was a major factor, along with capital’s declining share of national income, in prompting the business counteroffensive beginning in the mid-1970s. From 1967-1971 an average of 49.5 million strike days were lost, a dramatic increase over the ten preceding years. Business retaliation followed: the Powell Memo urging business to organize in resistance to the post-1920s order, Carter’s reduction of social programs and deregulation of business and, finally, the neoliberal age of Reagan, Clinton, the Bushes and Obama. Government and business were back in 1920s step. Piketty and Saez demonstrated in 2006 the recouping of capital’s share under neoliberalism.

Strangely, labor’s agency is absent from Piketty’s most recent account of the Golden Age reduction of inequality. I am reminded of the traditional debate as to the relative roles of structure and agency in determining the course of the historical process. Pikety’s signature argument in Capital in the Twenty-First Century is that the structural organization of mature capitalism determines greater inequality and a return to the dynastic rule of the Belle Epoche. It seems to stand to reason that agency is required to defeat this tendency. A truly effective agency would have to be aimed at installing an alternative structure, one in which the inevitable emergence of inequality and poverty is ruled out. Unless Pangloss is right and we inhabit the only possible world, the forging of such a structure is both possible and necessary.

What we get instead from Piketty is a stunningly lame prescription: ”What I argue for is a progressive tax, a global tax, based on the taxation of private property. This is the only civilised solution. The other solutions are, I think, much more barbaric – by that I mean the oligarch system of Russia, which I don’t believe in, and inflation, which is really just a tax on the poor.” (Guardian interview) Piketty himself describes this solution as “utopian.” It is not as if he is merely urging a US tax on wealth. He knows that the rich cross borders to evade taxation, so the wealth tax must be global. In an age in which capital rules with greater power than it has ever commanded, and State managers in capital’s pocket govern, a global tax on wealth is the least likely of imaginable political projects. What is required is a coherent conception of a viable alternative, the virtue of hope -ruled out only by a-priori cynicism- and political imagination. An animating vision of a feasible and desirable political-economic alternative structure is essential.

The only alternative Piketty seems capable of imagining is “the oligarch system of Russia,” by which he must mean Soviet Russia, not the current kleptocracy. There is no awareness evident in Piketty’s book of the illuminating and informed contemporary discussions of economic democracy. Gar Alperovitz’s detailed treatment of actually existing worker-owned enterprises, Hahnel and Albert’s defense of anarchist-inflected participatory economics (Parecon), and David Schweickart’s detailed description of just how a market socialist economy would work and why it is eminently practical in a way that capitalism is not, in After Capitalism, must be required reading for someone with Piketty’s ambitions. None of these alternatives is “barbaric.” Piketty’s implicit claim that any alternative to capitalism must be “uncilized” in entirely ungrounded, and in fact Piketty offers no argument in its defense. “must be”? What would such an argument look like?

The Political Counterpart to Piketty’s Thesis: The Gilens-Page Study of American Democracy

Piketty’s hasty dismissal of alternatives to capitalism is evidence of what Pikkety himself seems to acknowledge as his own political naivete. In the Guardian interview he is revealing: “I could see then that so many bad decisions were taken by politicians because they did not understand economics. But I am not political. It is not my job. But I would be happy if politicians could read my work and draw some conclusions from it.”

We are to believe that politicians now speak only the language of neoliberalism because they are inadequately educated in economics. The dominance of the very wealthy in campaign contributions, the overwhelming lobbying of Capital (sic) Hill by business, the standard route from political office to much more remunerative work as a lobbyist, the colonization of the discourse of the press and the Congress by richly funded and highly aggressive reactionary think tanks – none of these is supposed to shape the world view of the state managers. They are moved primarily by ideas, Piketty imagines. Alas, if only they had Piketty’s ideas.

In Capital in the Twenty-First Century, Piketty argues that “democratic control of capital” (569) is needed to steer us straight. “I do not see any genuine alternative: if we are to regain control of capitalism, we must bet everything on democracy.” (573) Let us pass over in silence (as the wily Cicero used to orate) that “regain”ing control of capitalism implies that “we” ever controlled it in the first place. We move on instead to a look at American democracy.

It’s clear that Piketty understands democracy to work through “politicians,” who either channel the wishes of their constituents, or legislate on the basis of their superior knowledge. These are lofty conceits, but they have something of a philosophical, speculative air about them. If we must “bet everything on democracy,” why not have a careful empirical look at how American democracy actually functions? Happily, we now can do just that.

In the world of political science, a major study of democracy in America has received almost as much attention as Piketty’s contribution. In April, Martin Gilens (Princeton) and Benjamin Page (Northwestern) released “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens”. Like Piketty’s work, Gilens and Page have introduced original and rigorous statistical models to measure the influence of various significant actors in determining policy outcomes.

There are four major theories in the tradition, each attributing predominant influence to one of four different group political agents. The standard suspects are average citizens, economic elites, mass-based organized interest groups, and business-oriented interest groups. Each theory stands or falls based on the accuracy of the predictions it generates. Gilens and Page are the first researchers to have constructed a single statistical model capable of testing the contrasting theoretical predictions against each other. They bring their investigation to bear on 1,779 policy issues.

Gilens and Page’s conclusions are not consistent with the notion that the American political system is democratic in any meaningful sense of the term. “Majority rule” accounts, construed numerically or by any “median voter” criterion, are found to be a “nearly total failure.” Controlling for the preferences of economic elites and business-oriented interest groups, the preferences of the average citizen have a “near-zero, statistically non-significant impact upon public policy.”

The preferences of economic elites have “far more independent impact upon policy change than the preferences of average citizens do.” This does not mean that ordinary citizens never get what they want by way of policy. Sometimes they do, but only when their preferences are the same as those of the economic elite.

The authors see their results as ‘troubling news for advocates of “populistic” democracy.’ “When a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose…even when fairly large majorities of Americans favor policy change, they generally do not get it.”

Gilens and Page conclude that “[M]ajorities of the American public actually have little influence over the policies our government adopts… [I]f policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”

There we have the polite understatement of mainstream academic critics. Actually, the authors’ findings entirely undermine the notion that America is a democracy. The infamous Citigroup memo’s term is the one the authors’ research points to: plutocracy. Piketty’s work, with its detailed analysis and projections regarding inherited wealth, further specifies the general notion of plutocracy. We are witnessing the world’s most remarkable form of patrimonial dynasty.

Piketty would have us “bet everything on democracy.” Fine, but betting wears many hats. If you’re into short-selling, American democracy could land you a fortune. Think about it.

I want to conclude with a more savory take on democracy. The distinguished Nobel-winning MIT economist Robert Solow has anticipated some of Piketty’s conclusions, with recommendations not at all typical of an MIT economist. In a discussion of the tendency for capital to substitute for labor in a developed economy, Solow points out that “profits will come over time to absorb an ever-increasing share of aggregate income… How will we live then?” Solow surprises us: “The answer seems pretty clear. For the grandchildren, or their grandchildren, to have a viable world, the ownership of capital will have to be democratized. If capital is the only source of income that matters, then everyone who matters -in other words, everyone- will need an adequate claim of income against capital.” (“Whose Grandchildren?,” in Revisiting Keynes)

Now Solow’s recommendation is not a call for democratic socialism. His examples of possible income claims against capital are a universal dividend or expanded pension funds. But it is remarkable that the historical development of capital to the point of world-historic crisis is so pronounced that some of the smarter mainstream luminaries are driven to intimations of a radically different economic order. Solow has recommended an option inconsistent with capitalist private property. His democratizing of the ownership of capital is quite unlike Piketty’s “democratic control of capital,” which construes democracy in exclusively political terms. He would have politicians indirectly affecting capital through conventional legislation. But if the use of capital were directly determined by the democratization of investment, i.e. popular control of the uses to which society’s productive potential is put, we would be on the road to something that is not capitalism. Solow has unwittingly set our thinking in that direction.

Piketty, Gilens and Page have taught us more than they imagined about the direction our efforts must take.

Alan Nasser is professor emeritus of Political Economy and Philosophy at The Evergreen State College. His website is:http://www.alannasser.org.  His book, The New Normal: Persistent Austerity, Declining Democracy and the Privatization of the State will be published by Pluto Press later this year or early next year. If you would like to be notified when the book is released, please send a request to nassera@evergreen.edu

 

Alan Nasser is professor emeritus of Political Economy and Philosophy at The Evergreen State College. His website is: www.alannasser.org.  His latest book is Overripe Economy: American Capitalism and the Crisis of Democracy. He can be reached at: nassera@evergreen.edu