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Cooking the Books: Capitalism and Inequality

The Observer (13 April) carried an interview by Andrew Hussey with Thomas Piketty, a French economist whose views on capitalism are, apparently, the talk of the town amongst economists. He is the author of a book Capital in the Twenty-First Century which is said to show that growing inequality is a built-in feature of capitalism.

In the interview Piketty says that, going through the data from the 19th century for Britain and other countries, ‘I saw a pattern beginning to emerge, which is that capital, and the money it produces, accumulates faster than growth in capital societies.’ What he is saying he has discovered is a tendency for a larger and larger proportion of new output to be accumulated as new capital. As a result, over time, the income from capital (property incomes such as profit and interest) grows faster than other incomes (mainly wages and salaries). The rich get richer. He claims, ‘I have proved that under the present circumstances capitalism simply cannot work.’

The key phrase here is not the claim that capitalism cannot work (it clearly can, even if this involves the rich getting richer) but the ‘under the present circumstances’ which suggests that under other circumstances capitalism could work. That this is his view can be seen by his proposal in the interview for ‘a progressive tax, a global tax, based on the taxation of private property.’

However unlikely it might be that any government would adopt what he calls in French a ‘révolution fiscale’ and impose high taxes on property and property incomes – Will Hutton in a comment in the same paper on the interview writes of ‘a top income tax rate of 80%, effective inheritance tax, proper property taxes and, because the issue is global, a global wealth tax’ – the implication must be that Piketty thinks that, if ever this was done, it would stop the rich getting richer.

It is not clear from the interview how Piketty defines capitalism. He seems to mean what the French call capitalisme sauvage, or unregulated, wildcat capitalism. If so, then his claim to have shown that ‘capitalism simply cannot work’ is reduced to the lesser claim that unregulated capitalism cannot work. This is a powerful refutation of the free marketers but is still suggesting that capitalism can be reformed ‘to work’.

The similarity between Piketty’s view and that of Marx on how capitalism works to make the rich richer is obvious but there is a difference. Piketty is more concerned with the distribution of the income from capital while Marx was concerned with the accumulation of capital itself irrespective of who owns it (whether individuals, corporations or the state) or who benefits personally from it.

Piketty claims in the interview that the data his research uncovered ‘contradicted nearly all of the theories [of inequality] including in Marx and Ricardo.’ He doesn’t say in the interview what he thinks Marx’s theory was, but elsewhere he has made it clear that he is criticising the theory of the long-run tendency for the rate of profit to fall (a position held, in different forms, by both Marx and Ricardo). He doesn’t think that there is any such tendency.

And of course, unlike Piketty, Marx never advocated trying to stop or reverse capital accumulation and/or the rich getting richer through legislation or government action. The distribution of property income amongst the rich can be changed, but that would make no difference to those whose income is derived from working. The way out is to get rid of capitalism.