Still plenty to do after Piketty

Tuur Elzinga discusses Thomas Piketty’s Capital in the Twenty-First Century

Will Thomas Piketty shortly be receiving a Nobel Prize? Perhaps, but what’s certain is that he’s worth a read. He has written an interesting and already influential book. He confesses to being a political economist of the old school, in which economics is seen as a social science. He bases his work on a unique collection of data of historic proportions, and draws attention to inequality and in particular the – long ignored – inequality of wealth. His solutions are probably less convincing: a number of things are insufficiently examined and some questions aren’t posed, let alone answered.

Piketty’s analysis shows that inequality grows historically and that capital takes an ever bigger slice of the cake. An exception is the period 1914-1973, which was characterized by the destruction of capital as a result of the Great Depression, two world wars and the thirty years which followed, during which policies were pursued which brought about a reduction of differentials of income and wealth. Piketty was able to demonstrate this result convincingly, and with the support of a large quantity of data, but just why policies in the thirty years after the Second World War could lead to a reduction in inequality received insufficient attention. It was also unclear what was behind the abandonment of successful policies for economic growth and redistribution.  Are population growth and technological progress indeed the principal reasons for higher economic growth in the thirty years following the war, as Piketty appears to suggest? The industrial revolution had, after all, begun much earlier and the ICT revolution began much later, so what was so special about this relatively short period?

Piketty notes that policies can be relevant, but also states that for the  most part they make little difference. In his view, without the wars and depression, inequality would have remained at the level of the twentieth century’s first decade. So it’s a pity that he didn’t dwell for longer on the question of under what circumstances policies can indeed exert an influence, particularly as he himself makes a number of policy recommendations.

The fact that the political context after the depression of the 1930s was conditioned by the aim to prevent renewed economic depression, and to counter mass unemployment and widespread poverty as feeding grounds for dangerous ideologies, had of course been an important source of these events. But the steady rise of trade unions in the decades preceding them and the establishment of universal suffrage in many countries in this period must not be dismissed. Piketty does discuss, for example, the importance of the labour union movement in the US, but principally as one of the results of the New Deal in reaction to the Great Depression, and not as an important political change.

Unfortunately, Piketty fails to make completely clear why economic growth and the return on capital go back down to their original levels. Such questions are certainly relevant if one is to make ambitious international policy recommendations in response to one’s findings and with the aim of exerting an influence on the distribution of income and wealth. If this, or the question of how and for how long a certain policy works, are not kept in mind, then one is simply dealing in wishful thinking. Piketty is, moreover, the first to recognise that his solution – a worldwide, progressive wealth tax – is to a large extent utopian. It can nevertheless act as a useful guide.

Piketty’s proposal for an international, progressive tax on wealth certainly has, therefore, a welcome sound; but if the trend now is precisely the opposite, that not only levels of tax on labour, but certainly also those on gains from capital are declining, how realistic is a proposal for an increase in tax on capital? And when, above all, the highest marginal rates have been and are being reduced, how likely is it that new progressive tax brackets will be introduced? And when countries generally compete with each other to attract new capital, and in doing so do not shun competition on tax rates; when multi-national corporations , by exploiting variations among national systems of taxation, pay de facto company taxes far lower than the already low rate, how probable is it that competing countries will tax this constantly mobile capital more heavily?

Piketty is also aware of this. What he wants, precisely, is a global tax, because otherwise tax competition and evasion would throw a spanner in the works. He thus estimates the chances of such a tax being introduced to be small, and for that reason proposes that, whatever else, a wealth tax should be introduced at EU level. The EU is a market from which capital will not want to withdraw, but should every country be willing to work together in this way, how would we prevent corporations and the superrich from continuing to avoid paying their taxes by means of other tax havens?

In my view a number of essential features are still missing if we are to properly understand and then adequately combat growing inequality. Piketty reviews the division of affluence – both incomes and wealth - in an international comparative perspective. In his analysis he does lay out the relationship between  the division of affluence and the division of economic and therefore political power, but as yet he has failed to analyse the structures of power. He focuses on the division of wealth among its final owners: individuals. In doing so he does examine heredity as an important source of wealth over time and thus of the clustering of wealth in families, but leaves the enormous concentration of wealth in corporations almost entirely out of his consideration.  What role do these important economic actors play in  national and international politics and in relation to the division of wealth?

How do things stand when it comes to power relations among major corporations, and as opposed to states? Or power relations between states? To political relations within states, or power relations between capital (primarily in firms) and organised labour, either national or international?

It’s well-known that the economic power of the world’s biggest transnational corporations has grown enormously. At the beginning of the 1980s the annual turnover of the two hundred biggest companies was comparable to a quarter of global GDP. In 2005 this had grown to almost 30%. It is also notorious that the rise of the financial sector has led to still greater concentrations of wealth; that power relations in the world are shifting rapidly and globalisation is having a major effect on the amount of political room for manoeuvre available to political administrations. A great deal of research has been done into relations of political power among and within countries, and a great deal is already known about the positive correlation between the degree of labour organisation and a more egalitarian division of prosperity. All of this knowledge and more would undoubtedly be too much for the scope of a single book, but is certainly extremely relevant when it comes to making realistic proposals.

We need not wait for Volumes 2 and 3 of Piketty’s Capital to know where we should begin. As long as we have insufficient powers of resistance at European and international level, we can expect neither  European nor global solutions limiting the affluence and influence of the existing elites. Until this changes, we must seek solutions closer to home, without turning our backs on the construction of international resistance. Left and progressive forces must work towards the formation of such resistance, by strengthening trade unions and progressive parties, both nationally and internationally. Where we are strong enough to change things, we must bring the powers that be under control: limit the mobility of capital, strengthen the position of trade unions, tax wealth, redistribute income and reinforce international cooperation in these matters.

In order to build resistance we need ideas, good ideas capable of confronting bad political and economic policy and inspiring and persuading people. Piketty’s research can be extremely useful in achieving this.

Tuur Elzinga is a Socialist Party Senator in the Netherlands (SP). This article was translated by Steve McGiffen and first appeared in the SP monthly magazine Spanning.