Society is governed for the wealthy. By William Davies at UnHerd.
Few had heard of Thomas Piketty when Capital in the Twenty-First Century appeared, but his publisher, Harvard University Press, would soon be struggling (and failing) to keep up with demand for the book. …
Piketty himself was instantly declared a “rock star economist”, and compared with Karl Marx, presumably because he had published a doorstopper with the word “capital” in the title. …
From the perspective of the trade publishing market, the book also had the merit of being beautifully simple to understand. Capital in the Twenty-first Century is ultimately a piece of historical statistical description, containing no real theory or mathematics to speak of. Its famous formula “R>G”, which even came to adorn t-shirts, refers to the long-standing tendency (Piketty has been adamant it’s not a “law”) of returns on capital being higher than growth in income from production. As anyone who has owned an asset (such as a house) might have noticed, its value tends to rise faster than one’s pay. Scale that up to an economy as a whole, and you have a situation where existing stocks of wealth are growing faster than GDP. …
The book’s focus upon the rising incomes and wealth of the top “1%” echoed the language of the Occupy movement, language which had itself been borrowed from the study of “top incomes” that Piketty had helped pioneer some years earlier. … There was a widespread sense of an economy that was rigged in favour of the rich, which Capital in the Twenty-first Century did much to empirically substantiate. …
Piketty and his publishers lucked out because the macrofinancial paradigm of the post-2008 world suddenly rendered the “R>G” tendency (which Piketty argued had been around for at least 200 years) impossible to ignore. Britain in particular experienced its longest period of wage stagnation since the industrial revolution, while asset prices (including housing) soared. Quantitative easing poured boundless cheap money into equities, facilitating the sharp ascent of BlackRock and other giant asset managers. Fiscal tightening and unprecedented monetary loosening combined to offer as devastating a demonstration of Piketty’s thesis as he could possibly have imagined.
It is caused by the way the banking system manufactures money. New money is created by lending, and most money that is lent has been newly created for the purpose. Banks lend for asset purchases, and hold mortgages on the assets for security. So asset prices rise, so long as interest can be paid.
This banking system started in 1694 with the Bank of England, and money manufacture was greatly accelerated in 1971 after the last links to gold were broken. (A gold standard constrains the rate of paper money manufacture with the threat of having to exchange paper for the gold.) Now, every asst class (except gold, whose price is suppressed by banks and government) is at record ratios.
Where to from here? Can’t rise further. An explosion of debt and inflation has always been what happened in these sort of episodes previously. But Piketty missed the woods for the trees.
In this Pikettyan dystopia, the wealthy didn’t need to take any risks or become Gordon Gekko to swell their portfolios further; they simply needed to take advantage of the glut of cheap credit and hire a wealth manager.
Capital in the Twenty-First Century arrived with a historical account of a phenomenon that had been largely forgotten about: the idle rich, living off passive investments and inheritances. Everything that Marx had admired about capitalism — its modernism, its upheaval, the insatiable hunger for productivity gains — was nowhere to be seen.
In his rather nerdish, atheoretical manner, coolly tracing the ebbs and flows of wealth since the Enlightenment, Piketty held up an image of capitalism that was less characterised by class conflict, exploitation or upheaval, and more by the sheer durability of estates and portfolios over time. …
Political-economic conflict now seemed less about class, in a Marxist sense, and more about intergenerational unfairness and the sheer luck of which family (with what sized “bank of mum and dad”) one happens to be born into. One of the remarkable implications of Capital in the Twenty-First Century is that, due principally to its very high levels of top marginal income and inheritance tax, the post-1945 Keynesian era is the one phase of capitalist history in which the promise of meritocracy has ever been close to being realised. By fiscally suppressing “R>G” for 30 years (and because so much capital had been destroyed by war), people were able to work their way towards wealth ownership. …
Piketty anticipated the anxiety of liberals today, who believe in “hard work” and “enterprise”, but can see quite clearly that this economy rewards neither. …
The political question, looking back on the decade that followed Capital in the Twenty-First Century, is why this groundswell of opposition has still not translated into a genuinely transformative political program that puts these tendencies into reverse. …
Because too few understand the reason for it. Banks and government rather like the current system of money manufacture, and don’t tell people how it’s done. It’s not a secret, but most people don’t know and don’t believe it even when it is explained to them. It’s banking that needs reforming. The free market part of capitalism works well, but the paper-money banking part is rotten.
When Occupy first raised their banners declaring “we are the 99%” in Zuccotti Park and on the steps of St Paul’s Cathedral, “the 1%” was felt to be nearby, in the banks of Wall Street and the City of London. These encampments were putative acts of democracy. But as empirical attention to wealth, asset management and “high-net-worth” individuals has grown, their distance from the rest of us has come to feel ever more unbridgeable. At their best, studies of the super-rich illuminate the impacts of extreme wealth upon cities, democracy and culture, to aid public understanding. But the sheer exoticism of Elon Musk, Mayfair hedge funds and Monaco superyachts can also become a spectacle, which reduces the observer to passivity. …
You know what to do and what to demand if you are a Marxist. The same is less true if you are a “Pikettyan”. A return to Sixties-era top marginal tax rates (at over 90% for income and inheritance, even in the United States) would be a start. Piketty has made many radical and optimistic proposals of this sort. The problem is that they suggest a faith in liberal democracy and the current assortment of political parties that few people share in 2024, given the influence of big donors and media. Meanwhile, the long-term tendencies roll on.
High immigration keeps the wages of the bulk of the population low, even while asset shufflers grow rich on the tide of newly manufactured money. Who benefits, and who is making the decisions?
