Capital in the Twenty-First Century (Communism, part 3)

 

( Part 1: The Communist Manifesto | Part 2: Capital, volume 1 | Part 3: Capital in the Twenty-First Century | Part 4: The Conquest of Bread | Part 5: In Defense of Capitalism )

 

Capital in the Twenty-First Century

by Thomas Piketty 

[TL;DR: The postwar years were an interruption in the usual way Capitalism operates. Money always pools in the hands of the people who own the productive parts of society. In prior centuries, that productive element was farmland. Today it’s shares in corporate stock. When the economy is not growing, the rich have nothing to spend their money on, so they will always collect more money from ownership than they have to spend to maintain their ownership. The Great Depression and the two world wars saw policy passed that placed limits on earnings from ownership and taxed huge fortunes, practically killing inheritance and allowing social mobility through individual merit. The world was busy rebuilding from the wars, meaning the economy was expanding, so the great fortunes of the past shrank. Those policies have been abandoned, much of the rebuilding is over, and now the rich own everything that was rebuilt. The world is on track to a Victorian-esque era in which inheritance and bloodlines are the only way to live even a modestly comfortable life. Piketty has data to show that this is Capitalism’s normal state. The postwar era from 1945 – 1980 is over. It’s back to business as usual. The rich have not earned their wealth. They merely own what other people produce, and the more the Ownership Class takes, the less everyone else has. It’s time for the democracies of the world to be real about the flow of money and decide the massive inequality cannot continue.]

You have to get 7 chapters in before everything he’s writing about starts to coalesce into a profound point. That’s a long time to wait. One of the reasons Marx’s Capital v1 is so easy to read (well, for me) is because Marx does not dwell on equations and statistics. He does dive into that, but his focus is on the stories of what was going on in the factories and in the mines at the time he lived. Piketty, however, devotes the entire first third of his book to discussing equations and statistics and analysis of numbers and theorems and defining economist terms with other economist terms. Numbers and equations are so abstract to me. They almost never connect to anything going on in reality, so the first third of this book is hard to get through.

 

 

It’s a bit of a slog to read, yes, but monsieur Piketty has parsed the data on income and wealth over two centuries and compiled everything into charts and equations. For the first time in history, we have data on what exactly happens to society under capitalism, and what he’s learned is that the postwar generations (1945 – 1980) lived during an exceptional time when ownership and inherited wealth meant little and individual merit and personal endeavors allowed one to achieve a good standard of living. Those of us born after the postwar years are living under different conditions. Finally we have data to prove it.

In the 18th and 19th centuries, the rich owned farmland, and they were able to live off the rent generated from owning such land. (“Rent” in the original sense of the term meaning the income derived purely from owning something, anything, without having to operate or use the thing personally.) It was lucrative because that’s where all the productivity of the society was at the time. The majority of people were farmers in one way or another, thus the land was valuable.

As the industrial revolution took place, a remarkable change in ownership happened. Farmland became less valuable while other properties increased in value. Now that the majority of people were no longer farmers but working in factories and offices, that’s where the value lay, so the tiny class of rich people gradually shifted to own that.

Whereas in prior generations people lived off farmland rents and dividends paid out by government bonds, ownership has simply shifted to corporate shares and executive salaries. Overall income and ownership has not changed at all since the early 1900s, only the nature of that ownership. Instead of property-owners living off farmers paying “tribute,” executives and shareholders now live off corporate salaries and derivatives. Piketty shows that the ownership class living off the work of others still exists. The only thing that has changed is what it owns.

It’s obvious what his research has confirmed: ownership is more important than individual drive. This was true even in the early 1800s, when people widely recognized you could toil all your life in the most skilled and disciplined professions of the time (lawyer, doctor) and never get rich or even live a comfortable life, but if you married into a family who had substantial land holdings, you would easily increase your station without having to exert any labor at all.

The period everyone remembers today is the postwar years. The time when everyone seemed to be equal and hard work and merit reigned supreme over bloodlines and inheritance. The author shows this did happen after the wars because industry and property had been destroyed and were being rebuilt, so labor was vital at the time, and the Ownership Class could not collect any “rent” because the things they owned had been destroyed and the people were not working purely in that capacity.

In the immediate aftermath of the Great Depression and the World Wars, it was more lucrative to work hard in a skilled field than simply to own property or shares in a business. This brief period is what everyone wants to believe is the default state of Capitalism, but Piketty shows this was an interruption in the prevailing trend. All economists focused on this era of history and based entire economic theories on it, but the postwar years were not how things worked before.

What Piketty has found confirms our empirical observations: the rich are richer than ever, and they don’t seem to be working harder than the average person. The postwar years suggested that Capitalism raises all boats and makes society more equal, but levels of income equality have returned to those of the 19th century. Now that things have stopped growing and rebuilding, the rich are sitting on their ownership and hoarding their wealth and passing it on to their children, and this trend of dynastic ownership is the same trend we saw prior to the World Wars. There’s reason to believe that is the normal state of Capitalism, not the postwar era.

Income cannot help but pool in the hands of the Ownership Class. Piketty spends a great deal of time outlining the mathematical and logic proofs showing that those who own everything do have to reinvest some of their wealth into maintaining that wealth (repairing machines, fixing buildings, payroll, etc), but when the economy is not growing, their income from ownership will always outpace any expenditures they need to forfeit to maintain that wealth. If the economy is not expanding, along with the population, the rich simply have nothing to spend money on, and they pass that wealth on to their children, and this is the situation we’re in right now. The beginning of a new dynasty of rich families who own everything and never have to work. We had it on the eve of the world wars, but those wars interrupted the prevailing trend, giving all of us the sense that dynasty was dead and the world operated by individual talent and merit and obviously only people who had the greatest talents would rise to the top and become rich. That entire mentality was an illusion created by the postwar years.

 

 Prior centuries took ownership of farmland for granted as the obvious means of generating an upper-class lifestyle. Today, it’s shareholders and CEOs of giant corporations who own all the productive elements of society. We take for granted that owning stock in tech companies or some other industry that is ratcheting its workforce and buying back its own stock is key to making millions. Working hard does not help you move up. Owning what the masses of people use to make the world go ‘round is far more important, and it always has been—that’s how fortunes were made then, and it’s happening again. It is only during times of growth that things seem to be equal. That’s about the only time when people can work their way up to the top. That’s when the rich will spend their money. Otherwise, the rich will hoard it.

The author shows government policies that curbed the behavior of corporate executives and shareholders and property-owners. With a tax rate of 90% on top incomes in some cases, it became impossible to get rich by abusing the workforce, so fortunes remained small, and companies had incentive to pay their workers more instead of buying back their own stock or stashing their profits on offshore accounts. The postwar egalitarianism did not simply happen on its own. People in power declared it should happen.

Since the 1980s, those policies have been reversed, and now we see a clear trend upward in the wealth of the rich corresponding to a drop in the wealth of the bottom 90% of society worldwide. This is no accident, and now we have long-term data to prove it, something previous generations of economists did not have. Piketty has complied the data to show that the rich own what the people produce, and as they collect more and more rent, the working class increasingly has less and less to show for its efforts.

 

The industrialized nations have returned to a state of inequality present on the eve of the World Wars. Inheritance is coming back. Income from ownership is more lucrative than individual labor, even in skilled fields, and people everywhere are starting to notice the promises they were sold in their youth are very different from observed reality. This is indeed the normal state of things: a tiny group of people at the top that owns everything, and the underclass feels the squeeze as they work harder and harder trying to get ahead, unaware that the harder they work the more wealth they generate for the rich and the deeper into poverty they push themselves.

Do the rich deserve their lavish lifestyles because they are better than everyone and are earning their corporate bonuses? Piketty argues that they don’t because this is merely the same class that once owned farmland and collected rent from the people who worked it. Some of them once owned government bonds and lived off the regular payments, effectively transferring public debt into private wealth and then passing that wealth on to their children, creating dynasties of money gained through no work. Now they own shares of corporate stock and live off that instead. Living off farmland or living off government subsidies, or living off tax breaks or corporate dividends and bonuses. No matter how you view it, it is living off the work of others.

Even if a person did innovate something and made a large fortune off a business based on this innovation which is beneficial to mankind, the next generation (be it family or successive managers of the company) did not create this innovation. They are earning money on something they own, and thus have no claim to the money it generates. If we truly do believe we live in a meritocracy, we are merely being honest when we say that wealth of this magnitude is never derived from merit. It is always derived from ownership of what someone else produces.

For a brief period in history, one could live a comfortable life through study and hard work in a skilled occupation, but those times are, mathematically and statistically, behind us. People may be making lots of money through “wages” and “salaries” these days, but those numbers always factor in hedge fund managers and bankers. Top executives of multinational corporations may be paid a “salary” and get “bonuses,” but those are never determined by one’s value to a company. It is merely a technical term to justify their position. Even doctors and lawyers cannot aspire to such high levels of wealth. You still have to work your ass off to be paid even a modestly comfortable wage no matter how high up you move on the skill ladder. As anyone in the programming/game development world will attest, even people with high skill levels are being squeezed, and only the owners of their hard work get rich. Everyone else gets a wage. Skill and merit are both myths used to justify inequality. The rich are the beneficiaries of rents and inheritance. Nothing more.

 

 

Incidentally, thank you, monsieur Piketty, for putting Victorian literature into context. Now I understand exactly who those fictional characters are, and why they spend all their time gossiping and vying for the best marriages and dowries. This was the tiny class of landowners living off unearned income. They were very concerned about fortune size because the size of landholdings was the only way to avoid actually having to work for a living. (Very identifiable.) People justified such inequality in that it’s necessary for some people to have nothing and do all the hard work of survival so others can concern themselves with more cerebral matters. Do those upper classes really deserve to be there if all they do is attend parties and balls and vie for the most advantageous marriages? Piketty writes that we are on our way to Victorian Era II, and no doubt the people at the top will tell the masses they deserve to be at the top because they earned their wealth through individual merit and hard work, but what exactly did they do to get there? The longer this continues, the more people are starting to realize that the rich did not start at the very bottom.

Challenging the legitimacy of the Ownership Class is the first step to true social change. Prior eras asked if the nobility truly deserves to be in charge by virtue of their bloodlines. Today we must ask if the rich acquired their wealth because they are smarter and work harder than the rest of us, or if they merely own the most productive elements of society and are living off the hard work of others.

Piketty’s solution is to tax not income but ownership. Since wealth is inherited and the people who claim it did not earn it themselves (we’re looking at you, Mr. Trump and Mr. Musk), why should anyone have claim to it? Massive fortunes corrupt democracies, and as they are passed down between generations, they will only increase in size and corrupt institutions even further, and this has been a source of worry for centuries.

When giant corporations are not paying taxes and outright demand subsidies and incentives to move to/remain in a particular city or country, cities and countries must raise taxes on the lower classes to pay for basic services. The more the rich take in the form of unearned income, the less everyone else has as a direct result. Billionaires are in a space race while entire communities don’t have clean drinking water. A single family can push addictive opioids onto the country and then negotiate their own legal consequences to keep the fortune it made, meanwhile half the country is terrified to go to the doctor for fear of the cost. People are starting to wake up to all of this. They are beginning to realize these things are connected.

 

I am not convinced the solution is as simple as a globally-coordinated tax on wealth, as it would require a lot of enforcement, not to mention the willpower to dig into barely-documented offshore assets. But the idea does have merit because we had it before. In the postwar years, we had such high tax rates on wealth and income, so it follows bringing them back would deter the creation of such fortunes, and may even curb some of the abuses of Capitalism itself, meaning if it’s impossible to get rich from subjecting people in factories and warehouses to dangerous and unethical conditions, then businessowners will have no incentive to treat people that way in the first place.

Enacting such a tax would acknowledge that stock prices going up and money returning interest do not just happen on their own. People at the bottom are working to make those assets increase in value. The work of the population makes it happen, therefore the returns do not deserve to pool in the bank accounts of an ownership class.

Piketty’s suggestions do not amount to communism. They simply acknowledge how the flow of money works given certain conditions. Capitalism can continue to exist, but it has to be managed for the benefit of all. Clearly if left to its own devices, it will result in a handful of rich families who own everything while doing no work to justify their position. Diverting this into something beneficial for everyone will take international cooperation between every single democracy and dictatorship in the world. The author’s solution strikes me as too optimistic, but perhaps in the future some catastrophe will push the governments and citizens of the planet to realize all their problems have a common source, and it is not the poor being lazy or immigrants stealing their jobs. It’s the fact that they need a job to survive in the first place, and most of their hard work goes to support the lavish lifestyles of the world’s richest people.

Piketty has the numbers to show us what the reality was before the world wars, and the changes we are seeing worldwide are not the system breaking. They are signs that the system is returning to its normal state. If we truly believe the rich are smarter and work harder than the rest of us, then we can let things continue as they are. But if there’s even a little doubt about where their money came from, and if maybe just maybe they got a head start in life due to preexisting family wealth, or maybe just maybe they are not the smartest and hardest-working people on the planet and they are in fact squandering their wealth on megayachts and phallic space rockets instead of creating a paradise for all of mankind, then they might not deserve those tax breaks and corporate bailouts after all. Something must change, or else the guillotines will come out again.