Andrew Leigh

THOMAS PIKETTY AND THE ROOTS OF GLOBAL INEQUALITY 

The Sydney Morning Herald, 7 March 2020

Thomas Piketty isn’t scared to tell a big story. In 2013, he produced Capital in the Twenty-First Century, a 700-page tome about inequality that combined Jane Austen and Honoréde Balzac with data from tax returns and national statistics.

One idea that captivated many readers was r versus g. When the rate of return on capital (think rental yields and share dividends) exceeds the overall economic growth rate, then inequality rises. When g is bigger than r, inequality falls.

The theory didn’t explain everything about inequality. For example, the rise in Australian inequality during the 1980s and 1990s was mostly due to widening wage gaps – such as the increasing pay gulf between cleaners and surgeons – rather than the difference between labour earnings and capital returns. But r versus g gave Capital in the Twenty-First Century a leitmotif, and readers were drawn in by Piketty’s broad sweep of European and American history, painstaking archival work, and literary allusions. Capital in the Twenty-First Century became the most popular economic history book in decades.

Seven years on, the 48-year-old French economist has produced a meaty follow up: Capital and Ideology. ‘This time it’s ideological’, cries the promotional material. At 477,000 words, it’s only one-fifth shorter than War and Peace. Then again, Tolstoy didn’t include supplementary charts and an online technical appendix.

To show his commitment to longue durée history, Piketty starts off with the extremes of inequality that existed from the 1500s to the 1700s. In India, Japan and much of Western Europe, a tiny elite of clergy, nobility and warriors ruled over a vast peasant population. Even more unequal were ‘slave societies’, such as Jamaica, Barbados and Haiti, in which four-fifths of the population were enslaved. The point is to remind the reader that inequality ‘is determined primarily by ideological and political factors, not by economic or technological constraints’. A society where most people are on the brink of starvation will be equal by necessity. But as incomes rise, it becomes possible for oppressive elites to confiscate any excess for their own pleasure.

Eventually, autocrats who treat the peasants revoltingly will find that the peasantry revolts. This happened most dramatically in Haiti, which from 1791 to 1804 saw a massive slave uprising that upturned society and redistributed income. Elsewhere, the changes were more modest, but all had to be fought for. In the Southern United States, slaves comprised one-third of the population on the eve of the Civil War, and the cotton they picked helped power Europe’s industrial revolution. It took more than 600,000 civil war deaths to end this inegalitarian institution.

The same held true for other egalitarian reforms. In the Belle Époque – the half century that preceded the outbreak of World War I – the concentration of wealth was exceptionally high. In Britain, France and Sweden, the top 10 percent owned more than 80 percent of all private property.

One way in which this inequality was maintained was by restricting the franchise to property owners, or by giving more votes to the most affluent. In 19th century Sweden, the wealthiest citizens could cast up to 100 votes apiece – a model that looks much more like the way voting takes place within a corporation. Expanding voting rights was a long fight. A universal truth about universal suffrage is that it has come about as a result of street marches and social struggles, not the beneficence of the powerful.

The same holds for progressive taxation, adopted in Britain in 1909, the United States in 1913 and France in 1915 only after ‘epic political battles and major constitutional reforms’. Piketty reminds us that French inequality was so acute in that era that almost no-one in Paris owned an individual apartment. Instead, a few people owned entire apartment blocks, while the rest rented.

Redistributive income taxes were often increased to fund wars (in the US, the 1942 law that raised the top tax rate to 91 percent was the ‘Victory Tax Act’). But in peacetime, egalitarian income taxation enabled egalitarian spending, including age pensions, public schools and universal health care.

Elsewhere, political movements affected inequality in different ways. In India, independence led to the introduction of affirmative action for members of the lower-castes, such as ‘untouchables’. In Germany, Austria and the Nordic countries, workers succeeded in obtaining minority representation on boards. As it turns out, co-management has two major impacts: it boosts firms’ productivity and constrains executive pay. The system is now widely accepted in the Germanic and Nordic nations, but only came into being ‘as the culmination of a very long process involving union struggles, worker militancy and political battles’.

Many progressive reforms took place in what Piketty dubs the ‘social democratic era’ of 1950 to 1980. Since then, he argues, we have moved into a ‘hypercapitalist’ era. From 1970 to 2015, the average real income of the poorest 50 percent of Americans rose only slightly, from $15,200 to $16,200. Meanwhile, incomes of the top 1 percent more than tripled, from $403,000 to $1,305,000. The world’s largest fortunes have been growing five times faster than global income. In nearly every region of the world, inequality has risen over recent decades.

Why hasn’t politics kept inequality in check? Here, we come to Piketty’s most provocative findings. Mainstream politics, he argues, has become a battle between the ‘Brahmin Left’ and the ‘Merchant Right’. Progressives increasingly value intellectual work and academic qualifications. Conservatives are more likely to prize business acumen and negotiating skills.

Across the advanced world, Piketty shows, voters with university degrees tended to support conservative parties in the 1950s and 1960s. Today, electors with tertiaryqualifications are far more likely to back parties of the left.

Take America. In 1948, US university graduates were 20 percentage points less likely to vote Democratic than non-graduates. In 2016, university graduates were 14 percentage points more likely to vote Democratic than non-graduates. Little surprise that Donald Trump crowed after his 2016 win ‘I love the poorly educated’.

The pattern holds for Australia too. In 1966, the earliest election survey that I can identify, university graduates were 15 percentage points less likely to vote Labor. In the 2019 election survey, I estimate that university graduates were 6 percentage points more likely to vote Labor. Piketty identifies similar trends in Britain, France, Italy, Switzerland, Canada, the Netherlands and New Zealand.

What’s going on? Piketty suggests that the left-right party system of the post-war era is breaking down. Like priorscholars, he notes that race-based appeals have become more common, and points to a growing cleavage between ‘globalists’ and ‘nativists’. Conservatives have increasingly resorted to exploiting racism for political gain, and attacking international institutions. In Britain, this was most apparent in the case of Brexit. Among the highest-educated Britons, more than 70 percent voted to remain in the European Union. Among the lowest-educated, less than 40 percent voted to remain.

But Piketty also thinks that that progressives have made some crucial mistakes, particularly when it comes to education. Some leading US universities have more students drawn from the top 1 percent of the income distribution than from the bottom half of the income distribution. By embracing the language of meritocracy, Piketty contends, the US Democratic Party has become ‘the party of the highly educated in a country with a hyper-stratified inegalitarian educational system’.

Piketty is especially scornful of the ‘inegalitarian and hypocritical’ French system, which invests at least twice as much in students who attend the elitist grandes écoles as in other students. Across the advanced world, he notes, school students from privileged backgrounds are more likely to be taught by experienced and qualified teachers than those from disadvantaged backgrounds. As it happens, this problem is especially acute in Australia, where the most advantaged quarter of students have teachers with three years more teaching experience than the least disadvantaged.

At the core of Piketty’s proposals is that social democratic parties must radically improve educational access and quality for the most disadvantaged. Teacher absenteeism should not be four times as bad in the poorest schools. Teacher pay ought not be an increasing function of students’ socioeconomic status. Parental wealth should not determine whether a child attends university.

Beyond education, Piketty wants to see a crackdown on tax havens, fair apportionment of multinational profits, global cooperation on reducing carbon emissions, and the creation of non-profit media organisations.

It’s not all misery and despair. The past two centuries have seen remarkable progress across the globe. Average life expectancy has almost tripled, from 26 to 72. Average incomes have grown tenfold. Yet inequality has soared, and many are convinced that politics is broken. Ultimately, Piketty’s message is a hopeful one: past egalitarian reforms were hard-won, and the future is malleable. ‘The inequalities and institutions that exist today are not the only ones possible, whatever conservatives may say to the contrary.’

ENDS

Authorised by  Paul Erickson, ALP, Canberra.