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The problem with capitalism

41ASis1P3hLIt is not often that a long, technical economic treatise becomes a best-seller. But this is just what has happened with Thomas Piketty’s massive volume Capital in the Twenty-First Centuryrunning as it does to 640 dense pages which includes an enormous amount of economic data and its analysis. Even if that had not happened, as Jeremy Paxman commented in last night’s edition of Newsnight, he is almost certain to win the Nobel Prize for economics for the statistical analysis alone.

I am interested in this because of having studied economics in the past and been involved in business. But Piketty’s thesis goes beyond personal interest; it is being hailed as addressing the most important economic and social question facing Western democracies. And it is also at the heart of any Christian vision of what society might be.

Piketty’s massive analysis of the data in the end makes a fairly simple point, but one that no-one has really noticed or seen as significant: in free-market democracies, outside of the catastrophic periods of the First and Second World Wars, capital has grown faster than incomes.

Piketty shows that in rich countries at the frontier of technology and skills, the growth of incomes is between 1% and 2% a year. Meanwhile, the rate of return on capital averages about 4% to 5% a year. So those who draw their income from capital returns will outstrip wage earners and “inherited wealth grows faster than output and income”. (source)

This means that what Marx believed from an ideological view is actual true based on cold, hard mathematical analysis of economic reality: in a free market, wealth will in the end accrue to a smaller and smaller group of richer and richer people. And we are seeing the evidence of this all the time.

The Newsnight piece is worth watching, as it illustrates this with a couple of nice graphs.

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 And Piketty himself mentions some striking statistics about Western economies: the poorest 50% of the population owns less than 3% capital wealth, and the poorest 80% population owns less than 25% of wealth.

Piketty goes on to identify two main problems with this situation. The first sits squarely in the realm of economics. It is true that some inequality is needed to make economies grow, since only by holding out the possibility of gain are people motivated to be effectively economically. So he is not, in fact, advocating Marxism or even pushing a socialist agenda. But he points out the lie that follows from this truth—the idea that more inequality leads to more growth. The opposite is the case: the level of inequality we have now stifles growth, because it is harder and harder for those without significant capital to acquire it. (Just consider what is happening right now in the UK housing market.) And growth in the West happened most rapidly after WW2 when inequality was much less than it is now—but much of this growth was hidden because it was filling in the economic deficit left by the war. (For a similar line of argument, with many fewer pages, see the book The Spirit Level). 

Andrzej Krauze on Piketty economicsBut his second point is much broader. Economic inequality also undermines democracy. The democratic institutions that we rely on cannot function when there is such a concentration of capital in the hands of so few people. I think there is a strong sense in the UK that a small cartel of people, most of whom know each other, are controlling both capital and politics. If you don’t believe me, just look at the share issue in the privatisation of the Post Office

Vince Cable, the Secretary of State for Business, agreed the sale of the Post Office for what is generally reckoned to be £2 billion less than its proper market value. He did this on advice from seven banks, all of whom then had preferential options to buy shares as corporate investors. There was a ‘gentleman’s agreement’ that these banks would not immediately sell their shares, but at least 50% of these shares were immediately sold to take the profit. One of the hedge funds that did purchase had immediately made £36 million profit; its director is one Peter Davies, who happens to have been George Osborne’s best man after getting to know him at Oxford University.

It seems to be no coincidence that the loss of confidence in politics in the UK is happening at the same time as both the professionalisation of the political class, and the rapid growth of economic inequality. As Stella Creasey, the Shadow Business Secretary (and probably the most impressive person in the whole of Parliament) comments on Newsnight, ‘Inequality disenfranchises people.’

Perhaps the most distinctive thing about Piketty’s approach is that, starting from mathematical analysis (his undergraduate studies specialised in mathematics and economics), he is connecting economic issues with much wider concerns.

Unlike many economists he insists that economic thinking cannot be separated from history or politics; this is what gives his book the range the American Nobel laureate Paul Krugman described as “epic” and a “sweeping vision”. (source)

This then leads to the theological significance of the debate. Biblical theology has a basic problem with capitalism as it has been practised for a couple of hundred years (and has been the cause of much debate). The essential claim of scripture in relation to capital is that ‘The earth is the Lord’s, and everything in it’ (Psalm 24.1). From a theological perspective, no-one owns anything, since it all belongs to God, and it is ours only on trust, as stewards acting on God’s behalf. It is this principle from which other concerns flow—the strict limitations around the accumulation of both capital and debt in Old Testament law, and the principle of manumission of slaves which is related to that.

To see the immediate pastoral significance of this, consider what is happening with health. In the UK, life expectancy of the richest sector of society is now 20 years greater than life expectancy of the poorest. Economics has a direct impact on well being.

What is the solution? Piketty has one—a global tax on wealth—but doesn’t think that anyone will agree to it. Perhaps what he has already achieved is the most important thing: an acknowledgement that there must be limits to inequality.

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9 Responses to The problem with capitalism

  1. paintingman May 1, 2014 at 11:00 am #

    Yes this book does appear to make sense of what is happening in our world.
    Is there any way of addressing the imbalance of capital ownership without converting the richest to an ideology (faith) that encourages sharing?

    • Ian Paul May 1, 2014 at 3:18 pm #

      Well, either you have to get them to agree to it (which they won’t) or you have to do something which they won’t like.

      So we have to do the latter. It is a question either of looking at the mechanisms by which wealth is accumulated, and revising those, or enacting something which tackles the accumulation after it has happened.

  2. David May 1, 2014 at 7:27 pm #

    The problem with wealth and democracy was found by the research referred to in this article:

    https://www.commondreams.org/view/2014/04/14

    which finds that the USA is an oligarchy, not a democracy.

    What to do? The OT jubilee had something to do with avoiding the accumulation of wealth in the hands of the few.

    • Ian Paul May 2, 2014 at 5:04 pm #

      Thanks for the link David. I have always felt this because of two things which are not the case in the UK:

      a. the independence of the judiciary from political process

      b. the limiting of expenditure in election campaigns.

      In the US there is also the link between politics and the military-industrial complex, which undermines democracy. But there are other oligarchies as work in the UK, demonstrated by the narrow social range in the present Government and Cabinet.

  3. deacongill May 2, 2014 at 1:15 pm #

    That’s fascinating stuff, and I appreciate the link to theology.

  4. Chris Bishop May 24, 2014 at 7:48 pm #

    The Financial times appears to have found a large number of flaws in Picketty’s analysis including his poor use of mathematics.

    See

    http://blogs.spectator.co.uk/coffeehouse/2014/05/why-didnt-pikettys-harvard-publisher-spot-the-errors-which-the-ft-has-exposed/

    • Ian Paul May 30, 2014 at 3:21 pm #

      Chris, a couple of things on this.

      Firstly, Giles’ view is completely unsustainable from an anecdotal point of view. Here’s two little statistics in the current edition of The Week:

      . The super-rich are wealthier than they have ever been. According to the Sunday Times Rich List, the top 1000 people in UK are now worth together £519 bn, 15.4% more than last year, equivalent to one third of the nation’s GDP. Their combined wealth has doubled since the 2009 crash—whilst average earnings have gone down in real terms.

      . 11% of the population own a house which is not their residence, whilst fewer people own their own houses (I think) than at any time since Thatcher.

      Second, Giles has made a bigger error than Piketty since he did not take into account the changes in the way that wealth is measured, which Piketty has in fact corrected for (though possibly not exactly). The full analysis is here:

      http://www.theguardian.com/news/datablog/2014/may/29/piketty-chris-giles-and-wealth-inequality-its-all-about-the-discontinuities

  5. Chris Bishop May 30, 2014 at 6:52 pm #

    Ian,

    Thanks for this. I had not read this analysis and I understand the points made about the discontinuities and different methodological approaches. But -yes I think I agree that the proof is in the pudding -it certainly appears anecdotally that the rich are getting richer.

    But is the answer to impose punitive taxes on the very rich like what happened under the Wilson government in the 1960’s the right way to address this?

  6. Dean August 2, 2015 at 8:40 am #

    It would be interesting to see if the author was able to connect the point in the 70’s when countries began adopting the floating exchange rate regime.

    Incidentally, I have devised a model which counter-balances capitalism. It is not a system-wide change but rather a model which could be employed by any individual (household) who no longer wishes to participate in ‘capitalism’ but is not denied the right to access the necessary resources to fulfill both his inner and external needs (he of course must renounce material pursuits for private ownership purposes – but this does not deny him the right or ability to act as a trustee over the necessary resources to fulfill his needs and those of his family, including religious pursuits). Most importantly it is backed both by religious and legal doctrine and principles.

    It is essentially a non-capitalist model but it co-exists alongside capitalism, and to be quite frank, is the only model/method I have been able to see (in my 15 years of studying economics, finance, law, religion, philosophy, politics, psychology, history, and more) that not only allows one to renounce capitalist pursuits and to still provide for himself, his family, and even the community, both externally and spiritually, but its very implementation reduces the inherent costs on society of capitalism far more effectively than charity or non-profit organizations could ever do, which then allows the healthy benefits that capitalism does induce (technology, inventions etc) to continue.

    It is very radical I have come to realize, because I have shared this with many people, quite famous people too from all areas in life (religion, law, economics etc), who have all failed to be able to see it – and yet never tell me on what grounds it cant work.

    And I do have to admit, I am reaching out to people because there is one tiny piece of the puzzle I am missing which I am hoping could be filled once I can connect with at least one person who can see what I see.

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