It 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 Century, running 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.
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).
But 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.