The challenge of promoting shared prosperity was one of the unifying themes throughout last week’s Spring Meetings at the World Bank Group and International Monetary Fund – the whirlwind of diplomacy and scholarship that sweeps through Washington every April and October. A remarkable new factor, however, energized this spring's event: In a vivid evolution of the policy debate, the seminars, forums and news-media coverage seemed focused, to a greater degree than ever, not just on the economic question of the creation of overall economic growth but on what has traditionally been seen as a social question: the distribution of wealth.
And in the wake of the Spring Meetings, Washington this week got a bracing reminder of how difficult it may be to build truly shared prosperity – not because our economic institutions lack the ability to achieve it, but because our political institutions may fail to summon the willpower to demand it.
A scholar whose work has taken the economics profession by storm, Thomas Piketty, captivated policy-watchers this week with the Washington launch of his landmark new work, “Capital in the Twenty-First Century.” Hailed as “the most important economics book of the year, and maybe of the decade” by Nobel Prize-winning economist Paul Krugman of the New York Times – and praised by Martin Wolf of the Financial Times as “an extraordinarily important” work “of vast historical scope, grounded in exhaustive fact-based research”– “Capital” offers vital new insights into how wealth and power are distributed in modern economies. “Piketty has transformed our economic discourse,” asserts Krugman. “We’ll never talk about wealth and inequality the same way we used to.”
Piketty’s account of “inexorably rising inequality,” according to New York Times columnist Eduardo Porter, challenges many of the economics profession’s “core beliefs about the organization of market economies” – including “the belief that inequality will eventually stabilize and subside on its own, a long-held tenet of free-market capitalism.” Instead, “the economic forces concentrating more and more wealth into the hands of the fortunate few are almost sure to prevail for a very long time.”
Piketty’s data-driven research confirms many of the trends toward plutocracy identified by another author, Chrystia Freeland – formerly of the Financial Times and Thomson Reuters, and now a member of the Canadian Parliament. Freeland will discuss her celebrated work “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else” at the World Bank’s “InfoShop” auditorium – and in a livestreamed webcast – at 12:30 p.m. on Tuesday, April 22.
Lord Robert Skidelsky of the University of Warwick, in a book review in Prospect, succinctly summarizes how capital has become ever more concentrated: Capitalism’s “natural tendency [toward] inequality was suppressed in the period between 1910 and 1960, as the two world wars and the Great Depression destroyed a mass of inherited capital, while trade union pressure, progressive taxation and welfare prevented its reconstitution. But [since] the late 1970s, with the decay of these countervailing forces, the natural inequality of the system has reasserted itself, so that today it is almost as great as it was before 1914. Piketty’s point here is that while the divergence of wealth and income under capitalism is natural, its ‘compression’ is contingent on singular events plus policy reactions.”
Without such constructive “policy reactions,” the trajectory for a society stratified by social class is a grim one, says Krugman. Projecting a relentless trend toward the concentration of capital in fewer and fewer hands, Piketty “makes a powerful case that we’re on the way back to ‘patrimonial capitalism,’ in which the commanding heights of the economy are dominated not just by wealth, but also by inherited wealth, in which birth matters more than effort and talent.”
Inequality accelerates, says Skidelsky, because of “what Piketty calls the ‘fundamental force for divergence.’ When the return on capital exceeds the growth of the economy, inherited wealth grows faster than output and income, meaning that inequality increases. So if the return on capital is high for rich people, inequality will have a tendency to rise explosively. And the return to low growth, including low demographic growth, means that inequality will rise even more.”
The unmistakable echo of the book’s title, “Capital,” evokes the incendiary tract “Das Kapital” – a manifesto that led toward a disastrous and now-discarded dead end of economic history. Yet Piketty’s logic is more evolutionary than revolutionary. He does not take a “deterministic” view, he insisted in a presentation this week at the Economic Policy Institute: “There are several possible futures,” depending on the political course that society chooses, over time. “I do not have this apocalyptic view of the future that some people seem to have.”
In the gradualist social-democratic tradition of enacting moderating reforms that can restrain excessive concentrations of power, Piketty calmly calls for a reasonable extension of existing social safeguards: such steps as a more progressive tax code, more rigorous limits on political influence-peddling and greater vigilance about attempted rent-seeking by powerful economic interests. His most imaginative proposal – for an international, progressive tax on individuals’ total wealth, so that wealth-owners cannot shelter their assets in tax havens – may not be adopted anytime soon, yet he engagingly calls the concept “a useful utopia.”
Based at the Paris School of Economics, Piketty gathered evidence for his insights in a years-long collaboration among many scholars – notably Emmanuel Saez of the University of California at Berkeley – as they painstakingly pored over tax records (from developed economies like France, the United Kingdom and the United States) to identify trends in the inequality of incomes and wealth. His far-reaching analysis builds on the research of such scholars as former World Bank economist Branko Milanovic – whose review of “Capital” contends that “we are in the presence of one of the watershed books of economic thinking.”
Piketty’s analysis will propel the arguments gradually advanced by some staff members of the IMF’s Fiscal Affairs Department – whose insights were recently underscored by IMF researchers Jonathan D. Ostry, Andrew Berg and Charalambos G. Tsangarides in an unofficial yet highly influential “IMF Staff Discussion Note.” The IMF researchers’ startlingly fresh thinking on the question of inequality has evidently made a deep impression on IMF Managing Director Christine Lagarde, who recently told Porter of the New York Times: “I hear people say, ‘Why do you bother about inequality? It is not the core mandate.’ Well, sorry, it is also part of the mandate. Our mandate is financial stability. Anything that is likely to rock the boat financially and macroeconomically is within our mandate.”
The intensifying debate on economic inequality has inspired criticism, predictably, by free-market fundamentalists on the political right – as well as some qualms among skeptics on the political left. Some have questioned whether inequality is really an economic-policy question, rather than a sociological one.
Yet as Skidelsky asserts, the trend toward intensifying inequality can lead to an erosion of democratic values: “Does the growth of inequality matter? The quick answer is that it is bad economically and socially. It is bad economically because it narrows the consumption base on which investment depends; and it bad socially because, as Piketty says, it ‘undermines the meritocratic values on which democratic societies are based.’ ” Wolf similarly underscores the threat that a growing plutocracy might devalue democracy: “The most convincing argument against the ongoing rise in economic inequality is that it is incompatible with true equality as citizens. If, as the ancient Athenians believed, participation in public life is a fundamental aspect of human self-realisation, huge inequalities cannot but destroy it. In a society dominated by wealth, money will buy power.”
A compelling contribution to the debate on the course of capitalism and democracy, Piketty’s “Capital in the Twenty-First Century” seems likely to inject a new sense of urgency to the all-important challenge of promoting shared prosperity.