BERKELEY – In Capital in the Twenty-First Century, the French economist Thomas Piketty highlights the striking contrasts in North America and Europe between the Gilded Age that preceded World War I and the decades following World War II. In the first period, economic growth was sluggish, wealth was predominantly inherited, the rich dominated politics, and economic (as well as race and gender) inequality was extreme.
But after the upheaval of WWII, everything changed. Income growth accelerated, wealth was predominantly earned (justly or unjustly), politics became dominated by the middle class, and economic inequality was modest (even if race and gender equality remained a long way off). The West seemed to have entered a new era. But then, in the 1980s, these trends seemed to start shifting steadily back to the pre-WWI norm.
Piketty’s central thesis is that we shouldn’t be surprised by this. Our reversion to the economic and political patterns of the Gilded Age is to be expected as the economies of North America and Europe return to what is normal for a capitalist society.
In a capitalist economy, Piketty argues, it is normal for a large proportion of the wealth to be inherited. It is normal for its distribution to be highly unequal. It is normal for a plutocratic elite, once it has formed, to use its political power to shape the economy in a way that enables its members to capture a large chunk of a society’s income. And it is normal for economic growth to be slow; rapid growth, after all, requires creative destruction; and, because what would be destroyed would be the plutocrats’ wealth, they are unlikely to encourage it.
Since the publication of his book, Piketty’s argument has come under ferocious attack. Most of the critiques are at best mediocre; they strike me less as serious acts of engaged intellect than reflections of the political and economic power of a rising plutocracy.
Out of this cacophony, however, two lines of criticism suggest that Piketty may be wrong, both with respect to the normal characteristics of a capitalist economy and where we may be headed when it comes to inequality.
The modern champion of the first line of attack is Matthew Rognlie, a graduate student at MIT, though his argument has a long and impressive pedigree. It can be found in, among other places, John Maynard Keynes’s 1919 The Economic Consequences of the Peace and his 1936 The General Theory of Employment, Interest, and Money.
Rognlie agrees with Piketty (as Keynes would) that the normal operation of capitalism produces a class that accumulates wealth, which, as a result, takes on a sharp-peaked distribution. But he disagrees about what happens next. Rognlie argues that the rising concentration of capital is to some extent self-corrective, as it produces a proportionately larger fall in the rate of profit.
Unequal wealth distribution, in this view, produces what Keynes called “the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” The result is an economy with relatively equal income distribution and a polity in which the wealthy have a relatively small voice. My response to this line of reasoning is an unequivocal “perhaps.”
The standard bearer for the second line of criticism is none other than Piketty himself – not in anything he has written, but in how he has behaved since becoming a celebrity and a public intellectual.
Piketty’s book encourages a passive response. It portrays the forces favoring the formation of a dominant plutocracy as being so strong that they can be countered only by world wars and global revolutions – and even then, the correction is only temporary.
But Piketty is not behaving like a passive chronicler of unavoidable destiny. He is acting as if he believes that the forces he describes in his book can be resisted. If we look at what Piketty does – rather than what he writes – it seems evident that he believes we can collectively make our own destiny, even if the circumstances are not what he, or we, would choose.
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research.
By J. Bradford DeLong