An Indictment of the Invisible Hand

by Jeffrey Madrick

The implications of Piketty's new book go to the heart of the issue that spurred the Occupy movement in 2011. (Photo: Public domain)

Thomas Piketty’s 700-page book, Capital in the Twenty-First Century, has stunned both the economic profession and most political observers. But the economic mainstream is not truly dealing with its most serious implications even as they widely praise his work.

Here in a nutshell is what he argues: Current rates of inequality are closer to historical norms than aberrations. Inequality is likely to stay high and perhaps increase. The normal workings of the free market won’t change this. The only way to rectify the imbalance is more aggressive taxes on property and high incomes to reduce inequality.

All this from an economist with strong mainstream credentials, and whose work in tandem with Emanuel Saez, Tony Atkinson and a few others has profoundly changed how we think about inequality. It was Piketty et al. who showed that a huge amount of income goes to the top 1 percent, and most of that to the top 0.1 percent. We don’t really have an inequality problem. We have stagnating incomes for the bottom 90 percent and a runaway of incomes at the very top.

Mainstream economics generally concedes the levels of inequality but for a very long time has said much the opposite of what Piketty has found. Current inequality is an aberration in the long march of capitalism, according to mainstreamers, due to educational inadequacies or globalization. Free-market competition should reduce excesses of capital accumulation and a balance will be struck with wages as productive investment creates more companies and more demands. Some higher taxes may be necessary, argues some mainstreamers, but excessive capital accumulation eventually has to fall as competition drives down the return.

Piketty’s book is an empirical tour de force. Close analysis of data in rich nations of several hundreds of years shows that the amount of capital compared to income in economies has always been high, even pretty constant. Capital includes stocks bonds, land, housing, business and on. It just keeps growing because it has generated persistently big returns, returns that make it grow faster than GDP or national income.

The only time capital as a percent of GDP came down was with the two World Wars of the twentieth century and some thirty “glorious” years of the Second World War’s aftermath. Capital stock itself was devastated by war, but GDP also grew rapidly in this period. The ratio of capital to GDP fell, and rich nations became more equal.

Now, that’s changed again. Capital is rising to its old levels, what Piketty calls the patrimonial state, epitomized by Britain in the first two thirds of the 19th century. As capital rises, the rich simply get richer, and inequality soars. They own the capital, after all, and reap its rewards. And in America, this has mostly been a function, Piketty calculates, of outsize remuneration for CEOs and other managers, who get huge stock options. Their compensation has risen with the stock market.

But the main flaw in the book is that it is not a tour de force of theory. (There are some more minor flaws, such as measuring labor income as if it is independent of capital accumulation, when US statistics include stock options as part of labor compensation.) Piketty writes outright that the accumulation of capital is not the result of “economic mechanisms,” but of political ones. But he does not pursue this adequately and the mainstream can thus ignore the implications, which are that markets are not working well enough.

Indeed, economist Robert Solow argued in one presentation that the persistence of high capital levels was not a “market failure” but the natural result of technological advance that continued to generate new opportunities set against diminishing returns to capital from older investments.

Had this been the case, however, the rate of growth of the economy due to technological advance would have improved, and the proportion of capital in GDP would have fallen.

What’s by and large been lost in the discussion as America’s most prominent economists try to contend with Piketty’s empirical findings is that they don’t seem constitutionally able to do so. In fact, the financial markets have failed to fully utilize capital, or worse, used it in perverse ways to make bankers rich while not dispersing capital effectively. Capital basically just sits there, enabling fat cats to get fatter. Not entirely, of course. Some of this capital has been put to good use, but as it grows so much faster than the economy, it seems more than obvious that it is the result of monopoly, rents that are not related to real returns of investment, manipulation of markets and regulations, political influence, and so on. Free market competition has not worked.

If Piketty had paid more attention to such market failures rather than gloss over them, he would have uncovered a treasure trove of policies that could reduce the hold on capital and distribute the benefits of the economy more widely.

Instead, he believes higher taxes are the only solution. But regulation of monopolists and Wall Street manipulators would be part of such a solution. More vigorous anti-trust prosecution would be another. Fairer and more strongly implemented labor laws would have given workers a fairer shake, as would more union-friendly regulations and a higher minimum wage. Keynesian stimulus policies have been stymied by the deficit hysteria of Republicans and not a few Democrats.

Piketty’s book is an indictment of laissez-faire market theory. One sign of how ineffectual the economics community has become is that it is unable to see the true fruits of the work, even as it praises Piketty’s extraordinary empirical contributions.

Jeffrey Madrick is director of the Bernard L. Schwartz Rediscovering Government Initiative at The Century Foundation. His latest book, Seven Bad ideas: How Mainstream Economists Damaged America and the World, will be published by Knopf in September.


Piketty Undermines the Hallowed Tenets of the Capitalist Mindset

Thomas Piketty Undermines the Hallowed Tenets of the Capitalist Catechism

Not only does capitalist growth not reduce inequality; it increases it.

by Jeff Faux

Thomas Piketty just tossed an intellectual hand grenade into the debate over the world’s struggling economy. Before the English translation of the French economist’s new book, Capital in the Twenty-first Century, hit bookstores, it was applauded, attacked and declared a must-read by pundits, left, right and center. For good reason: it challenges the fundamental assumption of American and European politics that economic growth will continue to deflect popular anger over the unequal distribution of income and wealth.

“Abundance”, observed the late sociologist Daniel Bell was “the American surrogate for socialism.” As the economic pie expands, everyone’s slice grew bigger.

The three-decade long boom that followed World War II seemed to prove Bell’s point, tossing Karl Marx’s forecast of capitalism’s collapse into the dustbin of history.

Marx predicted that as markets expand, profits from technological innovation would gradually dry up, depressions would get more severe and capitalists would drive labor’s share of income in the advanced industrial economies so low that revolution was inevitable.

But twentieth-century capitalism proved more resilient than Marx thought. New technologies continued to generate more profits and jobs. Keynesian fiscal and monetary policies prevented cyclical business downturns from triggering depressions. And the investor class, threatened by the specter of communism, agreed, grudgingly, to the New Deal model of strong unions, social insurance and other policies that forced them to share the profits from rising productivity with their workers.

In the United States, the portion of income going to the richest dropped from over 45 percent in the 1920s to under 35 percent by the 1970s. Between 1959 and 1973 the percentage of Americans living in poverty was cut in half. Other industrial countries followed the same pattern.

Ultimately, it was the communist system that collapsed, unable to match capitalism’s performance in providing the proletariat with a house, a car and the other totems of a middle-class life.

The idea that capitalism naturally led to greater equality was codified in a 1955 landmark study by the American economist Simon Kuznets, whose data showed that after an initial period of rising inequality (e.g., our nineteenth-century gilded age) the wealth generated by market economies is distributed between labor and capital more evenly. When workers’ productivity rose, so do their wages. The “Kuznets Curve” quickly became conventional wisdom for both mainstream economists and the politicians they advised. As the nautical John F. Kennedy put it: “A rising tide lifts all boats.”

The central question for Western economists then became how to keep the tide of growth rising. Liberals favored more active government interventions, conservatives more incentives for private investors. Income and wealth distribution—the issue that had preoccupied economists since Adam Smith—was narrowed to studies of the characteristics of the poor (their race, their gender, their sex life, etc.) that prevented them from rising with the tide. Almost no one studied the rich.

Then, in the late 1970s, the trend toward equality reversed. Workers’ output-per-hour continued to rise, but their wages and benefits flattened. Almost all of the gains from the increased productivity of the last three and a half decades went to corporate investors and their top managers. The poverty rate rose by a third. And the pain spread steadily up the socioeconomic ladder.

Mainstream economists have been disgracefully slow in responding to this historic shift in who gets what. When Larry Mishel and his colleagues at the Economic Policy Institute began reporting on the growing gap between workers’ productivity and their pay in the mid-1980s, the first reaction of the economist establishment was denial. When they could no longer ignore the data, economists blamed the workers themselves for not being educated enough for the new information age.

Mainstream politicians were soon lecturing downscaled Americans that they should go to—or back to—college. So they did, in record numbers. Increased education is critical for growing the economic pie, but the evidence—including a dozen years of falling real wages among new college graduates—shows that lack of schooling is not the reason why the slices of the super-rich rich are growing so much faster that everyone else’s.

No matter that the facts don’t fit. It is easier for economists and politician to tell a story about dumb workers and smart bosses than to address the more obvious causes of the upward redistribution of wealth. Talk of offshoring jobs, suppression of unions, shredding of social safety nets and tax breaks for the rich makes the corporate contributors to academic careers and political campaigns too nervous.

To be sure, Democrats have ramped up the rhetoric. Bill Clinton ran for president in 1992  complaining that Americans were “working harder for less.” Over two decades later, they still are. Five years into his presidency, Barack Obama now tells us that inequality is the “defining issue of our time.” But even if Congress passed his modest agenda of an increase in the minimum wages, tax credits for the poor and a marginal boost in funds for education and training, it would just slow down the ongoing upward redistribution of wealth. Other Obama proposals, such as more free trade and continued fiscal austerity, will accelerate it.

Underneath the rhetoric, the actual message from our governing class is: have patience. The economic tide—bringing with it good jobs at good wages—will soon rise again. It always has.

But as the US economy crawls into the sixth year of recession and the fourth decade of stagnant real wages, the signals ahead tell us that this time it probably won’t.

The Obama administration’s “optimistic” ten-year forecast (for obvious reasons, administration forecasts always lean toward optimism) is for enough growth to drop the unemployment rate to 5.4 percent by 2018 and have it remain there until 2024. Given that joblessness averaged 4.6 percent in the three years before the 2008 crash while wages stagnated, the president’s own economists are implicitly predicting that the gap between workers’ production and workers paychecks will widen further.

Others are even less sanguine. Progressive economists like Paul Krugman and Joe Stiglitz—and now even the less-than-progressive Larry Summers—think that the US and European economies are trapped by chronic weak consumer demand. Their remedy is more government spending on education and infrastructure to put more money in customers’ pockets. But the reactionary fiscal austerity that dominates Washington and Brussels—even among the left-center parties—makes such aggressive Keynesianism a political non-starter for the foreseeable future.

Over the longer term, the prospects can be downright grim. The venerable Robert Gordon, an economist known for careful analysis, thinks that the innovation that has driven growth for over a century might well slow from its average of 2 percent per year since 1891 to 0.2 percent for the foreseeable future. Add tightening environmental costs and constraints and the good ship Abundance sinks to the sea floor.

The pessimists of course could be wrong. It’s certainly possible, if not plausible, that some unpredicted burst of entrepreneurial energy or a simultaneous reconversion to Keynesianism could propel growth faster than even Obama’s optimistic economists forecast. Couldn’t that be enough to float us back to Kuznets’s curve of rising equality?

Enter Thomas Piketty, whose impressively researched analysis (600 pages plus a detailed 165-page online technical appendix) concludes that Simon Kuznets was wrong. Not only does capitalist growth not reduce inequality; it increases it.

Using data and computer power unavailable to Kuznets, Piketty pored through 200–300 years of the economic history of the largest capitalist economies—principally the United States, Britain, France, Canada, Germany, Sweden and Japan. The numbers show that that since roughly 1700, with one exceptional period, the returns to capital (profits and interest) have exceeded the rate of overall economic growth. Since the rich own most of the re-investable capital, their wealth accumulates faster than the wealth of the vast majority of people whose income depends on wages and salaries.

The exceptions to the historical trend were the years 1914–75 in Europe and 1929–75 in the United States, in which inequality shrunk in almost all western nations. According to Piketty this era was unique: the consequences of two world wars, the Great Depression and the social democratic character of the postwar recovery in Europe, Japan and North America. Once those forces were spent, capitalism returned to its normal function as a machine for producing “inequalities that radically undermine the meritocratic values on which democratic societies are based.”

Moreover—and this is a key point—contrary to what we’re taught in Economics 101, markets appear to have no self-correcting mechanism that can halt the worsening misdistribution of wealth. If allowed to go unchecked, a tiny number of capitalists will own just about everything, with social consequences that Piketty sees as “potentially terrifying.”

We have already returned to the levels of income inequality of the 1920s, and the concentration of wealth is heading toward the ratios of the 1890s. The social relations of the future, writes Piketty could resemble Jane Austen’s world, in which a tiny group of the wealthy employed vast armies of poorly paid servants.

The super-rich of the twenty-first century are somewhat different than they were in Marx’s time, especially in the United States. Most still are the heirs of fortunes made in the distant past. But those in the top tier of today’s “patrimonial capitalism” also include more recently arrived corporate CEOs and others who can set their own exorbitant salaries and leave their children both financial wealth and privileged access to education and elite networks. To the economist Piketty, the waste of resources going to the systematic enrichment of people who do not have to work for a living is particularly galling.

Piketty is certainly not the first economist to criticize inherited wealth. And the idea that capitalism is unfair will not shock most people who work for a living. But Piketty’s credentials and exhaustive attention to statistical detail make him harder for the pundits and policy elites that protect the plutocracy to dismiss.

In addition to exposing the weakness in a core principle of the economist canon, Piketty’s data-driven methodology skewers the class bias masquerading as science that pervades the study of economics and the formulation of economic policy.

Economics claims superiority over other social sciences on the basis of its greater capacity to quantify reality, i.e., crunch numbers. Yet for decades now the numbers have been in conflict with hallowed tenets of the capitalist catechism. For example, the forty-year gap between wages and productivity refutes the theory that workers get paid according to their efficiency. Twenty-five years of relentless job losses and wage decline because of globalization mocks the rigid faith in free trade. We haven’t had a peacetime price spiral driven by US government deficits in modern times, yet the conventional wisdom has us cutting food stamps to placate inflation paranoia.

Similarly, the orthodox creed holds that Piketty’s central point cannot possibly be true. The rate of return to capital cannot be higher than the rate of economic growth for long because when the supply of capital increases, its price—the rate of return—has to fall. Piketty’s response: look at the facts, which show that in the real world this adjustment can take so long (a century or more) and cause so much damage that the theory is irrelevant.

Piketty is not a Marxist. He sees no real alternative to global capitalism and has little interest in changing its inner workings through worker ownership, nationalization or the redevelopment or local or national markets. Like Keynes, his goal is to make markets a more efficient instruments for human progress. But although he supports the standard progressive agenda of financial regulation, public investment in education and infrastructure and aid to the poor, he thinks that in a globalized economy, capital is now beyond the control of any one country—even the United States. Efforts by individual nations to constrain capital will just chase away highly mobile private investment.

The ultimate solution, he writes, is a worldwide progressive tax on private capital. Piketty understands that this is now utopian. But he argues that the tax is technically feasible and could be gradually adopted region-by-region.

Here Piketty seems out of his political depth. In order to avoid Marx’s apocalyptic conclusion, he skips around a central implication of his own analysis: that the upward redistribution of wealth also generates an upward distribution of political power that perpetuates inequality. An enforceable global tax on capital ownership would require dramatic political shifts to the left within the major economies—at least the United States, Europe, China, Japan—and unprecedented cooperation among these economic rivals to face down transnational capital and force the rest of the world to accept it. Eyes will roll.

Still, Piketty’s proposal sets a realistic marker for the level and scope of radical change necessary to deal with the grim conclusion of his quite credible economic analysis. The analysis makes hash of the conservative claim that there are “market solutions” to inequality, as well as the liberal hope that small-bore reforms will eventually achieve social justice on the cheap.

It also challenges the lack of urgency that infects social democratic parties in the capitalist world whose answer to inequality has been to wait for the crisis to pass and tide to come back and float all our boats.

But if Piketty is right, time is not on their side. His study confirms what David Ricardo, Karl Marx and other nineteenth-century economists perceived earlier about the machinery of capitalism: it is not only unfair, it is relentlessly and dynamically unfair. Until we make radical changes either the way it works or who it benefits, the maldistribution of wealth and political power can only get worse.


Jeff Faux is the founder and now Distinguished Fellow at the Economic Policy Institute. His latest book is The Servant Economy.


Government = Protection Racket for the 1 Percent

by Bill Moyers and Michael Winship

The evidence of income inequality just keeps mounting. According to “Working for the Few,” a recent briefing paper from Oxfam, “In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer.”


Economic Inequality/Wealth Gap

Our now infamous one percent own more than 35 percent of the nation’s wealth. Meanwhile, the bottom 40 percent of the country is in debt. Just this past Tuesday, the 15th of April — Tax Day — the AFL-CIO reported that last year the chief executive officers of 350 top American corporations were paid 331 times more money than the average US worker. Those executives made an average of $11.7 million dollars compared to the average worker who earned $35,239 dollars.

As that analysis circulated on Tax Day, the economic analyst Robert Reich reminded us that in addition to getting the largest percent of total national income in nearly a century, many in the one percent are paying a lower federal tax rate than a lot of people in the middle class. You may remember that an obliging Congress, of both parties, allows high rollers of finance the privilege of “carried interest,” a tax rate below that of their secretaries and clerks.

And at state and local levels, while the poorest fifth of Americans pay an average tax rate of over 11 percent, the richest one percent of the country pay — are you ready for this? — half that rate. Now, neither Nature nor Nature’s God drew up our tax codes; that’s the work of legislators — politicians — and it’s one way they have, as Chief Justice John Roberts might put it, of expressing gratitude to their donors: “Oh, Mr. Adelson, we so appreciate your generosity that we cut your estate taxes so you can give $8 billion as a tax-free payment to your heirs, even though down the road the public will have to put up $2.8 billion to compensate for the loss in tax revenue.”

All of which makes truly repugnant the argument, heard so often from courtiers of the rich, that inequality doesn’t matter. Of course it matters. Inequality is what has turned Washington into a protection racket for the one percent. It buys all those goodies from government: Tax breaks. Tax havens (which allow corporations and the rich to park their money in a no-tax zone). Loopholes. Favors like carried interest. And so on. As Paul Krugman writes in his New York Review of Books essay on Thomas Piketty’s Capital in the Twenty-First Century, “We now know both that the United States has a much more unequal distribution of income than other advanced countries and that much of this difference in outcomes can be attributed directly to government action.”

Recently, researchers at Connecticut’s Trinity College ploughed through the data and concluded that the US Senate is responsive to the policy preferences of the rich, ignoring the poor. And now there’s that big study coming out in the fall from scholars at Princeton and Northwestern universities, based on data collected between 1981 and 2002. Their conclusion: “America’s claims to being a democratic society are seriously threatened… The preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” Instead, policy tends “to tilt towards the wishes of corporations and business and professional associations.”

Last month, Matea Gold of The Washington Post reported on a pair of political science graduate students who released a study confirming that money does equal access in Washington. Joshua Kalla and David Broockman drafted two form letters asking 191 members of Congress for a meeting to discuss a certain piece of legislation. One email said “active political donors” would be present; the second email said only that a group of “local constituents” would be at the meeting.

One guess as to which emails got the most response. Yes, more than five times as many legislators or their chiefs of staff offered to set up meetings with active donors than with local constituents. Why is it not corruption when the selling of access to our public officials upends the very core of representative government? When money talks and you have none, how can you believe in democracy?

Sad, that it’s come to this. The drift toward oligarchy that Thomas Piketty describes in his formidable new book on capital has become a mad dash. It will overrun us, unless we stop it.



Journalist Bill Moyers is the host of the new show Moyers & Company, a weekly series of smart talk and new ideas aimed at helping viewers make sense of our tumultuous times through the insight of America’s strongest thinkers.. His previous shows on PBS included NOW with Bill Moyers and Bill Moyers Journal. Over the past three decades he has become an icon of American journalism and is the author of many books, including Bill Moyers Journal: The Conversation Continues, Moyers on Democracy, and Bill Moyers: On Faith & Reason. He was one of the organizers of the Peace Corps, a special assistant for Lyndon B. Johnson, a publisher of Newsday, senior correspondent for CBS News and a producer of many groundbreaking series on public television. He is the winner of more than 30 Emmys, nine Peabodys, three George Polk awards and is the author of three best-selling books.


Michael Winship, senior writing fellow at Demos and president of the Writers Guild of America-East, is senior writer for Bill Moyers' new weekend show Moyers & Company.


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