Capitalism in the 21st century

Published: September 13, 2015
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The writer is vice-chancellor of the Pakistan Institute of Development Economics

The writer is vice-chancellor of the Pakistan Institute of Development Economics

Reviewers have called it a 700-page punch in the plutocracy’s gut. The title of Thomas Piketty’s magnum opus suggests that he is updating Das Kapital, to bring Marx into the 21st century. Piketty documents a sharp increase in income inequalities over the last 25 years, not only in the US, but also in Canada, Britain, Australia, New Zealand, China, India, Indonesia and South Africa, with people with the highest incomes far outstripping the rest of society. However, he goes far beyond the compilation of statistics and provides a grand unified theory about the deep forces which have shaped human history over centuries. His analysis points out a fundamental conflict between free markets and democracy, directly contrary to widely accepted conventional wisdom that the two go together.

As one illustrative statistic, the bottom 80 per cent of the US population has only five per cent of the wealth, while the top five per cent has 72 per cent. This level of inequality matches the inequality levels seen around the Great Depression. Why is there so much inequality, and why does it continue to rise? Piketty’s answer is brilliantly simple: r > g. The ‘r’ is the rate of return to wealth. This is the profit that the wealthy can make when they invest. The ‘g’ is the growth rate of the economy, currently around 3.3 per cent, globally. There are two types of people in the economy. The wealthy earn money by investing their wealth, while rest must work for a living. If return to wealth is larger than the growth rate, the wealthy grow richer faster than the growth of the economy, while the earnings of the salaried classes grow at a slower rate. As a natural consequence, the rich get richer, while the bottom 99 per cent gets squeezed.

Many authors have searched for an explanation for rising inequality and slow growth since the mid-1970s. Piketty reverses the problem: what needs explanation is the rapid growth and increasing equality of the mid-20th century. His detailed historical evidence shows that slow growth and rising inequality is a centuries-old pattern for capitalism. It is only the 30 post-war years from 1945 to 1975, which form a rare exception to the historical trend. The prosperity that we have all come to associate with capitalism is an illusion based on an exceptional historical experience. The two world wars destroyed entrenched capital, re-arranged the global balance of power, and created rapid technological progress. A complex combination of other unusual factors led to a shift in the balance of power away from the non-productive wealthy, and towards the productive workers. This led to a short-lived period of rapid growth and prosperity for all, memories of which have shaped our understanding of capitalism.

Looking beyond the immediate past, we find that Europe up until the First World War is a picture of ‘patrimonial capitalism’: a few wealthy families dominate society. The British and European aristocracy considered the commoners to be an inferior race and had contempt for those who had to work for a living. Similarly, capitalism did not get started in the US until the 1870s. Characteristically, it soon ushered in the Gilded Age — where massive displays of luxury by newly minted fortunes of the super-rich were combined with misery for the masses.

As exceptional conditions created by the world wars faded into the background, the underlying structural dynamics of capitalism (r>g) came back into prominence in the 1970s. With growing financial liberalisation, the rates of return to wealth overtook the rates of return to all types of work. Investors and financiers now make much larger returns than the innovators and the entrepreneurs. Global economic growth is slowing down while wealth inequality is accelerating. Not only that, but the more wealth a person or institution owns, the faster that wealth grows. For instance, from 1987 to 2013, the global rate of return on the wealth owned by the average adult was 2.1 per cent. During that same period, the rate of return on wealth owned by the average billionaire was more than 6.5 per cent. Exactly in accordance with meticulously documented centuries-old patterns of capitalist development, wealth started to accumulate in the hands of the rich, and economic growth declined as the returns from productive work declined.

Piketty argues that the internal dynamics of capitalism ensure that wealth will concentrate, leading to a concentration of power in the hands of a small number of families. This incompatibility between democracy and capitalism is in stark conflict with the ideas of Milton Friedman. Historical evidence gathered by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism, shows that brutal effects of free market capitalism are resisted by the masses and require enforcement by force. Thus, 20th century history strongly supports Piketty over Friedman.

Today, state capture by the wealthy in advanced capitalist economies is easily documented in terms of numerous policies against the public interest which serve the interests of the elite. Ever since the French Revolution, the wealthy have learnt of the necessity to manage discontent by giving in sufficient amounts to prevent an uprising. Piketty argues that the ‘social state’, with relentless growth in the proportion of national income consumed by the state, spent on universal services, pensions and benefits, is an irreversible feature of modern capitalism. Capitalists enjoy a high degree of legitimacy today because they have found ways of co-opting thought leaders and the managerial class, as well as ways of keeping the labour class weak and divided. Nonetheless, impetus for change may be created by repeated financial crises which result from widening disparities in income and wealth. Like Marx, Piketty argues that these crises are a built-in feature of the system.

Marx’s vision in Das Kapital of a classless society which provided for the needs of all members shaped the 20th century, inspiring two major revolutions and the great battle between communism and capitalism. Only time will tell whether Das Kapital of the 21st century can fill the shoes of its predecessor.

Published in The Express Tribune, September 14th,  2015.

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Reader Comments (3)

  • Shalom
    Sep 14, 2015 - 11:13AM

    Thomas Picketty created sensation last year about how capitalism has failed majority of people and how worrying it is to see the gap between rich and poor increasing.I’m not that qualified to comment over cherry picking of data but having read the book i find it quite disturbing as to how wealth inequality is increasing day after day. the amount of data given in the book is mind boggling and covers a vast span of time. i think his book capital in 21st century is groundbreaking and may set the tone for more engaging debate on how to tackle income and wealth inequality. Capitalist system is evil but it has improved its strategy. What we need is governments making sure that the poor are looked after. Laws should be made to increase the minimum wage and some control on housing market.Recommend

  • Amin Jan Naim
    Sep 14, 2015 - 6:39PM

    This is a selective analysis, comparing historically what cannot be compared. Capitalism is not at all perfect but the alternatives are far worse. Communism, socialism and statism have now been rejected all over the world. Inequality need not be condemned per se. That there are fluctuations in this model does not mean that they will not occur under communism. We have to manage with an imperfect world and weigh the relative advantages and disadvantages. Besides the factor of risk-taking is also relevant and important in any economy.Recommend

  • Ashfaq
    Sep 21, 2015 - 10:08AM

    The growing political voice on social media in favor of socialism is an obvious evidence that masses are fed up of this system. Historically who owns large portion of agriculture lands, large capitals and businesses are enough confident to run for elections and get elected. Thus the so called democracy comes in conflict with capitalism where the capitalists run the democracy. Even economists claim that the failure to increase the tax base is due to the parliamentary structure, where parliamentarian coming from agricultural background do not allow the house to include the agriculturists in tax base.Recommend

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