Posts Tagged ‘Capital and Ideology’

The misleading ‘elephant curve’ graph

June 6, 2020

Click to enlarge.

This widely-circulated graph supposedly shows that the great growth in income of the world’s richest 1 percent is justified because the world’s poorest people also are making great gains under the present system.

The problems of poor and middle-class people in rich countries are supposedly a necessary sacrifice to make this happen.

What makes this chart misleading is that it deals with percentages rather than amounts (dollars, euros, etc.)  So a tiny gain in income for a poor person in, say, Bangladesh or Sudan is a large percentage, even though it is a small amount.

Annotations by the famous French economist Thomas Piketty, in his book, Capital and Ideology, show the true picture.  The poorest 50 percent of the world’s population got only a one-eighth share of the growth in world income over a 38-year period.

The next 49 percent, even though their proportionate gain was less, enjoyed more than sixth-tenths of the amount of the gain.  The world’s richest 1 percent got more than a quarter of the gain.  The richest 0.01 percent got the biggest proportionate gain of all.

The graph does show that the poorest 50 percent of the world’s population made some gains.  A lot of that consists of progress in just one country, China.  A lot of it may consist of people moving from a barter economy to a money economy, and from the “informal” off-the-books economy to the visible economy.

Many of the world’s poorest people may be slightly better off than they were 40 years ago. It’s possible. Even if this is so, there should be a better way to improve their lot than the trickle-down system illustrated by this chart.

LINKS

World Poverty Is NOT Decreasing by Ian Welsh.

No, the World Isn’t Getting Better for Everyone by Ian Welsh.

Worldwide inequality report shows gap between rich and poor by Sam Meredith for CNBC

Thomas Piketty on inequality in education

June 5, 2020

In the present-day USA, young people are told they have no economic future unless they have college educations.  Unless their parents are relatively affluent, the only way they can afford tuition is to go into debt—debt that literally can follow them all their lives.

Many of the top jobs in management, academia and government are only open to graduates of prestigious colleges.  So the educational system reinforces inequality.

Thomas Piketty

Thomas Piketty, in his new book Capital and Ideology, shows that this pattern exists across the Western world, including his native France.

It wasn’t always this way, he noted.  During the decades following the Second World War, the progressive and socialist political parties opened up higher education to working people in a way that hadn’t been done before.

Many of the beneficiaries of these programs became leaders of the moderately progressive and socialist parties.  They became what Piketty called the Brahmin Left, an educational elite, which, according to him, lost touch with the wage earners without college degrees.  He said in an interview:

If you look at education policies, in the 1950s, 1960s and 1970s, there was a relatively egalitarian platform of investing in primary and secondary education for all and bringing everyone to the end of secondary school. Gradually, in the 1980s and 1990s there was the rise of higher education, but this egalitarian platform has been abandoned in some cases.

There is a lot of hypocrisy in terms of access to universities. I show in the book that if you look at a country like the United States, there is data now available on the relationship between parental income and access to education that shows if your parents are poor, you still have a 25% chance to enter higher education, but when your parents are rich, you have a 95% chance.

Actually, this is understating the impact on equality of opportunity because of course the universities that those with rich parents have access to are not the same as the universities that those with poor parents have access to.

If you look at the amount of education investment, you find that even in a supposedly more egalitarian public system like France, the picture is unequal.

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Thomas Piketty on corporate co-determination

June 5, 2020

I’ve written a good bit about Thomas Piketty’s new book.  Click on the Capital and Ideology tag to read my previous posts about it.  In this post, I’m going to discuss his ideas on corporate governance.

Great corporations typically begin with an individual who has a vision—a Steve Jobs, a Walt Disney, a George Eastman, a Henry Ford, a Soichiro Honda or a Jack Ma.

The drive and creativity of the individuals make the companies what they are.  Over time, though, the companies devolve into authoritarian bureaucracies, little junior watered-down versions of the Soviet Union.

Click to enlarge.  Source: Oxford Law Faculty

The goal of reform would be how to prevent corporate abuse without stifling enterprise and beneficial innovation.  Piketty’s solution is to adopt German-Scandinavian co-determination, under which corporations of a certain size have to allow employees to choose a certain number of corporate directors.

In Germany, according to Piketty,  all firms with more than 2,000 employees must reserve half the seats on their oversight committees to worker representatives.  All firms with 500 to 1,999 employees must reserve a third of their oversight committee seats to worker representatives.  There also are factory committees with union representatives who have a say one work rules and training.

However, in Germany, the oversight committees only supervise day-to-day operations of companies.  Policy is set by directorates, on which workers have no representation.

Other countries reserve one-third of seats for workers on companies of a certain size.  In Sweden, the threshold is 35 employees; in Norway, 50 employees; in Austria, 500 employees.

In April 2018, according to Wikipedia, U.S. Senators Tammy Baldwin, Elizabeth Warren and Brian Schatz sponsored the Reward Work Act,  which would amend federal legislation to require all companies listed on national stock exchanges to have one-third board representation for workers.  Polls showed majority support among Americans for the measure.

In August 2018, Elizabeth Warren sponsored a new Accountable Capitalism Act that would require 40 percent of the board of directors be elected by employees in federal corporations with taxable incomes over $1 billion.

In Britain, the Bullock Report in 1977, during the Harold Wilson administration, called for co-determination in big businesses based on the formula 2x + y. In this, workers and stockholders would have equal representation on boards of directors, but there would be two government representatives to break a tie.  It never became reality.

In practice, even though workers have a voice, the final authority rests with the owners.  I think there still is a benefit to having worker representatives.

Employees usually know things about how companies operate that the top managers don’t.  This can be valuable in avoiding the Stupidity Paradox, in which layers of bureaucrats demand good news and truthful information doesn’t filter up.

It’s also good for employees, especially union representatives, to have access to the same information that top management has.  Of course all these desirable goals can be thwarted by a sufficiently cunning and authoritarian management.

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Thomas Piketty on equality through taxation

June 4, 2020

Thomas Piketty’s Capital and Ideology is the most comprehensive study I know about the causes of economic inequality.  He gathered a vast amount of data and made sense of it.  To read my comments on his research, click on this, this, this and this.

In the last chapter, he outlined proposals for a “participatory socialism” to make society less unequal.  He saw three main ways to do this: (1) taxation, (2) reform of corporate governance and (3) educational reform.  This post will be about taxation.  I will take up the other two later.

His plan is based on steeply graduated income taxes, inheritance taxes and new taxes on wealth.  These were to be used to finance a wealth endowment of 60 percent of average wealth to every citizen at age 25 and a guaranteed income of 60 percent of average income.

He does not make absolute equality his goal, but he would allow a much narrower band of inequality than exists today.

I’ve long been indignant at the growing extremes of inequality in my country and the abuses of power of the very rich.  Reading Piketty forces me to think about just how much equality I want and how much I would give up to attain it.

Piketty wrote in earlier chapters of Capital and Ideology about how higher taxes have often been the key to greater national power and wealth.

One of history’s mysteries is how it was that European nations could defeat great Asian empires, such as the Ottoman Empire, the Mughal Empire in India or the Manchu (Qing) Dynasty in China, when, prior to the Industrial Revolution, they were equal in wealth and technology to the European nations.  It was the Chinese, for example, who invented gunpowder.

Piketty’s answer is that the Europeans gained an advantage through a higher level of taxation.  Tax revenue across Europe and Asia prior to the modern era was roughly 1 to 2 percent of national income.  This gave a king or emperor enough revenue to reign, but not to exercise tight control over his realm.

This changed in Europe, during the wars of the 16th and 17th centuries, when military competition forced kings to increase their revenues to 8 to 10 percent of national income.

Click to enlarge

The greater revenue enabled kings to become absolute monarchs, exercising almost as much control over their citizens as a 20th century president or prime minister.  It also enabled them to put armies in the field that the Turks, Persians, Indians, Chinese and Japanese could not match.

Western governments’ revenue was bumped up again in the early 20th century, to 30 to 50 percent of national income.  This made possible the total wars of the early 20th century.  But it also gave governments enough money to pay for universal public education, old age pensions, public health and the other services of the welfare state.

This was only tolerable because the Western nations had grown rich enough that their people could give up a big fraction of their incomes to government and still enjoy a high material standard of living.

It would not have been possible in, say, France in the time of Louis XIV.  The taxes he levied to finance his wars reduced the peasantry to misery and, in some cases, starvation (because the nobles enjoyed most of the national income, but paid no taxes).

The same conditions may exist in poor African countries today.  But in rich Western countries, it is technologically and economically feasible to raise taxes revenues to 50 percent of national income, which is necessary for PIketty’s program.

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Piketty’s stats and the problem with class conflict

May 28, 2020

The late Saul Alinsky used to say that politics is a struggle among the haves, the have-nots and the have-a-littles.  He said the outcome usually depends on which side the have-a-littles choose.

Reading Thomas Piketty’s big new book, Capital and Ideology,  reminded me I’d forgotten this important truth.

The USA and much of the rest of the world is governed in the interests of a political and economic elite and not a majority of the public.  I want a politics that represents the interests of the majority of the population.

But there are objective reasons why this is harder than it seems.  If you look at economic class in terms of a top 10 percent in income or wealth, a middle 40 percent and a bottom 50 percent, you see that there is a difference between the middle class (the have-a-littles) and the lower class (the have-nots)

I had come to think that the big problem of American politics is that so much of it is a conflict of the top 0.1 percent of income earners with the next 9.9 percent, leaving the rest of us behind.

The top 0.1 percent, in this interpretation, are the millionaires and billionaires that Bernie Sanders denounces.  The next 9.9 percent, very roughly speaking, are highly paid professionals, the “professional managerial class,” who tend to be more socially liberal, but whose economic interests are different from the majority.

Matthew Stewart wrote a good article about this in The Atlantic a couple of years ago.  The conclusion is that we the American majority have to stop thinking we have to choose between the plutocrats and the PMC and unite in our own interests.

That would make sense if economic inequality were the same as it was in Britain, France or Sweden around the turn of the previous century, as reflected in the chart above (taken from Piketty’s book)

But it’s not.  There is now a big middle class, in between the top 10 percent and the bottom 50 percent, as shown in the chart below (taken from an article co-authored by Piketty).

Click to enlarge.

In western Europe and the USA, the middle 40 percent aren’t doing too badly.  They’re open to the politics of a Margaret Thatcher or a Ronald Reagan.

Instead of claiming a larger share from the haves, they’re told they need to worry about the claims of the have-nots.  Even in parts of the world where economic inequality is greater than in Europe or the USA, there is a middle class with something to lose.

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Thomas Piketty and the politics of inequality

May 27, 2020

Reasonable people differ on the amount of economic inequality that is tolerable.  But I think almost anyone would set some upper limit.

In today’s USA, a single individual, Bill Gates, is wealthy enough to buy the city of Boston for the assessed value of its property.  The size of Jeff Bezos’ wealth is almost unimaginable.

Meanwhile four in 10 Americans lack enough cash on hand to meet an unexpected $400 expense without going into debt.

Why is this acceptable?  I’ll describe the ideas of the great French economist Thomas Piketty in his new book, Capital and Ideology.  Then I’ll discuss some of the things Piketty left out.

Piketty said the fall of Communism in the Soviet bloc and China discredited egalitarianism and validated the market economy.  Leaders of Western capitalist countries felt they were in a position to tell the working class that there is no alternative.

Even before that, the economic stagnation of the late 1970s discredited the welfare state.  The USA had both high unemployment and high inflation, which was considered theoretically impossible.  One diagnosis was that the welfare state had reached its limit, that it was in a state of deadlock because of the inability to satisfy all claimants.  This had been predicted by Friedrich Hayek in The Road to Serfdom.  He said that only a fascist dictator would be able to break the deadlock.

Click to enlarge

Ronald Reagan and Margaret Thatcher presented a different answer.  Dial back to welfare state, cut upper-bracket tax rates and allow rich people and corporations to accumulate wealth.  They will invest that wealth and the workings of the free market will assure that this works for the benefit of all.

As Piketty pointed out, none of this worked out as promised.  Cuts in marginal tax rates did not result in job creation, economic growth or anything else that was promised.

So why do Reaganism and Thatcherism still prevail?

One reason is that the historic left-wing parties abandoned the working class.  The Democrats in the USA, the Labour Party in Britain and the French socialists came to represent an educated elite rather than laborers and wage-earners.

Politics in these countries has come to be a conflict of elites, between what Piketty called the Merchant Right and the Brahmin Left.  It is like the conflict between the nobility and the clergy in the European Middle Ages and the conflict between landowners and business owners in 19th century Britain.

In the USA, many progressives see today’s politics as a conflict between the plutocracy, whose power is based on wealth, and the professional-managerial class, whose power is based on their academic credentials and their positions in organizations.  Wage-earners are not represented.  Piketty showed that the same conflict exists in other countries.

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Piketty on the sacredness of property rights

May 27, 2020

When English settlers first dealt with American Indians, there was a fundamental misunderstanding of the nature of property rights.

The Indians had no idea of buying the exclusive right to use a tract of land, keep everybody else off it and sell the land to someone else.

Thomas Piketty pointed out in his new book, Capital and Ideology, that, in fact, this was a fairly new idea even for the English and other Europeans.

The idea of absolute property rights did not exist in the European middle ages. Someone might have a hereditary right to grow crops on a certain tract of land, a second person the right to 10 percent of all crops grown on the land, a third person the right to grind grain produced on the land for a fixed fee, and so on.

Furthermore the right to land use was not so much bought and sold as inherited.

Medieval France was what Piketty called a “ternary” society—a society in which political power and property ownership were divided between a hereditary noble class who “fought for all” and a priestly class who “prayed for all,” leaving very little for a lower class who “worked for all.”

The “ternary” system existed in the Islamic world, India and many other parts of the world, and it casts its shadow over the present world.  Saudi Arabia and the Gulf states (mostly Sunni) are ruled by hereditary monarchs while Iran (mostly Shiite) is ruled by clerics.  In India, the descendants of Brahmins (priests) and Kshatriyas (warriors) are richer and more influential than the Vaishyas (farmers, craftsmen and traders) and Shudras (laborers).

In Europe, uniquely, priests were celibate.  They could not found dynasties.  This mean that the Roman Catholic institutions had to be corporations.  They had to have a continuing existence that was independent of who was in charge.  It’s not accidental that business corporations originated in Europe.

The French Revolution overthrew hereditary property rights and established what Piketty called “proprietarianism” or “the ownership society”—the idea that property rights were sacred, provided that the property was acquired through legitimate purchase.

The accepted story in France is that the revolutionaries divided up the aristocrats’ estates among the peasants and turned France into a nation of small landowners.  In fact, according to Piketty, the revolutionaries made arbitrary distinctions between land that was owned through hereditary privilege and land acquired through voluntary contract, and, in many areas,  property ownership remained almost as concentrated as before.

Piketty wrote that the revolution was one of history’s “switch points.”  He thinks it could have been more radically egalitarian than it was.

In fact, concentration of wealth in France at the beginning of the 20th century was even greater than at the time of the French Revolution.

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Piketty’s new book on economic inequality

May 26, 2020

The French economist Thomas Piketty made a big splash with Capital in the 21st Century (published 2013, translated into English 2014).  He showed why, all other things being equal, the rich will get richer and the rest of us will get less.

In different countries in different historical periods, the rate of return on income-producing property exceeded the rate of economic growth.  This was true whether the income-producing property was real estate, government bonds, corporate stocks or something else.

What this meant was that, in the absence of revolution, war or something else that wiped out the value of their assets, the rich would get richer and everybody else would be left behind.

Piketty’s new book, CAPITAL AND IDEOLOGY  (published 2019, translated 2020), is more ambitious and complicated.  He thinks it is an even better book that its predecessor and I agree.  It is a great work.

He looked at all the forms that economic inequality has taken in the past few centuries and all the different ways that inequality has been rationalized.  While his earlier book was based mainly on data from France, Great Britain and the United States, the new book tries to be global in scope.

He said it is important to understand not only the forms of economic inequality, but the reasons why people accept them.

His book covers several kinds of “inequality regimes”:

  • “Ternary” societies in which most wealth is controlled by hereditary kings and aristocrats and an established church or religious institution.
  • “Ownership” societies in which property ownership is regarded as a sacred right, superseding everything else.
  • Slave and colonial societies.
  • “Social democratic” societies, which limit the rights of property owners.
  • The hyper-capitalism of today, which is a backlash against social democracy and Communism.

The degree of inequality in any nation or society is not the result of impersonal economic law, he wrote; it is the result of choices that could have been different.  History does not consist of class struggles; it consists of a struggle of ideas and a struggle for justice.

To understand inequality, he wrote, it is necessary to understand the reasons for choices at various “switch points” of history—the French Revolution, the British constitutional crisis of 1911, privatization in Russia after the fall of Communism.

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Piketty on the merchant right and Brahmin left

September 24, 2019

The French economist Thomas PIketty is famous for his best-selling book, Capital in the 21st Century, which explained why inequality constantly increases.

Thomas Piketty

The explanation is the formula r>g.  It means that the rate of return on assets over time exceeds the rate of economic growth.  That means the wealthy get an ever-larger share of the economic pie until and unless something happens to destroy the value of their assets—war, revolution or a financial crash.

Piketty has just published a sequel, Capital and Ideology. in France.  It will be published in English translation next March.  Reviewers say it takes a more global view than the first book and advances more radical ideas for reducing inequality.

The part that’s getting the most attention is Piketty’s notion that politics in the USA, UK and France are polarized between a “Brahmin left,” representing the highly-educated, and a “merchant right,” representing great wealth—two elites who have more in common with each other than with the majority of working people..

Initially, left-wing parties represented poorly educated wage-earners, while right parties represented owners of capital and the professional classes.  Over time, left-wing parties helped children of wage-earners advance into the educated middle class, and their children supposedly became the liberal elites, whom Piketty calls the “Brahmin left.”

The Brahmin left occupy high positions in organizations—government, corporate, educational, “non-profit”— based on their educational credentials.  Their counterparts, the merchant right, have power based on their ownership of businesses and financial assets.

Both believe their power and position is based on merit.  Both embrace global competitiveness, immigration and dismantling of trade protections and the social safety net, which leave working people with lower wages and greater insecurity..

This has produced a nationalist backlash.  Americans elected Donald Trump as President, the British voted to exit the European Common Market and Marine le Pen’s National Rally has a substantial following among French voters.  What they have in common is opposition to globalization and immigration.

The nationalist backlash is not yet a serious threat to the financial elite.  But it has driven immigrants and racial minorities into the left-wing parties in all three countries.  By championing minority rights, the Brahmin left can convince themselves they are still on the side of the underdog.

Piketty thinks the “Brahmin left” and “merchant right” may merge, and true workers’ parties may emerge in opposition to them, as the original British Labor Party emerged in opposition to the Conservative and Liberal parties in the early 1900s.

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More about the Brahmin left and merchant right

September 24, 2019

Democrats in the U.S., the Labor Party in Britain and left-wing parties in France no longer primarily represent the interests of wage earners, according to Thomas Piketty, the famous French economist.

Instead they represent an educated elite, which he calls the Brahmin left, while the conservative parties represent a financial elite, which he calls the merchant right.

The educated elite are not an intellectual elite.  Having advanced college degrees don’t make you an intellectual any more than owning stocks and bonds makes you an entrepreneur.

I agree that there is less conflict of interest between the educated elite and the financial elite than there is between the two elites and the majority of wage-earners.

In a typical Fortune 500 corporation, the CEO, the board of directors and the institutional stockholders would be the merchant right.

Salaried middle management, the highly-paid consultants and most especially the human resources department would be the Brahmin left.  Their income would not come from financial assets, but from their rank in an organization, for which they would qualify by means of educational credentials.

The human resources department of an organization usually determines the organizational culture.  Typically HR people are big on diversity training and being LGBTQ allies because these things do not affect the wealth of stockholders or the power of top management.

American non-profit organizations such as universities and hospitals and also government agencies are adopting a  corporate model.

This means a well-paid top-heavy administrative overhead along with lower pay, higher demands and less security for those who do actual work.   Adjunct teachers, hospital nurses and letter carriers are treated just the same as factory workers.

Just to be clear, I’m in favor of sticking up for the rights of minorities, women and other groups that are targets of prejudice.  What’s wrong is using this as cover for lower wages, longer hours, expansion of contingent work and a fight against labor unions.

Such are my observations about American institutional life.  I don’t know how true these observations are true of institutions in Britain and France, or whether they are true at all, but I wouldn’t be surprised if they were.

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