The Ambiguities of Class in Thomas Piketty’s Capital in the 21st Century

Chapter 7

Introduction

• In the US, until recently (written 2015) inequality was treated as a problem only with respect to discussion of opportunities and rights
• Equal opportunity and rights are deeply held American values and certain types of inequalities are seen as violating them
• They violate the ‘level playing field’
• The main issue in poverty discourse was not the magnitude of the distance between poor and rich, but the absolute material deprivations of people living in poverty, and how this harms their life changes
• Inequality was not an important academically recognised problem
• It is still argued that in the long run the high incomes of the wealthy benefit everyone, since it is out of this income that new investments are made, and will thus generate the rising tide that lifts all boats
• It was in the changing atmosphere of the Occupy movement that Thomas Piketty’s Capital in the 21st Century appeared, an unlikely international best seller

Capital in the 21st Century

• Piketty’s book is built around the detailed analysis of the trajectory of two dimensions of economic inequality and their interconnection:
• Income
• Wealth
• Previous research on this topic is severely hampered by the lack of data on the richest people, because so few people at the top are selected in survey samples, and top coding of income and wealth categories in most available data.
• It has been impossible to study the historical trajectory of inequality for more than a few decades because of the lack of any good data much before the middle of the 20th century
• Piketty has solved these problems to a significant extent by assembling a massive dataset starting from the early 1900’s based on tax and estate data

The Trajectory of Income Inequality

• The central observation that animates much of Piketty’s analysis is the U-shaped graph of the share of national income going to the top layers of the income distribution
• The richest 10% of the population received just over half of all income generated in the US economy
• The sharp rise in income share of the top income decile is largely the result of the dramatic rise in income share of the top 1%
• Income is not merely becoming more concentrated at the top; it is being much more concentrated at the top of the top
• In every country studied, income concentration declined sharply from 1920’s - 1960’s, the increase in the latter part of the century varied considerably from country to country
• These trends are much more pronounced in the US

How does Piketty explain these broad patterns?

1. The rapid increase in concentration of income since the early 1980s is mainly the result of increases in super-salaries at the top of labour market earnings rather than the result of dramatic increases in income from capital ownership. In the early 20th century income from capital was the primary resource for the top 1 percent of the income hierarchy. In 2007, one has to climb to the 0.1% level before this is true
2. The universal decline in income inequality in the middle of the 20th century and the varying extent of its increase across different countries since then stem from the exercise of power in various ways, not the “natural” workings of the market. Power exercised by the state is especially important in counteracting the inegalitarian forces of the market through taxation, income transfers, and a range of regulations
3. The emergence of super-managers - these top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity

The Trajectory of Wealth Inequality

• Piketty uses the terms “wealth” and “capital” interchangeable.
• He defines capital in a comprehensive manner as “the sum total of nonhuman assets that can be owned and exchanged on some market…. Includes all forms of real property as well as financial and professional capital (plants, infrastructure, machinery, patents etc) used by firms and government agencies”
• Piketty calls the income generated by capital as the return on capital
• A fundamental feature of any market economy is the division of national income into the part that goes to owners of capital and the part that goes to labour

The Trajectory of Wealth Inequality

Piketty makes two basic observations about wealth inequality:

1. Levels of concentration of wealth are always greater than concentrations of income

In the US in 2010 the top decile of wealth holders owned 70% of all wealth, and the bottom half earn nearly nothing.

• The key to understanding the long-term trajectory of wealth concentration is what Piketty calls the capital/income ratio

This ratio is a way of measuring the value of capital relative to the total income generated by an economy. In developed capitalist economies today, this ratio for privately owned capital is between 4:1 and 7:1. His argument is that this ratio is the structural basis for the distribution of income between owners of capital and labour. The higher this ratio, the higher the proportion of national incomes goes to wealth holders

The Trajectory of Wealth Inequality

Piketty spends substantial tie exploring the trajectory of this capital/income ratio and its ramifications. They involve discussion of the interconnections among economic growth rates, population growth, productivity, savings rates, taxation, and other factors. Some notable conclusions:

• As economic growth declines in rich countries, the capital/income ratio is almost certain to rise unless counteracting political measures are taken
• Over time, the rise in capital/income ratio will increase the weight of inherited wealth among wealth holders, rising to levels seen in the early 20th century
• The unprecedented high concentrations of earnings among people who also receive considerable income from capital ownership, in the course of the coming decades concentration of income will likely exceed the levels of the 19th century

“This can lead to a race between supermanagers and rentiers to the detriment of those who are neither.” [equating capitalist with rentiers?]

The only remedy (lol) Piketty argues is political intervention to counteract these economic processes, since “there is no natural, spontaneous process to prevent destabilizing inegalitarian forces from prevailing permanently”. [Non-dialectical approach which sees both politics as unnatural and completely separate from the economy]

His preferred policy solution is the introduction of a global tax on capital. So long as market dynamics as left unhindered the polarisation of the extreme concentration of income and wealth is likely to deepen even further in the future

Ambiguous Class Analysis

• Piketty displays a solid level of class analysis in his early discussion in the book of the conflicts around how the income generated in production is divided between capital and labour. However, this largely disappears after the opening of the first chapter
• When the term “class” is used at all, it is treated as simply a convenient way of talking about regions of the distribution of income or wealth - top, upper, middle, bottom
• The owners of capital receive a “return on capital” - they are not described as exploiting the labour of workers.
• The distribution of incomes reflects a division of the national income pie into “shares” - it is not a real transfer from one class to another
• The absence of a sustained class analysis of the social processes by which income is generated and appropriated obscures some of the critical social mechanisms at work

Ambiguous Class Analysis - Income Inequality

• Piketty’s claim that the sharp rise in income inequality in the US was largely a result of an increase in wages of the top managers, is controversial
• The conclusion depends, in part, on precisely what is considered a “wage” and what is “capital income”.
• Piketty adopts the conventional classification used by economists and treats all of the earning so top managers as “income from labour”, regardly of the form the earnings take - salary, bonus, stock options - or the specific mechanism by which the level of earning is determined
• In the modern corporation many of the powers of capital are held by the top executives. This means they cannot reasonably be described as simply “labour” within in the firm that is just better paid. They occupy a contradictory location within class relations, meaning that they have some but not all the powers of capitalists
• A significant part of earnings of top managers should be thought of as an allocation by the executives themselves of profits of the firm to the personal accounts of the managers, rather than wages in the normal sense

Ambiguous Class Analysis - Income Inequality

• They exercise their capitalist-derived power within the class relations of the firm to appropriate part of the corporations profits for their personal accounts
• If this is correct, a substantial part of their earnings should be classified as a return on capital, albeit of a different form from dividends derived from ownership of a stock
• How to classify the income of these top earners then becomes a difficult problem
• It is similar to the problem Piketty recognised of dividing the income of the ordinary self-employed into a wage component and a capital component
• The implication for Piketty’s overall analysis of the trajectory of income inequality is that more of this increase should be attributed to capital than is conventionally calculated through national income accounts
• If accepted, this calls into question one of Piketty’s key claims - that the explosion of inequality is driven by rising inequality in incomes from capital

Ambiguous Class Analysis - Returns to Capital

• Piketty combines real estate and capitalist property into a single aggregate category ‘capital’
• This blurs the social mechanism through which the returns to capital are generated, combining the rentier with the productive capitalist
• How to classify the income of these top earners then becomes a difficult problem.
• The social relations involved in American homeowners making capital gains on their family home are very different from those that enable a capitalist generate a return on their productive investment
• The social struggles that are unleashed by inequality in home-ownership on the one hand and by inequality in the ownership of capitalist capital on the other hand are fundamentally different
• The public policies that would help remedy the harms generated by these different kinds of “returns to capital” would also be different
• Piketty’s proposed global tax on capital seems to have little relevance to the harms caused by inequality in returns to ownership of residential real estate
• If we want to understand the trends in income and wealth inequality, and transform the power relations that generate these trends, we must go beyond the conventional categories of economics to identify the class relations that generate escalating economic inequality