Michael Lewis’s “Flash Boys,” his takedown of high-speed stock trading, may be making headlines this week, but it’s just one of two books on our economic dysfunctions that are flying off the shelves. While “Flash Boys” explains how the fastest-growing form of trading enriches the few at the expense of the many, the other book, Thomas Piketty’s “Capital in the Twenty-First Century,” provides a more fundamental and disquieting explanation: how capitalism itself enriches the few at the expense of the many.
Piketty, a Paris-based economics professor, is one of a small but growing number of economists who are scanning digitized tax records to discover the distribution of income and wealth in various nations, both today and in the past. Piketty’s work with Emmanuel Saez, an economist at the University of California at Berkeley, has shown that the share of Americans’ income going to the wealthiest 1 percent has risen to the level last seen just before the 1929 crash. In his new book, in which he looks at tax records that in Britain and France date all the way to the late 18th century, Piketty has unearthed the history of income distribution for at least the past hundred years in every major capitalist nation. It makes for fascinating, grim and alarming reading.
Piketty’s chief conclusion is that, in most nations in most times, the interest on capital — income from investments and ownership — accumulates at a higher rate than that at which the overall economy is growing. In the largely preindustrial economies that Jane Austen and Honore de Balzac chronicled in their novels, he notes, the road to riches came through inheritance rather than even professional labor. The interest rate on property of all kinds was roughly 4 to 5 percent a year, while the overall economies of Britain and France were growing at a rate of just 1 percent (a figure Piketty derives by adding the nations’ population growth to their economic growth). Over time, this meant that the value of those nations’ capital rose to six or seven times their gross domestic product, and capital’s major owners — the richest 1 percent — controlled the lion’s share of their nation’s income and wealth.
Even after the Industrial Revolution, those ratios largely persisted until the outbreak of World War I. The combination of two world wars and the Great Depression destroyed many European fortunes, while the Depression wreaked havoc on American fortunes. The reforms of the New Deal in the United States and of social democracy in Europe then boosted workers’ incomes on both continents and gave rise to a sizable propertied middle class. The rate of return on the property of the wealthy remained high, but the value of their property had been so diminished by the cataclysms of the first half of the century that their wealth was diminished.
Since 1980, however, their fortunes have swelled again — at the expense of everyone else. Ronald Reagan and Margaret Thatcher slashed taxes on wealth, workers lost the ability to bargain for wages and, crucially, the population growth of many nations ground nearly to a halt. Capital, again, was accumulating faster than the overall economies were growing. In the United States, Piketty shows, the incomes of the top 1 percent have grown so high — chiefly due to the linkage of top executive pay to share value, a form of capital — that they soon will create the greatest level of income inequality in the recorded history of any nation.
Indeed, Piketty’s book provides a valuable explanatory context for America’s economic woes. Wages constitute the lowest share of U.S. GDP, and profits the highest, since the end of World War II. And with heightened accumulations of wealth come heightened accumulations of political power — a shift toward plutocracy to which Wednesday’s Supreme Court decision, permitting the wealthy to contribute to as many electoral campaigns as they wish, adds a helpful push.
Piketty’s primary contention is that it is inherent to capitalism that the returns on capital generally exceed the growth of nations’ economies, save in times of epochal population growth or almost unimaginable technological breakthroughs, and that this leads to ever-rising concentrations of wealth and power. “No self-corrective mechanism exists” within capitalism to retard this descent into plutocracy, he writes. Rather, he concludes, its prevention requires political action: He suggests a global tax on capital, which, he acknowledges, is a utopian solution, though others — empowering workers again, increasing the social provision of goods and services — are more readily attainable.
Lewis gives us a great read on today’s latest scam. Piketty gives us the most important work of economics since John Maynard Keynes’s “General Theory.”