The intellectual buzz in the United States at the moment has as its focus a newly-published book by French economist Thomas Piketty, Capital in the 21st Century, in which the author presents a disturbing new interpretation of the growing gap between rich and poor in the industrialised world. It’s just a coincidence, of course, that the “Piketty phenomenon” occurs just at the centenary of the outbreak of World War I. Nonetheless the two have much to say to each other.
Piketty does not blame economic inequality on an aberration or failure of government policy, nor on an evil conspiracy by the One Percent to subvert everyone else. He says that inequality is built into the structure of a growing industrial economy, because the interest rate earned by capital investments is almost always greater than the growth rate of the economy as a whole. In other words, you can make more money by investing your savings than by working and earning a fair salary.
And who can benefit from this higher rate of return for investments? Why, those who already have the money to invest, of course. This, says Piketty, is why the rich get richer, and why the most powerful corporations are the banks and insurance companies, not the manufacturers. With Piketty, the old adage that “it takes money to make money” suddenly acquires a mathematical grounding. His analysis shows that, in all of the advanced countries, economic inequality has reached levels not seen since the so-called Gilded Age of the late nineteenth century.
At nearly a thousand pages of tables, charts and analyses, Piketty’s book is not for bedtime reading. He has amassed 250 years of data from twenty countries to support his findings. He does not attempt to explain why the rate of return on investments is greater than the growth rate of the economy; he just shows that this is the case. (Subsequent discussion has turned up several possible explanations, most of them based on the shortage of capital and the surplus of labour in any growing society.)
Apart from the obvious anti-democratic threat posed by the concentration of more and more wealth and power in fewer and fewer hands, the dynamic of inequality exposed by Piketty has three serious implications. First, if you can get richer by manipulating wealth than by creating it, where is the incentive to create it? How sustainable is that? Second, once the concentration of wealth has lasted for more than a generation, we start to see hereditary fortunes dominating the top of the social pyramid. That is, you are powerful because of the luck of birth, and no longer through the meritocracy that has been the pride of our progressive civilisation. Welcome to the New Gilded Age.
Third, and most importantly, Piketty finds that the tendency towards inequality is a fundamental property of the free market system itself. Those who champion the free market like to argue that the market provides its own self-regulating mechanisms, but there doesn’t seem to be one here. Or, rather, there is — but we’ll get to that.
Taken together, these trends would tend to strangle productivity and undermine the very prosperity that brought them about. Yet these trends have existed for 250 years, and those dire results haven’t happened yet. Or have they?
Piketty recognises that his theory doesn’t work for much of the twentieth century. From 1915 until 1975, he finds, the rate of return on capital investments was actually lower than the growth rate of the economy. During this exceptional period the middle class flourished, literacy and education blossomed, and economic inequality was reduced to tolerable levels. Piketty explains this aberration by observing that two world wars and the Great Depression combined to destroy the capital assets that the Gilded Age had sequestered, so that raw economic growth based on actual work was all that was left.
Ironically, the strong recovery from the last century’s disasters also allowed the rate of return on investments to resume, starting in the late 1970s, its historical position above the economic growth rate. Now we are seeing the social results of that.
Thus Piketty regards the start of World War I, exactly a hundred years ago, as a perversely beneficial accident that tore down the structures of inequality and laid the groundwork for a prosperous remainder of the century for the great bulk of the working classes — at least those who weren’t among the hundred million or so who died during the thirty years of conflict. But Piketty is an economist, not a historian. He fails to make the connection, clear to anyone who studies the First World War, that the war was not an accident that “happened” to the elite of its day; it was positively caused by them.
That the assassination of an archduke should provoke a war between Austria and Serbia in 1914 might have been unavoidable. The Balkans had, after all, been the theatre for three other small wars in the previous six years, and none of these had drawn the great powers into the conflict. Why did this one do so?
When we look at the decision-makers of the time, we see the champions of the Gilded Age: Tsar Nicholas of Russia, who thought he needed to provoke a war in order to prevent another revolution like the one in 1905; the German high command, who figured the time was ripe to take on both Russia and France militarily, and make themselves the masters of Europe; the French generals, anxious to avenge their humiliation in the Franco-Prussian War of 1871; and the hawks of England, led by Winston Churchill, who thought that naval superiority was the trump card, and were itching to play it.
All of these players had tried their hand at previous crises, hoping to provoke a conflict that would give them the glory they craved. In 1914 they finally got it right; but if they had failed then, they would have tried again in 1915, and 1916, until they got their war. The fact that the people of Europe had no taste for war was of no importance, because it was the elites of the Gilded Age who made the great decisions, and who destroyed themselves in the process. When a large edifice rests on a narrow foundation, it’s easy to tip it over.
As a self-regulating mechanism, world war is rather harsh, but it’s very effective.
As we enter our new Gilded Age, with power concentrated in a new elite, we should do well to consider the lessons of a century ago. The men and women at the top are human beings like the rest of us, subject to the same passions and delusions as anyone else. In the absence of the checks and balances of an egalitarian democracy, the delusions of our masters, when backed by state power, can lead to unmitigated disaster.
When we look at current events in Iraq, Syria, and Ukraine, and at the growing militarisation and assertiveness of China, we can observe some striking parallels with a hundred years ago, not only in diplomatic and military configurations, but also in the origins and attitudes of those who hold the levers of power.
Piketty has a solution to the new inequality: a tax on capital that would bring its rate of return down to the level of the overall growth rate. Yet unless such a tax could be imposed globally — and good luck with that — the big money would simply flee from those countries that imposed it to those that didn’t. Still, either we come up with some way to apply the brakes to the gentrification of wealth, or else we wait until the new elite destroys itself as the old one did — and takes a few hundred million more souls with it.
Paris, June 2014
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Copyright © 2014 T. Mark James
This article first
appeared in the Gulf
News,
Waiheke Island, New Zealand, on 26 June 2014.