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How Thomas Piketty lost touch with reality

Acclaimed by the left, Piketty wants to transform European politics. But he ignores the real concerns of most people.

Britain’s left needs new ideas. Bruised by Tony Blair’s ethics-light power-is-the-purpose ethos, and Gordon Brown’s megalomaniac command-and-control, it stumbled into the cul-de-sac of Marxism from which it is now escaping. This book by the French economist Thomas Piketty aspires to guide the left during the 21st century and it deserves to be taken seriously. There is much of value here and many of its ideas are insightful. But in the end, if this becomes the agenda of the left, it will exchange one cul-de-sac for another.

Piketty’s central proposition is important and neglected: a society’s ideas – its “ideology” – shape its outcomes. A corollary that he bravely accepts is that economics has become both too narrow and too imperial – it needs to return to social science and history. Capital and Ideology is long because it is full of global social history. The Marxists will be attracted by its title, but they won’t like it: from that history Piketty accepts that communism was, and could only be, a disastrous failure.

He focuses on one set of ideas – how a society justifies its prevailing inequality – and offers a reductionist but useful distillation. One justification, essentially feudalism, assigns the members of society to one of three roles: security, community and production. Each needs the other two, and inequalities in some sense reflect their relative value. The other justification is the legitimacy of private property: the centre of the book is a critique of how the French Revolution went wrong by elevating property rights over the feudal concept that rights followed from status within the caste system. Piketty’s core skill is the careful compilation of numbers that reveal how inequalities of wealth and income have changed. He argues convincingly that the switch to a society constructed around property rights resulted in a considerable increase in inequality during the 19th century, as wealth accumulated without significant ethical challenge.

Property rights are social constructs and so in principle can be reformulated in any way a society chooses. Piketty argues that the process is best done through informed deliberation by means of representative democracy – parliaments. He is contemptuous of the capture of parties of the left by the “Brahmin class”, the well-educated affluent. Letting choices be made by members of parliament is an important guard against such capture. But what should  be the norm by which success is judged? Here, Piketty retreats into the 1970s: his recommendations are essentially Rawls with numbers.

John Rawls was a Harvard philosopher who argued that social justice required that society should be organised by the state in whatever way resulted in the poorest group being as well off as possible. Piketty accepts the principle, albeit baulking at the term “Rawlsian” because, as with many French intellectuals, he prefers to trace the origin of an idea back to French thought. In the Utilitarian calculus used by economists since the 1970s, what we are ultimately trying to make equal is how much each person consumes. Income is taken as the readily observable proxy for consumption.

But perfect equality is not feasible because there would be insufficient incentive to work: in consequence, everyone would end up very poor. Hence, the solution to how a just society should be organised was reduced to a technical problem: how much incentive must be retained in order for the pie to become big enough that once redistributed, it maximised the incomes of the poorest. The result is simply the rates of income tax that would do the job.

What, then, should the state do with the revenues? Piketty does not believe in the centralised, commanding-heights state beloved of the Marxist left. Instead, he opts for the New Left ideology of the entitled individual. The state takes the income off the rich and redistributes it to everyone as basic income. The Piketty variant, already his big theme in his earlier book, Capital in the Twenty First Century, is that we need to redistribute wealth as well as income, and so everyone should be given a lump-sum on coming of age: basic wealth. Property (wealth) is not theft but it is a social construct and we should choose to make it temporary – eroding annually through taxation, and non-transferable at death.

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The bold part of the proposal is this heavy taxation of wealth – sufficiently heavy as to make it temporary. Why wealth instead of just income? Capital is the key driver of income inequality: the return on it exceeds the rate of growth of the economy. In the 18th century Thomas Malthus had the misfortune to spot a fundamental economic relationship (that population growth drives mass incomes down to subsistence), just when it ceased to be true. The same has happened to Piketty: currently there are some $13trn of assets yielding negative returns, while economies are still growing. The concept is now so important that John Maynard Keynes’s term has been revived: secular (meaning long-term) stagnation. The current worry in economic policy circles is that for the foreseeable future, the rate of economic growth is greater than the return on capital.

In his previous book, Piketty assumed that the rate of return on capital (after inflation) was permanently around 4.25 per cent. No pension fund is now willing to be that optimistic. Piketty acknowledges the fall in the rate of return, but his response is that the really wealthy are able to avoid tax by buying legal expertise. There is some truth in this, but the more credible approach would be to clean up the legal profession rather than make all wealth temporary.

In a more radical sense, the accumulation of extreme wealth does not generate equivalent inequality in consumption. Notably, unlike in the 18th century, it has not led to the emergence of an idle leisure class. On the contrary, the wealthy tend to be workaholics: the American billionaire Warren Buffett promises to leave his children “enough money so that they would feel they could do anything, but not so much that they could do nothing”. The ABs (the upper and middle classes) beget ABs primarily through passing on their culture rather than their money. The modern social tragedy is that if there is a multi-generational leisure class, it is among households on benefits whose despair has trapped their children into a syndrome of being economically inactive.

The obsession with making all wealth temporary leads Piketty to fear that the nation-state is too small an entity to achieve social equity: capital will skip away. As he points out, this could be addressed at the national level by taxing attempts to move wealth out of the country. But that is not possible in the EU because the mobility of money and labour are enshrined.

He grapples with how to reconcile membership of the EU with achieving equity within a nation. Small countries have an incentive to become tax havens (the book includes a justified assault on Jean-Claude Juncker’s Luxembourg), and many nations free-ride by not reducing carbon emissions and avoiding refugees. In order to overcome these problems, Piketty is prepared to dismantle much of the EU. He advocates a new super-EU, formed of only France, Germany, Italy and Spain. They would write new rules on corporate taxation and capital flight. To get Germany to join, the new EU would abandon attempts at economic redistribution between countries: its focus would be to enable each country to redistribute internally. Implicitly, the Schengen Area of free movement would be abandoned. The European Parliament would morph into an Assembly with members elected primarily by national parliaments.

Setting these proposals out in a single paragraph, it is apparent that they are not going to happen. That Piketty has good arguments for them does not constitute a credible manifesto for a stronger Europe. Instead, its troubling implication is that there is a trade-off between getting the efficiency gains of access to the large European market and having the power to tax profits and wealth effectively. Adding to his critique of the Brahmin left, Piketty presents British evidence of the Remain/Leave split by income. The only section of the population with majority support for Remain were the top 30 per cent of earners; the less affluent 70 per cent of the population leaned more towards Leave. Keir Starmer is most suited to lead a party of these metropolitan ABs.

Piketty is hostile to what he terms “social nativism”: understandably, the book is heavily influenced by fear of Marine Le Pen, the leader of France’s right-wing Rassemblement National party (formely Front National). As with many others on the left, he conflates opposition to open borders with hatred of immigrants. This leads him to a simple, four-way classification of opinions into those for and against redistribution, and for and against open borders, each attracting around a quarter of the electorate.

He agonises as to how the pro-redistribution, pro-open borders quadrant can come to power. But he avoids any discussion of what it is about a nation that makes it, by his own admission, the only feasible political structure for achieving an equitable society. Perhaps it is harder in the French language, where nation stems from naissance (birth), to avoid the association between nationality and consanguinity. The long French tradition of the droits de l’homme may also encourage the notion that everyone has a right to live anywhere.

There is, however, a different interpretation of what is going on. Europe’s nations are places to which people have learned to belong. The poor in these nations may understand all too well that they depend upon a web of mutual obligations built on a shared attachment to place, achieved through two centuries of struggle. As Piketty detects, the Brahmins are gleefully disengaging from these obligations, as are Europe’s richest regions: his scathing attack on Catalan separatism in Spain will cause discomfort for the SNP. From this perspective, immigration has the potential to weaken these laboriously nurtured mutual obligations. 

Why, Piketty asks, if bold wealth taxes and basic wealth are the answer to social justice, have we not adopted them? He blames the Brahmins of the New Left. But is the northern working class howling for a wealth tax? I think it is more likely to applaud a tax on the capital appreciation of the ABs who own London property. They are angry because the owners didn’t deserve the gains. The idea of just deserts matters, and by sweeping all capital into the same pot Piketty ignores the real concerns of most people. “Social justice” does not mean whatever arrangement most benefits the poor; it requires making some distinction between rewards that are deserved and those that are not.

Underpinning the insistence that all wealth must be temporary is an ideology of extreme individualism. Each person acquires parents at birth as if by lottery. In reality, the only society to attempt this – the Israeli kibbutzim – rapidly abandoned it. You have more obligations to your children than to mine, and it is ethically better that you should save to help your children rather than lavish consumption on yourself now.

Piketty justifies a general tax on wealth on the grounds that “there is no connection between the legal form of an investment and its social or economic efficiency”. Yet different forms of wealth reflect substantial differences in social value: for example, the wealth due to the appreciation of property prices is entirely due to the contribution of society and should be taxed accordingly.

The viability of the left depends upon engaging with a range of communal social obligations that reflect people’s sense of belonging and from which they get meaning. It is a view of society in which neither individuals nor states are primary. With the best intentions, Piketty remains trapped in an obsolete framework. 

Capital and Ideology  
Thomas Piketty
Harvard University Press, 1,150pp, £31.95

Paul Collier is professor of economics and public policy at the Blavatnik School of Government

This article appears in the 06 March 2020 issue of the New Statesman, Inside No 10