This book by Thomas Piketty was first published in 2014 and became an instant best seller. It had taken the author some 15 years to research and complete, and deserves a detailed attention and analysis rather than the usual one-off, production-line tracts which are read and instantly forgotten. Piketty describes the end of an old epoch, the rise of the new – the golden age of welfare-capitalism, Le Trente Glorieuses, the Keynes/Beveridge consensus, call it what you will, circa 1945-1975 – and the re-emergence of a second rentier capitalism regime which began the early 1980s.
Using apposite literary references to writers of the first gilded age he quotes:
It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife.”
Jane Austen – Pride and Prejudice
An immortal sentence which says a thousand words. Such was the moral zeitgeist in Europe during the 19th century; Piketty then drives home the point by adding Honorė De Balzac’s novel Pėre Goriot which focuses on the decadent, money-grubbing dispensation of the Bourbon Restoration. Arguably the moral climate hasn’t appreciably changed in our money worshipping age, but the origins of a ‘good fortune’ has. What concerns Piketty, is the source and nature of this ‘good fortune’ which is so sought after, and also where this latest historical configuration is leading.
The world of Austen and Balzac lasted from roughly 1870-1910 representing the first belle époque of rentier capitalism. The system involves ownership of capital assets – in the 19th century mainly land – and living from the rent (in the broad sense) derived from these assets. Latterly, in what is the second golden age of the rentier regime, the capital asset base has changed from simply land to ownership of financial assets, real estate, stocks and bonds and high corporate incomes.
This is not to say that the old rentier classes have ceased to exist, but they have been supplemented by an emergent new class of hedge-fund managers, corporate executives and CEOs, investment bank chiefs, and former entrepreneurs like Bill Gates – which for a better term, we will call the working rich. As Piketty explains:
The top decile (10%) always encompasses two different worlds: the 9% in which income from labour predominates, and the 1% (of true rentiers) in which income from capital becomes progressively more important.”
Thus, former entrepreneurs such as Bill Gates cease to live off their labour as their accumulation of capital enables them to enter the genuine rentier class, the class able to live off capital. The new rentiers would also include Heiresses such as Liliane Bettencourt of L’Oreal and Paris Hilton, neither of whom have ever done a day’s work in their lives. Consequently, the rentier class grows with every passage of successful entrepreneurs entering its ranks. It might also be added that there has also been the rise of a parasitic speculative financial sector class who make a living by purchasing and selling various asset classes, in the main stocks, property and bonds.
Historically speaking Piketty asserts that the trend line for return on capital has been 4/5% – this has been an historical fact rather than some inexorable law – whereas growth has lagged at 1 to 1.5%. This process is expressed in the equation r>g where r is return on capital and g is growth. Accumulated capital (as stock) has tended to increase as a ratio to income (as flow). Moreover, the distribution of national income (GDP) has become increasingly skewed to the top decile. According to Piketty this has been a technical as well as a social/political process the consequences of which will be profound.
When the rate of return on capital significantly exceeds the growth rate of the economy (as it did throughout history up to and including the 19th century and as is likely to be the case in the 21st century) then it logically follows that inherited wealth grows faster than output and income … Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labour by a wide margin, and that the concentration of capital will attain extremely high levels – levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.
The rise of the neo-rentier, sector, i.e., Finance, Insurance and Real Estate (F.I.R.E) – consisting of banks, credit agencies, investment companies, brokers and dealers of commodities and securities, security and commodity exchanges, insurance agents, buyers, sellers, lessors, lessees and so forth – has now reached such a level that it has become larger, more ubiquitous, and profitable than productive industry. Prior to the ascent of financialised capitalism and the deregulation and privatisation mania/racket, the role of finance was usually restricted to greasing the wheels of the productive (value-creating) economy. Commercial banks took the publics’ deposits and funnelled it as credit into manufacturing and commercial enterprises. In this regulated environment commercial banks and other financial institutions were legally circumscribed in the level of credit they could extend.
This development was in large part given additional impetus by the “Big Bang” a term used in reference to the sudden deregulation of financial markets, by Margaret Thatcher’s administration in 1986. Finance was off the leash. Instead of producing real value as embodied in goods and services, selling of ownership titles and tapping into income streams was to become the chosen field of investment.
Thus, the rentier class, both then and now, accumulates and lives off what David Ricardo (1772-1823) once described as economic rent, income in his time derived from land ownership. Rent in this sense should be understood as a payment over and above the costs of ownership to the aristocratic, land-owning rentier class – who don’t actually produce any value as such. But economic rent is not restricted to land tenure; it is any income flow which contains a surplus increment over and above the costs of production, maintenance and ownership. Thus, monopolies and oligopolistic corporate structures are able to gouge economic rent from captive consumers.
As for banks they produce little in terms of value, loan money into existence and draw rental interest from these loans (mainly mortgages). It should be emphasised that economic rent is not be confused with profit (in Marxist terms ‘surplus value’). Profit involves the production of wealth and expansion of capital, rent is merely an extraction of wealth, it does not create any new value. Employees of Goldman Sachs, or any other financial institution do not produce profit, they produce rental monetary flows which are in fact a cost levied on productive value-creation. The financial sector in this sense is purely bloodsucking on the productive sector of the economy.
Not that this contemporary rentier regime has always had its own way. At a guess, and with due deference to Mr. P, I would say that the democratisation and equalisation process which ended the first epoch of the rentier ancien regime began with Roosevelt’s New Deal (1933) and continued during the war and post 1945.
The profound shocks, both political and social, of the period 1914-1945, tended to narrow both the capital/income ratio and the grotesquely unequal share of the rentier classes in national income (GDP). These shocks were of both a technical and political nature.
High rates of growth are both cause and effect of deep-going economic, social and political change: primarily war, preparation for war and post-war reconstruction. New economic functions and innovations were of necessity constantly being created and new skills were needed. Education, perforce, became more widespread and compulsory as the system revolutionised itself from within and new classes and work methods emerged which required increased rates of social mobility; in this sense the permanent revolution in the economic structures gave rise to changes in the occupational, political and social structures.
This process tended to spread the social product more evenly, tilting it towards more egalitarian levels. Additionally, political developments – trade unions, workers’ political parties and movements and the growing militancy of the working class – tended to add an additional momentum to this process. The increasing state regulation of the system which now introduced progressive taxation and the number of lost fortunes during the depression years, in addition to the capital destruction during World Wars 1 and 2 resulted in the ancien regime of rentierdom undergoing a severe contraction.
Unfortunately, this was not to be a permanent fait accompli as revisionists like the Labour party grandee Anthony Crosland and his epigones imagined. From 1980-2010 reactionary forces were, to a significant extent, able to re-establish the status quo ante. The neo-liberal counter-revolution eventually overturned the post-1945 settlement and became the new orthodoxy. It was a return to business as usual but considerably more ruthless. This new age did not brook failure or poverty: In the words of the late Freddie Mercury and Queen (the band) there was ‘No time for losers.’
Pikkety’s mooted solution to this inexorable increase in income and wealth inequality is a progressive tax on capital which will, it is argued, prevent the ultimately unsustainable mal-distribution of wealth into fewer and fewer hands. This Land Tax policy was very widespread during the 19th century; it was a view shared by Ricardo and J.S.Mill – who noted the injustice of those landowners ‘who enriched themselves in their sleep’.
One of the leading proponents of this theory was Henry George (1839-1897) the American land reformer as contained in his popular writings and who at the time was giving spellbinding performances during a lecture tour of England in 1882.
In addition to land tax, Piketty stipulates taxes on capital which would generally include any levy on the flow of income from capital (such as corporate income tax, as well as tax on capital stock (such as real estate tax and/or a wealth tax). Capital controls could be used to stop inflows and outflows of ‘hot money’ which has been largely a function of tax competition between states and a generally destabilising force.
A contemporary of Pikkety – Michael Hudson – argues along the same lines:
Volumes II and III of Marx’s Capital describe how debt grows exponentially, burdening the economy with carrying charges. This overhead is subjecting today’s Western finance-capitalist economies to austerity, shrinking living standards and capital investment while increasing their cost of living and doing business. That is the main reason why they are losing their export markets and becoming de-industrialized.
The most pressing policy challenge is to keep down the cost of housing. Rising housing prices mean larger and larger debts extracting interest out of the economy. The strongest way to prevent this is to tax away the rise in land prices, collecting the rental value for the government instead of letting it be pledged to the banks as mortgage interest.
The same logic applies to public collection of natural resource and monopoly rents. Failure to tax them away will enable banks to create debt against these rents, building financial and other rentier charges into the pricing of basic needs …’’ Ergo. ’’The best protection against this rentier burden is simple: first, tax away the land’s rising rental valuation to prevent it from being paid out for bank loans; and second, keep control of banks in public hands. Credit is necessary but should be directed productively and debts written down when paying them threatens to create financial Armageddon.
Agreed, all very well and good. However, at this point I must raise a particular issue. Piketty, like J.A.Hobson, Sismondi, Keynes, and most other underconsumption theorists tended to think of capitalism’s malfunctions as problems of distribution. No problems were apparently situated on the supply side – production – of the economy.
This I believe is a glaring oversight. For it is the case that capitalism does have supply-side malfunctions which lead to a secular tendency toward stagnation regardless of the level of aggregate demand. This has been pointed out by inter alia: (Ricardo) diminishing returns, (Keynes) the collapse in the marginal efficiency of capital, (Schumpeter) disappearing investment opportunities (Marx) the tendency of the rate of profit to fall; none of which warrant a mention in the reformers lexicon. (see further below).
As an aside these theories are much to detailed to go into and beyond the scope of this article (I’m not trying to squirm out!) but deserved to be mentioned and form an article in their own right one day.
Moreover, the problem of increasing secular stagnation tends to be viewed as being a fundamentally technical problem: all that was needed was just get the macro-economic and fiscal variables correctly lined up and – bingo! Problem solved. Once all the technical ducks were in a row it was possible to have a system which produced the goods ad infinitum. This is not how capitalism, particularly in its mature (i.e. stagnant) stage really works, however. The system is characterised by laws of motion internal and intrinsic to the system. This raises the question whether capitalism – like the EU – can really be reformed at all. One V.I. Lenin certainly didn’t think so.
It goes without saying that if capitalism could develop agriculture, which today is everywhere lagging terribly behind industry, if it could raise the living standard of the masses, who in spite of technical progress are everywhere half-starved and poverty-stricken, there would be no question of a surplus of capital.
This argument is very often advanced by petit-bourgeois critics of capitalism. But if capitalism did these things it would not be capitalism; for both uneven development and semi-starvation levels of existence levels of the masses (particularly in the third world – my emphasis – FL) are inevitable conditions and constitute the premises of this mode of production.
As long as capitalism remains what it is, surplus capital will be utilised not for the purposes of raising the standard of living of the masses in a given country, for this would mean a decline in the profits for the capitalists, but for the purpose of increasing profits by exporting capital abroad to the backward countries.”
At the present time debt is growing faster than output in an attempt to obviate the onset of diminishing returns, or in Marx’s terms the tendency of the rate of profit to fall. (See both the work of David Harvey and Michael Roberts). US public debt to GDP ratio was 30% in 1980, it is now in 2019 105%. The US sovereign debt is bigger than its GDP. (Let’s not even go to private debt and unfunded future liabilities, social security, Medicare and Medicaid, it might frighten the children)
Profitability, which drives corporate investment has declined and resulted in spare capacity, since as profits fall so does investment; corporations therefore attempted to fatten up the bottom line by; launching the offensive against organized labour by pushing down wages and working conditions; moved offshore to take advantage of lower costs; clamoured for corporate tax cuts; bought back their own stocks with free money courtesy of the central bank to push up stock prices; as well as engaging in some very dubious mergers and acquisitions, in an attempt to restore profitability or at the least to stay solvent. Thus, we have the emergence of a late capitalist zombie economy.
Low interest rates create zombie companies. Weak businesses survive (when they ought to have gone out of business) directing cash flow to cover interest on loans – but not the principal – that cannot be repaid but that banks will not write off. With capital tied up, banks reduce lending to productive enterprises, especially small and medium sized ones, which account for a large proportion of economic activity and employment. Firms do not dispose of or restructure unproductive investments.
The creative destruction of the slump when businesses of this type go out of existence and debts are wiped out and the reallocation of resources necessary to restore the economy does not, for better or worse, take place today. Thus, a zombie economy, where failed businesses are kept artificially afloat is one where the necessary adjustments including liquidation of unproductive enterprises and assets are allowed to continue and the necessary restructuring fails to take place. This thus results in a semi-permanent, depressed conditions, until the next downturn comes along.
All very Austrian, but it has to be said, basically correct. A debt saturated economy will increasingly stagnate. Debts must be written off or restructured as the sine qua non for any genuine recovery. Under neoliberalism? Fat chance!
Additionally, the problem is as much political and ideological as technical. History clearly evinces that the ruling elites will not give up their wealth and power without a tenacious struggle; and moreover, they won’t hesitate to use extra-parliamentary methods to defend their privileges. The programme advanced by Piketty, whilst worthwhile in a technical sense, is weak in political content in terms of what a popular resistance to the status quo would look like. He poses the question:
Can we imagine a 21st century in which capitalism will be transcended in a more peaceful and more lasting way, or must we simply await the next crisis or the next war (this time truly global)? On the basis of history which I have brought to light here, can we imagine political institutions that might regulate today’s global patrimonial capitalism justly as well as efficiently?”
Good question, which brings us to the ‘class-struggle’.
Mindful of the expected petit-bourgeois sniggers, one of the great political truisms is that substantial economic, social and political reforms, tend to be achieved by a combination of irresistible and often extra-parliamentary pressure from below. Without the mass movement, and without the theoretical direction and programme of such a movement, such well-intentioned, well-thought out and sensible policies seldom get off the ground.
Such was the essence and creation of the Trente Glorieuses 1945-1975 resulting from the New Deal in the US in the 1930s and Roosevelt’s reforms and in 1945 of a strong Labour party/government and trade union bloc committed to fundamental reform under the theoretical tutelage of J.M.Keynes’ economic policies and William (Lord) Beveridge’s social policies, which provided a theoretical rationale for this movement, which was to lead to a fundamental changes in both the US 1930s and UK 1940s and Western Europe as a whole.
Alas this epoch is no more, it was swept away by the Thatcher-Reagan counter-revolution of the 1980s. Yet it still remains the blueprint for a more humane and rational society. Europe will I believe be the crucible for this struggle which in fact is already starting.
-  Rentier capitalism refers to the derivation of rent from possession of assets that are scarce or artificially made scarce. Most familiar is rental income from land, property, minerals or financial investments, but other sources have grown too. They include the income lenders gain from debt interest; income from ownership of ‘intellectual property’; capital gains on investments; ‘above normal’ company profits (when a firm has a dominant position); income from subsidies; and income of financial intermediaries derived from third-party transactions.
-  Picketty, p.275
-  Henry George – Progress and Poverty
-  George’s theories made a considerable impression on the newly formed Fabian Society and converted, G.B.Shaw to socialism. Land reform had a long history in England and goes back to the English Civil War 1642-1651 when a militant sect in the Parliamentary New Model Army – ‘the Diggers’ led by Gerrard Winstanley – attempting to farm common land (“levelling” land) and reform the existing social order with an agrarian lifestyle based on their ideas for the creation of small, egalitarian rural communities. Ironically the location of their attempts at land reform – Weybridge and Cobham – are probably two of the most affluent areas of Surrey which is also the highest per capita income county in the UK.
-  “Creating Wealth” through Debt: The West’s Finance-Capitalist Road by Michael Hudson, Wednesday May 2 2018, Peking University 2018
-  Under-consumption theory is based upon the premise that capitalist crises are caused by insufficient aggregate demand, in terms of both investment and consumption. This is, however, a half-truth. What needs explaining is why during an upswing, particularly when it reaches its most febrile levels of expansion aggregate demand disappears. Marx points out that:
It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers, the capitalist system does not know any other modes of consumption that are not effective…[Such a crisis that is caused by a fall in aggregate demand] are always preceded by precisely a period in which wages rise generally and that the working class gets a greater share of that part of the annual product which is intended by consumption. From the point of view of those advocates of sound and ‘simple’ common sense such a period should rather remove the crisis [rather than precipitate one].”
Marx – Capital volume 2 p414
Exactly so. Increasing and unstoppable aggregate demand eventually arrives at the inflexion point when asset prices outpace corporate and individual ability to earn and/or borrow sufficient funds to support such price levels, then the whole upswing of the boom/bust cycle goes into reverse. From the glut of aggregated demand to a scarcity of aggregate demand and the descent into bust.
This was also a view voiced by Keynes when he spoke of the collapse in the marginal efficiency of capital.
I suggest that a more typical, and often more predominant, explanation of the crisis is, not primarily due to a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.
The General Theory p315
This bears comparison with Marx’s theory of the tendency of the rate of profit to fall, and Ricardo’s theory of diminishing marginal returns. All of which attributed causes of capitalism’s to supply-side conditions as well as demand-side factors.In the BoE paper, the two economists point out that the rate of return on capital has fallen since the early 1990s, but not by as much as the ‘risk free interest rate’ – so that the cost of borrowing for risky investment has increased by around 100bps. In other words, the cost of borrowing to invest has stayed up while profitability on investment has fallen, squeezing the ‘profitability of enterprise’ and lowering the incentive to invest. The BoE paper refers to the IMF World Economic Outlook April 2014 where the IMF finds that “investment profitability has markedly declined in the aftermath of the global financial crisis, particularly in the euro area the UK and Japan.
-  V.I. Lenin. Imperialism, The Highest Stage of Capitalism
-  Piketty, Ibid, p.471
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