Last Wednesday, October 1, Martin Wolf published an article in the Financial Times on the reasons why inequality is a real drag on the economy. To demonstrate the economic impact of inequality in the distribution of income and capital, particularly weak demand and regression in education levels, Wolf relies on two studies, one by Standard & Poor’s and the other by Morgan Stanley, two institutions that can hardly be considered left-wing. The picture that emerges from these analyses, which refer to the United States since the 1990s, is such that the author concludes that in a debt-based economy the greatest costs of rising economic and educational inequality are the erosion of the republican ideal of “shared citizenship,” in other words, the risk of economic and social deflagration of capitalism itself. Curious is the fact that these remarks are made in the pages of the same financial newspaper that, on the occasion of the English publication of Thomas Piketty’s book, Capital in the 21st Century (now in Italian thanks to the types of Bompiani, transl. by Sergio Arecco, Milan, 2014,, pp. 928), had tried to grotesquely dismantle one of the book’s central theses, the upward trend of wealth concentration. This is enough to underscore the importance of Piketty’s study whose main merit, apart from the earthquake unleashed within the academy hegemonized by neoliberal thought, consists in having described, “with atrocious precision and difficult to refute,” as David Harvey has written (Reflecting on Piketty’s ‘Capital,’ in commonware.org), the evolution over the past two centuries of social inequality with respect to both wealth and income.
“Capitalism’s central contradiction.”
Since its publication in France in 2013, Piketty’s book has been reviewed several times, but it is still useful to summarize the main findings of his study. In particular, the theoretical conclusion that when the rate of return on capital (r) exceeds the growth rate of income (g), inequality increases to the point of being “incompatible with the meritocratic values and principles of social justice on which modern democratic societies are founded.” When the “becoming rentier” of capital at the expense of those who own nothing but their labor, compounded by hereditary succession of accumulated wealth, reproduces capital faster than the increase in production, “the past devours the future,” and the polarization of wealth and income grows out of all proportion. Over the span of two hundred years this has been the “rule,” except in the period between the two World Wars, which, in the face of the USSR as a competitor, allowed for the thirty “glorious” years after World War II the introduction of welfare and wealth redistribution policies. In fact, in the period between 1920 and 1980, the return on capital experienced a relative decline (to 2.5/3.5 percent), only to recover to around 4-5 percent from 1980, the same rate as in the period between 1870 and 1910, with an average income growth rate of 1-1.5 percent.
What remains opaque in the central thesis of Piketty’s analysis, however, is precisely the cause of the inequality between return on capital and income growth. Giorgio Gattei demonstrates this well in his article, That Dangerous Capital: All of Piketty’s Formulas (in “Economics and Politics,” an online journal of economic policy criticism): “the percentage of income going to capital increases if the rate of return and/or the propensity to save increases, while it decreases if the rate of income growth increases.” This is a tautological formula that allows one to describe the symptoms of a much deeper and more complex process. Moreover, the phenomenon described by Piketty can only be temporary because the share of the benefits of capital cannot increase linearly out of proportion, with half and more of the income produced going to returns on capital, as Piketty exemplifies to show what could happen by the end of the 21st century. Since workers do not live on air, there is an extreme limit to the percentage return on capital, and it is a historically determined limit.
Of course, wars and revolutions have served, and still serve, to devalue capital and thereby reduce inequalities of income that were in the long run unbearable. But there is something even more “constitutive” that explains the origin of inequality between return on capital and return on income, and that is the role of orginal accumulation. At the origin of private property and capital accumulation lies the violent appropriation of the commons, an appropriation-recession of the commons, as Sandro Mezzadra has masterfully explained (see his latest book, written with Brett Neilson, Boundaries and Frontiers. The Multiplication of Labor in the Global World, il Mulino, Bologna, 2014), which is repeated over time because the tendency of capital is to fence off from time to time the forms of social cooperation in the sphere of production and in the sphere of reproduction-conservation of life. The becoming rent of capital described by Piketty is a historical process of struggle between appropriation of the common, extraction of value-wealth and social production of new spaces of cooperation and sharing. It is this that makes capital a social relation, a “relational processuality” (D. Harvey) of artificial creation of scarcity (e.g. of labor, but also of intangibles) such that growing rents can be realized. In the absence of this definition of capital, Piketty’s study risks being limited to a “history of wealth,” regardless of the capitalist use of this same wealth.
Debt as the cause of inequality
Russell Jacoby is therefore right, in his The Pragmatism of Utopia (which appeared in Le Monde Diplomatique and was picked up by the manifesto, August 22, 2014), to highlight the absence of labor in Piketty’s study, the fact that capital “needs labor power and at the same time tries to do without it,” creating a relative surplus worker population. Not only labor, its transformations in historical time, does not seem to interest the French economist indifferent to social movements, “vacillating for life against conventional and trite anti-capitalist discourses” (Piketty). Absent in his definition of capital (money, land, real estate, factories and machinery, movable assets) is human cognitive capital, that capital made up of knowledge, acquaintances, relationships, and cooperations, which makes it possible to explain the geographic concentration of wealth but also its increase and spread as factors of growth. A crucial factor, which unveils the contradiction between rising returns and pure neoclassical competition (David Warsh, Knowledge and the Wealth of Nations. A history of economic inquiry, Feltrinelli, Milan, 2007).
Growing returns that would not be possible without money, without access to bank credit and the inequalities generated by the debt economy, as German economist Daniel Stelter shows (Die Schulden im 21. Jahrhundert, Was ist drin, was ist dran und was fehlt in Thomas Pikettys DAS KAPITAL, Frankfurter Allgemeine Buch, 2014). Here we really touch on one of the major weaknesses of Piketty’s work, the total absence of the analysis of debt as a decisive factor in the rise of inequality over the past three decades. In Stelter’s analysis, wealth inequality comes from the low-interest-rate monetary policy orchestrated by central banks and the rise of debt. The systematic attack on wages, with the addition of the fall of the Berlin Wall and China’s opening to capitalism, has allowed economic growth through private debt. Debt, not only in the U.S., has shot upward to support rising incomes, and in Europe, social transfers have increased relative to lower taxation on high incomes and capital. Debt is the key problem because debt concentrates risk on those least able to bear it, and when the assets in which one has invested (as in the case of subprime mortgages) depreciate, the concentration of losses and wealth inequality increases. “Debt introduces a nonlinearity into the economic system, which Keynesian models overlook” (Atif Mian Amir Sufi, House of Debt. How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening again, The University of Cicago Press, Chicago and London, 2014).
Perhaps the real merit of Piketty’s The Capital lies in forcing a bit of everyone to think Marxian, to look in what he does not say for what we want to see for struggle.
taken form here