The big economic debate of the 21st C has just been launched – and it’s about power rather than money.

March 30, 2014 by
Filed under: Adam Lent 

Six years after the Wall Street Crash, a book was published that revolutionised economic thinking and set the tone for policy for decades to come.  That book was, of course, The General Theory written by John Maynard Keynes.  Has history just repeated itself?

Thomas Piketty’s book Capital in the Twenty-first Century* has beaten Keynes’s record appearing five years and six months after the 2008 Crash. Nevertheless, it does look set to create just as much debate.  Whether it will recast policy in the same way is less certain but, if there is any justice, it should although maybe not in the way Piketty himself suggests.

Piketty’s central claim is that material inequality persists because the wealthy earn their income in a different way to everyone else. The rich get rich because of the return they make on their investments in capital which for Piketty encompasses land, housing, shares, machinery, intellectual property amongst other elements.  The rest of us poor schlubs have to rely on income from selling our labour.

Nothing that original there but Piketty’s key contention, based on a vast study of historical data, is that the return on capital always outstrips economic growth which is what determines any rise in income from labour.  So the rich will keep getting richer while everyone else increasingly lags behind. The only exception to this is an anomolous period in the middle of the twentieth century when, due to a strange coincidence of factors, growth outstripped the return on capital meaning inequality consequently fell.

This insight has the power to influence public debate about the economy hugely. Instead of the current obsession with relative levels of pay, tax and benefits, it could force a much more profound discourse about ownership.  Piketty points out that the source of inequality is not ownership as such but a complex interplay of legal, historical, political, social and cultural factors which allow ownership to be incredibly concentrated meaning that the financial benefits of that ownership flow to the few.  Fiddling about with fiscal, regulatory and labour market policy (a not too inaccurate characterisation of current political debate) will never make a significant difference to such profound forces.

This plays in to the divide I outlined in my last post. Those in the Conservative and Labour parties who believe we need a broader distribution of power away from the unholy alliance of big state and big business are closer to offering a solution to Piketty’s contradiction than those who think growth driven by corporations or by government is the answer. In fact, Piketty’s analysis has the potential to give major empirical weight and provide an economic focus for the ‘Littleendians’ that is currently lacking.

But that raises the more disappointing aspect of Piketty’s analysis.  His one hit solution is the introduction of a punitive global tax on wealth. Leaving aside the fact that the idea is, in many ways, a total non-starter it surely repeats the mistake socialists and social democrats have made for decades namely that the solution to the concentration of economic power is a countervailing concentration of political power.

As a recent detailed empirical study of public spending across the world showed, it is an approach that becomes less effective – both in terms of improving social outcomes and generating economic growth – the more it is relied upon. It also, of course, generates all sorts of constraints on freedom of choice which extend well beyond the immediate impact on the yacht-buying classes to affect the whole of society.

Far better surely to explore how capital ownership could be spread much more evenly without the need for the intervention of an over-bearing state. Could we not, for example, imagine a world where intellectual property is far more widely shared as a result of the unfolding empowerment through new technologies, a much stronger focus in school on creativity and a liberalisation of patent and copyright law?

Such thinking aligns with the RSA’s idea of the Power to Create. Jonathan Rowson has very helpfully broken the idea down into five elements:

An analysis of ongoing socio-technical disruption: The reality of new technologies undermining old forms of cultural, political and economic power.

A grasp of the urgency of innovation: The need for new ideas and institutional forms to tackle major systemic problems (such as structural inequality).

A belief in the value of of mass creativity: A vision of social transformation grounded in meaningful creativity for the many, not the few.

A reappraisal of ‘small is beautiful’: The belief that a legion of small initiatives can and should challenge or usurp big businesses and governments in areas where their activity is relatively ineffectual.

A philosophy of freedom: A commitment to a vision of the good life grounded in self-actualisation and the joy of turning our ideas into reality.

All of these, it seems to me, could have a bearing on the current narrow distribution of capital ownership and the concentrated power structures that maintain it.

Importantly they provide a framework for us to respond to Piketty’s observation that given the complex forces upholding the status quo means that a wider distribution of capital must go far beyond piecemeal economic solutions (such as employee ownership or community asset schemes) to a more profound reformulation of the way we think about our work, our ambitions and our institutions.

With this sort of focus and through Thomas Piketty’s insight, it feels like what will be the fundamental economic and political debate of the twenty-first century might be about to begin.

 

* I should say I have yet to read the book (give me a break: it’s 950 pages long and was only published a few days ago) but, in my defence, there are already plenty of reviews, at least one very detailed and lengthy summary of the core arguments while Pikkety himself has written (£) and given interviews and talks about his work, many of which are on-line.

 

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Comments

  • Piperage

    ‘The solution to the concentration of economic power is a countervailing concentration of political power.’

    Does taxation have to translate into public spending or large government? Is there some other way that Picketty’s tax solution can be used without its ‘socialist or big government’ downside? For example ‘tax’ does not have to mean a central authority taking money and redistributing it. The tax may be a requirement for the use of small firms in a supporting capacity. Does a car manufacturer have to own it’s own paint shop? Might even the components parts of that factory be provided by specialist middle sized firms?

    Taking this further could anti-monopoly laws be extended to mandate large firms outsourcing non-core business functions to small-medium sized businesses not owned by themselves? What unintended consequences might this have?

    If the economic and political structures need to change to allow ‘small’ to flourish, will those changes be resisted by the existing power structure. How do you counteract that? People as a whole won’t accept a second class life while they build a small society. So they won’t build it at all, at least until economic inequality becomes so great it’s a no brainer. Better to stop the pendulum swinging that wildly.

    Government has been a key part of the big business part of the problem. Government procurement has always favoured large, often to its own detriment. While there are currently moves to reverse this the government definition of small business is still very large. There is still a barrier to the new startup. Does it make sense for government to become more extreme in defining small, and its use of small outsource providers? What about planning law. If I want to open a large supermarket will I have the same chance of getting it past the planning stage without the weight of tesco et al pushing the planners? Most small firms would not have the money and expertise to get through that minefield.

    ‘Much stronger focus in school on creativity and a liberalisation of patent and copyright law?’ As long as wealth (especially liquid investable wealth) is concentrated, any good ideas or creative people can and will be snapped up by the larger incumbent. Very few people will have the balls to resist a big offer. I agree with Picketty that education won’t help, paradoxically may make the problem worse. Reduction in the length of copyright might help. Rules to prevent the use of patents to inhibit competition might help also. It would be interesting to study how many new businesses are stillborn due to ‘trivial’ patent infringement. It’s probably one example of the many structures that would need to change to favour small over large.

  • LucyC

    Really interesting blog, thank you. The arguments around wealth creation being dependent upon capital ownership are borne out by the model of a circular economy and its emphasis on the conservation of capital (whether natural, social, cultural or economic) rather than its exploitation. This also chimes with a shift in taxation, from renewable resources (ie labour) to non-renewable resources (ie natural capital).

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