Thomas Piketty knows where he stands in the sweep of economic and intellectual history. In the 19th century, he shows, society accepted inequality and certain economists rationalized it in various ways. Then came the era of the two world wars, which profoundly changed the distribution of wealth and income in all the advanced nations. By the mid-1950s the economist Simon Kuznets was writing that capitalism had entered a new phase characterized by more equality, rather than less. Piketty reached consciousness just as that era was coming to an end, and he has evidently spent a good deal of his adult life documenting the resurgence of inequality. His book is an excellent example of why history has to be rewritten in every generation. First of all, as Michael Beschloss generously recognized in his review of my new book in The New York Times, new data always remains to be discovered even on the most written-about topics. Secondly, changes in the present change our perspective on the past. The greatness of Roosevelt's Missionary generation becomes clear when they are compared to the current generation of Prophets, the Boom generation.
Piketty makes an overwhelming case that the period 1914-80 was very different both from what came before and from what has come after. Because, however, he is an economist--albeit a relatively sophisticated one about history--he has a lot of trouble explaining why. It might be better to say that he makes little real attempt to do so. The data he presents about the period are striking. Thus, for example (pl 196), the worldwide capital-income ratio--the ratio of accumulated assets to world economic product in a given year--fell by almost exactly half, from 500% to about 250%, from 1910 to 1950, rose quite slowly for the next twenty years, and then began accelerating much more rapidly and now once again exceeds 400%. In terms of annual income, the share of the top 1% in the US fell from 18% in 1910 to 8% in 1960, where it stayed, roughly, until 1920, after which a swift rise has taken it back to 18%. In Britain the top 1% dropped from an even higher peak of 22% in 1910 to a lower one of 6% in 1980. Capital suffered even more heavily from the two world wars on the continent, where inflation virtually wiped out savings, and income became more equal there before the 1980s. It is still more equal.
The question is, why? Piketty simply refers, again and again, to "the shocks" of the two world wars. There's a good deal of truth to that as far as it goes, but where did those shocks come from? Like many Europeans of his age, I suspect, Piketty regards great war as an anachronism of a bygone age, a product of obsolete values. There is, we can hope, some truth in this, but in my opinion, both the wars and the economic policies pursued in their aftermath have to be understood in political and intellectual terms. We can only do this with the help of some lengthy background.
When one applies Piketty to the 18th and 19th centuries, what emerges is a powerful refutation of one aspect of Marxism: Marx's idea that intellectual change always reflected economic change. Piketty shows that the western world experienced relatively little economic change in the 18th century, and no change in the pattern of inequality--although it did experience significant population growth. The nineteenth century experienced the industrial revolution but without any significant change in income distribution. Yet these were centuries of intellectual and political revolution. Traditional authority gave way to authority based on reason--whether in a new democracy like the United States, or the bureaucratic states of Europe in the first half of the 19th century. The idea of democracy took root in the eighteenth century, and that of socialism took root in the late nineteenth. I was very struck, reading Piketty, at how little socialists had managed to accomplish before 1914 with respect to income distribution, but they had become a significant political force at the ballot box in many European countries, including Germany, where the Social Democrats became the largest party in the Reichstag in 1912. Many thinking people, as well as much of the lower three quarters of the population, understood that inequality was much too vast. In the United States Theodore Roosevelt and Woodrow Wilson took a similar line, although their initial steps were also extremely tentative and not effective.
Meanwhile, nationalism had redrawn the map of western and southern Europe during the 19th century. Because of German expansionism, a crisis in the Balkans between Austria-Hungary and Serbia turned into a global struggle for world domination. That forced every major government to mobilize its people and resources to fight on a scale not seen since the Napoleonic Wars, if then. Because France and Germany both borrowed to pay for the war and counted on indemnities from defeated states to make their debts good, the war drastically cut the value of their currencies, and thus, their capital. Meanwhile, both Britain and the United States imposed serious progressive income taxes. With European soldiers dying by the hundreds of thousands and millions, the idea that sacrifices must be broadly shared was inescapable. In addition, labor exploited its position within the war effort to make significant gains, especially in Germany.
Another huge political shock hit Europe late in 1917: the Bolshevik Revolution. The Russian state had collapsed under the weight of the war, and revolutionary socialists seized power and won a protracted civil war. As Piketty notes, they repudiated the enormous debts of the imperial government, dealing a heavy blow to British and French rentiers. But they also frightened many people in the west about the consequences of laissez-faire capitalism.
After a modest recovery in the 1920s, an excess of unregulated speculation in the United States, combined with structural problems growing out of the war, triggered the Great Depression. The United States government and the German government reacted strongly to it, perhaps because they were the hardest hit. In 1932 Herbert Hoover signed a new tax bill raising the top marginal tax rate to 65%. (Piketty mistakenly attributes this increase to FDR, who did raise the rate still further in 1936 and again during the war, when it topped 90%.) In Germany the depression created a complete political collapse and led to the advent of Adolf Hitler. It is easy to forget not only that Hitler put an end to unemployment in Germany with a combination of public works projects and rearmament, but that he also began to implement a vision of a good life for every German, complete with paid holidays and Volkswagens. But partly because he was destined to lose the war, his legacy did not endure. Roosevelt's did.
As I show at length in my new book, Roosevelt based the New Deal on a new set of values. As he said in his first inaugural, a relentless pursuit of private wealth had landed the United States in a catastrophic economic situation, and only new values could get us back on the right track. Equally importantly, he and his advisers specifically believed it necessary to transfer incomes from the wealthy, who would simply accumulate them, to farmers and workers who would spend money and promote recovery. He did so partly by undertaking a series of gigantic public works projects. He also took steps to create what Piketty calls the modern social state, signing Social Security in 1935 and also guaranteeing the rights of labor to organize. (Germany and Britain, to be fair, had instituted forms of social security in the 1880s and early 1910s, respectively.) And when the world crisis became critical beginning in 1937, Roosevelt defined a new contest of values between the U.S. and other democracies, standing for the rule of international law, and dictator powers who were plunging the world into international anarchy. In 1940-1 he took steps to insure that the US would throw its full industrial weight into the scales. By then the world war had engulfed nearly every major nation.
Two sweeping historical changes, I would argue, transformed both economics and politics in the advanced nations. On the one hand, the world wars forced them into an unprecedented mobilization of their resources which was bound to have a greater effect upon those who had resources--the rich--than those who did not. At the same time, especially in the victorious nations of Britain and the US, the working classes took advantage of the mobilization to make large gains and strengthen their unions. On the other hand, the ideas of socialism (in Britain) and regulated capitalism (in the US) became mainstream ideas. Lastly, the threat of totalitarian revolution never left the consciousness of the generation born in the first quarter of the twentieth century, which in the United States held power into the 1980s and even later. Piketty believes that economic growth increased in the postwar period simply to make up for the losses during the war. There is certainly a good deal of truth in this in Europe--but not in the United States. I believe it increased partly because of the huge increase in the birth rate--the demographic baby boom--and partly because, to put it bluntly, economic growth was the principal focus of domestic public policy.
That was not all. European Communist parties were strengthened by the war, and the United States became involved in a worldwide cold war with the Soviet Union. Those developments convinced both center-left and even conservative parties that they had to make real improvements in the lives of ordinary citizens to win national and political competitions, and they did so. German workers became full partners in their industrial enterprises. The British, French, and West German governments all nationalized large sectors of their economies, meaning that these sectors would now accumulate public, not private, capital. The social state grew all over the western world.
One particular example suggests that Piketty is indeed exaggerating the impact of the world wars, relative to independent political and intellectual change. The relatively small nation of Sweden, Piketty shows, has gone through the same stages in the last 120 years as all the major western European countries. It was very bit as unequal in income and wealth around 1900, became the most egalitarian nation in Europe in the mid-century decades, and in the last thirty years has been moving steadily in the other direction (although it is still far more equal than the United States or Britain.) But Sweden took absolutely no part in either world war. I do not know exactly how or why all this was accomplished there, and Piketty doesn't seem to either, but it certainly suggests that the war was not necessarily critical to the creation of the relatively egalitarian era in which I grew up.
What I am suggesting is that we do, in fact, know how to moderate or reverse the trends that Piketty is so concerned about. We can do so, as we once did, by mobilizing our societies on behalf of a large and expensive public goal. I am not suggesting that we need to unleash a new series of world or large-scale regional wars--far from it. The crises in Ukraine and the South China Sea do suggest that we are heading for a more conflict-rich environment, even among major nations, but I do not expect them to become full-blown wars--and that will be a good thing. There is, however, no lack of expensive projects to undertake. The infrastructure of the United States is in many ways second-rate and desperately needs repair. Lots of evidence suggests that the use of the automobile has peaked and that we need other forms of transportation. Last, but hardly least, a real commitment to cleaner energy and a reduction of fossil fuels could be a huge project, and a good one as well.
Another interesting problem concerns birth rates. Piketty says again and again that higher birth rates fuel economic growth, as they did in the US, especially, from the 1940s through the 1970s. (Oddly, Piketty at one point talks as if the baby boom of the late 1940s included Europe as well. It did not--European birth rates, including French ones, remained low until the late 1950s.) He also says that continuing US population growth, mainly through immigration, is the only reason that US GDP is growing faster than European GDP. But he does not dare call for policies to encourage more children in the west. The trend is obviously in the other direction, especially among the upper half of the population, and I think it would be beneficial for it to increase. The social and cultural changes of the last few decades, however, all tell in the opposite direction.
To undertake such projects, we need to recover the idea of common national enterprise and of the government as the steward of the economy and society. We also need another rebirth of new values. It may take a long time for these things to happen, and the men and women who might implement such changes may not yet be born. Yet history shows that it could be done. With the proper political will, nations can overcome capitalism's natural trend towards inequality--a trend which thanks to Piketty has become impossible to deny, but which, history shows, can also be reversed, given the proper inspiration and the proper political will.