Tuesday, May 20, 2014

Piketty and the twentieth century crisis

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.


Mourned_Cause said...
This comment has been removed by the author.
Unknown said...

The future ideologies are based on future and current trends due to human technological developments. This was the same in the last 200 years where human population grew from 500 million(1800) to 2-3 billion by 1930-1965 with transition from agrarian society to urbanization and industrialization based not on wood(1750) but on fossil fuels. The ten times increase in production of goods due to industrialization (steel, etc.) resulted in a wealth effect which destabilized an outmoded system of feudalistic structures allowing mass ownership through industrialists of production and spreading of products made to workers.

The new problems since 1980 are based on the fall of communism de- facto in China, and former East Bloc in Europe. Deng Hsiao Peng decided that a cat's colour was unimportant as long as the results were what were desired and the Russians followed suit a few years later in perestroika. The Indians and other tightly structured socialist type states took up the idea and the global neo-liberal idea won the day spreading 19th century type mass production USA style (not European style, a key distinction, as the products like cars(or train transport(class separated) there were elitist-why socialism was not USA rooted - ever). This is the American dream in action, chicken in every pot type of idea but for all Japanese type hi-tech gadget, among other things. Middle class income participation globally has risen substantially, mobile phones simplify life everywhere and internet access with such gadgets giving power to everyone and making truth available(alternate press) and power to criticize govt. as well. This is yellow press 1900 style USA.

Essentially then since 1980 in the West the excitement with the new spread of capitalistic middle class ambition to mainland Eurasia in terms of cheap goods Wal-Mart style created and economic boom. Everybody became much more middle class and accepted the American Dream idea(everybody can make it if he tries-individually and nationally in the global competition-using comparative productive advantage (Bangladesh/ southern Chinese factories-or going to Harvard or Cal-tech for Asian students).

However everyone miscalculated terribly on trade flow stabilities and regulation was terribly missing on banks and tax havens. The usage of USD Bretton Woods system fell apart 1972, (USD to gold convertibility) and the petrodollar and general USD usage as reserve currency and trade currency for all trade flows(as well as English as lingua franca between Europe and Asia) overtaxed the whole post-war system. For 1 billion people it was difficulty enough to manage such money stability but for 3-4 billion and a much higher global GDP? So USA is drunk on USD power flows presuming global economic and military dominance but we are really in a different world. Real Chinese GDP is higher than USA considering production not exchange rates. When Eurasian economic and military global influence adjusts to the level of real economic capability then the USA with its 5% of global population will sink into the 1950s level of UK insignificance of a middling power. US bonds replaced by Asian, Russian bonds on global markets for reserves, etc. USA military spending and general trade and budget deficit financed by Japan/China money recycling ( both near bankrupt as well of course).

This is just the one aspect of a humanity linearly self focused on its own "pursuit of happiness" American Style. The other being of course that we have used up quickly all earth metals and fossil fuels, groundwater, soils eroded, and are experiencing climate change destroying capacity to produce grain and live along coasts or eat fish (overfishing) or have diversity of animal kingdom(mass extinction event).

Unknown said...

(a bit more)

From the economic perspective it would seem obvious that USA is in for a surprise similar to the European one which they got through two world wars destroying their racist/imperialist dominance of the world ca. 1950. US exceptionalism is the equivalent of racism. We find this in the Western attitude towards the Ukraine situation currently(one-sided press coverage ignoring or twisting massively facts) as well as ignoring illegality of Iraq war, drone strikes and general, NSA activities. Essentially USA is getting its comeuppance. 2008, Lehman, housing crisis was just the beginning of USA power reduction. This is of course inevitable historically. Gases diffuse and power diffuses as well. Asia was power and population center until 1600 and is retaking that position. Islamic rebellion against Western values, not to mention Russian conservative morality and Chinese self determination is all not unlike German and Japanese stance before WWII seeking equal status to Western imperialist powers. Germany wanted to copy France/Britain and Japan took colonies in Asia for mercantilist methods as Britain, Holland did earlier.

Russia is now stating openly that USA has a double standard, that it presumes that it is exceptional and is allowed to take any stance possible and to change ethic stance the next day on a whim, supporting a dictator to get its way and then supporting democracy and then nazis and thugs to get oil, whatever it likes and torture and detain its own citizens at will, while maintaining high moral ground and expecting respect and obeisance in the UN, etc. and executing and imprisoning massively own prisoners(2 millon in prison), ignoring global warming, whatever. The student outgrows his teacher. The newly capitalist and / or democratic countries have learned that their "parent" USA has faults and is selfish and hypocritical.

In ca. 1990 Russians and Chinese, Indians and Latins, Africans all worshiped USA. Now they are severely disappointed by a global policeman with paranoid Stalinist control features, an oligarchist state where poverty for the common man is a built in permanent state of affairs for the former middle class. America is less and less a country to emulate for emerging democracies and transitional countries. Russia and China are more orientation points. Maybe a major war between the great powers (China, Russia, USA/NATO) will not occur but a reorientation of economic flows and influence most certainly will reducing USA, western dominance. This would remove hypocritical aggression on the part of the West if there were a counterpoint to their economic and military "hyperpower". Democracy is never served well in a one party system, nor in a global power system with USA a sking-maker. Thsi was case with one party dominance in East bloc amd in Japan LDP 50 year dominance or post War Italy style. In the West the parties all look the same so that we have a unitary party system. Who is president or chancellor or prime minister is unimportant in Germany, USA, in Spain or France as the biog banks, IMF, military, lobbyists generally call the tunes regardless of elections. We have seen this clearly since 2008 in various changes of government in Europe and USA. This is not just demagogic talk point but statistically proven.

That Putin manipulates the elections and remains in power (Deng understood this as in Chinese Tiananmen masssacrte) shows that he is aware of the hypocrisy of the oligarchic system as in Ukraine. "He who has the money makes the rules." True free elections mean a sell-out to the rich who then sell out to the West. Banana republics then become slaves to Western corporations. National patriotism means control of the economy by local companies. Japan and Korea understood this and controlled trade flows to develop their economy and technology and continue to do so. "Free trade and democracy" are Western code words for "heads I win, tails you lose". This was always so, always will be.

Unknown said...

(another paragraph)

Until Russia is extremely competitive in all economic areas it would be wise to be careful and the Eurasians should get rid of American internet and banking dominance (Visa, google, USD reserve currency) and control access to vital minerals, oil, gas. Open acceptance of international technical standards (Windows, google, USD, English, Hollywood films and music) means naive application of US backed economic and cultural dominance.

This is both a rant, and a long process of thought from the last years and due to the Ukraine crisis as well as a response to your current post.

Zosima said...

G. William Domhoff has said that social power is always based on some form of organization. In America the most powerful organizations have been the corporations. Corporations, through their dominance of government, have ensured that alternative social organizations, such as unions, are either crushed (as they are in the South) or neutered. As long as corporations and the wealthy can use their wealth and power to buy the government, the government’s prime role will be to ensure that corporations continue to have a free hand to grow and increase that power. This is what we have today - corporations setting the goals of government. This is why there have been few large projects that might have helped workers. The increasing inequality that we see goes hand in hand with increased corporate power. Corporations will always use their power to crush unions and keep workers wages low and they will always try to make sure that government power is not used to help workers. They will also use their ownership of the media and their domination of nearly all the institutions of our society to make sure that no discussion of any new set of values takes place. This explains why no generation since the 1930’s has been able to challenge the corporate values of “relentless pursuit of private wealth.”


CrocodileChuck said...

A smashing, insightful post - until the last three para's.

"The infrastructure of the United States is in many ways second-rate and desperately needs repair" (snip)

Neoliberal economic orthodoxy prohibits expenditure of public monies on the commonwealth. Any build must be performed by the private sector, at a profit.

"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" (snip)

Pretty weak sauce. Simple mean reversion will result in a change in direction of the flow of capital, in the long term.

Pinning all our hopes on future generations not yet born?

Something tells me this isn't quite what the Founding Fathers had in mind in bringing forth a new nation..

Mourned_Cause said...

@ Zosima

Mismanagement leads to power vulnerability.

Eventually when reform movements break down, the Corporation/Aristocracy/Theocracy "eats" itself to death.

In a very, very similar way to how a human dies from a alcohol addiction. It cannot deal with its systemic problem, so it destroys itself.

(Furthermore, the "actual" method of obtaining power invulnerability is the exercise of power for others.

Doesn't matter how many "guns" you own, if people don't believe that your organization will help them, then the majority of the population will abandon the organization when serious adversity strikes.

Peasants in the Russian Civil War, despite actually believing in the Czar being Gods' representative for Russia, did nothing for the White Movement because they knew that the White Movement never attempted to better their lives in the first place, and they had better chances hiding from the Reds then trying to die for the White Movement.

All revolutionaries win the same way elections are won; the majority of the population stays home when the nation crumbles.

That, in essence, is how Power vulnerability is given, and never achieved)

Zosima said...

Joseph Young said...Mismanagement leads to power vulnerability. Eventually when reform movements break down, the Corporation/Aristocracy/Theocracy "eats" itself to death. Doesn't matter how many "guns" you own, if people don't believe that your organization will help them, then the majority of the population will abandon the organization when serious adversity strikes.

Joseph - Many Americans have already abandoned the organization. But where have they gone? To what alternative organizations? They already don’t vote. They've gone to the fundamentalist churches, to Fox News/Limbaugh, and to the gun store. Exactly the places where corporations want them to go. Places full of hatred and fear of their fellow man, not to places where they might join with their brothers and sisters in revolutionary solidarity. Adversity HAS struck, and they’re told that the cause is blacks, immigrants, gays, Muslims, atheists, and liberals. All the usual suspects (minus communists, since they’re now defunct). Domhoff is a realist, with a sober approach to America’s unique and debilitating features, he doesn't indulge in fantasies about magical generations and phantom revolutions. The corporations have won because of America’s unique history (the slave South) and its undemocratic political system. An unbeatable combination.

Mourned_Cause said...


To be fair, the three places you have referred to have a median age of around ~50.

If you are looking for the "Millennial Far-Right" I'd go here.


It is VERY different in nature, and therefore more...powerful.

(However, in a bizarre twist, the cards are MUCH more stacked against them, leaving their situation...dire.)

Finally, I fully understand the "Unique" nature of the South, but the US is really one nation divided into several hard geographic borders, equivalent to the Frankish Empire.

It isn't a coincidence that the politics of Americans are also overlaid by the politics of Native Americans


(Again, something that hasn't "hit" Academia.)

Finally, I feel it is grossly underestimate how dangerous incompetence is, because the "West" doesn't have any grasp of what it is like to live in a failing economy.

You need 1/10th the manpower to conquer a nation from within then outside, and as the economy worsens and worsens, the State cannot defend itself against the populace, leading to destruction.

But I will digress, I've been reading up on Hannah Arendt,and its worth mentioning (to whoever is listening)

My biggest complain is how Hannah Arendt totally botched up Totalitarianism, now that I've read her books; her accounts are extremely far off from people who have lived both in Nazi Germany AND the Soviet Union.(I've talked to both.)

Only a naive Liberal would look at them from the sky and think "Oh, they are the same."

As a result, I don't think we actually have the capacity to understand Left-Wing politics anymore, and as such we take the most simplistic distinction

Far-Right: Atrocities to prevent Reform

Far-Left: Atrocities to force Reform

And then try to attach some great significance to prevent us from coming to terms with it. (Historcism! Historicism! Historicism!)

Finally, Hannah Arendt wrote her book with a serious kind of pathology where she defended the Russian Population from the the atrocities they forced on the soldiers who defended them in the war they started

10,000,000 human souls were ruined because the Russian Population thought that God and the Czar were more important then rationally governing their nation; and as such Communism provided them a method to have War Veterans get revenge on the "Russian Rednecks" who kept sending them to die

One needs to understand that Lenin took power because the Soldiers, not the workers, gave up on Russia....

...and that Hannah Arendt lied to the world, by claiming that those responsible for the catastrophe of World War I lacked any responsibility for the empowerment of Communism. (Historicism! Historicism! Historicism!)

Ironically, it was because the US feared Communism which allowed it to be Socialist, and so they knew by governing rationally, they could save themselves from Communism...funny, it kind of worked out like that.