After months away from the joys of reviewing due to another writing commitment – which didn’t preclude a lot of reading - I am delighted to be back to tell you about the good and the bad and there is no shortage of the latter! However, one book has bowled me over and is one I shall go back to again and again and I have to thank the long dark cold wintery days that gave me the drive and time to work through a dense 570 pages: it is Capital in the Twenty-First Century by Thomas Piketty. It is this tome that has given rise to the buzz word of the year in economic, political and particularly media circles – inequality. He identifies the main impetus of inequality as arising from the tendency of returns of capital to exceed the rate of economic growth leading to a concentration of and consequent unequal distribution of wealth and to counter this he sets out a new vision for Europe which, even if it seems to involve a bloodless revolution, just might be achievable.
Thomas Piketty is Professor of Economics in the Paris School of Economics, his alma mater being the LSE (where he got his Ph.D. at age 22 – no slouch then!) and Ecole Normale Superieure. His speciality is of course wealth and income inequality. Among his activities, he included serving as an economic adviser to Segolene Royal for the Socialist Party during the French presidential campaign. According to Wikipedia, he rejected the French Legion of Honour order because he did not think it was the government’s role to decide who is honourable. You have to like him! And to cap it all, he writes the most readable economic prose I have ever read.
The final sentence of his book reads, ‘if democracy is someday to regain control of capitalism, it must start by recognising that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again’. This is a concrete summing up of his thesis. On the way to this sentence, he treats us to an economic history from the Industrial Revolution to the present day drawing data from twenty countries including the United States. He explains the dynamics of the capital/income ratio looking at both Europe and the US up to the twenty-first century moving on to the structure of inequality in labour income, capital ownership and the global inequality of wealth in this century. With this understanding behind us, he moves into regulating capital today and puts forward his thesis for a new Europe. This is where it gets exciting!
He argues that the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a progressive global tax on capital but quickly acknowledges that this is a utopian ideal but at the same time, the tax and transfer systems are in constant need of reform and modernization, and financial capitalism needs controlling, both aims requiring strong state intervention suitably tooled up. Over the last century, the creation and development of a progressive income tax has fostered the social state but as he points out, the tax is regressive when it comes to the top centile and he avers that ‘if the modern social state is to continue to exist, it is therefore essential that the underlying tax system retain a minimum of progressivity or at any rate that it not become overtly regressive at the top’. Looking at the developed countries, there is a close correlation between the top marginal income tax rate and the size of the increase in the top centile’s share of national income.
However, to really regain control of the fiscal system, a progressive tax on capital would be the ideal. This would effectively stop the indefinite increase of inequality of wealth and would serve ‘to impose effective regulation on the financial and banking system in order to avoid crises’. It would involve a comprehensive global sharing of bank data and would include all asset types. In other words, it would include not only real estate assets but also financial assets. He points out that a tax on real estate assets already exists but is badly managed in that it takes no account of debt and is not progressive but generally charged at a flat rate. He argues that without such a tax on wealth, the top centile share of global wealth will continue to grow indefinitely. The EU which has successfully launched a currency with no state has yet failed to accomplish anything like this in the area of taxation though the proposed financial transactions tax could be the beginning of a true European taxation system. He questions the effectiveness of the ECB and finds faults with its constitution. He would like to see a ‘budgetary parliament’ made up of elected representatives from the Eurozone who would decide on matters like the size of national debts, maybe create a ‘redemption fund’ and agree budgets.
It is likely that one might quail at the prospect of such seemingly loss of sovereignty but the reality is that monetary sovereignty is already of the past. Such a budgetary parliament would de facto restore its own sovereignty to those countries already part of the Eurozone with the realization that monetary policy is but a tool in the restoration of growth, social cohesion, employment and its inherent dignity to the peoples of those nations without conflicting with the national parliaments. Further, as Piketty points out, ‘in addition to pooling debts and deficits, there are of course other fiscal and budgetary tools that no country can use on its own’ – for example, a progressive tax on capital.
To try and summarise such a book crammed with analyses and proposals is impossible but I have tried to show that it should not be ignored. His proposals are deeply thought out and argued and he represents a new way of looking at economic principles long past their sell by date. He asks ‘are all these proposals utopian? No more so than attempting to create a stateless currency’. They could also lead to a rethinking of the timeworn institutions such as the ECB which by their very constitutions no longer function to advantage and reinvent them again. It is certain that unless serious reconsideration is given to the notion of restoring a failed system the direst Marxian prophecies will come true.
Capital in the Twenty-First Century (Thomas Piketty) Harvard University Press and London, 2014 (Book Depository, €33.89)