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# Capitalism-and-Its-Critics-A-History-From-the

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After Lehman Brothers went bust, financial markets around the world plummeted, and concerns rose about the health of many other financial institutions. In Britain, savers lined up to withdraw their deposits from Northern Rock, an inaptly named bank whose finances were already shaky. Facing the first bank run that the country had seen in more than a century, the British government guaranteed all deposits at Northern Rock, which would eventually be nationalized. Despite this move, and pledges from central banks to flood the financial system with money, the panic continued, prompting more government action. Within a week, the Republican administration of George W. Bush had proposed a \$700 billion taxpayer bailout for major US banks. Mindful of a voter backlash, the Republicancontrolled House of Representatives voted against the bailout. The markets promptly had another conniption, which caused some of the refusenik lawmakers to change their minds. On October 3 the Emergency Economic Stabilization Act of 2008 was passed into law.

A combination of bailouts, ultraloose monetary policy, and emergency lending programs from the Fed and other central banks eventually stabilized the global financial system. But the panic brought on the deepest global slump since the Great Depression. After this experience, it was hard for promoters of deregulation to argue that unfettered financial capitalism represented a viable economic model for the world, although that didn’t stop some of them from trying. On the center left and far left, meanwhile, a small army of economists, journalists, and commentators wrote books that sought to draw lessons from the crisis. Among the authors were Amin, Stiglitz, and Rodrik.

Amin provided the most expansive analysis. In his 2013 book, The Implosion of Contemporary Capitalism, he attributed the blowup to the financialization of the Western economies, which he portrayed as a response to monopoly capitalism’s chronic tendency to generate huge surpluses that couldn’t find a profitable outlet. As the global surplus rose, owners of capital, rather than investing in physical assets, such as factories and offices, diverted their money to bonds, stocks, and other financial products, which proliferated “at dizzying speeds, not commensurate with growth in GDP  … or with investment in real production.”75 This process fueled economic growth, rising asset prices, and rising inequality, but it was inherently unstable and couldn’t go on indefinitely, Amin argued. “It is this system—commonly called ‘neoliberal,’ the system of generalized monopoly capitalism … that is imploding before our eyes,” he wrote. “This system, apparently unable to overcome its growing internal contradictions, is doomed to continue its wild ride.”76

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Stiglitz, in his 2010 book Freefall, placed the primary blame for the financial crisis on the Federal Reserve, for allowing a real estate bubble to develop, and a series of administrations, including the Clinton administration, for embracing financial deregulation. He singled out two episodes: the 1999 repeal of the Depression-era Glass-Steagall Act, which had separated commercial banks from investment banks; and the Treasury Department’s torpedoing of an effort to regulate derivative securities, such as credit default swaps, which ended up playing an important role in the subprime blowup. “The head of the Commodity Futures Trade Commission, Brooksley Born, had called for such regulation,” Stiglitz recalled. “But Secretary of Treasury Robert Rubin, his deputy, Larry Summers, and [Fed chairman] Alan Greenspan were adamant—and successful—in their opposition.”77

Rodrik took a somewhat different tack. “Financial globalization lay at the core of the crisis,” he wrote in his 2011 book The Globalization Paradox, which was a follow-up to Has Globalization Gone Too Far?78 During the years leading up to 2007, Rodrik pointed out, China and the Gulf Oil states had parked much of their vast savings in US Treasury bonds. This helped to keep US interest rates, including mortgage rates, low, fueling the real estate bubble. Rodrik recounted how, after the bubble popped, it emerged that a number of foreign banks, particularly in Germany, had invested in American subprime securities and incurred significant losses. “Financial globalization ended up promulgating instability rather than higher investment and more rapid growth,” he wrote.79 This was surely true. The panic selling in the markets plunged countries as far afield as Ireland, Hungary, and Jamaica into crisis. The Wall Street crash of 1929 reverberated around the world, but this was contagion on an unprecedented scale, and it was practically instant.

Between the publication of Has Globalization Gone Too Far? and the outbreak of the Global Financial Crisis, a decade had passed. Rodrik placed the financial blowup in the context of other developments since 1997, including the Asian Financial Crisis, the violent demonstrations in Seattle, and anti-austerity riots in Argentina. Going beyond the doubts that he had raised previously, he said the entire globalization project needed rethinking before it led to further disasters. Rodrik didn’t mention Polanyi by name this time, but when he described the folly of efforts to build a single world market, with no allowance for inherited customs or national peculiarities, there were echoes of the Austrian’s account of interwar attempts to re-create the nineteenth-century laissez-faire model. “We cannot simultaneously pursue democracy, national determination, and economic globalization,” Rodrik wrote. “If we want to push globalization further, we have to give up either the nation state or democratic politics.”80

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As a fervent supporter of democracy and a skeptic about the prospects of global governance, Rodrik called for the abandonment of hyperglobalization and its replacement with “A Sane Globalization.”81 In his estimation, sanity would include allowing countries to opt out of trade rules that violated their labor standards or environmental laws; placing limitations on movements of financial capital; expanding temporary work visas for migrants from poor countries; and reforming the Bretton Woods institutions, particularly the IMF, to make them more accountable and give a bigger voice to developing nations. On the latter point, Rodrik, Stiglitz, and Amin were all agreed, but their strictures, and those of other would-be reformers, had little impact. Even though the shock of the Global Financial Crisis had discredited free market fundamentalism, the subsequent stabilization of the financial markets and the unwillingness of the United States and other powerful countries to countenance major changes ensured that Amin’s “wild ride” of globalization would continue. And so would the political reaction against it.

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“A historically unprecedented situation”

Thomas Piketty and Rising Inequality

“With all due respect to the ‘dismal science,’ this doesn’t happen often,” the Guardian journalist Stuart Jeffries wrote in a piece published on June 17, 2014. “Hundreds of people are queueing round the block for an economics lecture on a lovely summer’s evening in London. And those are the people who have successfully booked seats. There’s another queue of shiftylooking people hoping for return tickets and steeling themselves for disappointment.”1 The speaker at the Peacock Theater, just off the Aldwych, was Thomas Piketty, a forty-three-year-old professor at the Paris School of Economics who had recently published a seven-hundred-page book, Capital in the Twenty-First Century, in which he traced the long-term dynamics of inequality and warned that the prospect of recent trends continuing was “potentially terrifying.”2

Piketty’s book met the moment. The Global Financial Crisis and Occupy Wall Street’s denunciations of “the 1 percent” were still on people’s minds. Although the protest encampment at Zuccotti Park in lower Manhattan only remained in place for about two months in the fall of 2011, it came to symbolize widespread outrage about rising inequality and the privileges accorded to the financial sector and the uberwealthy. Occupy movements sprang up in other cities and countries, and even mainstream politicians responded to the concerns that the protesters raised. In a December 2013 speech, President Barack Obama described “dangerous and growing inequality and lack of upward mobility” as “the defining challenge of our time.”3 After an obscure German publisher put out Marx’s Capital in

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1867, it was largely ignored for years. Capital in the Twenty-First Century rapidly became an international bestseller. It was published in French in 2013. In April 2014 Harvard University Press rushed out an English version, which quickly sold out on Amazon.com. Shortly before Piketty arrived in London, the book reached number one on the New York Times Best Seller list for hardcover nonfiction.4 By January 2015, it had reportedly sold more than 1.5 million copies worldwide.

Piketty was born in 1971 in a northern suburb of Paris. His parents were left-wing activists who, for a time, operated a goat farm in the French countryside. After high school, Piketty secured a place at the École Normale Supérieure, one of France’s leading universities, where he did a degree in mathematics and economics. Graduate work followed at the London School of Economics and the École des Hautes Études en Sciences Sociales. He wrote a doctoral dissertation on the theory of taxation. In 1993, when he was just twenty-two, he moved to MIT as an assistant professor. Piketty seemed to be on the path to becoming an economic theorist at a top US university, a well-trodden path for mathematically adept French economists. But he decided to avoid that route. “I did not find the work of US economists entirely convincing,” he recalled in the introduction to Capital in the Twenty-First Century. “To be sure, they were all very intelligent, and I still have many friends from that period of my life. But something strange happened: I was only too aware of the fact that I knew nothing at all about the world’s economic problems.”5 Piketty decided to return to France and follow the example of his early intellectual inspirations, the French historians of the Annales School, such as Lucien Febvre and Fernand Braudel, who provided detailed chronologies of daily life over the centuries, creating a new kind of bottom-up history. After joining the French National Center for Scientific Research, he delved into historical data about income and wealth distribution, an area that many members of the economics profession had neglected.

In mainstream economics, the modern study of inequality dates to 1953, when Simon Kuznets, a Russian émigré who taught at Harvard, published a pioneering study of income trends in the United States. Kuznets’s paper showed that between 1913 and 1948 the percentage share of total income received by the richest 1 percent of taxpayers had fallen from 14 percent to 9.5 percent.6 In a December 1954 lecture to the

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American Economic Association, Kuznets hypothesized that inequality increases during the early stages of capitalist development, as rural workers move to higher-paying industrial jobs in the cities, then gradually falls back once a majority of the workforce is employed in the high-paying sector.7 Over time, then, inequality follows an inverted U-shape, which became known as the Kuznets Curve. This reassuring pattern seemed to fit the United States in the period from 1870 to 1950, and the Kuznets Curve became widely accepted. However, even before Piketty started to study inequality, recent income data from the US Census Bureau was contradicting the Kuznets theory. Instead of continuing to decline, at least some measures of inequality—including the commonly used Gini coefficient—had started to rise again. “From 1966 (when the Gini coefficient reaches its lowest value of 0.405) to 1993, there is a clear upward trend in inequality,” Edward N. Wolff, an economist at New York University, wrote in his 1997 textbook, Economics of Poverty, Inequality, and Discrimination, which was ahead of its time.8 Over the same period, Wolff noted, the share of income received by the top 5 percent of households had risen from 15.2 percent to 18.6 percent.9

After examining tax data on income, wages, and inheritances, Piketty wrote a paper on how income shares had evolved in France over the twentieth century. His main finding was that from 1914 to 1945 inequality had fallen considerably, but it had subsequently remained pretty stable—a trend that didn’t fit the Kuznets Curve.10 A 2003 paper that Piketty wrote with Emmanuel Saez, a young French economist who had done a PhD at MIT, looked at the American experience and confirmed it didn’t match Kuznets’s pattern, either. “Top wage shares were flat before World War II, dropped precipitously during the war, and did not start to recover before the late 1960s but are now higher than before World War II,” the Piketty-Saez paper said.11

How general were these findings? Since inequality statistics weren’t entirely consistent across countries, it was hard to say. To address this problem, Piketty and Anthony Atkinson, an economist at Oxford, launched an international research project that generated consistent case studies of ten Western countries: Australia, Canada, France, Germany, Ireland, the Netherlands, New Zealand, Switzerland, the United Kingdom, and the United States. The studies, which were published in a 2007 volume, showed that during the first half of the twentieth century, inequality had declined across virtually all these countries, but more recently there had been a significant divergence. Since the 1970s, all six Anglo-Saxon countries had experienced a rise in top income shares, with the most dramatic shift coming in the United States.

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In 2011, Piketty and his colleagues created a World Top Incomes Database, which is now called the World Inequality Database and covers dozens of countries. Two years later, Piketty, Atkinson, Saez, and another economist, Facundo Alvaredo, published an article in the Journal of Economic Perspectives that distilled their findings. It featured a chart showing the top 1 percent’s income share from 1910 to 2010 in four English-speaking countries: the United States, the United Kingdom, Australia, and Canada.12 Rather than resembling an inverted U—a Kuznets Curve—the lines on the chart looked more like a right-way-up U, with the bottom of the curves situated about 1980, when the Thatcher-Reagan revolution began. In 1910 the top 1 percent in the US had received about 18 percent of pretax income, the chart indicated. By 1979, this share had fallen to about 9 percent, but by 2010 it had rebounded to about 20 percent.

Although Piketty and his coauthors didn’t provide a definitive explanation for the 1 percent’s share doubling in just three decades, they suggested it was tied to the big reductions in the top rate of income tax that Reagan and Thatcher had pioneered. “When top marginal tax rates were very high, the net reward to a highly paid executive for bargaining for more compensation was modest,” the economists wrote. “When top marginal tax rates fell, high earners started bargaining more aggressively to increase their compensation. In this scenario, cuts in top tax rates can increase top income shares, but the increases in top 1 percent incomes now come at the expense of the remaining 99 percent.”13 The language was calm, but the inference was clear: since the onset of the neoliberal era, the corporate plutocracy had been successfully waging a class war in reverse.

★ ★ ★

In Capital in the Twenty-First Century, Piketty laid out this message for a more general audience. The book featured a number of U-shaped income share curves, as well as data on inheritances, profit rates, income tax rates, and much else. “I will show that this spectacular increase in inequality largely reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population,” Piketty wrote in the introduction.14 Of the top 0.1 percent of earners in the United States—the richest 10 percent of the 1 percent—he noted further on in the book, six or seven in ten were senior corporate executives or “supermanagers.” “In all the English-speaking countries,” he went on, “the primary reason for increased income inequality in recent decades is the rise of the supermanager in both the financial and non-financial sectors.”15

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Piketty wasn’t the first observer to highlight the skyrocketing pay of CEOs, of course. After decades of financialization in the United States and other Anglo-Saxon economies, the path to megariches that Disney’s Michael Eisner, General Electric’s Jack Welch, and others had established in the 1990s was by now a well-trodden one. In 2011, Tim Cook, Apple’s CEO, received salary, stock options, and other benefits worth \$378 million:16 6,258 times the annual wages of an average Apple employee.17 Such gargantuan payouts were justified on the grounds that the CEO’s job was to create “shareholder value,” which Apple had certainly done. (Between December 2001 and December 2014, its stock price had risen nearly a hundredfold.)

The triumph of the shareholder value movement was by this stage so complete that few people pointed out that its origins were relatively recent, or that one of its original promoters, the economist Michael Jensen, had expressed misgivings about some of its consequences. After a series of big accounting scandals in the early 2000s, including a huge one at the energy trading firm Enron, Jensen told an interviewer: “I was a defender of the move toward stock options and more liberal rewards for C.E.O.s. But I’m now a critic of where we got to.”18

Piketty didn’t address the shareholder value movement directly, but he dismissed the argument sometimes put forward by defenders of CEOs that their productivity had increased sharply, and their compensation had simply risen to match it. A more plausible explanation, he argued, was “that these top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity.”19 At most major corporations, pay for top executives was set by remuneration committees led by supposedly independent outside directors. But these directors tended to be senior executives, or former senior executives, at other major companies, and in many cases they rubber-stamped the huge “incentive” packages demanded by CEOs. “It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously, or, at the very least, to be rather optimistic in gauging their marginal productivity,” Piketty noted wryly.20

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His description of a self-enriching corporate elite harked back to Veblen’s description of the “captains of industry” of his day. Piketty didn’t make the connection, but citing estimates from Forbes magazine, he noted that the number of billionaires on the planet had risen from around 140 in 1987 to more than 1,400 in 2013.21 Relying on various other sources, he estimated that the richest 0.1 percent of individuals in the world owned nearly 20 percent of all global wealth; the top 1 percent owned about 50 percent; and the top 10 percent owned somewhere between 80 and 90 percent.22 Rampant wealth inequality was a global phenomenon.

★ ★ ★

Arguably, the charts and data that Piketty compiled in Capital in the Twenty-First Century were his biggest contributions to the public discourse. You didn’t need a degree in economics, or an understanding of the Gini coefficient, to grasp the meaning of a line showing the income share of the 1 percent rising toward the sky. This empirical work helped shape the political debate about inequality in many countries, including the United States. However, Piketty—like Marx—wasn’t content to describe how capitalism worked: he also wanted to explain its laws of motion. Much of Capital in the Twenty-First Century was taken up with discussions of the underlying economic forces that were driving up income and wealth inequality. In another evocation of Marx, Piketty developed a pair of simple mathematical equations that he said represented “The First Fundamental Law of Capitalism” and “The Second Fundamental Law of Capitalism.”

Some of Piketty’s exposition of these “laws” wasn’t readily comprehensible to anybody who hadn’t studied economic theory. But his basic ideas were straightforward enough. In a capitalist economy at any time, he explained, there are “forces of convergence” tending to lower inequality and “forces of divergence” tending to generate more inequality.23 Among the benign forces that Piketty identified were rising education levels, which make workers more productive and raise their wages; higher taxes on the rich; and the diffusion of scientific knowledge, which gives people in poor countries access to technological advances. The forces of divergence included underinvestment in education, tax cuts for the rich, and the avarice of top executives. But Piketty argued that the most important factor was the tendency for the rate of return on capital—the annual income it generates in profits, interest, and dividends divided by its market value— to exceed the economy’s growth rate.

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At first glance, this observation, which can be expressed in mathematical terms as $r > g _ { \mathrm { : } }$ , appears to be a trivial one, but it isn’t. Over the long term, Piketty explained, the rate at which the economy expands sets an upper limit on the growth rate of wages and incomes. So if r is greater than g, the income (and wealth) of capitalists (including CEOs with large stock grants) tends to grow faster than workers’ pay, and inequality increases. Piketty referred to the relationship $r > g$ as the “fundamental force for divergence” and, in another place, as “the central contradiction of capitalism.”24

During much of the twentieth century, he pointed out, this contradiction had been held in abeyance because r had been less than g: Western economies had grown faster than the rate of return on capital, which he estimated at 4 to 5 percent a year in inflation-adjusted terms. As a result, inequality had fallen. But much of this rapid economic growth, Piketty argued, represented unrepeatable “catch-up” growth from the devastation of two world wars and the Great Depression. Going forward, he said, there was “ample reason to believe that the growth rate will not exceed 1–1.5 percent in the long run, no matter what economic policies are adopted.”25 It was likely, therefore, that $^ {  } r > g$ will again become the norm in the twentyfirst century, as it had been throughout history until the eve of World War $\mathrm { I . } \stackrel { \mathbf { \prime } \mathbf { \prime } _ { 2 6 } } { = }$

It was this dynamic that Piketty referred to as “potentially terrifying.” In the first half of the twentieth century, he said, it had taken two world wars, which destroyed a great deal of capital and prompted governments to tax the rich at punitive rates, to produce a historic reduction in inequality.

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