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

Then during the postwar decades, a combination of rebuilding, full employment, a new social contract between capital and labor, and the retention of high taxes on the wealthy had kept inequality in check for a further period. “A concatenation of circumstances … created a historically unprecedented situation, which lasted for nearly a century,” Piketty wrote. “All signs are, however, that it is about to end.”27 With executive pay skyrocketing and globalization and political capture undermining the ability of individual governments to raise taxes on the rich, the forces of divergence appeared to be in ascendancy again, particularly in America. “The risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed,” Piketty concluded.28

To counter these tendencies, he called for “a progressive annual tax on global wealth.”29 If democracy was to regain control over globalized capitalism, it needed to invent new tools, he said. His proposed levy would apply to all forms of wealth, including financial assets, real estate, and business assets, with “no exceptions.” In the current political constellation, Piketty readily conceded, a global wealth tax was a “utopian idea.” But he argued that the proposal was a useful “reference point” that, at least in theory, “would provide a way to avoid an endless inegalitarian spiral.” Fortunes of less than a million euros would be exempted from the new tax. People with fortunes of one to 5 million euros would pay an annual levy of 1 percent, and people with more than 5 million euros would pay a 2 percent levy. Piketty also suggested that “one might prefer a much more steeply progressive tax on the largest fortunes (for example a rate of 5 or 10 percent on assets above 1 billion Euros).”

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Despite all the hoopla that surrounded Piketty after Capital in the Twenty-First Century was published, the book got a mixed reception from his fellow economists. Writing in The New York Review of Books, Paul Krugman, who had highlighted the economic and political repercussions of soaring inequality in his own writings, called it “magnificent” and said it would “change both the way we think about society and the way we do economics.”30 In The New Republic, Robert Solow, the grand old man of American Keynesianism, hailed Piketty’s r > g formulation, labeling it the “rich-get-richer dynamic.”31 Elsewhere, however, Piketty encountered criticism from several different quarters, some of it well founded. Writing in Dissent magazine, James K. Galbraith, a Keynesian of the older school, pointed out that in commingling physical capital used in production (factories, machinery, and so on) with financial capital and real estate, Piketty had ignored the thorny question of how aggregate capital should be defined and counted, which Joan Robinson and her colleagues had raised in the 1950s. “This, I fear, is a source of terrible confusion,” Galbraith wrote.32

Some Marxists criticized Piketty for dealing in theoretical abstractions that obfuscated the exploitation and class conflict at the heart of the capitalist system. On the right, reviewers suggested Piketty was propagating a “new Marxism.” Amidst all these competing interpretations, Piketty didn’t help matters by telling an interviewer that, despite the title of his book, he had barely read the original Capital and didn’t consider Marx an important influence on him.33 Inadvertently backing up these claims, Piketty also claimed that Marx’s books didn’t contain any data. Evidently, he hadn’t made it as far as the famous chapter twenty-five of Capital, “The General Law of Capitalist Accumulation,” in which Marx included a lengthy section on income trends in Victorian England that prefigured, in some ways, the sort of analysis that Piketty himself presented a century and a half later.

Politically, Piketty was a supporter of the progressive left rather than the revolutionary left. Intellectually, he regarded Marx’s economics as overly simplistic. But in the introduction to his book, he had also acknowledged that “the principle of infinite accumulation that Marx proposed contains a key insight”: if the growth rates of productivity and population are low, “then accumulated wealth naturally takes on considerable importance, especially if it grows to extreme proportions and becomes socially destabilizing.”34 As John Judis, an American author and journalist, pointed out in an article about Piketty and Marx, they both viewed capitalism as a historical process beset by internal contradictions, one of which was a tendency for inequality to increase.35

Although Piketty was using different intellectual tools, he was plowing in the same furrow as Marx. Indeed, the entire Piketty phenomenon was testimony to the reemergence, on a global scale, of the extremely top-heavy capitalism that the German revolutionary had made his subject. During much of the twentieth century, the forces of convergence—wars, tax policies, progressive social norms, public education, the enhancement of worker skills, labor unions—had held in check some of the system’s darker tendencies. But by the new millennium the combination of neoliberal policies, globalization, labor-saving technological progress, and a shareholder value movement that glorified wealth creation had shifted the balance of power (and material rewards) back in favor of capital.

Despite the positive reviews from Krugman and Solow, some mainstream economists took Piketty to task for getting his neoclassical economics mixed up. They brought up something called the “elasticity of substitution,” which is a measure of how easy it is to substitute capital for labor, or vice versa, in production. Piketty had assumed this elasticity was greater than one, which implies that the rate of return, r, doesn’t decline much as capital expands, and so the share of income accruing to capital increases. In a 2014 article, Harvard’s Lawrence Summers said the empirical evidence strongly suggested that the elasticity was less than one and concluded that “it is not at all clear that there is any kind of iron law of capitalism that leads to rising wealth and income inequality.”36 Another criticism came from the economist Matthew Rognlie, who was then a graduate student at MIT. After looking at the sectoral data on profits and income, Rognlie pointed out that in the United States, at least, much of the increase in the share of income going to owners of capital could be accounted for by the rising price of housing, which Piketty counted as part of the capital stock. Outside the housing sector, Rognlie said, the capital share hadn’t increased much.37

Interesting as these critiques were to economists, they didn’t take much away from Piketty’s essential points that income and wealth inequality had risen sharply, and that so long as r remained disproportionately high, the “rich-get-richer dynamic” would likely continue to operate. The most serious and sustained challenge to Piketty’s narrative came from Gerald Auten, an economist at the Treasury Department, and David Splinter, an economist at the Joint Committee on Taxation of the US Congress, who contested the basic claim that income inequality in the United States had skyrocketed. In a 2018 draft of a paper that was based on anonymized data from individual tax returns, Auten and Splinter said that if you looked at income after tax and transfer payments rather than at pretax income, which is what Piketty and Saez had done, and if you made some different adjustments for underreported income, the picture was very different. Between 1979 and 2015 the share received by the top 1 percent went from 8.2 percent to 8.8 percent—an increase, but a very modest one compared to the doubling that Piketty and Saez identified.38 In this revisionist version of recent American economic history, a progressive tax and benefits system had done much to mitigate diverging pretax incomes.

The paper by Auten and Splinter led to an extended back-and-forth with Piketty and his associates. In a 2018 article, Piketty, Saez, and Gabriel Zucman of Berkeley used a new methodology to estimate trends in US pretax and post-tax income. They conceded that “posttax national income is more equally distributed than pretax income: the tax and transfer system is progressive overall.”39 But their results still showed the 1 percent’s share of post-tax income rising from 9.1 percent in 1979 to 15.7 percent in 2014, a very large increase.40 Auten and Splinter contested this finding. In a 2023 paper, they updated their data to 2019 and concluded: “For after-tax income, which includes transfers, our analysis shows that the top one per cent share increased only 1.4 percentage points.”41

The papers by Auten and Splinter received a good deal of media attention, and some commentators claimed they had discredited Piketty’s thesis. Even on the basis of the authors’ own figures, that was an exaggeration. In their 2023 paper, Auten and Splinter reported that between 1979 and 2019 the share of pretax income received by the 0.1 percent rose from 3.2 percent to 5.4 percent, a striking jump in proportional terms, and that the share of post-tax income increased from 2.1 percent to 3.0 percent, which was also a big increase.42 So if you looked at the very, very rich, as opposed to the merely very rich, then, based on Austen and Splinter’s own findings, income inequality had risen sharply. The two researchers also calculated Gini coefficients, which provide the broadest measure of inequality, for pretax and post-tax income. In both cases, the Ginis indicated a significant rise in inequality between 1980 and 2019.43

These findings jibed with other data. In 1982, when Forbes magazine published its first ranking of the wealthiest people in America, the shipping tycoon Daniel Ludwig topped the list with a net worth of \$2 billion (about \$6.5 billion in 2024 dollars).44 In the 2023 Forbes list, Elon Musk was in first place, with a net worth of \$251 billion, and there were eight other individuals worth more than \$100 billion.45 Merely to get on the Forbes list, you had to be worth nearly \$3 billion. At the start of 1990, according to the Federal Reserve, the top 0.1 percent owned 8.6 percent of total US wealth; by the end of 2023, their share had risen to 13.5 percent.46 An academic paper published in 2023 in the Quarterly Journal of Economics went further back in time and found an even bigger jump. Between 1978 and 2016, the article said, the top 0.1 percent’s share of total wealth more than doubled— from 7.1 percent to 15.7 percent.47

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Efforts to refute the basic picture that Piketty described were ultimately unconvincing. A more valid criticism of Capital in the Twenty-First Century was that it didn’t fully explain where these huge new agglomerations of wealth at the very top were coming from. The proximate answer was clear: they were based on the remarkable growth of the tech sector, captive corporation remuneration boards, and stratospheric stock market valuations, which, in turn, reflected soaring profits and a high rate of return on capital. But what was it about twenty-first-century capitalism that was keeping profits so high that r remained above g year after year?

In a 2015 interview, Joseph Stiglitz emphasized the rise of monopolies and rent-seeking behavior, developments he had discussed in his 2012 book, The Price of Inequality. “So when you look at the top, it’s monopoly power,” Stiglitz said.48 In an illuminating 2017 volume of essays titled After Piketty, Suresh Naidu, an economist at Columbia, argued that technological and political developments had combined to make it a lot easier for businesses and financial interests to extract monopoly rents from consumers and workers. The technology part of Naidu’s thesis, which he labeled “wild Piketty,” was that in the high-tech sector, firms’ unit costs tend to decline as their output (or the number of people on their platform) increases: in economics jargon, these are “increasing returns” industries. “In a world of generic increasing returns, high fixed costs, and low marginal costs, monopolies will be pervasive,” Naidu wrote.49 In other words, the high-tech sector simply doesn’t conform to the textbook picture of a competitive market. It is another beast entirely.

But rising monopoly power wasn’t confined to high-tech, Naidu emphasized. In many other industries—airlines, banking, energy, pharmaceuticals, media—regulators had nodded through waves of consolidation that had reduced competition and left a few giants controlling the entire sector. “Generalized retrustification of the U.S. economy should make us dust off the old copies of Hilferding, Hobson, and Lenin,” Naidu remarked.50 During the same period, conservative legislation had weakened labor unions; conservative courts had strengthened property rights, such as patents, which he identified as a key component of capital; and investors had cheered these developments by revaluing corporate assets in the stock market. Put all this together, and widening inequality wasn’t just a tech story. Ultimately, it was rooted in the conservative political backlash and financialization of the economy that began in the 1970s and continued unabated for decades.

On one level, this explanation was consistent with Piketty’s argument that the Reagan-Thatcher tax cuts encouraged CEOs to grab more of the pie for themselves. But Naidu’s narrative was a broader one, about how the owners of capital were able to mobilize the entire political system to protect their interests. “There is little in Capital in the Twenty-First Century about how inequality changes the political system,” he noted. “This is a gaping missing chapter.”51 In trying to fill the hole, Naidu highlighted some new and old tools that the ultrarich could use to influence policies. Among the former were large campaign contributions, which the US Supreme Court had enabled in its landmark 2010 Citizens United ruling. Naidu pointed to research suggesting that roughly a quarter of traceable individual contributions came from members of the 0.1 percent. “When … the means to contest elections are allocated via the cash nexus, it is a short step to policy being set by the media dollar,” he noted.

Turning to older tools that owners of capital had at their disposal, Naidu brought up the possibility of a “capital strike,” in which businesses refuse to invest large amounts of capital in a political environment that they don’t like, and the threat of capital flight to foreign countries with lower taxes and less regulation. Piketty himself had cited France during the Socialist administration of François Mitterand, in the 1980s, as an example where owners of capital effectively went on strike against policies they opposed, including a reduction in the workweek, the nationalization of some large companies, and the “solidarity tax on wealth.” The examples of governments shaping their tax policies to satisfy the demands of the financial markets and multinational corporations were too numerous to need listing individually.

This discussion harked back to the doubts about Keynesianism that Michał Kalecki and Paul Sweezy had raised in the 1940s. It also went back to the three earlier thinkers whom Naidu mentioned—Hobson, Hilferding, and Lenin and indeed, all the way back to the Communist Manifesto’s description of the modern state as “a committee for organizing the common affairs of the whole bourgeoisie.”52 Naidu didn’t go that far. He did say that anyone interested in reducing wealth inequality and containing the forces of divergence that Piketty identified needed to concentrate on “lowering the share of income paid out to property titles” and “regulating the financial markets that price those titles.”53

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Another issue with Capital in the Twenty-First Century was that it largely focused on trends in Western countries, where data was more readily available. (To their great credit, Piketty and his colleagues at the World Inequality Database subsequently expanded their coverage to the entire world, including developing countries.) In an era of hyperglobalization, this obviously raised the question of what was happening to inequality at the global level. One economist who set out to answer this question was Branko Milanović, an expert on inequality at the World Bank who subsequently moved to CUNY Graduate Center in New York. In his work at the Bank, Milanović and a colleague, Christoph Lakner, sought to reconcile the evidence that wages were stagnating in Western countries with the rapid income growth in places like China and India, which had been heavily exposed to globalization. In a 2013 paper, Milanović and Lakner encapsulated these global trends in a memorable chart that became known as the Elephant Curve because it looked like an elephant with its trunk in the air (see the figure on the next page).54

On the horizontal axis, the chart showed the entire world population divided into percentiles of after-tax income, and on the vertical axis, it showed cumulative income growth (inflation adjusted) from 1988 to 2008. Reflecting the gaping divergence in incomes across countries, the incomes on the horizontal axis went from under \$450 on the extreme left of the chart to about \$1,400 in the middle to \$71,000 on the extreme right. Most people in poor countries resided in the left third, near the elephant’s tail, and most residents of advanced countries resided somewhere in the right third, near the elephant’s trunk. The middle third consisted of three groups: residents of middle-income countries, the richest people in poor countries, and the very poorest folk in rich countries. By capturing everybody on the planet on one graph, Milanović and Lakner were able to display very clearly who the winners and losers from globalization had been.

The graph indicated that during the era of globalization, the biggest gainers were the people in the middle third, on the elephant’s back, who saw their incomes rise by more than 60 percent over the twenty-year period.

In his 2016 book, Global Inequality: A New Approach for the Age of Globalization, which expanded on his earlier article, Milanović explained that nine out of ten of these folks lived in a handful of Asian countries, which included China, India, Indonesia, Thailand, and Vietnam. The other people who had done very well out of globalization were those at the tip of the elephant’s trunk on the far right of the chart, whom Milanović referred to as “global plutocrats.”55

Conversely, two sets of people had made up the least ground. The world’s poorest people, those residing on the elephant’s tail, saw their paltry incomes rise by about 15 percent. The other laggards were located between the seventieth and ninetieth income percentiles, in the middle of the elephant’s trunk. Most of them lived in advanced countries, Milanović explained. They were well off by global standards but not rich by the standards of their own societies. “In short: the great winners have been the Asian poor and middle classes; the great losers, the lower middle classes of the rich world,” he wrote. “Such a bald statement may not surprise many people today, but it would certainly have been surprising to many if it had been made in the late 1980s.”56

Milanović’s last point was well taken. Rapid income growth in countries that not so long ago had been very poor, particularly China and India, defied widespread pessimism about the economic prospects of the developing world. Similarly, the income stagnation experienced by many workers in developed nations seemed to contradict the optimistic claims made by promoters of globalization in those countries. “Politicians in the West who pushed for greater reliance on markets in their own economies and the world after the Reagan-Thatcher revolution could hardly have expected that the much vaunted globalization would fail to deliver palpable benefits to the majority of their citizens,” Milanović wrote.57 The key takeaway from his fascinating book was that how you judged globalization depended very much on where you stood. For hundreds of millions of people in China and India, it had provided an escape route from the most acute poverty. But for residents of textile towns in the Carolinas or parts of the industrial American Midwest, globalization represented an existential threat. “It is this fundamentally ambivalent nature of globalization that I hope to bring out,” Milanović wrote. “The reader needs to be constantly aware that globalization is a force both for good and bad.”58

By the time Milanović’s book appeared, an overdue reassessment of the impact of trade, particularly trade with China, on US jobs was taking place. In a 2012 paper for the National Bureau of Economic Research, three US economists—David H. Autor of MIT, David Dorn of the University of Zurich, and Gordon H. Hanson of the University of California at San Diego —pointed out that between 1991 and 2007 China’s exports to the United States had increased by more than 1100 percent.59 During roughly the same time period, China’s share of global manufacturing had increased from about 1 percent to about 20 percent. “That’s a massive, massive change,” Autor pointed out in a 2017 interview. “We never see things like this occur in modern history.”60

To isolate its impact on US manufacturing, Autor, Dorn, and Hanson divided the United States into more than seven hundred commuter zones. Previous studies had looked at the country as a whole and found the effects from rising trade to be small or nonexistent. Using their more geographically focused approach, Autor, Dorn, and Hanson found that areas with a lot of businesses that had been exposed to competition from China experienced several ill effects. “Rising exposure increases unemployment, lowers labor force participation, and reduces wages in local labor markets,” the economists wrote. “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”61

The economic fallout from the “China shock” helped to produce a political backlash against globalization that Donald Trump and other protectionists eagerly exploited. During his 2016 presidential campaign, Trump labeled NAFTA and the WTO “a disaster” and pledged to withdraw the United States from the Trans-Pacific Partnership, a trade deal that the Obama administration had negotiated with eleven Pacific Rim countries.62

In a paper published after the 2016 election, Autor, Dorn, Hanson, and a fourth author, Kaveh Majlesi, said they had identified a link at the county level between trade shocks and voting patterns in the election. “We find a robust positive effect of rising import competition on Republican vote share gains,” they wrote.63 The suggestion that trade and globalization could have cost the Democrats the 2016 election was hotly disputed. Other studies of voting patterns found that race, religion, and other cultural factors played a bigger role than economics in Trump’s victory over Hillary Clinton.64 But it was surely no coincidence that in 2021, when another Democrat, Joe Biden, returned to the White House, he adopted a much more skeptical approach to globalization than his Democratic predecessors. Biden left some of Trump’s tariffs in place and introduced an ambitious industrial policy, which was designed to boost US manufacturing and “onshore” production that had moved abroad.65