Thomas Piketty’s “Capital in the Twenty-First Century” has been much discussed and criticized in the last few months. Piketty argues that increasing inequality of wealth is the normal result of capitalism, that the first half of the 20th century, with its wars and revolutions, was not normal, but that the restored normal conditions of the latter half of the 20th century have returned inequality roughly to the level it reached in the 1800s.
Some critics have accused Piketty of trying to bring back Marxism. Perhaps Piketty invited that suggestion since the English title of Marx’s three-volume tome is “Capital.” (In English-language discussions we often use the German title, “Das Kapital.”) Nevertheless, Piketty’s economics is very different from Marx’s in some important ways — and might have been better if it had been more like Marx’s analysis.
Piketty, like most modern economists, does not think in terms of social classes. Social position in his book is just a matter of percentages in a distribution: the top 1 percent or 0.01 percent or the bottom 50 percent of the distribution of wealth, for example. By contrast, from a Marxist perspective, class is determined by the person’s relationship to the means of production.
For example, in a feudal society (think England in 1200) the serf class has no independent access to land, and they can only get access to land to grow food by swearing to work for and obey the local aristocratic or ecclesiastical landowner. Similarly, in a capitalist system the working class consists of people who, during most of their life cycle, have to sell their labor to an employer in order to get an income. The capitalist class consists of people who are wealthy enough to live off the income of their wealth if they choose not to work.
This will make a difference. Piketty treats government debt as wealth and includes it, along with buildings and equipment, in the portfolios of the wealthy class, but he does not treat private indebtedness as wealth. The reason is that it cancels out: a house mortgage, for example, is negative wealth to the homeowner but positive wealth to the lender. However, some economists believe that the growth of private debt was a major factor in the housing crash of 2008. After all, the securitized subprime mortgages that played a key role, along with many other “troubled assets,” were private debt.
Piketty argues (rightly, I think) that the wealth of the wealthy class increases more rapidly than the opportunities to invest it in machinery and buildings. One way to solve that problem is to increase government debt. Another way is for the wealthy to invest abroad: colonialism. An alternative is for the private debt “of the working class” to increase.
Let us think of the two great classes in a capitalist system as if they were two countries. Economists understand that national debt can be unstable: if a country is borrowing money from abroad beyond some limit, then the risk of default rises. The lenders demand higher interest rates, which in turn increase the burden of the debt and the risk of default, which again leads to higher interest rates, and so on. One way that the country might recover from this is to devalue its currency, but (like Greece and Ireland) if it is part of a currency community, that cannot be done.
The private debt of the working class to the wealthy class can become unstable in the same way. Moreover, since the working class and the wealthy class are always partners in a currency union, the working class cannot devalue — and indeed, a reduction of wages would only make things worse, increasing the risk of default on working class debt and thus making that debt even more unstable.
Indeed, the best answer to unstable private debt owed by the working class to the wealthy class could be a rise in wages, which would make default less likely — but in a crisis all the pressure (including the “wisdom” of many economists) is to reduce wages.
As the wealth of the wealthy class grows faster than their opportunities for profitable investment, government debt or their secure lending to other countries, the natural tendency is for private debt from the working class to expand. This is one important channel by which the growth of wealth inequality creates instability and crises.
As the wealth of the capitalist class grows, the demand for “financial innovations” grows with it: these “financial innovations,” like securitized mortgages, are ways to increase the indebtedness of the working class to the capitalist class. This would have been all the clearer if Piketty had used the concepts of social class we know from Marxism.
An economist who chooses not to learn what Marx has to teach impoverishes only himself. Of course, that is equally true of those who choose not to learn what Adam Smith and Joseph Schumpeter and John Kenneth Galbraith have to teach.
Roger McCain is a professor of economics at Drexel University. He can be contacted at firstname.lastname@example.org.