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Picking on Tom Piketty | The Triangle


Picking on Tom Piketty

French economist Thomas Piketty’s recent book, “Capital in the Twenty-First Century,” has been more discussed than any work in economics since those of John Kenneth Galbraith and Milton Friedman. Piketty argues that under normal capitalist conditions, the distribution of wealth is highly unequal and grows more unequal. It’s pretty simple arithmetic: the average rate of return on capital is greater than the growth rate of the economy, so individual fortunes grow faster than the economy itself.

He presents evidence that the bigger the fortune, the faster it grows. So, in normal times, wealth grows increasingly unequal. But Piketty argues that the middle of the 20th century was not normal: the destruction and disruption of 1914-50 had reduced inequality to historically low levels. In the period since 1950, the restored normal conditions in the advanced economies have brought us back to the inequality that existed in about 1900, and they promise more of the same.

Most of the controversy has been around that argument. But Piketty points to one important way in which our present time differs from the Gay Nineties. He does not stress it much, and his critics have neglected it, but it could be quite important. Piketty points out that in the 20th century, a patrimonial middle class came into existence. Here is the idea: before the 20th century, a person who had to work for a living would typically own some clothing, a few dishes and other personal effects, and very little else — if anything. This was true as a rule even of well-paid, professional or specialist workers.

Today, by contrast, there are millions of people who must work for a living for most of their life, but who by old age own some substantial assets: typically a home, a pension fund and enough left over to leave something to the kids or assist them with intergenerational gifts. Working people who can aspire to own a patrimony are Piketty’s patrimonial middle class.
They are also Drexel students faculty, for the most part.

This patrimonial middle class may be politically important. Piketty argues that increasing inequality is likely to lead to social conflict, as it did in the 20th century and often in earlier centuries. But the patrimonial middle class, with something to lose, could be a stabilizing factor. Indeed, much of our political rhetoric on both sides of the spectrum is already determined by the perspective of the patrimonial middle class: when we hear how people who go to school and play the game according to the rules should have a satisfactory economic situation, we are hearing the political ethos of the patrimonial middle class.

How did this change come about? Because he stresses wealth, Piketty argues that economists have tended to overstress income, and he has a point. But the higher incomes commanded by working people in the 20th century seem to have been an important basis for the emergence of a patrimonial middle class. Below some critical level of incomes, people don’t save. They are liquidity-constrained. They spend what they get in order to stay alive. (Most of our theoretical models in economics don’t recognize this common-sense point, but the evidence is pretty clear: common sense has it right in this case.)

What happened in the 20th century is that labor productivity increased steadily, wages kept pace and, as a result, a considerable number of working people were able to save enough to enter the patrimonial middle class.

That is, about the first three-quarters of the 20th century went that way. Since the mid-’70s in the United States, productivity has continued to increase but average wages have not kept up. The median wage, a measurement no greater nor less than wages earned by half of the population, has hardly increased, if at all.

Isn’t technology the answer? No, not by itself. Recently, American businessman Larry Page has argued that, in the future, the work day will be shorter so that there are more jobs to go around. (This is not a new depiction of the future! John Maynard Keynes and John Stuart Mill both foresaw the same.) But that means that, instead of increasing incomes, people enjoy more leisure. More leisure would be a fine thing, but it will not preserve nor expand the patrimonial middle class.

Can we envision a utopian future society in which almost everyone who is not rich is at least a member of the patrimonial middle class? Perhaps — and, if so, some of you who read this will live to see it, though the writer will not. But this will only occur if more and more of the population have access to stable jobs that pay them enough to buy a house and put away enough to retire and help the kids. That is not the direction we are drifting in. And, bluntly, nobody knows how to make it happen. The other possibility — a return to the war, revolution and chaos of 1914-1950 — is something I do not want to live to see.

Roger McCain is a professor of economics at Drexel University. He can be contacted at [email protected]