Book review – Capital’s ‘comeback’

2014-05-05 08:00

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The Marikana massacre sets the scene for an ambitious new study on capitalism that is making waves around the world.

It’s not exactly a sequel to Karl Marx’s Capital, but French economist Thomas Piketty’s Capital in the Twenty-First Century is similar. Through a massive research effort, it describes the evolution of capitalism since the 1700s to the present?–?and then sets out to predict how the 21st century is likely to play out.

It is not news that a global elite is growing ridiculously rich, but Piketty’s book tries to explain why this is probably going to become true.

He backs up his thesis with a massive amount of new statistics compiled from income tax statements in rich countries going back to the beginning of income tax a century ago.

He sees the likely trend to be a growing share of national incomes going to “capital” instead of labour.

That’s because the profit rate tends to be higher than the growth rate in the long term. This means capital grows faster than the national income?–?and that profit becomes a larger part of national income.

This is more true when there is relatively low growth and especially true of advanced economies that are not catching up with technology and have a low population growth.

The fact that in the middle of the 20th century this was not the case, is described as “accidental” and caused by the world wars, Great Depression and revolutions.

In time, the growth of capital means a return to inheritance becoming the main factor in how social hierarchies form?–?the opposite of a meritocracy. This is the “patrimonial” capitalism that reigned in 19th-century Europe and may very well do so again if Piketty is right.

Despite focusing mostly on the original capitalist countries in Europe, the US and Japan where there is enough historical data, the books starts off in South Africa.

The first paragraph of Chapter One recounts the police massacre of striking mineworkers on August 16 2012 at Lonmin’s Marikana mine

“Does this kind of violent clash between labour and capital belong to the past, or will it be an integral part of twenty-first-century history?” asks Piketty.

Despite that, the book does not really deal with the developing world

In South Africa, discussions about inequality tend to place the blame on the country’s colossal unemployment problem rather than an innate tendency of the system.

Quite apart from the wage share being too low, millions have no share except for government grants.

Says Professor Jeremy Seekings from the University of Cape Town’s Centre for Social Science Research: “Piketty does not consider any economies which have unemployment rates anywhere near South Africa’s, which is exceptional relative to the rest of the world now and historically.”

Extending Piketty’s thesis to South Africa is not straightforward, he says.

Doing that would require considering the effects Piketty describes are “magnified” by unemployment.

The rise of capital is also not exclusively tied to the superrich.

In South Africa, the profit share in national income has risen as is the case almost everywhere, but this includes capital owned by pension funds, which is to say, workers.

The way Piketty defines “capital” will include pension fund investments, says Seekings.

“My impression is that Piketty does not pay close attention to the relationship between profit share and rate and the overall distribution of income,” says Seekings, who adds that he has not yet had the time to fully digest the book’s data and arguments.

“My sense is that he is adding an important piece to the picture, rather than providing the whole picture.

“The share of the rich tells us a lot, but not everything about inequality,” he adds.


The rise and rise of capitalism in a developed world

The main finding from Piketty’s analysis of capitalism in the long run is that the developed world has rapidly become more “capitalistic” since 1970.

What this means is that the amount of capital in private hands has rapidly increased when compared with national income. The result is that capital plays a far larger and growing part in income.

He calls it a “comeback” for “patrimonial capitalism”, meaning a capitalism where inheritance is the key institution separating the haves from the have-nots.

He demonstrates that the amount of capital (compared with income) is returning to the levels before the First World War after having fallen to very low levels in the middle of the 20th century.

What seems like a rising tide of equality in the past was really “accidental” - the result of “shocks” to capital in the form of the world wars, revolutions and the Great Depression.

Capital is basically only now recovering from the 20th-century’s shocks, goes the theory. Capital has also fundamentally transformed itself. The things that constitute wealth have changed over time.

While the capital intensity of advanced countries is creeping back up to 19th- century proportions, half of that capital now consists of housing as opposed to agriculture.

In the 1700s, agricultural land made up most of the capital in these advanced economies. Now it accounts for nothing.

Today housing makes up about half of the total capital in these advanced economies?–?a 20th-century development.

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