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Sunday, January 11, 2015
Current Affairs ... Economics/Business ...

As 2014 came to an end, a variety of “year in review” articles cited French economist Thomas Piketty’s “Capital in the 21st Century” as perhaps the most important book in the business and economics field in quite some time. Piketty’s book has stirred up a lot of discussion and controversy about the problem of inequality in industrialized society. It’s well known that income inequality is inherent to any capitalistic economy; arguably, income inequality is needed in a system that progresses through competitive economic incentives. The apologist for capitalism basically argues that even though some people don’t do as well as others, and many remain poor, everyone is still better off because of the dynamic growth caused by capitalism. Even the lowest on the income ladder eventually do better than the poor in less dynamic economic systems.

Piketty changed the focus somewhat as to include wealth; it follows that if income is unequal, then wealth, what people manage to accumulate or save up over their lifetimes, is probably also going to be unequal. What Piketty has done, however, is to show (purportedly) that modern trends in wealth accumulation are reaching something of a “runaway” point, whereby the income and opportunities gap becomes so wide that hard work, good ideas and other talents (and also good luck, quite frankly) no longer rule the day. The situation is now reaching the point, according to Piketty, where economic elites have formed amidst the populace, elites that are increasingly restricted by parentage and location, such that if you’re not born with the right parents in the right place, your opportunities for a decent income and reasonable wealth (i.e., the good life of the “middle class”) aren’t very good. And they are getting worse with every new year.

So, Piketty has added fuel to the fire regarding the increasingly popular notion that the rich really are getting much richer, the poor much poorer, and the middle class is getting melted away throughout the developed world (i.e., America, Western Europe, Japan and some other areas in the Pacific Rim). And if the developed world can’t bring forth wide-spread wealth, then forget about things ever getting better in the poorer “developing nations”, even in the faster-growing ones like India, China and Brazil. And put aside any hope for more equality in the resource-dependent nations such as Saudi Arabia, Russia and Nigeria, where small but powerful groups or families keep most of the benefits from selling oil and other natural stuff, while the rest of the populace wallows in backward conditions. A few years ago, the “Occupy Wall Street” movement here in the US created an effective meme by casting “the 1 percent” as enemies of the people; and Piketty has come along with a lot of economic data and analysis that in effect says, “they ain’t just imagining it”.

There are a wide variety of articles available to summarize Piketty’s thesis; the Economist magazine summarizes Piketty in four paragraphs. I would like to offer another way to look at what Piketty is saying. To be honest, I haven’t read his book, but I have read a wide variety of the summarizing articles (including a fairly detailed exposition by Nobel Prize-winning economist Robert Solow in The New Republic). I roughly understand why Piketty is concerned about the fact that the rate of return on capital exceeds the growth rate of the overall economy and has been exceeding it for a long time now, on a world-wide basis (“capital” is basically wealth that is re-invested in the economy, and represents a large chunk of overall wealth). This fact generally implies that those with capital wealth, which is very largely concentrated in the hands of the rich, will get a bigger and bigger share of the overall economic pie as time goes by; and labor, i.e. the masses, those who aren’t rich – they will get less and less.

Perhaps industrial capitalism was a really good thing when it replaced agricultural feudalism in America, Europe and parts of Asia from the 16th thru 19th centuries. Perhaps the coming of an urbanized, factory-based trade economy (one almost entirely dependent upon carbon-rich sources of energy) really did allow a better life for billions of people, as opposed to how things were in the Middle Ages. (Well, better on average anyway; certainly a lot of people were exploited and suffered because of this trend). Perhaps this trend reached an apotheosis during the 7 or 8 decades following World War 2, when millions of families in America, Europe and Asia enjoyed a life unimaginably better than what their great-grandparents could have anticipated. (That includes my own family).

The problem seems to be that the economic trends that allowed all of this to happen are now reaching something of an inflexion point, where the rich in effect are starting to take back the wealth formerly shared with a growing middle class (and also with a somewhat less-impoverished lower class). If Piketty is to be believed, this trend is going to continue, unless some really big changes happen in the structure of the economy, something akin to how the “Industrial Revolution” ended the era of feudalism.

So, let’s talk about that Revolution. From a “Big History” perspective, it all goes back to a friction that existed for perhaps thousands of years, going back to the Roman Empire and maybe even before that. This was the on-going tension between the feudalists, i.e. the kings and land-barons who owned most of the land and got rich off the sweat of the thousands and millions of impoverished peasants who grew crops on their property; and the craftsmen and merchants, those who had a skill and could make stuff that was valuable to others (from iron, glass, wood, ceramics, leather, etc.). Oh, and throw in a few traders, ship owners and money lenders. Like the craft merchants, they needed to sell their stuff to the landed gentry and not get on their wrong sides; but still, they wished that the peasants would get a better deal from the landowners, so that the proletariat could buy more from the merchants and thus increase the demand for trade-related services.

The gentry, however, liked things just as they were. They wanted to keep the peasants poor, keep themselves rich, and have just enough craftspeople and traders around to give them the fancy stuff that the local peasant families couldn’t cobble together for them. This situation went on and on for many centuries and even millennium, but by the 16th century, things were starting to change. There were new technologies, new materials, and new energy sources; ships could sail further, people could get around a bit more. The merchants could make more and better stuff at lower costs, the traders could travel farther and make bigger deals, and the moneylenders were making bigger loans and more often. New cities were cropping up and they were craft and trade oriented, no longer just there to serve the surrounding farmlands. The merchant class was growing, and it needed more and more people to work for it; in effect it was starting its own economy. The merchants and their retinue still needed to do business with the kings, armies and land barons; but more and more, they could sell their goods and services amidst their own class, i.e. within the growing cities.

The feudalists certainly would have preferred to have kept things as they were; they held most of the riches and power, and the armies and kings were all allied with them. But now the merchant class was becoming more and more powerful and independent. There were battles and clashes, but in the end, history and technology was on the side of the merchants. The urbanized merchant class laid the foundations for the rise of the nation-state, and the great agricultural estates were broken up and distributed to private or family farmers who had to act more like merchants themselves.

The economy went through a major shift – and the merchants finally had their day. The children and grandchildren of the peasants mostly went into the cities and worked in the mills. Their lives weren’t all that much better off at first, but over a few generations, the middle class as we know it today evolved.

But at the same time, those small-time money lenders were now becoming increasingly powerful themselves. All of this industrialization didn’t just happen by itself; someone had to put a lot of money up-front to build factories, railroads, ships, mines, etc. So the money lenders became the bankers, and the successful merchants who earned more than they needed for their own wants and needs thus re-invested their excess wealth into new business ventures; they became the capitalists. Up to this point, these people were the friends of the masses; they needed them as workers, but more importantly, they needed them as customers as to grow their enterprises. They had a vested interest in spreading the wealth; they could only increase their own wealth if everyone else had more income and wealth.

And that was the charm of capitalism. Sure, labor and capital were always at odds. But as Henry Ford realized early on, his business couldn’t grow if he kept his workers stuck at feudalistic subsistence-level wages. He needed workers, both his own and those of other manufacturers, to buy his Model T’s. Yes, there was plenty of labor-management strife in the 19th and early 20th century, but ultimately both sides knew that they needed each other and somehow had to come to terms. The business class could not imagine going back to feudalistic days when they and their most valued technical assistants (managers, inventors, scientists, engineers) could have all the luxuries they could ever imagine, while everyone else would be wallowing in dire poverty.

But now we’re in the 21st Century, and something seems to have changed. Piketty notes that it seems rather strange that the rate of return on capital does not go down over time as the economy grows. With all else fixed and equal, economists expect there to be declining returns to every added dollar of capital investment, due to technology factors and the basic notion of “going for the low-hanging fruit first”. Once that fruit is picked, you have to have to spend more effort to get each additional apple or pear as you go higher and higher up the tree. So, your overall returns for picking each next apple goes down. If that is the case with capital investment in a growing economy, then over time the average rate of return should go down, as the return on this year’s new facilities ventures (that which is required to meet the growth of the economy) should be lower than for last year’s new investment.

The obvious answer is that technology is getting better and better over time, making that next incremental investment just as good as the one from last year, in terms of expected returns. That’s all fine in terms of distribution of income, so long as the new technology does not interfere with the need for labor. But guess what? It does. In the early 20th century, new machines were introduced that could use one worker to do what used to take two or three (or maybe more). But those machines usually also needed a smarter and more skilled worker.

Thus, the capitalist had to pay the remaining worker more, and the increased pay seemed to boost the economy enough to create new jobs for the displaced workers (so long as they obtained the requisite education and skills; sometimes the business would even train them at its own cost). The rise of machines and technology didn’t seem to be a threat to labor, so long as workers gained enough education and skill to keep up with the capitalists’ needs. The US moved to universal high school education early in the 20th century as one way to meet this need, along with expanding college opportunities later on.

But today, something different is happening. Technology is getting to the point where business machinery needs just a very few highly-skilled people and maybe a small handful of unskilled assistants. The growth equation that allowed the labor class to keep up (and even improve their lot because the capitalists were willing to pay higher salaries to increasingly smart workers) doesn’t seem to work anymore. (This is not even considering the “China effect”, i.e. the ability of manufacturers today to exploit low-cost labor overseas in lieu of more expensive domestic labor; eventually as the world economy unifies, that effect will go away – a worker in central China or southern India will demand just as much as a worker in Omaha as standards of living equalize.)

Piketty talks about an evolving “supermanager” class, who seem to be taking the place of the feudal land barons of old. Technology and robots are now making it possible for them to maintain and grow their wealth without the participation of the masses. Ironically, the great-great-great-whatever-grandchildren of the merchant class no longer need to economically empower the peasants so as to get rich themselves. They can stay rich and satisfy all their foreseeable wants and needs without a broad middle class. They will need to maintain a small class of scientists and other experts as to keep their machines running well. But they will no longer need growth and a relatively wide distribution of wealth to accomplish their goals. Thus, you now see articles about Piketty such as this one in the Guardian entitled “Capitalism Simply Isn’t Working”.

Can the “supermanager techno-feudalists” be challenged by any group, as the merchants once challenged the agrarian feudalists? At the moment, it’s hard to imagine who or what might pose a threat to their cartel of wealth. Sure, there will be occasional uprisings and “disruptors” akin to Microsoft and Apple and Google, but these ventures will need to originate from within the technical helper class. It’s hard to imagine how any new enterprise in the 21st and 22nd century would profit from increasing the amount of human participation, as the merchants required in the 16th century. In the future, it will almost entirely be a question of more robots. And robots don’t spend money. So, new ventures in the future will have to get rich by offering better products to the “supermanager” class and their small band of helpers, and not to the increasingly superfluous ranks of urban workers. This may grow the “new feudal” economy a bit, but not enough to bring the masses back into the fold.

And so what about those increasingly disempowered masses? Obviously, if they become unhappy, there is the prospect of revolution, of terrorism and other ugly violence against the techno-infrastructure, a sort of neo-Ludditism gone viral. (In a sense, modern hackers are the vanguard of this.) I suppose that the “supermanagers” will decide to tolerate the continuance of our modern central governments, as a way to placate this threat, i.e. to keep the un-needed in check. The new feudalists will agree to pay enough taxes as to keep all the unnecessary people from starving, and perhaps busy enough to avoid any ugliness or demagoguery. It will just be another cost of doing business. Hey, let them write poetry, or paint pictures, or sing songs . . . sort of like the folk art projects during the Great Depression.

So, that’s my take on Piketty. Perhaps I’m going even farther than he and his reviewers do, into a somewhat nightmarish vision of a dystopian economic future. Although, who knows. If the techno-feudalists develop such incredible wealth that they can agree to support the masses so as to avoid riots, perhaps the masses might think of some creative new things to do with their time. If living standards could be kept at a decent level, well, maybe things won’t be so bad. I guess that we will just have to wait a hundred years or so to find out how it turns out.

◊   posted by Jim G @ 7:55 pm      
 
 


  1. Jim, I think that Piketty quite precisely answers the problems that have been arising with the Capitalist economy; he seems to hit the nail on the head.

    Apropos of the point that a “supermanager” class is evolving I found myself putting names that might fit in to the 1% group who will end up having all the money. Since they are on TV, I feel I could well put their names here. I imagine Donald Trump would be one name. Another “group” name would be “The Sharks” of the TV program by the same name. The few times I’ve watched that program I’ve tho’t when I hear them make a deal with someone and then say, “you’ll have more money than you’ve ever had before” I think: Sure, you’ll have maybe $750,000 which likely is more than that person(s) has ever seen before; but the “Sharks” themselves will make several million dollars which is their goal.

    I have also found myself wondering just what/why it is that so many of the terrorist groups seem so fearful of present day society, and right there in your post seemed the answer: The changes that are so obviously coming in society, the fear of how the ordinary person may end up is causing a terrified wish to return to Medieval times; the religious aspect to the whole thing is the excuse being used to cover the fear.

    And certainly if one reads enough blogs, or even a specific few, one finds a different approach (but the same wish) to return to the past. Again, a different approach, a peaceful approach but nevertheless a wish to return to the past.

    I can’t find myself quite envisioning a society in which the 1% support the 99% to allow them to “be creative” and find new things to do with their time, although some aspect of that kind of thing may be part of the future.

    I also can’t help myself saying yet again that I wonder what an economy based on a cooperative approach would look like (as opposed to the competitive approach of Capitalism). I wonder if such a cooperative economy would be an answer or part of an answer to the solution the future will have to develop.

    A very interesting post, posing a lot of questions that generations of the future will have to answer. Yet, I’m sure society will find a constructive and appropriate answer to the many questions involved in the changes that will inevitably come. Such answers have been found in the past; and while they’ve had their own problems and surely the new, creative answer to the economic problems will have its own problems too, if societies in the past have found answers that met the needs of the times, surely the generations of the future will find the appropriate answers for their times. MCS

    Comment by Mary S. — January 12, 2015 @ 7:47 pm

  2. I purchased this book recently – partly because I had read elsewhere that it was one of the best econ books to be published in a long time, and your post reminded me of its importance. I’m delivering a sermon for my church ln July on “economic injustice”, and so I thought at a minimum I needed to be familiar sith the book. Thanks for the reminder!

    So far, there is nothing about the book that I found disagreeable – other than that the author is sometimes a little wordy.

    Jim, I will be passing through Newark Penn Station on Wednesday evening. Would you like to have dinner together? My flight doesn’t leave until 8:30, and I will be finished with my meeting in NYC at about 3pm – although I could stick around in NYC for awhile after that. Send me an email with a suggestion if you are interested; if possible I would like to finalize arrangements before I head out on Monday morning.

    Comment by Zreebs — February 19, 2015 @ 6:08 pm

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