Friday, July 17, 2015

2 out of 3 and the 1%

Umberto Boccioni, Visioni simultanee


James sent me an email yesterday evening. (Perhaps you remember me recounting a conversation I had with him last month.)

Subject: wow, i didn't think it would happen like this

Granted the latest police assault on an African American happened a few days ago, but I don't think the story broke until today. I'm still rooting for the Pirates to win the world series


Lately I've been reading Capital in the Twenty-First Century by French economist Thomas Piketty as a dessert course to Karl Marx's Capital, Volume I, which I (finally) plowed through during the spring months.

Unsurprisingly, some very substantial differences stand between the nineteenth-century Capital and Capital in the Twenty-First Century. It's quite possible the very progenitor of Marxist socioeconomic analysis might have dismissed Piketty one of the "bourgeoise economists" he lambasts at least once every three pages in Capital. Piketty, by his own admission, is no Marxist: at several points he criticizes Marx and his method, and declares that capitalism is, historically, the best avenue for elevating the standard of living for the greatest number of people. (Which is not debatable in itself: twentieth-century experiments in communism tended to be concomitant with hard-handed totalitarianism and persistent poverty, which anti-capitalists and free-market skeptics frequently find themselves having to answer for in barroom debates.)

But the fundamental difference between Marx and Piketty is their academic backgrounds. Marx is a philosopher who applied his talents to "political economy" (as it was known in those days); Piketty is a thoroughbred economist. Capital brims with Hegelian dialectics, classical allusions, abstract dynamics, bold generalizations, and sweltering outrage at the miserable treatment of workers in nineteenth-century Great Britain (whose plight was obvious to anyone who lived in London and possessed functioning eyeballs). Piketty's book, on the other hand, is all about the numbers—national incomes, the capital/labor split, growth rates, the divide between public and private capital, and so on—and Piketty finds the numbers rather troubling. (Piketty does also point out that Marx, writing in the mid-nineteenth century, didn't have the sophisticated statistical tools or wealth of detailed economic records available to the twenty-first century economist, which excuses some of his errors and makes the insights which proved accurate all the more remarkable.)

The Occupy demonstrations injected the buzzphrase "income inequality" into the national conversation for a few months during 2011–2. Piketty's book dropped in 2013 (coincidentally) as an exhaustive, six-hundred-page exploration of the grievances the movement sought to address, examining what economic inequality looked like in the past, why it seemed to go away for a little while during the inter- and postwar years, and why it's on the rise again.

I find Piketty's assessments of the United States' situation especially fascinating: most Americans writing about the national economy are treating a subject in which they have a substantial personal investment, which can politicize their argument and magnify any biases they bring to it. Piketty, writing from across the Atlantic, is able to approach the subject of inequality with the impartiality of one standing at some distance—although he is not too distant, nor his he completely neutral. (In a global society, geographical distances have a way of shrinking, and everyone has a growing stake in what everyone else is doing.)

Let's look at an excerpt! (Note: I will not be reproducing tables or graphs, so please take Piketty at his word when he refers to them.)

Thus to judge the inequality of a society, it is not enough to observe that some individuals earn very high incomes. For example, to say that the "income scale goes from 1 to 10" or even "1 to 100" does not actually tell us very much. We also need to know how many people earn the incomes at each level. The share of income (or wealth) going to the top decile or centile is a useful index for judging how unequal a society is, because it reflects not just the existence of extremely high incomes or extremely large fortunes but also the number of individuals who enjoy such rewards.

The top centile is a particularly interesting group to study in the context of my historical investigation. Although it constitutes (by definition) a very small minority of the population, it is nevertheless far larger than the super-elites of a few dozen or hundred individuals on whom attention is sometimes focused (such as the "200 families" of France, to use the designation widely applied in the interwar years to the 200 largest stockholders of the Banque de France, or the "400 richest Americans" or similar rankings established by magazines like Forbes). In a country of almost 65 million people such as France in 2013, the top centile comprises some 500,000 people. In a country of 320 million like the United States, the top centile consists of 2.6 million individuals. These are numerically quite large groups who inevitably stand out in society, especially when the individuals included in them tend to live in the same cities and even to congregate in the same neighborhoods. In every country the upper centile occupies a prominent place in the social landscape and not just in the income distribution.

Thus in every society, whether France in 1780 (when 1–2 percent of the population belonged to the aristocracy) or the United States in 2011 (when the Occupy Wall Street movement aimed its criticisms at the richest 1 percent of the population), the top centile is a large enough group to exert a significant influence on both the social landscape and the economic and political order.

This shows why deciles and centiles are so interesting to study. How could one hope to compare inequalities in societies as different as France in 1789 and the United States in 2011 other than by carefully examining deciles and centiles and estimating the shares of national wealth and income going to each? To be sure, this procedure will not allow us to eliminate every problem or settle every question, but at least it will allow us to say something——and this is far better than not being able to say anything at all. We can therefore try to determine whether "the 1 percent" had more power under Louis XVI or under George Bush and Barack Obama.

To return for a moment to the Occupy Wall Street Movement, what it shows is that the use of a common terminology, and in particular the concept of a "top centile," though it may at first glance seem somewhat abstract, can be helpful in revealing the spectacular growth of inequality and may therefore serve as a useful tool for social interpretation and criticism. Even mass social movements can avail themselves of such a tool to develop unusual mobilizing themes, such as "We are the 99 percent!" This might seem surprising at first sight, until we remember that the title of the famous pamphlet that Abbé Sieyès published in January 1789 was "What Is the Third Estate?"

*      *      *

Finally let us now turn to inequality of total income, that is, of income from both labor and capital. Unsurprisingly, the level of inequality of total income falls between inequality of income from labor and inequality of ownership of capital. Note, too, that inequality of total income is closer to inequality of labor than to inequality of capital, which comes as no surprise, since income from labor generally accounts for two-thirds to three-quarters of national income. Concretely, the top decile of the income hierarchy received about 25 percent of national income in the egalitarian societies of Scandinavia in the 1970s and 1980s (it was 30 percent in Germany and France at the same time and is more than 35 percent now). In more inegalitarian societies, the top decile claimed as much as 50 percent of national income (with about 20 percent going to the top centile). This was true in France and Britain during the Ancien Régime as well as the Belle Époque and is true in the United States today.

Is it possible to imagine societies in which the concentration of incomes is much greater? Probably not. If, for example, the top decile appropriates 90 percent of each year's output (and the top centile took 50 percent just for itself, as in the case of wealth), a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening. When it comes to the ownership of capital, such a high degree of concentration might be tenable if the income from capital accounts for only a small part of national income: perhaps one-fourth to one-third, or sometimes a bit more, as in the Ancien Régime (which made the extreme concentration of wealth at that time particularly oppressive). But if the same level of inequality applies to the totality of national income, it is hard to imagine that those at the bottom will accept the situation permanently.

That said, there are no grounds for asserting that the upper decile can never claim more than 50 percent of national income or that a country's economy would collapse if this symbolic threshold were crossed. In fact, the available historical data are far from perfect, and it is not out of the question that this symbolic line has already been exceeded. In particular, it is possible that under the Ancien Régime, right up to the eve of the French Revolution, the top decile did take more than 50 percent and even as much as 60 percent or perhaps slightly more of national income. More generally, this may have been the case in other traditional rural societies. Indeed, whether extreme inequality is or is not sustainable depends not only on the effectiveness of the repressive apparatus but also, and perhaps primarily, on the effectiveness of the apparatus of justification. If inequalities are seen as justified, say because they seem a choice by the rich to work harder or more efficiently than the poor, or because preventing the rich from earning more would inevitably harm the worst-off members of society, then it is perfectly possible for the concentration of income to set new historical records. That is why I indicate in Table 7.3 that the United States may set a new record in 2030 if inequality of income from labor——and to a lesser extent the inequality of ownership of capital——continue to increase as they have done in recent decades. The top decile would then claim about 60 percent of national income, while the bottom half would barely get 15 percent.

I want to insist on this point: the key issue is the justification of inequalities rather than their magnitude as such. That is why it is essential to analyze the structure of inequality. In this respect, the principal message of Tables 7.1–3 is surely that there are two different ways for a society to achieve a very unequal distribution of total income (around 50 percent for the top decile and 20 percent for the top centile).

The first of these two ways of achieving such high inequality is through a "hyperpatrimonial society" (or "society of rentiers"): a society in which inherited wealth is very important and where the concentration of wealth attains extreme levels (with the upper decile typically owning 90 percent of all wealth, with 50 percent belonging to the upper centile alone). The total income hierarchy is then dominated by very high incomes from capital, especially inherited capital. This is the pattern we see in Ancien Régime France and in Europe during the Belle Époque, with on the whole minor variations. We need to understand how such structures of ownership and inequality emerged and persisted and to what extent they belong to the past——unless of course they are pertinent to the future.

The second way of achieving such high inequality is relatively new. It was largely created by the United States over the past few decades. Here we see that a very high level of income inequality can be the result of a "hypermeritocratic society" (or at any rate a society that the people at the top like to describe as hypermeritocratic). One might also call this a "society of superstars" (or perhaps "supermanagers," a somewhat different characterization). In other words, this is a very inegalitarian society, but one in which the peak of the income hierarchy is dominated by very high incomes from labor rather than by inherited wealth. I want to be clear that at this stage I am not making a judgment about whether a society of this kind really deserves to be characterized as "hypermeritocratic." It is hardly surprising that the winners in such a society would wish to describe the social hierarchy in this way, and sometimes they succeed in convincing some of the losers. For present purposes, however, hypermeritocracy is not a hypothesis but one possible conclusion of the analysis——bearing in mind that the opposite conclusion is equally possible. I will analyze in what follows how far the rise of labor income inequality has obeyed a "meritocratic" logic (insofar as it is possible to answer such a complex normative question).

At this point it will suffice to note that the stark contrast I have drawn here between two types of hyperinegalitarian society——a society of rentiers and a society of supermanagers——is naïve and overdrawn. The two types of inequality can coexist: there is no reason why a person can't be both a supermanager and a rentier——and the fact that the concentration of wealth is currently much higher in the United States than in Europe suggests that this might well be the case in the United States today. And of course there is nothing to prevent the children of supermanagers from becoming rentiers. In practice, we find both logics at work in every society. Nevertheless, there is more than one way of achieving the same level of inequality of income from labor (probably higher than in any other society at any time in the past, anywhere in the world, including societies in which skill disparities were extremely large) together with a level of inequality of wealth less extreme than the levels observed in traditional societies or in Europe in the period 1900–1910. It is therefore essential to understand the conditions under which each of these two logics could develop, while keeping in mind that they may complement each other in the century ahead and combine their effects. If this happens, the future could hold in store a new world of inequality more extreme than any that preceded it.

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