Capital in the Twenty-First Century

According to Simon Kuznets, writing in the 1950s, “inequality would automatically decrease in advanced phases of capitalist development … until eventually it stabilized at an acceptable level” (13). His theory was reassuring. Industrialisation would at first produce high levels of inequality, as seen in the 1800s. It would then fall, as the skills required for improved technologies allowed more people to benefit from new wealth. And better still this would happen “quite apart from any policy intervention” (17). That is, it would occur without the need for action by government. This was initially borne out by facts. Between 1913 and 1948, in the United States, the share of national income of the population’s top decile fell from 45% to below 35%.

Unfortunately, this theory turned out to be true only for a specific moment. While society in the West did become more equal from the early 20th century, and remained so through the 50s and 60s, by the 1970s things were changing. As Piketty notes, since then “inequality has increased significantly in the rich countries” (19). Indeed, by 2010, US income inequality had exceeded the levels of 1910. Kuznets’ dream of an organically egalitarian capitalism has vanished. Should this worry us? Is growing inequality an indictment which requires urgent remedy? Or is it an outmoded 20th century concern, about which, as British prime minister Tony Blair said, we should feel “extremely comfortable”?

The answer to this, of course, depends upon both the nature of, and justifications for, these inequalities. For example, if inequality is the result of what is known as “saving over the life cycle,” (29) it is not much of a problem. On this view, people usually save when young, and are poorer in the present, to accumulate wealth for their old age. Thus, since everyone goes through this cycle, and there is a rationale for it, such inequalities do not really matter. The same is true if inequalities result from meritocracy or, as Piketty says, are “founded only upon common utility” (40). We are more willing to accept inequality if it is, as is often claimed, merely a way of rewarding those who have worked harder or more effectively. For example, most would accept that a brain surgeon should be paid more than a personal trainer as compensation for their years of training, cost of schooling, and for the greater social good they provide. In fact, inequalities of income here could be seen as necessary. In other words, differential incomes are crucial to incentivise individuals to pursue challenging careers which benefit society overall.

The difficulty comes in assessing how far either explanation accounts for existing inequalities. Lifecycle saving exists, but it does not explain the large differences in income within age cohorts. Same with merit. Some unequal pay doubtless reflects the skills of different workers. Nevertheless, it is hard to say, for instance, that the social contribution of a financial manager is ten times that of a nurse, or that such monetary reward is necessary for them to work effectively. Then there is wealth. Unlike income inequalities, wealth, especially when inherited at high levels, tends to be neither meritocratic nor productive. There is no social utility or meritocratic element to someone inheriting a house worth millions of dollars or a business worth billions. Nor does their accumulation of interest or returns on this wealth, often tens or hundreds of times the average wage, benefit anyone other than themselves. And this is especially troubling, given the contemporary re-emergence of vast sums of inherited wealth. As Piketty mentions, “inherited wealth comes close to being as decisive at the beginning of the twenty-first century as it was in the age of Balzac’s Pere Goriot” (29). That is, inherited wealth is almost as significant in 2010 and it was in 1835.

Moreover, beyond abstract questions about the ultimate “fairness” of various inequalities, which can always be debated, there is a more practical point. This relates to what Piketty calls, “political disequilibria” (7). Societies with extreme inequalities, even if they are partly meritocratic, become highly unstable. As Plato had warned in The Republic (written in 375 BCE), when there is a growing gap between the haves and have-nots, and when the former start to monopolise power, the door opens for demagogues. Democracy may come to seem more like plutocracy. In this case, where democracy bypasses the majority, anti-democratic movements flourish, with leaders proposing either communist or nationalist anti-liberal revolutions. This is what happened in Europe in the early 20th century. It is also what Piketty is keen to avoid, motivating him to understand the extent and causes of current inequality and driving him to look for democratic solutions.