Noah Smith remarks that Tyler Cowan’s portion of the Marginal Revolution blog, since the release of Thomas Piketty’s Capital in the Twenty-First Century, seems to have become “your one-stop-shop for anti-Piketty links and analysis.” Smith goes on to say:
This is interesting, because Cowen himself recently wrote a book called Average is Over, which makes predictions somewhat similar to those made by Piketty. From the Wikipedia article about Average is Over:
Cowen forecasts that modern economies are delaminating into two groups: a small minority of highly educated and capable of working collaboratively with automated systems will become a wealthy aristocracy; the vast majority will earn little or nothing, surviving on low-priced goods created by the first group, living in shantytowns working with highly automated production systems.
There is a difference, of course. Piketty forecasts that wealth inequality will go up because of an increase in capital’s share of income, while Cowen forecasts that wealth inequality will go up because of increased inequality in labor income. But the basic future foretold by the two is the same.
Speculating on why Cowan has turned into “an anti-Piketty crusader,” Smith continues:
But it also seems possible that Piketty has deeply worried economists and pundits who thought that concern over inequality was a thing of the past, and that laissez-faire had basically won the battle of ideas. Piketty’s immense popularity might seem, to these folks, to threaten to drag us back into a dark age when radical wealth redistribution was taken seriously, not only by large segments of the public, but by a number of prominent economists as well. Piketty might seem like the vanguard of an onrushing wave of socialist thought that could succeed in turning back the tide of neoliberalism that had been advancing for at least 40 years. So Cowen – and the numerous anti-Piketty writers he links to – may simply be worried about Piketty and what he represents.
And I think that account is quite plausible. But I also think more can be said about the specific nature of the challenge Piketty poses to contemporary neoliberal and laissez faire attitudes. Smith touches on this challenge in the passages quoted above, but doesn’t really pick it up and develop it.
Cowan might very well have predicted a future of growing inequality in Average is Over, but wants to tell a story according to which the source of inequality lies in the differences among individuals in what some would be pleased to regard as a certain kind of merit. He defends a version of what Piketty calls the “rising human capital hypothesis.” But a central purpose of Piketty’s book is to refute that hypothesis. Piketty argues that the greatest differences in contemporary labor income depend primarily on power and hierarchy, and the consequent ability of top managers to determine their own wages, rather than on great differences in the marginal productivity of labor. (pp. 330-333) Along the way to making this point, Piketty also offers some skeptical comments about the very concept of marginal productivity, which he believes cannot even be defined in the context of unique job functions and imperfect information, and is close to being a “pure ideological construct” offering no justification for labor income inequality. More importantly, Piketty argues that the most significant source of inequality does not come from differences in labor compensation at all, but to a pervasive tendency in market economies, observed throughout the history of these economies, to increase the flow of income going to the possessors of existing wealth purely as a reward for owning stuff. In the latter case, the income has nothing to do with any kind of reward for hard work, innate talent or some combination of the two, and the only corresponding merit that these income recipients possess is the merit of being a possessor of previously accumulated wealth.
So Piketty is out to show that woven deep into the sinews of market economies, economies based on private property institutions as they have actually existed for over 200 years of modern capitalism, is a powerful force for income and wealth divergence that continually thwarts the meritocratic ideals that inform the sense of social justice in modern democratic societies. Piketty also argues that this problem is not a problem of imperfect markets that can be alleviated by reducing monopoly power and making those markets function more competitively. He sums up that conclusion like this:
The problem posed by this use of the word “rent” is very simple: the fact that capital yields income, which in accordance with the original meaning of the word we refer to as “annual rent produced by capital,” has nothing to do with the problem of imperfect competition or monopoly. If capital plays a useful role in the process of production, it is natural that it should be paid. When growth is slow, it is almost inevitable that this return on capital is significantly higher than the growth rate, which automatically bestows outsized importance on inequalities of wealth accumulated in the past. This logical contradiction cannot be resolved by a dose of additional competition. Rent is not an imperfection of the market: it is rather a consequence of a “pure and perfect” market for capital, as economists understand it: a market in which each owner of capital, including the least capable of heirs, can obtain the highest possible yield on the most diversified portfolio that can be assembled in the national or global economy. (p. 423)
Piketty eschews the concept of human capital in his book, and argues for the importance of distinguishing capital from labor power, and capital income from labor income. But even if one embraces the concept of human capital, then one would only be subsuming Cowan’s story about the economic divergence between his two groups under Piketty’s story about the strong forces for divergence represented by the tendency for the return on capital to significantly exceed the rate of growth in national income. And yet it is clear that Piketty is not simply making an arid economic prediction about the future, but rather regards this deep tendency in capitalism as a challenge to democratic society calling for a policy response consisting of deliberate interventions into the ordinary function of markets, whether those markets are functioning relatively perfectly or relatively imperfectly. He believes the defense of democracy possesses an overriding moral logic of its own that in many places trumps a deference to market mechanisms, even where those mechanisms are functioning so as to allocate resources “efficiently”, and he speaks repeatedly of developing new institutional forms of democratic control over capital. Piketty is very much open to ne laissez pas faire where the values of social justice and democracy call for such an interventionist policy.
This passage on rent, quoted above, leads naturally into another aspect of Capital in the Twenty-First Century that contributes, I believe, to the sense of threat perceived by stalwart defenders of laissez faire institutions. Throughout the book, Piketty makes casually provocative comments in passing that point in the direction of a deeper moral or economic critique of contemporary institutions, but then leaves it to his readers to trace out those implications on their own, and by their own critical lights. For example, continuing the line of thought in the passage I just quoted, Piketty goes on to say:
… To be sure there is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working. There is something in this notion that is an affront to common sense and that has in fact perturbed any number of civilizations, which have responded in various ways, not always benign, from the prohibition of usury to Soviet-style communism. Nevertheless, rent is a reality in any market economy where capital is privately owned. (pp. 423-4)
In passages like this, Piketty has cut down through the intellectual fat to the real bone, and re-exposed the classic moral discomfort over capitalism: that some people receive income that comes not from any labor contribution they make to the production process, but simply as the rent they collect on the production factors they are fortunate enough to own going into the production process. And not only is this rent collection one factor in generating capitalist inequality, it is the dominant factor, and a factor that appears to be of growing significance in the 21st century.