What if Piketty is Right?
Capitalism and democracy are incompatible.
Katerina once told me that democracy is a deception that the powerful offer to trick people into believing they have a voice in their government. She was a left-wing student of mine when I was teaching high school in Greece almost 40 years ago, and I have always remembered not only her words, but the matter-of-fact way she expressed them.
In truth, the people seem to have little influence in the policies of their government. Martin Gilens of Princeton and Benjamin Page of Northwestern University have recently published a paper in which they summarize, “Our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts…Policy making is dominated by powerful business organizations and a small number of affluent Americans…America’s claims to being a democratic society are seriously threatened.”
To many conservatives, the US Constitution and free enterprise are inextricably intertwined. An example of a succinct description of this came in response to a question on Yahoo Answers, What kind of economic system does the United States Constitution establish for the United States? One answer:
However, it does protect our individual liberties, which is the basis of Capitalism.
So, although the Constitution does not say the word “capitalism”, it clearly protects individual liberty and restricts government powers, which is pretty much the definition of Capitalism.
A more involved answer, again at Yahoo! Answers, came in response to the question How does constitution protect the free enterprise? The response:
The Tenth (sic Fifth) Amendment requires that property may only be taken by the government after due process and with just compensation. The Supreme Court ruled long ago that “property” in this clause means both real and personal property, plus the rights to receive such for any legal reason.
It follows that the right of a businessman to receive the profits of his endeavor, if the business is legal, are protected by the Constitution and that he and he alone has the right to sell, modify, or dispose of his enterprise.
Thus, capitalism is indirectly protected in the Constitution.
In his book, Prophets, Principles and National Survival, Jerreld L. Newquist writes, “How many of the Latter-day Saints truly believe in the Constitution of the United States? That Constitution stands for free initiative. That is free agency. In a business sense we have spoken of it as free private enterprise.”
The National Center for Constitutional Studies puts it this way,
America’s Constitution did not mention freedom of enterprise per se, but it did set up a system of laws to secure individual liberty and freedom of choice in keeping with Creator-endowed natural rights. Out of these, free enterprise flourished naturally. Even though the words “free enterprise’ are not in the Constitution, the concept was uppermost in the minds of the Founders, typified by the remarks of Jefferson and Madison as quoted above. Already, in 1787, Americans were enjoying the rewards of individual enterprise and free markets. Their dedication was to securing that freedom for posterity.
In his book, How to Read the Federalist Papers, Anthony A. Peacock makes much of the notion expressed in the Federalist Papers that it is only as a commercial republic that a republic as large as the original thirteen colonies could survive as a republic, since all other examples of republics were of limited territory, mostly city-states.
Listening to conservative talk radio, we hear adherence to the Constitution, and promoting free enterprise, as part and parcel of what has made this country great (until, of course, the current administration came into power).
In From Commercial Republic to Plutocracy at The Christendom Review, Paul Cella makes both the case for free enterprise at the heart of the nation that the Constitution created, but also since the recent economic troubles, as a scourge which threatens the republic. “The unique place reserved for free enterprise in America, in other words, acquires constitutional significance in The Federalist; and it cannot be doubted that this work, above all others, provides the interpretative key for our constitutional order.” But in the wake of the recent recession, he continues,
In a word, the answer to the hard questions may be that we have had the misfortune to witness the degradation of Hamilton’s noble work, his painstaking formation of a commercial republic characterized by liberty, into a much baser form of political arrangement: plutocracy, an aristocracy of alienated wealth, characterized by insolent speculative gain. Instead of patriotic statesmanship grounding prosperity in the security of property, we shall have idle elitism, grounding narrow interest in sophistication and the abstraction of property. I leave it to the reader to judge whether such an environment is conducive to liberty.
Cue Piketty. I’ll summarize Robert M. Solow’s summary of his work. Piketty traces total private and public wealth over time and geograpy. He calculates a wealth-income ratio so that he can compare nations in different times and places. A high ratio indicates wealth inequality, and stood at 7 in Europe in the 1700’s and 1800’s (using France and England as examples). It fell to around 2.5 and 3 in those countries after World War II, but is now back up to 5 and 6. (In the U.S. the trajectory is different, starting low at about 3 in 1770, rising to 5.5 around 1930, down to 4 after the war and back up to 4.5 now. That inequality was low during the time that the Declaration of Independence and Constitution were promulgated should head off any suggestions that the Founding Fathers lived in a time of inequality and were comfortable with it). Piketty predicts this wealth-income ratio will rise to 6.5 by the end of this century, putting us back at the levels last seen over a hundred years ago, effectively wiping out modern trends toward a large and prosperous middle class.
If an economy grows at a certain rate, and invests its capital at a proportional rate, the wealth-income, or capital-income ratio will stay stable. But Piketty sees growth as slowing in the rest of the century, while investment stays steady at current rates. This leads to capital becoming a larger part of overall wealth, and raises this capital-income ratio, to 6.5 in Piketty’s prediction.
But capital also produces income by having a rate of return, which has been rather steady at 3-6% over time and geography. Growth in the economy is dependent on growth in productivity, and wages have not kept up with this growth in productivity, meaning that wages are a smaller part of the national income, with returns on capital taking a greater proportion. More capital, growing faster than wages and taking a greater proportion of income, means that those with capital take an increasingly large share of national income and those who get wages a smaller share. If most capital is owned by few people, wealth becomes ever more concentrated in fewer hands. In the U.S. more than continental Europe, this inequality is exacerbated by a recent trend of rising wage income of top earners and stagnant income of the rest of wage earners. Not only do the wealthy get a larger share of the national income because their income comes from increasing accumulations of capital rather than from wages, but a small proportion of individuals are getting super salaries and taking an increasing proportion of the wage income as well.
Solow sums up the worst case:
So Piketty’s foreboding vision of the twenty-first century remains to be dealt with: slower growth of population and productivity, a rate of return on capital distinctly higher than the growth rate, the wealth-income ratio rising back to nineteenth-century heights, probably a somewhat higher capital share in national income, an increasing dominance of inherited wealth over earned wealth, and a still wider gap between the top incomes and all the others.
Piketty sees rising inequality between the wealthy and the wage earners. In the U.S., Citizen’s United opened the doors for more corporate money to flow into and influence elections; McCutcheon v. FEC increased the amounts that donors can give to individual candidates. And even before this money started flowing into election campaigns, Gilens and Page observed that policy follows money, that policies favored by wealthy people (favoring wealthy people) are more likely to get passed than those favored by majorities of the common people.
Many, particularly conservatives, see American democracy and capitalism as inextricably intertwined and at the foundation of our nation. But the story that Piketty’s data tells shows that capitalism leads to oligarchy, unless our political choices redirect it toward more equality. But as Gilens and Page note and Supreme Court decisions reinforce, the wealthy are now more in charge of our political choices than the majority is.
Democracy is truly endangered.