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The Moral Dimensions of Capital: James Emmet on the Downton Abbey-ization of Society

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Editor’s Note: Today’s entry in our forum on Thomas Piketty’s Capital in the Twenty-First Century is by James Emmet, a retired corporate finance manager and life-long scholar of history and theology. This is the fourth post in our forum, which kicked off with an introductory post, where you’ll find an index of all the posts in the forum.


The cumulative effect of the socioeconomic polarization of our society over the past three decades has been dramatic. Concerns about increasing wealth and income disparities, and about pervasive economic insecurity in our new nation of me-incorporateds, subcontractors, and temporary laborers are now being raised across the political spectrum.

In Capital in the Twenty-First Century, Thomas Piketty explains why this polarization is happening. He asks the question: “Do the dynamics of private capital accumulation inevitably lead to an economically and politically destabilizing concentration of wealth?” The answer is yes. “The principal destabilizing force is that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g” (571).

He continues: “The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. The entrepreneur inevitably tends to become a rentier, more and more dominant [in terms of share of national income] over those who own nothing but their labor. The past devours the future” (571).

Piketty is saying that under our current tax regime we are headed toward a re-creation of the world of Balzac and Jane Austen, of Henry James and the Belle Epoch, of Downton Abbey. So it’s good that we love Austen so much that we repeatedly release major film adaptations of her books; good that we are watching Downton and realizing that it’s possible for the rich to behave kindly and for us to foresee fulfillment in serving them—that loyalty can be real on both sides. The nature of capital has changed, yes, from landed wealth, to modern industrial, commercial and financial capital and to residential real estate, but the dominance of capital as a whole, especially if we include human capital (in the form of an elite education and the connections which facilitate elite apprenticeship) is reapproaching nineteen century European proportions, and may soon exceed those proportions substantially.

The book’s key argument is historical. The natural process of wealth and income concentration—which is a very long-term process, taking decades—was interrupted for two entire generations because of the traumatic events of the first half of the 20th century: the two world wars and the Great Depression. These catastrophes had the result of destroying both capital and capital valuation, for the following reasons:

  • physical destruction
  • a bear market of unprecedented severity and duration
  • expropriation
  • unanticipated inflation, which effectively expropriated the enormous wealth held in the form of bond portfolios
  • rent-control laws, suppressing the value of urban residential real estate
  • regulatory changes to the financial industry
  • changes in labor laws institutionalizing union power
  • and, probably most of all, tax policies levying a high marginal rate on estates and upper incomes, especially upon so-called “unearned income” (income from dividends and interest)

Especially interesting was Piketty’s description of the operations of the National War Labor Board in the United States during WWII, which severely compressed wage and salary differentials.

The effects of the traumas, in terms of a more egalitarian distribution of income, lasted into the 1970s. The re-emergence of capital as the dominant element in the economy was delayed by relatively high growth, which reduced the differential r > g. High growth was a result of post-war reconstruction in Europe, the post-war baby boom (especially strong in the United States), and the full implementation of the so-called second industrial revolution—consisting of the internal combustion engine, petroleum and the modern synthetic chemical industry, which made possible the construction of suburbia—and electrical technology, which revolutionized factory productivity and electrified the home, driving enormous investment and enabling women to enter the workforce throughout the developed world.

The events of 1914-1945 and the catch-up process afterward obscured the long-term dynamic of capital concentration. In the 1950s, Simon Kuznets studied income distribution in the United States from 1913 to 1950. He ended up measuring the effect of the historical traumas and concluded that capitalism spreads equality. Great. That’s what everybody wanted to hear; economists turned to other matters. The true dynamic of concentration remained invisible, until recently.

The heart of the book’s message is found in tables 7.1, the distribution of labor income; 7.2, the distribution of capital (wealth); and, especially and most relevant, 7.3, the distribution of total income—income from both labor and capital.

Alt Text: Table 7.3, Inequality of total income (labor and capital) across time and space

Table 7.3, “Inequality of total income (labor and capital) across time and space,” from *Capital in the Twenty-First Century* (source: Thomas Piketty’s homepage)
[emphasis added; click to enlarge]

Table 7.3 tells us that the inequality of total income in the US, income from labor and capital combined, is now equivalent to the inequality in Europe in 1910. (He should tell us how it compares to the U.S. in 1910. If it is worse, that is worth knowing. It is hard to believe that US income inequality in 1910 could have been as bad as it was in Europe.) The upper 10% in the United States receives 50% of the national income! The bottom 50% of the population makes only 20% of the total income. The top 1% makes 20%! This means that if we took half of the income of the 1% and gave it to the lower half of the population, we could increase their income by 50%! And after this transfer the income of the 1% would still be 17 times greater than the income of the lower 50%.

I found these figures shocking. I had always believed that the high income of the rich didn’t really matter—that there were not enough of them such that redistribution of their income would make a meaningful difference to the majority of the population. I think nearly everybody believes that. This isn’t true! I am a well-educated and well-informed person, relatively speaking. I didn’t know the truth of this question. A French economist has to tell me this. I am shocked and surprised… by the facts, yes, but also by the fact that I didn’t know this already. I have to question the validity of the media I read. The proportion of the national income appropriated by the top 1% in Europe is half that of the US, only 10%!

Piketty’s fear is that the slowing of technical innovation (the digital revolution has simply not had the same kind of dramatic impact on productivity and investment as the second industrial revolution) and the drop in the birth rate (which appears to be leading to a stabilization of population throughout the developed world) will lower growth going forward, increase the r > g differential, and increase the dominance of capital even further. It is better not to wait to make changes: the sooner we start to rein in the power of capital and the more gradually we reverse the concentration process, the less violent will be the likely political struggle between rich and poor. It is better to change the tax code, and raise minimum wages, gradually, over time, in the same way we in the United States are slowly increasing the age at which we become eligible for full Social Security benefits, to allow people time to prepare and adjust. This is rational and fair, and it merits bipartisan support. Few Republican voters, wherever they may lie on the socioeconomic hierarchy, really wish to see a new Gilded Age, an age of working class poverty and labor radicalization.

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