Piketty’s Charge: What Conservatives Can Learn from a Liberal Economist

Once again, it seems, the issue in America boils down to the old contest between Hamilton and Jefferson.

This article is part one of a three-part series on inequality, especially in light of the new bestselling book, Capital in the Twenty-First Century, by Thomas Piketty. 

Many ghosts haunt Thomas Piketty’s publishing sensation, Capital in the Twenty-First Century. The most conspicuous is Karl Marx himself, whose own 19th-century volume on the dynamics of capitalism inspired Piketty’s title and sweeping vision. Like Marx, Piketty is interested in the stratification between the wealthy and the proletariat, and especially the decline of the middle class and concentration of wealth in the hands of the few.

So what does Piketty contribute to the conversation? What insights, if any, does he have on the state of the 21st-century economy? And what, as conservatives, should we take away from his analysis?

The Rich Are Getting Richer: Piketty’s Capitalist Critique

At one level, Piketty’s contribution is simple, and modest. As he acknowledges, he builds on the mid-twentieth-century analysis of economist Simon Kuznets, whose study of relevant numbers found a sharp decline in American income inequality between 1913 and 1948. This led to the Kuznets Curve, which suggested that inequality under capitalism formed a bell-shaped curve: high in the early period of industrialization, yet automatically decreasing as an ever-growing fraction of the population could enjoy the fruits of economic growth.

Carrying Kuznets’s analytical framework forward to 2011, though, shows that the situation in 1948 was in fact an anomaly. The relatively low levels of income inequality and the growing middle classes found in Western nations during the “Trente Glorieurses”—the thirty glorious years between 1945 and 1975—were actually the consequence of the massive and violent shocks of two world wars and global depression and their policy legacy of high marginal taxation of income and estates. The rapid rise in inequality since 1980, Piketty concludes, belies the optimism of the Kuznets Curve. He concludes that the prevailing classical liberal argument—“ever more fully guaranteed property rights, ever freer markets, and ever ‘purer and more perfect’ competition” are sufficient to guarantee a just and harmonious society—is complete fiction. A high level of inequality is, in fact, the “natural” consequence of the unregulated marketplace.

Piketty also takes aim at the “unprecedented explosion of very elevated incomes from labor” found particularly among American CEOs. He is skeptical that this “veritable separation” of top executives in large firms from the rest of the population has any basis in their special skills or productivity. Rather, he traces this very specific form of inequality to the effectively unchecked power of corporate leaders to set their own remuneration and to the sharp reductions in top income-tax rates that occurred after 1980.

Looking ahead, Piketty calls for a new regime of high marginal taxes in order to reduce inequality and to rebuild a predominant middle class resting on merit rather than birth. He would raise the tax rate on annual incomes above $1 million to 80 percent and would impose a similar high progressive tax on estates. He also calls for a new global impost on capital, which would tax all forms of wealth—the value of stocks and bonds as well as real estate—at around three percent a year.

These recommendations have especially horrified Piketty’s American critics. The abstract case for the global tax on capital responds to the easy contemporary flow of wealth across national borders. Alas, it would require a faith in elite-driven, international entities such as the United Nations and the World Bank that does not seem justifiable. More tellingly, though, progressive taxes on incomes and estates that rose to 80 percent actually operated during the wonder years 1945 to 1975, and probably did contribute to the unprecedented expansion of the middle class recorded in the United States and beyond.

Piketty’s Unexpected Influences

Behind the Marxist shadows and calls for global governance, other, more elusive spirits lurk in the shadows of the book as well. And though conservative should rightfully be skeptical of Piketty’s more Marxist conclusions and his more radical prescriptions, he does present an important critique of the postindustrial economy that has historically formed and should continue to help form the basis of a conservative economic order. While never mentioned, Karl Polanyi’s splendid history of Europe’s industrial revolution, The Great Transformation (1944), anticipated several of Piketty’s core arguments. Polanyi concluded, for example, that morally and politically unsustainable levels of inequality were endemic to capitalism and could be tempered only by embedding the marketplace in social, cultural, and public policy constraints. As Piketty frames the same point: “There is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.” Another ghost in Piketty’s attic is Joseph Schumpeter, cited only once (and in a somewhat misleading way), who brilliantly dissected the economic and cultural contradictions of capitalism, including the effects of static or declining populations on economic life. For his part, Piketty shows how population growth ensures that inherited wealth plays second fiddle to meritocracy, while a static or declining population restores the primacy of inheritance.

The most unexpected spirits present, though, are the British duo Hilaire Belloc and G. K. Chesterton—authors whom any conservative must take seriously. Their analysis of finance capitalism—found most systematically in the former’s The Servile State (1912) and The Restoration of Property (1934) and in the pages of the latter’s G. K.’s Weekly—held that the system tended in two directions. A small, “free” portion of the population steadily accumulated property in land, buildings, and financial instruments. Meanwhile, the great majority (90 percent or more) sank into “the servile state,” a modern form of slavery that combined low wages with the rudiments of the welfare state. These instruments provided security and survival for the masses, albeit at a fairly mean level. Under this dynamic, a “middling class” owning small-scale farms and businesses moved toward extinction. Belloc’s policy responses, in particular, also anticipated those of Piketty. The former called for progressive taxes on incomes, capital, and estates, designed to create conditions suitable to a property-owning middle class.

A key difference in argument, though, lies in the sources of inequality. Belloc and Chesterton attributed the problem primarily to politics, where the well-off used the coercive power of law and regulation to protect their wealth and privileges while undermining small property (“enclosure acts” of the 18th century being an early example). Piketty, in contrast, finds the problem to be inherent in mature capitalism: “When the rate of return on capital exceeds the rate of growth of output and income, … capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”

Another difference lies in the kinds of evidence used. “Chesterbelloc” (George Bernard Shaw’s dismissive title) relied primarily on a close reading of history. Piketty builds his argument on an impressive mass of quantitative data, gathered from twenty nations and transformed by computer analysis into an array of graphs and charts. Given this background, the real miracle of Piketty’s book lies in its readability.

What Does This Have to Do with American Conservatism?

Piketty’s critique—and his influences, advertent and inadvertent—clarifies the real questions that Capital in the Twenty-First Century poses for Americans, especially American conservatives. Conservatives should not be so quick to dismiss Piketty’s charges against capitalism. Instead, conservatives who seek to preserve a free-market economy must ask themselves, What is a true free market? Is it simply the freedom for the few to amass wealth and concentrate power while forcing others to live and work in the economy that they create? Should this land be defined by a small number of grandees enjoying ever-increasing inherited wealth and residing in gated communities and “sky boxes” with minimal interaction with the servile masses? Or should it be a land of widespread property ownership, a dominant and expanding middle class, and a democratic mingling of people from all socio-economic levels?

Once again, it seems, the issue in America finally boils down to the old contest between Hamilton and Jefferson.

Framed that way, count me on the side of Jefferson.

Allan Carlson is president of the Howard Center for Family, Religion & Society in Rockford, Illinois, and author of  The “American Way”: Family and Community in the Shaping of the American Identity, and Third Ways: How Bulgarian Greens, Swedish Housewives, and Beer-Swilling Englishmen Crafted Family-Centered Economies … And Why They Disappeared, both available from ISI Books.