I‘ve now completed Part Two of Capital in the Twenty-First Century. (See my analysis of Part One here.) Part Two concerns history of capital in relation to income (the capital/income ratio) over the course of the twentieth century.

This ratio is a handy way to think about money and power. A high capital/income ratio indicates a society in which money (and therefore to a large extent power) flow to people who own income producing assets—land in traditional societies, factories, breweries, and so forth during the early industrial revolution, and securitized versions of the same during the modern era. Piketty speaks of this as a rentier society (rentier is the French term for someone who lives on collected rents—investment income). By contrast, when the capital/income ratio is low, more of the overall annual income in a society goes to pay wages.

In a crude way, therefore, the capital/income ratio indicates when our economy is oriented toward owners of things as opposed to people who make things—a rentier society as opposed to a workers society. Communism is a workers paradise, because the capital/income ration is theoretically zero. Nobody is permitted to own anything. A ratio of one is a capitalist paradise in which owners pay their workers nothing. Owners own, and everyone else is a slave.

Needless to say, in the history of American and European nations the ratios have never been zero or one. But they have fluctuated. Here’s the basic history.

At the end of the nineteenth century and beginning of the twentieth the ratio was high, which means a great deal of national income went to owners of capital and not to workers. This was especially true in Europe. It was the Belle Epoque, a time when being rich meant living on investment income—a condition of leisure well represented in the novels of Henry James. It was also a time of labor unrest as workers sought a larger share.

Then the capital/income ratio declined dramatically. Why? The turmoil of the period from 1914 to 1945 crushed the people who owned things. Inflation is hell on anyone with fixed rate bonds. Depression decreases the value of factories—not enough people are buying things. And, of course, a continent-wide war of unprecedented destruction . . . Between 1910 and 1950 the share of national income that went to owners dropped by half in Europe. The decline was less dramatic in America, though we’ve for the most part always had a capital/income ratio lower than Europe. (Given the spirit of his inquiry, this ought to move Piketty to observe that the United States has always been something of a worker’s paradise, but he doesn’t.)

Since the end of World War II the capital/income ratios have climbed in European countries (and in America, though less rapidly). As a result, the twentieth century has a U shape that Piketty believes tells us pretty much all we need to know. Here’s his interpretation. Capital reigns at the outset. Global trauma unseats it. Labor has three glorious decades. Then the inexorable laws of capitalism reassert themselves in the 1980s, and now capital is again ascendant, inequality is on the rise, threatening democratic values, and etc.

There’s something right about this grand narrative. Who would dispute the supreme importance of the global traumas of depression and war that convulsed the West for more than a dozen years? Moreover, we all know that the post-war years were great for unions and middle class workers—and that we’re presently in a new Gilded Age of sorts.

But there’s also something wrong. First, the data shows that income from investments has declined in significance throughout the twentieth century as compared to income from labor. Lesson: This Gilded Age is different from the previous one. Second, when it comes to the golden era of return on capital, it was the same glorious decades that favored labor. Lesson: Rapid growth is good for all stakeholders. And so the story of the last century is complicated—like human beings.

Which is why I think there’s something wronger still in Piketty’s book—its professional conceit. It’s pretty clear that World War II is the mother of all causes of change in the economic history of the West in the last century. Precisely that fact—so evident in his many charts—should make him (and us) very skeptical that capitalism has “laws.” Indeed, it should make us very skeptical that “capitalism” exists. What does exist is the economic history of the twentieth century—a very interesting reality shaped by the extraordinary confluence of endlessly complex human motivations, actions, and forms of life.

Put differently, why assume that war-making is fundamentally different from factory-building, or that vote-getting is different from soap-selling, or that union-organizing is different from soul-saving? I believe in the need and value of specialization, which is what economists do. But when we consider our societies on the world-historical scale of Capital in the Twenty-First Century, we’re thinking about the human condition, not “doing” economics. 

Articles by R. R. Reno


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