When the Dismal Science Fails

Book Review

Literature March 13, 2020

Capital and Ideology by Thomas Piketty (Harvard University Press – 1,150pp – £31.95 – ISBN 978-0-6749-8082-2)

The Economists’ Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Applebaum (Pan Macmillan – 448pp – £20.00 – ISBN 978-1-5098-7914-4)

Ideology is merely a narrative that seeks to justify and perpetuate privilege and inequality. In his latest book, French economist Thomas Piketty (49) needs well over one thousand pages to substantiate his premise: throughout the course of human history the property-owning classes have propagated seemingly coherent and utterly believable, yet self-serving, stories that rationalise the unequal division of wealth and income – and by extension impose and maintain an orderly social stratification.

The tale around which societies are erected and organised changes over time but represents a common thread that runs unbroken from the first larger-scale human settlements in Mesopotamia via the Early Medieval Period to post-revolutionary France, and indeed to the presumed end of history and the present day.

Mr Piketty posits that inequality is neither a law of nature nor the result of technological or economic progress: it is a political choice, i.e. an ideology. This, he argues, is how pharaohs, brahmins, cardinals, kings, industrialists and their assorted helpers held on to power and wealth.

Though he argues, perhaps contradictory, that the poor and downtrodden, in the end, must ‘always win’ due to the force of numbers, their triumph has been denied time and again by the imposition of ideologies that distort and obfuscate reality. Mr Piketty aims to change that by illuminating the other side of history. He uses statistical analysis to make his point, oblivious to the warnings of Mark Twain regarding the misuse of numbers.

Doorstopper Stardom

In 2014, Mr Piketty attained stardom after his doorstopper book Capital in the Twenty-First Century claimed the top spot on bestseller lists ranging from Amazon to The New York Times and handing Harvard University Press its biggest-ever sales success. HUP, 107-years-old and home to timeless standards such as the Loeb Classical Library, shipped over 2.5 million hardcover copies of Mr Piketty’s tome whereas the venerable publisher is more accustomed to print runs of a few hundred copies or a thousand at most.

In Capital in the Twenty-First Century the author uses historical tax data to prove that after a brief 35-year post-war period of relative shared prosperity, the generation of wealth (return on capital) had reasserted its prior dominance over labour, leading inevitably to a concentration of institutional and political power. This set in motion a feedback mechanism that sees ever more capital flowing into ever fewer pockets. Mr Piketty’s conclusion, grounded in rigorous research and impeccable data, and well over ten years in the making, severely upset mainstream economists whose almost blind faith in the ingrained ability of markets to correct imbalances was shown to be misplaced.

The book’s publication followed in the wake of the Occupy protest movement which had shifted the terms of the political debate in Europe and North America by putting rising inequality centre stage. Mr Piketty’s findings proved the movement’s point by showing that the median income of workers had stagnated since the early 1980s notwithstanding significant increases in productivity.

In the US particularly, real average wages (adjusted for inflation) have barely moved for the past 45+ years. According to numbers compiled by the Bureau of Labor Statistics (BLS), the 1973 average hourly wage of $4.03 had the same purchasing power of $23.68 would today – just 19 cents less than the actual present-day average pay rate. During that same period (January 1973 to January 2020), BLS data show that non-farm productivity increased by close to 80 percent.

In his book Mr Piketty uses economic history to put paid to the theoretical and mathematical modelling favoured by most mainstream economists. Perhaps more disconcertingly, the writer also shows that, at least in its present form, capitalism isn’t working. The Economist promptly placed the Frenchman alongside David Ricardo and Karl Marx for his groundbreaking research into the forces that cause inequality.

Grand Tour

In his latest work Capital and Ideology, Mr Piketty elaborates and looks for clues outside the realm of economics. The book is a fascinating, albeit rather long, read that displays the author’s commanding knowledge of world history. Mr Piketty takes the reader on a grand tour that takes in Asia, Africa, Europe and the Americas. Everywhere he looks, Mr Piketty sees and documents the ruthless exploitation of workers. Unlike his first work, the author now assigns blame and proposes solutions.

If, as some would have it, Mr Piketty is the 21^st Century reincarnation of Karl Marx, then he regrettably seems to suffer the same limitations that plagued his intellectual forebear. Whilst Marx has belatedly been recognised as a keen observer of his times and a brilliant analyst of the inner workings of society and economy, he was much less gifted as a convergent thinker.

Mr Piketty dismisses all notions of class struggle as the leitmotiv of history and concludes that there is no deterministic economic, cultural, or technological force or reason to explain why some societies are more equal or unequal than others. In order to make his point, the author turns to Sweden which he hails as an example of the ‘participatory socialism’ that is presented as the cure-all for contemporary societal ills.

Associated Professor of Economics Andreas Bergh of Lund University begs to disagree and argues that the Swedish approach – ‘au contraire’ – has been to welcome capitalists and create an open environment for the private sector which in turn allows for the fairly high level of taxation needed to underwrite the welfare state. Prof Bergh explains that in Sweden high functioning capitalism is leveraged to redistribute income which, he says, represents a more efficient and comprehensive solution than the global wealth tax suggested earlier by Mr Piketty.

The French ‘rock star economist’ erects almost his entire discourse on the statement ‘r > g’: the rate of return on capital (r) is generally bigger than growth in output and incomes (g), resulting in a mismatch that favours those who own over those who earn.

The solution that Mr Piketty comes up with entails the introduction of, amongst others, a wealth tax with global reach to discourage capital flight. Now that the author has narrowed down the causes of inequality to ideological choice, he proposes one of his own in the form of a three-pronged approach:

A confiscatory inheritance tax of up to 90 percent;
A progressive income tax of up to 90 percent, and;
The creation of a truly transnational European Union.

The first two of Mr Piketty’s solutions aim to do away with the ‘ideological’ concept of permanent private property and replace it with ‘temporary property rights’ that the present generation may enjoy but not pass on to its offspring. As an added bonus, billionaires are taxed into oblivion.

According to Mr Piketty this is necessary because billionaires do not create jobs or promote economic growth. As an example, the author cites the almost six-fold increase in the number of US billionaires since the early 1990s (to around 550) which coincided with a marked slowdown in the long-term rate of per capita income growth from 2.2 percent annually between 1950 and 1990 to barely 1.1 percent since.

Mr Piketty argues that billionaires have not been the ‘saviours’ that Reaganites and Thatcherites held them to be. In order to save capitalism from itself, the über-rich need to be knocked down a good few notches. To do that, the sacredness of absolute property rights must end – an ideological choice.

Dialectical Materialism

The French economist maintains that he is not a Marxist and does not favour endowing the state with exclusive rights over the means of production. In fact, Mr Piketty claims that he hasn’t read Das Kapital and says that he is not overly interested in the dialectical materialism of Marx and Engels. The latter statement seems, however, slightly at odds with Mr Piketty’s own approach to economic research given that he seeks simple and logical patterns to map and explain the dynamics of change.

The three core solutions proposed by Mr Piketty show an ambition to readjust the Overton Window of acceptable government policies slightly downward towards the ‘less free’. The author believes that the moment is right to introduce fairly radical policy initiatives to redress the inequality of wealth and income that a decade ago were only discussed on the outer fringes of public discourse. Mr Piketty and his associates Gabriel Zucman and Emmanuel Saez have been instrumental in the design of the wealth tax proposals now being fielded by senators Elizabeth Warren and Bernie Sanders during the Democratic presidential primaries.

Messrs Zucman and Saez hold tenured positions at the University of California, Berkeley, and their applied research seems to bear out Mr Piketty’s analysis. The pair showed that over the last four decades the top 0.1% of Americans – fewer than 250,000 people with an average personal net worth in excess of $70 million each – tripled their share of national wealth to almost 20 percent. This single statistic, presented in the bestseller The Triumph of Injustice, has galvanised the Democratic Party and prompted a lively debate on the need for a thorough overhaul of the tax system – and the philosophy behind it.

Returning to the sage advice dispensed by Mark Twain, statistics can be used to substantiate almost any story. During the high-tax years (1950–1979), personal income tax revenue in the US averaged 7.6 percent of GDP. Though personal income tax was repeatedly slashed, since 1980 the total volume collected averaged a slightly higher 7.9 percent.

This is where Binyamin Applebaum comes into his own. He wants economists, purveyors of what the 19^th Century Scottish essayist Thomas Carlyle called the ‘dismal science’ (after reading the gloomy predictions of Thomas Malthus), to return to the basement from where they gradually emerged in the 1960s. Mr Applebaum also longs for the time when economists knew and recognised the gaps in their knowledge. In The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society the author tracks the growing influence of economists over an ever-widening range of policy questions. He aims to show that the promised scientific rigour, expertise, and fact-based analysis economists were supposed to contribute never really materialised. Worse still, Mr Applebaum writes that the untold interventions of economists amounted to a well-intentioned revolution with many unintended and ‘far from benign’ consequences.

The Economists’ Hour chronicles the demise of the conventional wisdom which holds that societies rest on a number of pillars – a body politic comprised of corporations, churches, labour unions, political parties, etc – that ensure a degree of equilibrium and promote harmonious development. However, thanks to the teachings of economists, the market now rules supreme and demands deference from all other actors.

Mr Applebaum has a warning for Mr Piketty et al: your expertise is overrated. Donald Trump, Brexit, and the re-emergence of nationalist or anti-globalist forces in many countries represent a direct response to the rule of technocrats whose only yardstick is the market. British Tory politician Michael Gove, now minister for the Cabinet Office, captured the moment in the run-up to the Brexit vote of 23 June 2016 when asked to name any economist who supported his position that the United Kingdom should leave the European Union. He refused and proceeded to state that, “people in this country have had enough of experts”.

An Admonition

Despite numerous and dire warnings from economists, the British electorate took the cue and voted to depart the union. Mr Applebaum interprets Brexit as an admonition that economists would be unwise to ignore. He suggests the partial abandonment of sophisticated mathematical models and the acknowledgement of the interpretive nature of economics as a science and the limits stemming from that.

Mr Applebaum reserves his considerable ire for pliant ‘pretend economists’ who, he says, regularly apply a veneer of scientific objectivity to their blind and unreasoned worship of the market and the outcomes of their cost-benefit analyses which, more often than not, fail to consider the human factor – or rather cynically attach a price to human life or suffering. In particular, Mr Applebaum deplores the absence of non-economists at the top, noting that the 1950s the Board of Governors of the US Federal Reserve counted old-fashioned small-town bankers, lawyers, and even a hog farmer amongst its members.

A significant part of The Economists’ Hour is taken up by tracing the rise of free-market advocate par excellence Alan Greenspan who chaired the Federal Reserve from August 1987 to January 2006 and during that time left an almost indelible imprint on the US and, indeed, the global economy. A former member of the Ayn Rand Collective – the inner circle of acolytes gathering around the self-styled Russian-American philosopher and writer of libertarian tracts – Mr Greenspan orchestrated the wholesale dismantling of financial regulation. In 2002, Mr Greenspan told a group of economists that, “unfettered markets create a degree of wealth that fosters a more civilised existence.” He found that insight ‘compelling’ and was not to be swayed even when proved wrong by verifiable fact.

The chairman’s aversion to regulation paved the way for the banking crisis of 2008 and the almost-demise of civilisation as it was known up to then. Former World Bank Chief Economist Paul Romer, now professor of Economics at New York University, argues that economists such as Alan Greenspan should, perhaps, consider leaving questions of right and wrong to civil society and embrace honesty and humility as their guiding principles instead. Politicians, meanwhile, would do well to assume ownership of their answers to the big normative questions asked by society instead of parading economists as a poor excuse for allowing the primacy of politics to be replaced by the primacy of the market – marginalising vox populi in the process.

In conclusion, Mr Applebaum warns economists that voters may send them back to the basement – where incidentally he thinks the profession belongs – should they persist in claiming moral authority from their scientific findings. Considering their track record, economists, the writer states, do not at all deserve a special say in fundamental decisions regarding the way in which societies are organised or operated. Economists who argue otherwise are summarily dismissed as frauds.

Turning to Capital and Ideology, Mr Piketty is most certainly not a fraud although he did succumb to the temptation to enrich his findings of scientific fact with policy solutions that can at best be described as fanciful. This undermines the impact of his hefty second book and detracts from its core message that unfettered markets undermine democracy and that rising inequality must be addressed if disaster is to be averted. How to do this is best left to the actual stakeholders, i.e. civil society.

Mr Piketty deplores the tendency, recently more pronounced, of the masses to opt for ideological choices that seem almost diametrically opposed to their own interests. They do so because opinion is often presented as fact by smooth-talking ‘pretend economists’ furthering an agenda outside academics – Mr Applebaum’s fraudsters.

As a purveyor of data, trends, and their causes Mr Piketty is almost peerless and makes a valuable contribution to the debate. However, as a fount of solutions, he regrettably fails and does so rather miserably.