It is very rare for the Left to have a best-seller but we have one now. The French economist Thomas Piketty's Capital in the Twenty-First Century is currently being both widely read and even more widely discussed. That is great news. The question it leaves us with is how to put all that reading and discussion to best use.
My suggestion is that we capitalize on this rare moment of clarity on the true sources of contemporary inequality by placing the Picketty thesis at the core of a wider argument on the need for a managed capitalism. We need that progressive argument now -- and we need it disseminated widely in the run-up to the mid-term elections -- because of the equally wide dissemination around us of its obverse: namely the libertarian and conservative counter-assertion that markets work best when regulated least.
The standard line for a fully deregulated set of capitalist markets goes something like this.
There is no need to regulate capitalism because, left to themselves, capitalist markets are the great drivers of human progress. Unregulated markets not only generate economic growth, as recent history so clearly demonstrates. They also allocate scarce resources in an entirely optimal way. Prices in unregulated markets educate consumers, trigger entrepreneurial activity and set in motion Adam Smith's "invisible hand" -- the one that leads entrepreneurs to benefit society without planning to do so. Interference in such markets by well-meaning governments only distorts those optimal settlement points. Heavy taxation discourages enterprise. Labour laws create unemployment; and bailing out the weak only penalizes the strong. Letting the market decide is more than economic common sense. It is also the quintessential American way of doing business. Let Europeans regulate markets if they must, but don't bring those European weaknesses to this side of the Atlantic.
So what does the Piketty argument do to that general case?
• Debunking core claims It blows a huge hole in the central libertarian and conservative claim about optimal allocation. Conventional economics would have us believe that unregulated markets can be expected to reduce income and wealth inequalities over time. Piketty, by contrast, demonstrates that, without political intervention, unequal societies are likely to become more unequal rather than less. That is particularly so, he argues, in periods of slow economic growth of the sort we have witnessed in advanced capitalist economies since the 1970s; for in those periods, when the rate of return on capital and the rate of economic growth both diminish, the latter slows much more dramatically than the former. As he recently put it:
"Beyond education and income factors, history tells us that, in the long run, the most powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital (r) to exceed the rate of output growth (g). When r exceeds g, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, initial wealth inequalities tend to amplify and to converge towards extreme levels."
The Piketty data suggests that inequality in contemporary capitalism is now at such a level that ordinary market processes no longer apply. Instead the trend is otherwise: "The past tends to devour the future: society inexorably tends towards dominance by inherited wealth." So just because healthy competition requires some degree of inequality, there is no reason to claim that for reasons of competitiveness we must tolerate whatever level of inequality happens to prevail. If Piketty is right, too much inequality is as damaging to long-term economic health as too little.
• Perfect & Imperfect Competition The data-sets in the Picketty volume are new and extremely valuable, but the basic argument that they sustain has its own long and well-established pedigree. It has long been recognized by critics of market deregulation that only under the very special circumstances of perfect competition do capitalist markets perform in the optimal way claimed for them by their advocates. Unregulated markets work in that optimal way only when the economy is entirely composed of small firms competing with each other in sectors that are easy for new firms to enter. And unregulated markets only work in an optimal way in economies in which no one firm is capable of affecting prices in the market by its actions alone. But modern capitalist markets are rarely of that kind; and when they are, the competitive processes that go on within them invariably move them away from such perfect competitiveness. Markets necessarily generate both winners and losers. As the winners get bigger and the losers smaller relative to each other, perfect competition between them becomes necessarily imperfect in character unless those markets are managed back into competitiveness. No matter how often it is asserted otherwise, market competition rarely works in the manner of Adam Smith's invisible hand; and it does so only if, and to the degree that, periodically the invisible hand is itself given some externally-generated assistance.
• Arguments for market regulation Nor is anti-monopoly policy of itself enough for progressive purposes, for unregulated markets do more than generate structurally-embedded inequalities of wealth of the Piketty variety. They also suffer from a basic fallacy of composition. In unregulated markets, action that is rational for the individual firm is not necessarily rational for the economic system as a whole. That is why there is an environmental case for market regulation. Unless markets are regulated, there is no incentive for firms to factor in the costs of pollution. That is also why there is a Keynesian argument for market regulation. Cutting wages for competitive advantage works for individual firms, but if all firms cut wages simultaneously they open a race to the bottom that leaves each of them short of consumers with money to spend. That is also why there is a labor market argument for market regulation. Successful firms growing larger gain market power not only over their competitors but also over their employees. Unless trade unions can establish minimum standards of wages and conditions, there is nothing in unregulated markets that blocks off sweat-shop routes to immediate profitability. And that is why there is always a democratic argument for market regulation. Because unregulated markets produce losers as well as winners, they eventually settle at points of economic optimality which are not automatically socially optimal. Their minimum standards and ours are not automatically the same.
• The moral limits to markets Moreover, it is simply not the case that everything produced and consumed in modern economies can safely be left for allocation to unregulated market forces. There are moral limits to markets that everyone recognizes, limits that have to be imposed from outside, since ultimately the only morality an unregulated market recognizes is that of the jungle. Morality in unregulated markets lies with the victor in the perennial competitive struggle between demand and supply. Yet there are things which any civilized person recognizes are not suitable for allocation in that manner. In modern America, it isn't legal to sell people any more. We don't allow small children to work when they should be at school. We don't think people should be allowed to starve simply because disabilities of age, illness or infirmity exclude them from labor markets. And in modern America, most of us don't think that every good or service available to us should be freely sold. Instead, we implicitly agree that a list of exceptions to market mechanisms is required while we explicitly disagree - often intensely -- about what that list ought to contain. For some, at the top of that list ought to be abortions. For others, it ought to be drugs. For many more, it ought to be health care itself. But clearly, for all the sharp disagreement on detail, all of us recognize that some limits to unregulated market processes are required. So the one thing that is illegitimate in the political conversation between us is the anger that many libertarians project back at progressives for having the audacity to propose market limits at all. It is not that progressives are out to destroy America -- or God forbid, Europeanize America -- by proposing that certain market outcomes need to be amended by public policy. It is simply that different ways of understanding how modern economies work produce different sets of policy proposals for their greater success.
With inequality at the levels they currently occupy in contemporary America, unregulated markets lock most individuals onto self-fulfilling trajectories of wealth or poverty. A particularly fortunate or gifted individual might break away from the poverty into which he/she was born, but for the mass and generality of us, the reality is that we have to strive endlessly just to stand still. As Thomas Piketty's colleague Emmanuel Saez has recently demonstrated, since 2008, the richest 1 percent have taken a remarkable 95 percent of the new income and wealth generated by the collective efforts of us all, in the process locking the economy onto a low growth trajectory that over time excludes more and more of us from the core claim of the American Dream. What is that core claim: namely that through hard work, Americans can achieve a higher living standard as adults than they enjoyed as children. It is time to un-wrap the flag placed around unregulated markets by their libertarian and conservative advocates, and to wrap it instead around a progressive program of managed markets. It is time to advocate again a genuinely American New Deal that uses tax policy to break cycles of poverty and deprivation, and public spending to trigger the return of strong middle class jobs anchored in prosperous American-based businesses.
These arguments are developed more fully in David Coates, Making the Progressive Case: Towards a Stronger U.S. Economy. New York: Continuum Books, 2011
First posted at www.davidcoates.net