By Jac Laubscher, 7 September 2015
And so French Professor of Economics, Thomas Piketty, crowned “the first rock star economist of the twenty-first century” after the enormous success of his book, Capital in the Twenty-First Century (hereafter referred to as Capital), of which more than 2,5 million copies have been sold in the past two years, is coming to South Africa soon. After a brief visit to Cape Town, he will be off to Johannesburg to deliver this year’s Nelson Mandela Memorial Lecture on 3 October.
Presumably the invitation to Professor Piketty is as a result of his writings on economic inequality being deemed relevant to South Africa in view of it being such a highly unequal society. Professor Piketty’s book has after all been widely adopted by proponents of greater egalitarianism in support of their case in spite of it being lauded more for its polemical impact than its academic rigour.
With the release of the English translation of Capital coinciding with the debate around the 1% vs. the 99%, in particular in the USA, its success was not by chance and it is not surprising that at one stage it topped Amazon’s list of top sellers. A large chunk of Capital’s popularity can probably be ascribed to what is generally known as “confirmation bias”, viz. the inclination of people to be very receptive to writings that support their own preconceived ideas and viewpoints and to dismiss those that are in disagreement with them.
It is likely that a significant number of the 2,5 million people that have bought a copy of Capital have not read all of its approximately 600 pages of rather dense prose (although that has not kept them from quoting the book in support of their own views!). It is even more unlikely that many of them have immersed themselves in the secondary literature that has sprung up in response to Capital, much of it critical of Piketty’s conclusions. Without the latter one is of course bound to end up with an unbalanced view of Piketty’s argument.
I wonder how many supporters of Piketty have, for example, wrestled with the substantial research that has shown that much of the post-WWII increase in wealth that irks Piketty so much is due to increasing housing wealth in the wake of growing homeownership, which is surely no bad thing, contributing to social stability rather than jeopardising it. But in Piketty’s world the accumulation of assets through savings from labour income is an unwelcome intrusion.
Piketty concerns himself mostly with the rise in the income share at the very top of the income distribution (the top 1%) rather than inequality as a broad phenomenon. As an explanation for this trend he focuses on income from wealth or assets rather than from labour as a driver of inequality, while the latter is generally regarded as the most important driver of inequality across the full income distribution.
In his review of Capital Paul Krugman judges this to be a core deficiency in Piketty’s argument. According to Krugman “the fact is that the most conspicuous example of soaring inequality in today’s world ̶ the rise of the very rich one percent in the Anglo-Saxon world, especially the United States ̶ doesn’t have all that much to do with capital accumulation, at least so far. It has more to do with remarkably high compensation and incomes”.
Piketty’s greatest concern is the possibility of the rise of a new rentier class living off the income derived from inherited wealth. In Krugman’s assessment “the big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to ‘patrimonial capitalism’ in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties”.
But perhaps the most relevant critique of Capital from a South African perspective is that of Daren Acemoglu and James A. Robinson, the authors of another highly acclaimed recent book on the economic issues of our times, viz. why some nations are successful while others fail.
Acemoglu and Robinson take Piketty to task for making the same mistake as Karl Marx (the title of the Piketty book was after all deliberately chosen with Marx’s Das Kapital in mind) in trying to deduce general laws of economics from a very limited set of data pertaining to a specific era and geography and then generalising these “laws” across time and space.
The Piketty thesis is based on data from a limited number of developed (Anglo-Saxon in particular) countries during the past 100 years, a period that includes major events such as two world wars, the rise and demise of a major ideology (communism), globalisation, successive waves of technological change, increasing financialisation, etc., which all influenced trends in the distribution of income and wealth.
In Acemoglu and Robinson’s opinion “the quest for general laws of capitalism is misguided because it ignores the key forces shaping how an economy functions: the endogenous evolution of technology and of the institutions and the political equilibrium that influence not only technology but also how markets function and how the gains from various different economic arrangements are distributed”. One therefore cannot generalise conclusions reached in the way Piketty does and his thesis leaves much to be explained.
According to Acemoglu and Robinson the main reason for the incompleteness of the Piketty thesis is that “though he discusses the role of certain institutions and policies, he allows neither for a systematic role of institutions and political factors in the formation of inequality nor for the endogenous evolution of these institutional factors”. They furthermore find no correlation or causal effect between the relationship between the interest rate (r) and the rate of economic growth (g, to give Piketty’s r > g premise) and inequality (especially the top 1% income share), which Piketty sees as the key driver of increasing inequality.
In Acemoglu and Robinson’s view the distribution of income and wealth in society is determined by the reigning economic and political institutions, taking the distinction they made between inclusive and extractive institutions in their earlier work further. To prove their point they refer to the experiences of two countries, one known for low inequality, viz. Sweden, and one known as highly unequal, viz. South Africa, comparing their respective institutional frameworks.
In other words, they regard the South African experience with inequality as evidence that Piketty got it wrong. By implication, without claiming any foresight with regard to what Professor Piketty will say in his upcoming lecture, his thesis as set out in Capital is not applicable to South African circumstances.
However, it does not mean that Acemoglu and Robinson do not share Piketty’s concern regarding inequality. They blame South Africa’s current high inequality in essence on the institutions of the apartheid era and earlier (the Native Land Act of 1913, job reservation, the Group Areas Act, educational inequalities, etc.), which disadvantaged black people.
Unfortunately they give scant attention to the post-1994 institutional revolution and its implications. Although the institutional change of the past 20 years (involving affirmative action, black economic empowerment, the favouring of black business in government procurement, the growth of the welfare state, etc.) did narrow the income gap between different population groups, it encouraged a further widening of the gap between individuals in each population group.
As the figure illustrates, the top 1% income share is as controversial in South Africa as in the developed world, with South Africa reporting the biggest increase during the decade from 2000 to 2010, viz. after the passing of apartheid, compared with the other countries included in the figure. In so far as Piketty’s concern with the top 1% income share is relevant to South Africa, it should therefore be acknowledged that it would apply not only to the beneficiaries of the pre-1994 dispensation but also to the beneficiaries of black economic empowerment deals and tenderpreneurship.
Already we have seen this concern reflected in the Davis Tax Committee’s recommendation (inter alia motivated by extensive references to Capital) that the rules governing the payment of estate duty should be changed to the effect of increasing tax revenue from this source approximately 10 fold.
Source: IMF (2015)
Perhaps a public debate between Piketty and Acemoglu would have been more interesting than having Piketty deliver the Nelson Mandela Memorial Lecture!