In my last post, I claimed that Piketty offers four evaluative and four prescriptive arguments in Capital in the 21^st Century. In this post, I will reconstruct and examine claims 1E and 1P. To repeat them:

1E. Social Instability: the danger of r > g and patrimonial capitalism is that wealth inequality will produce some bad form of social instability, perhaps even violent revolution.

1P. Restoring Stability: A global progressive capital tax will reduce wealth inequalities, and so will undermine, correct or at least restrain the instabilities generated by capitalism.

Click Piketty Social Stability Passages for all the passages from the book that I think develop both arguments. Otherwise, you can find the relevant passages on pages: 1, 10, 40, 41, 77, 263, 297, 422, 473, 497, 530, 538, 571 and 572. There is no sustained defense of either 1E or 1P, so I’ll have to do some reconstruction.

Note: I do not demand that Piketty formulate arguments like a philosopher would, but I suspect you’ll agree with me that he should have done more than he did.

IE. Social Instability

Piketty’s core stability argument is that patriomonial capitalism will lead to instability of some form or another. He claims, for instance, that,

The central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality (77, emphases mine).

This passage doesn’t explain what “destabilizing” means, but it is clearer in other passages that Piketty thinks that at some margin (one we’re quickly approaching) wealth and income inequalities will lead to something like social revolution or the formation of substantially repressive institutions to keep the rabble in line. Consider the following passage:

Is it possible to imagine societies in which the concentration of income is much greater? Probably not. If, for example, the top decile appropriates 90 percent of each year’s output (and the top centile took 50 percent just for itself, as in the case of wealth), a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening. When it comes to the ownership of capital, such a high degree of concentration is already a source of powerful political tensions, which are often difficult to reconcile with universal suffrage. (263, emphasis mine)

I think Piketty is right that there exists a margin of wealth and/or income inequality that will produce a social revolution of some sort. If, for instance, the top 1% owned 99% of all wealth, then we’d almost certainly see some violence. However, what Piketty never seems to see is that whatever forms of social revolution or instability might be exacerbated by inequality, revolution is also a function of the absolute well-being of the groups in revolt. If, for instance, the income and wealth held by the least-advantaged largely provides them with a decent form of life, then they will be much less likely to revolt or use violence than if they were impoverished. So, social revolution is a function of both wealth inequality and absolute levels of wealth (among many other factors). Piketty never acknowledges this.

Note also in this passage that Piketty suggests that patrimonial capitalist societies could stop this instability, but only at the price of substantial repression (what that comes to, he doesn’t say). And he notes that we already see some “political tensions.” Perhaps he is thinking about Occupy, though that was a bit of a flash in the pan. Perhaps he is talking about nasty political fights over tax rates, but he seems to have something more severe in mind.

And then there’s the perplexing bit on universal suffrage, by which I think he means that if you get enough wealth inequality, you’ll undermine the effective voting power of the general public, but that bleeds into the democratic control argument (4E) which I will cover later.

I really don’t know what Piketty is imagining. And other passages make this even less clear. Consider the following two passages:

It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups. (297)

And:

In all civilizations, the fact that the owners of capital claim a substantial share of national income without working and that the rate of return on capital is generally 4-5 percent a year has provoked vehement, often indignant, reactions as well as a variety of political responses. (530, emphasis mine)

Now, in the first passage, it looks like Piketty thinks that an economy and society cannot function indefinitely with some degree of inequality (though he might mean increasing divergence, rather than divergence at a time). But in the second passage, it appears that inequality has not merely provoked indignant “reactions” (what’s a reaction?) but a variety of political responses. And again, Piketty never explains what these responses are.

Clearly, however, Piketty has something awful in mind:

The consequences for the long-term dynamics of the wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake and that the divergence in the wealth distribution is occurring on a global scale. (571, emphasis mine)

So something bad is going to happen at some point. But from the text, we don’t know what that is.

I think we can say the following, however: at some margin or wealth and income inequality, there will be some violence, political instability and lack of social trust. That is, we’ll get many kinds of instability. Of course, this isn’t very controversial, largely because it remains terribly vague. But it’s the best I can do with the text.

IP. Restoring Stability

As far as I can tell, there is really only one passage that states IP explicitly, and it is this:

This would contain the unlimited growth of global inequality of wealth, which is currently increasing at a rate that cannot be sustained in the long run and that ought to worry even the most fervent champions of the self-regulated market. Historical experience shows, moreover, that such immense inequalities of wealth have little to do with the entrepreneurial spirit and are of no use in promoting growth. (572)

By “this” Piketty means the progressive annual tax on capital which will “make it possible to avoid an endless inegalitarian spiral.” He suggests that we could have,

… a capital tax schedule with rates of 0.1 or 0.5 percent on fortunes under 1 million euros, 1 percent on fortunes between 1 and 5 million euros, 2 percent between 5 and 10 million euros, and as high as 5 or 10 percent for fortunes of several hundred million or several billions euros. (572)

The argument here is pretty simple: if we tax away the inequalities, we’ll reduce or eliminate the relevant instabilities. And there is surely some margin of capital tax that would prevent the instabilities Piketty describes, though one wonders if very high wealth taxes would generate other forms of instability.

IF. Financial Instabilities (Skippable)

Sometimes Piketty suggests that patrimonial capitalism will lead financial instability. Consider:

In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms. (297, emphasis mine) (Also see p. 473)

In this case, Piketty is at least more specific. But he claims that the increase of inequality helped produce financial instability, not the absolute level of inequality, so it’s not clear what Piketty is after. I think Piketty must mean that the way in which inequality increased helped to cause the financial instabilities of the late 2000s. However, this suggests that if inequality had increased through other means, it’s hard to see how that would necessitate financial instability.

Piketty also thinks that particular types of wealth inequalities cause instability, such as the inequality of ownership of oil-producing capital  in Middle Eastern countries (see p. 538).

But since these instability claims do not seem directly connected to social instabilities of other forms, I’m going to set this passage aside. What Piketty has in mind, generally speaking, is that the obvious presence of wealth inequalities will breed some sort of resentment, which will in turn produce instability. He doesn’t mean, I think, that wealth inequalities will cause economic disruptions that will, in turn, cause resentment at the disruptions, which will in turn cause instability.

II. What is Stability? Power or Moral?

If we are to make any sense of Piketty’s arguments, we need to know what “stability” comes to. In political philosophy, especially Rawlsian political philosophy, we distinguish between types of stability and instability. One form of stability is a mere balance of power or modus vivendi where social groups cannot gain an upper hand over the others for purely contingent reasons. Another form of stability is what Rawls in A Theory of Justice called “imposed stability” where people do not endorse their institutions via their sense of justice, but instead are forcibly prevented from resisting by a state with Hobbesian power. I’m not clear on the relation between these two forms of stability in Rawls’s thought, they’re not very different. So let’s just call them both power stability. 

The other sort of stability Rawls calls “inherent stability” and later “stability for the right reasons” where institutions are stable because people freely comply with them because they think those institutions comport with their sense of justice. This is not stability based on the fact that society is based on the “true” moral and political principles, but rather a kind of intersubjective stability, where each person endorses principles and the institutions that manifest them by autonomously complying with their dictates. Let’s just call Rawls’s form of stability moral stability for the remainder of the post.

Obviously Piketty does not avail himself of these distinctions. But I think there’s reason to think he oscillates between the two ideas. If inequalities generate power instability then that means some groups will be able to use the violent power of the state or use violence directly to establish or resist dominance and generate social chaos. The cost of such instability is direct: violent revolts, political upheaval, the destruction of social trust and poorly functioning political institutions widely seen as illegitimate and corrupt. That’s the effect of most of the passages.

However, note the first passage I quoted. Piketty claims that “a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening.” So Piketty acknowledges that wealth inequalities don’t guarantee power instabilities, so long as one group (presumably the state) has enough power to discourage revolt. But in that case, I think Piketty’s problem is that we now have a repressive system.

So the argument doesn’t seem to be that inequality will guarantee power instability, but that it will guarantee one of two morally unattractive states of affairs: revolt or repression (or both).

Now, what’s wrong with repression? Well, presumably what Piketty would like is for the stability of institutions not to be based on repression but on something else. And I seriously doubt he has in mind that social institutions should be based on some true moral principles, as he recognizes that our societies are based on certain intersubjectively acknowledged ideals, like those set out in the Declaration of Independent and the Declaration of the Rights of Man and of the Citizen, which I will discuss more in the next post. So what Piketty wants are social institutions that are stable for the right reasons, namely based on the fact that people see their institutions as based on justifiable principles.

I don’t think I’m reading too much into Piketty here. I am certainly reading into him, but I think charity justifies me in doing so. Otherwise, it’s hard to make sense of the passages I’ve cited.

In sum, it’s not clear whether Piketty is more worried about power or moral instability. Let’s say he’s worried about both.

III. Completing IE

But regardless of which form of stability Piketty has in mind, he can only get us worried (via 1P) if (a) there is some identifiable margin of income and wealth inequality that will generate instability and (b) that we are in danger of reaching that margin in the foreseeable future.

Regarding (a): I think Piketty is surely right that there is some margin of wealth and income inequality that will generate power instability and moral instability. It would be bizarre to deny it, though again, I do think the degree of instability is also a function of the absolute amount of wealth. Take the French Revolution as an illustration. Suppose that French peasants hadn’t been absolutely miserable, but rather had incomes equivalent to what French citizens in the bottom decile have today. Then make the French aristocrats that much richer, maintaining the revolutionary period’s degree of inequality. Do we have reason to think the French Revolution would still have happened? That seems to me implausible.

Now, can we identify the margin mentioned in (a)? This is a harder question. Suppose we reach a point at which the top decile in the United States owns 90% of total wealth, and then suppose we start to see violent revolts across the country. Would we be able to rationally conclude that the wealth inequality was the cause of the revolts rather than something else? Maybe. It would depend on who revolts and what they’re complaining about, and that there aren’t other forces contributing to the revolts in question. But at 70% or 60% it would be substantially harder to tell. I’m sure that some people who revolt would say that wealth inequality was their problem, but people can revolt for lots of other reasons.

Regarding (b): Piketty also needs an argument that we’re in danger of reaching that (hard to identify) margin. Insofar as I can tell, such an argument does not appear in the book. It will all depend on the relevant returns on capital and the growth level as to when we will reach that level of inequality. If the level of inequality is reached 100 years from now, we probably don’t need a global capital tax today. But if we’re going to hit it in 20 years, then there’s an argument for doing so.

Finally, we need an argument that stopping the instability won’t do more harm than good, but these considerations bleed into the question of the means of reducing the instability, which leads us naturally to argument 1P.

IV. Completing 1P

 In order to justify the annual tax on capital, Piketty needs at least two arguments. First (c), that the global annual tax on capital would effectively reduce wealth inequalities to stable levels and (d) that there are no other moral considerations that would bar such action.

Piketty has arguments for (c), namely that while the tax is somewhat utopian, a tax would do the job better than the alternatives. He’s definitely right that it’s better than protectionism and socialism. And if it could be implemented, well, then the capital tax would reduce inequality. Even if you think the capital tax would make the poor poorer, it probably wouldn’t make them so poor that the level of inequality would increase.

Piketty has some arguments for (d) as well. He claims, for instance, that there is no meritocratic justification for such inequalities, since much of it is generated simply by capital’s regular function, and not by meritorious “supermanagers.” He also denies that a global tax on capital would significantly slow economic growth or make the poor worse off in other ways. As Piketty says in the conclusion, “such immense inequalities of wealth have little to do with the entrepreneurial spirit and are of no use in promoting growth.” I think Piketty is obviously right that merit can’t justify the inequalities we see, given that so much of the market is based on luck, as Hayek famously pointed out in The Constitution of Liberty. So I don’t see that as a major issue.

One question for (d) is whether a global wealth tax would slow economic growth by disincentivizing the creation of more wealth. That would be a countervailing moral consideration. Perhaps a bit of power instability is worthwhile if it makes the poor better off in the end. I’m not saying I believe that, but there are many people who think democratic institutions are merely instrumentally valuable, such that if a non-democratic regime capable of suppressing revolts made the poor better off than democracies incapable of such repression, there might be an argument for repression.

Throughout the book, Piketty largely asserts that the global capital tax won’t reduce growth. I’m not aware of any serious empirical argument to this effect, however. You could argue that we can generalize from the effects of national wealth taxes. But generalizing is difficult, given the international mobility of capital. But even if we could generalize, Piketty makes no sustained attempt to do so. So I think the jury is out on how a global capital tax would affect the growth of wealth. My priors strongly suggest there’s be a fall in the level of capital and so a fall in rising wage rates for the least-advantaged relative to growth in the absence of the tax. But that’s based on my more market-friendly mental models than those held by Piketty fans.

Another question for (d) is whether there is any public choice-style argument that would undermine the case for the capital tax. Here’s how it might go: instituting a global capital tax requires powerful international institutions, whose general operation would do more harm than good. I think this is prima facie plausible. You’d need something akin to a world government for enforcement, and you can’t escape a world government without colonizing other planets, so it’s bound to be much more repressive than national governments, which are already pretty bad.

A third question for (d) is whether there are any deontological restraints that would bar the justification of a global capital tax, such as natural property rights. I think there are publicly justified rights to private property that would render such wealth taxes unjust, at least at the levels Piketty suggests, but I recognize many will disagree.

V. My Assessment – Against (b) and (d)

I do not think Piketty’s argument is successful because I don’t think we have any good reason to think we’re in danger of instability-generating levels of wealth inequality any time soon. Most people don’t really care that, say, Bill Gates is wealthy. They largely care about the wealth levels of their next door neighbors. I’m sure if Bill Gates owned three-quarters of the globe that people would care, but why think we’re anywhere near that level? Piketty owes us an argument.

What’s more, I think there are lots of countervailing considerations that weigh against a global capital tax, in particular its growth-stunting effects, public choice-style worries and deontological restraints on wealth taxation. I think everyone should take the growth-stunting effects very seriously and I think everyone should be worried about the potential power abuses of global institutions, but I recognize my concerns about deontological constraints aren’t going to move a lot of non-libertarians.

So in sum, we lack good reasons to endorse critical premises in Piketty’s argument, and so his stability-based arguments (1E and 1P) are not compelling.