Capital in the Twenty-First Century (3 page)

In any case, capital prospered in the 1840s and industrial profits grew, while labor
incomes stagnated. This was obvious to everyone, even though in those days aggregate
national statistics did not yet exist. It was in this context that the first communist
and socialist movements developed. The central argument was simple: What was the good
of industrial development, what was the good of all the technological innovations,
toil, and population movements if, after half a century of industrial growth, the
condition of the masses was still just as miserable as before, and all lawmakers could
do was prohibit factory labor by children under the age of eight? The bankruptcy of
the existing economic and political system seemed obvious. People therefore wondered
about its long-term evolution: what could one say about it?

This was the task Marx set himself. In 1848, on the eve of the “spring of nations”
(that is, the revolutions that broke out across Europe that spring), he published
The Communist Manifesto,
a short, hard-hitting text whose first chapter began with the famous words “A specter
is haunting Europe—the specter of communism.”
⁶
The text ended with the equally famous prediction of revolution: “The development
of Modern Industry, therefore, cuts from under its feet the very foundation on which
the bourgeoisie produces and appropriates products. What the bourgeoisie therefore
produces, above all, are its own gravediggers. Its fall and the victory of the proletariat
are equally inevitable.”

Over the next two decades, Marx labored over the voluminous treatise that would justify
this conclusion and propose the first scientific analysis of capitalism and its collapse.
This work would remain unfinished: the first volume of
Capital
was published in 1867, but Marx died in 1883 without having completed the two subsequent
volumes. His friend Engels published them posthumously after piecing together a text
from the sometimes obscure fragments of manuscript Marx had left behind.

Like Ricardo, Marx based his work on an analysis of the internal logical contradictions
of the capitalist system. He therefore sought to distinguish himself from both bourgeois
economists (who saw the market as a self-regulated system, that is, a system capable
of achieving equilibrium on its own without major deviations, in accordance with Adam
Smith’s image of “the invisible hand” and Jean-Baptiste Say’s “law” that production
creates its own demand), and utopian socialists and Proudhonians, who in Marx’s view
were content to denounce the misery of the working class without proposing a truly
scientific analysis of the economic processes responsible for it.
⁷
In short, Marx took the Ricardian model of the price of capital and the principle
of scarcity as the basis of a more thorough analysis of the dynamics of capitalism
in a world where capital was primarily industrial (machinery, plants, etc.) rather
than landed property, so that in principle there was no limit to the amount of capital
that could be accumulated. In fact, his principal conclusion was what one might call
the “principle of infinite accumulation,” that is, the inexorable tendency for capital
to accumulate and become concentrated in ever fewer hands, with no natural limit to
the process. This is the basis of Marx’s prediction of an apocalyptic end to capitalism:
either the rate of return on capital would steadily diminish (thereby killing the
engine of accumulation and leading to violent conflict among capitalists), or capital’s
share of national income would increase indefinitely (which sooner or later would
unite the workers in revolt). In either case, no stable socioeconomic or political
equilibrium was possible.

Marx’s dark prophecy came no closer to being realized than Ricardo’s. In the last
third of the nineteenth century, wages finally began to increase: the improvement
in the purchasing power of workers spread everywhere, and this changed the situation
radically, even if extreme inequalities persisted and in some respects continued to
increase until World War I. The communist revolution did indeed take place, but in
the most backward country in Europe, Russia, where the Industrial Revolution had scarcely
begun, whereas the most advanced European countries explored other, social democratic
avenues—fortunately for their citizens. Like his predecessors, Marx totally neglected
the possibility of durable technological progress and steadily increasing productivity,
which is a force that can to some extent serve as a counterweight to the process of
accumulation and concentration of private capital. He no doubt lacked the statistical
data needed to refine his predictions. He probably suffered as well from having decided
on his conclusions in 1848, before embarking on the research needed to justify them.
Marx evidently wrote in great political fervor, which at times led him to issue hasty
pronouncements from which it was difficult to escape. That is why economic theory
needs to be rooted in historical sources that are as complete as possible, and in
this respect Marx did not exploit all the possibilities available to him.
⁸
What is more, he devoted little thought to the question of how a society in which
private capital had been totally abolished would be organized politically and economically—a
complex issue if ever there was one, as shown by the tragic totalitarian experiments
undertaken in states where private capital was abolished.

Despite these limitations, Marx’s analysis remains relevant in several respects. First,
he began with an important question (concerning the unprecedented concentration of
wealth during the Industrial Revolution) and tried to answer it with the means at
his disposal: economists today would do well to take inspiration from his example.
Even more important, the principle of infinite accumulation that Marx proposed contains
a key insight, as valid for the study of the twenty-first century as it was for the
nineteenth and in some respects more worrisome than Ricardo’s principle of scarcity.
If the rates of population and productivity growth are relatively low, then accumulated
wealth naturally takes on considerable importance, especially if it grows to extreme
proportions and becomes socially destabilizing. In other words, low growth cannot
adequately counterbalance the Marxist principle of infinite accumulation: the resulting
equilibrium is not as apocalyptic as the one predicted by Marx but is nevertheless
quite disturbing. Accumulation ends at a finite level, but that level may be high
enough to be destabilizing. In particular, the very high level of private wealth that
has been attained since the 1980s and 1990s in the wealthy countries of Europe and
in Japan, measured in years of national income, directly reflects the Marxian logic.

Turning from the nineteenth-century analyses of Ricardo and Marx to the twentieth-century
analyses of Simon Kuznets, we might say that economists’ no doubt overly developed
taste for apocalyptic predictions gave way to a similarly excessive fondness for fairy
tales, or at any rate happy endings. According to Kuznets’s theory, income inequality
would automatically decrease in advanced phases of capitalist development, regardless
of economic policy choices or other differences between countries, until eventually
it stabilized at an acceptable level. Proposed in 1955, this was really a theory of
the magical postwar years referred to in France as the “Trente Glorieuses,” the thirty
glorious years from 1945 to 1975.
⁹
For Kuznets, it was enough to be patient, and before long growth would benefit everyone.
The philosophy of the moment was summed up in a single sentence: “Growth is a rising
tide that lifts all boats.” A similar optimism can also be seen in Robert Solow’s
1956 analysis of the conditions necessary for an economy to achieve a “balanced growth
path,” that is, a growth trajectory along which all variables—output, incomes, profits,
wages, capital, asset prices, and so on—would progress at the same pace, so that every
social group would benefit from growth to the same degree, with no major deviations
from the norm.
¹⁰
Kuznets’s position was thus diametrically opposed to the Ricardian and Marxist idea
of an inegalitarian spiral and antithetical to the apocalyptic predictions of the
nineteenth century.

In order to properly convey the considerable influence that Kuznets’s theory enjoyed
in the 1980s and 1990s and to a certain extent still enjoys today, it is important
to emphasize that it was the first theory of this sort to rely on a formidable statistical
apparatus. It was not until the middle of the twentieth century, in fact, that the
first historical series of income distribution statistics became available with the
publication in 1953 of Kuznets’s monumental
Shares of Upper Income Groups in Income and Savings.
Kuznets’s series dealt with only one country (the United States) over a period of
thirty-five years (1913–1948). It was nevertheless a major contribution, which drew
on two sources of data totally unavailable to nineteenth-century authors: US federal
income tax returns (which did not exist before the creation of the income tax in 1913)
and Kuznets’s own estimates of US national income from a few years earlier. This was
the very first attempt to measure social inequality on such an ambitious scale.
¹¹

It is important to realize that without these two complementary and indispensable
datasets, it is simply impossible to measure inequality in the income distribution
or to gauge its evolution over time. To be sure, the first attempts to estimate national
income in Britain and France date back to the late seventeenth and early eighteenth
century, and there would be many more such attempts over the course of the nineteenth
century. But these were isolated estimates. It was not until the twentieth century,
in the years between the two world wars, that the first yearly series of national
income data were developed by economists such as Kuznets and John W. Kendrick in the
United States, Arthur Bowley and Colin Clark in Britain, and L. Dugé de Bernonville
in France. This type of data allows us to measure a country’s total income. In order
to gauge the share of high incomes in national income, we also need statements of
income. Such information became available when many countries adopted a progressive
income tax around the time of World War I (1913 in the United States, 1914 in France,
1909 in Britain, 1922 in India, 1932 in Argentina).
¹²

It is crucial to recognize that even where there is no income tax, there are still
all sorts of statistics concerning whatever tax basis exists at a given point in time
(for example, the distribution of the number of doors and windows by
département
in nineteenth-century France, which is not without interest), but these data tell
us nothing about incomes. What is more, before the requirement to declare one’s income
to the tax authorities was enacted in law, people were often unaware of the amount
of their own income. The same is true of the corporate tax and wealth tax. Taxation
is not only a way of requiring all citizens to contribute to the financing of public
expenditures and projects and to distribute the tax burden as fairly as possible;
it is also useful for establishing classifications and promoting knowledge as well
as democratic transparency.

In any event, the data that Kuznets collected allowed him to calculate the evolution
of the share of each decile, as well as of the upper centiles, of the income hierarchy
in total US national income. What did he find? He noted a sharp reduction in income
inequality in the United States between 1913 and 1948. More specifically, at the beginning
of this period, the upper decile of the income distribution (that is, the top 10 percent
of US earners) claimed 45–50 percent of annual national income. By the late 1940s,
the share of the top decile had decreased to roughly 30–35 percent of national income.
This decrease of nearly 10 percentage points was considerable: for example, it was
equal to half the income of the poorest 50 percent of Americans.
¹³
The reduction of inequality was clear and incontrovertible. This was news of considerable
importance, and it had an enormous impact on economic debate in the postwar era in
both universities and international organizations.

Malthus, Ricardo, Marx, and many others had been talking about inequalities for decades
without citing any sources whatsoever or any methods for comparing one era with another
or deciding between competing hypotheses. Now, for the first time, objective data
were available. Although the information was not perfect, it had the merit of existing.
What is more, the work of compilation was extremely well documented: the weighty volume
that Kuznets published in 1953 revealed his sources and methods in the most minute
detail, so that every calculation could be reproduced. And besides that, Kuznets was
the bearer of good news: inequality was shrinking.

In fact, Kuznets himself was well aware that the compression of high US incomes between
1913 and 1948 was largely accidental. It stemmed in large part from multiple shocks
triggered by the Great Depression and World War II and had little to do with any natural
or automatic process. In his 1953 work, he analyzed his series in detail and warned
readers not to make hasty generalizations. But in December 1954, at the Detroit meeting
of the American Economic Association, of which he was president, he offered a far
more optimistic interpretation of his results than he had given in 1953. It was this
lecture, published in 1955 under the title “Economic Growth and Income Inequality,”
that gave rise to the theory of the “Kuznets curve.”

According to this theory, inequality everywhere can be expected to follow a “bell
curve.” In other words, it should first increase and then decrease over the course
of industrialization and economic development. According to Kuznets, a first phase
of naturally increasing inequality associated with the early stages of industrialization,
which in the United States meant, broadly speaking, the nineteenth century, would
be followed by a phase of sharply decreasing inequality, which in the United States
allegedly began in the first half of the twentieth century.