Capital in the Twenty-First Century (99 page)

Make no mistake: I have no particular liking for public debt. As I noted earlier,
debt often becomes a backhanded form of redistribution of wealth from the poor to
the rich, from people with modest savings to those with the means to lend to the government
(who as a general rule ought to be paying taxes rather than lending). Since the middle
of the twentieth century and the large-scale public debt repudiations (and debt shrinkage
through inflation) after World War II, many dangerous illusions have arisen in regard
to government debt and its relation to social redistribution. These illusions urgently
need to be dispelled.

There are nevertheless a number of reasons why it is not very judicious to enshrine
budgetary restrictions in statutory or constitutional stone. For one thing, historical
experience suggests that in a serious crisis it is often necessary to make emergency
budget decisions on a scale that would have been unimaginable before the crisis. To
leave it to a constitutional judge (or committee of experts) to judge such decisions
case by case is to take a step back from democracy. In any case, turning the power
to decide over to the courts is not without risk. Indeed, history shows that constitutional
judges have an unfortunate tendency to interpret fiscal and budgetary laws in very
conservative ways.
⁴⁹
Such judicial conservatism is particularly dangerous in Europe, where there has been
a tendency to see the free circulation of people, goods, and capital as fundamental
rights with priority over the right of member states to promote the general interest
of their people, if need be by levying taxes.

Finally, it is impossible to judge the appropriate level of debts and deficits without
taking into account numerous other factors affecting national wealth. When we look
at all the available data today, what is most striking is that national wealth in
Europe has never been so high. To be sure, net public wealth is virtually zero, given
the size of the public debt, but net private wealth is so high that the sum of the
two is as great as it has been in a century. Hence the idea that we are about to bequeath
a shameful burden of debt to our children and grandchildren and that we ought to wear
sackcloth and ashes and beg for forgiveness simply makes no sense. The nations of
Europe have never been so rich. What is true and shameful, on the other hand, is that
this vast national wealth is very unequally distributed. Private wealth rests on public
poverty, and one particularly unfortunate consequence of this is that we currently
spend far more in interest on the debt than we invest in higher education. This has
been true, moreover, for a very long time: because growth has been fairly slow since
1970, we are in a period of history in which debt weighs very heavily on our public
finances.
⁵⁰
This is the main reason why the debt must be reduced as quickly as possible, ideally
by means of a progressive one-time tax on private capital or, failing that, by inflation.
In any event, the decision should be made by a sovereign parliament after democratic
debate.
⁵¹

The second important issue on which these golden rule–related questions have a major
impact is climate change and, more generally, the possibility of deterioration of
humanity’s natural capital in the century ahead. If we take a global view, then this
is clearly the world’s principal long-term worry. The Stern Report, published in 2006,
calculated that the potential damage to the environment by the end of the century
could amount, in some scenarios, to dozens of points of global GDP per year. Among
economists, the controversy surrounding the report hinged mainly on the question of
the rate at which future damage to the environment should be discounted. Nicholas
Stern, who is British, argued for a relatively low discount rate, approximately the
same as the growth rate (1–1.5 percent a year). With that assumption, present generations
weigh future damage very heavily in their own calculations. William Nordhaus, an American,
argued that one ought to choose a discount rate closer to the average return on capital
(4–4.5 percent a year), a choice that makes future disasters seem much less worrisome.
In other words, even if everyone agrees about the cost of future disasters (despite
the obvious uncertainties), they can reach different conclusions. For Stern, the loss
of global well-being is so great that it justifies spending at least 5 points of global
GDP a year right now to attempt to mitigate climate change in the future. For Nordhaus,
such a large expenditure would be entirely unreasonable, because future generations
will be richer and more productive than we are. They will find a way to cope, even
if it means consuming less, which will in any case be less costly from the standpoint
of universal well-being than making the kind of effort Stern envisions. So in the
end, all of these expert calculations come down to a stark difference of opinion.

Stern’s opinion seems more reasonable to me than Nordhaus’s, whose optimism is attractive,
to be sure, as well as opportunely consistent with the US strategy of unrestricted
carbon emissions, but ultimately not very convincing.
⁵²
In any case, this relatively abstract debate about discount rates largely sidesteps
what seems to me the central issue. Public debate, especially in Europe but also in
China and the United States, has taken an increasingly pragmatic turn, with discussion
of the need for major investment in the search for new nonpolluting technologies and
forms of renewable energy sufficiently abundant to enable the world to do without
hydrocarbons. Discussion of “ecological stimulus” is especially prevalent in Europe,
where many people see it as a possible way out of today’s dismal economic climate.
This strategy is particularly tempting because many governments are currently able
to borrow at very low interest rates. If private investors are unwilling to spend
and invest, then why shouldn’t governments invest in the future to avoid a likely
degradation of natural capital?
⁵³

This is a very important debate for the decades ahead. The public debt (which is much
smaller than total private wealth and perhaps not really that difficult to eliminate)
is not our major worry. The more urgent need is to increase our educational capital
and prevent the degradation of our natural capital. This is a far more serious and
difficult challenge, because climate change cannot be eliminated at the stroke of
a pen (or with a tax on capital, which comes to the same thing). The key practical
issue is the following. Suppose that Stern is approximately correct that there is
good reason to spend the equivalent of 5 percent of global GDP annually to ward off
an environmental catastrophe. Do we really know what we ought to invest in and how
we should organize our effort? If we are talking about public investments of this
magnitude, it is important to realize that this would represent public spending on
a vast scale, far vaster than any previous public spending by the rich countries.
⁵⁴
If we are talking about private investment, we need to be clear about the manner
of public financing and who will own the resulting technologies and patents. Should
we count on advanced research to make rapid progress in developing renewable energy
sources, or should we immediately subject ourselves to strict limits on hydrocarbon
consumption? It would probably be wise to choose a balanced strategy that would make
use of all available tools.
⁵⁵
So much for common sense. But the fact remains that no one knows for now how these
challenges will be met or what role governments will play in preventing the degradation
of our natural capital in the years ahead.

More generally, it is important, I think, to insist that one of the most important
issues in coming years will be the development of new forms of property and democratic
control of capital. The dividing line between public capital and private capital is
by no means as clear as some have believed since the fall of the Berlin Wall. As noted,
there are already many areas, such as education, health, culture, and the media, in
which the dominant forms of organization and ownership have little to do with the
polar paradigms of purely private capital (modeled on the joint-stock company entirely
owned by its shareholders) and purely public capital (based on a similar top-down
logic in which the sovereign government decides on all investments). There are obviously
many intermediate forms of organization capable of mobilizing the talent of different
individuals and the information at their disposal. When it comes to organizing collective
decisions, the market and the ballot box are merely two polar extremes. New forms
of participation and governance remain to be invented.
⁵⁶

The essential point is that these various forms of democratic control of capital depend
in large part on the availability of economic information to each of the involved
parties. Economic and financial transparency are important for tax purposes, to be
sure, but also for much more general reasons. They are essential for democratic governance
and participation. In this respect, what matters is not transparency regarding individual
income and wealth, which is of no intrinsic interest (except perhaps in the case of
political officials or in situations where there is no other way to establish trust).
⁵⁷
For collective action, what would matter most would be the publication of detailed
accounts of private corporations (as well as government agencies). The accounting
data that companies are currently required to publish are entirely inadequate for
allowing workers or ordinary citizens to form an opinion about corporate decisions,
much less to intervene in them. For example, to take a concrete case mentioned at
the very beginning of this book, the published accounts of Lonmin, Inc., the owner
of the Marikana platinum mine where thirty-four strikers were shot dead in August
2012, do not tell us precisely how the wealth produced by the mine is divided between
profits and wages. This is generally true of published corporate accounts around the
world: the data are grouped in very broad statistical categories that reveal as little
as possible about what is actually at stake, while more detailed information is reserved
for investors.
⁵⁸
It is then easy to say that workers and their representatives are insufficiently
informed about the economic realities facing the firm to participate in investment
decisions. Without real accounting and financial transparency and sharing of information,
there can be no economic democracy. Conversely, without a real right to intervene
in corporate decision-making (including seats for workers on the company’s board of
directors), transparency is of little use. Information must support democratic institutions;
it is not an end in itself. If democracy is someday to regain control of capitalism,
it must start by recognizing that the concrete institutions in which democracy and
capitalism are embodied need to be reinvented again and again.
⁵⁹

Conclusion

I have presented the current state of our historical knowledge concerning the dynamics
of the distribution of wealth and income since the eighteenth century, and I have
attempted to draw from this knowledge whatever lessons can be drawn for the century
ahead.

The sources on which this book draws are more extensive than any previous author has
assembled, but they remain imperfect and incomplete. All of my conclusions are by
nature tenuous and deserve to be questioned and debated. It is not the purpose of
social science research to produce mathematical certainties that can substitute for
open, democratic debate in which all shades of opinion are represented.

The overall conclusion of this study is that a market economy based on private property,
if left to itself, contains powerful forces of convergence, associated in particular
with the diffusion of knowledge and skills; but it also contains powerful forces of
divergence, which are potentially threatening to democratic societies and to the values
of social justice on which they are based.

The principal destabilizing force has to do with the fact that the private rate of
return on capital,
r,
can be significantly higher for long periods of time than the rate of growth of income
and output,
g.

The inequality
r
>
g
implies that wealth accumulated in the past grows more rapidly than output and wages.
This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably
tends to become a rentier, more and more dominant over those who own nothing but their
labor. Once constituted, capital reproduces itself faster than output increases. The
past devours the future.

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.

The problem is enormous, and there is no simple solution. Growth can of course be
encouraged by investing in education, knowledge, and nonpolluting technologies. But
none of these will raise the growth rate to 4 or 5 percent a year. History shows that
only countries that are catching up with more advanced economies—such as Europe during
the three decades after World War II or China and other emerging countries today—can
grow at such rates. For countries at the world technological frontier—and thus ultimately
for the planet as a whole—there is ample reason to believe that the growth rate will
not exceed 1–1.5 percent in the long run, no matter what economic policies are adopted.
¹