“If investors in wealthy economies like the US are getting less back on their capital, how can capital rapidly be outgrowing the growth in productivity? Of course, our culprits should be globalization and the financial sector.”
Stiglitz versus Piketty
Here is a curious dilemma for anyone who wants to understand the development of the global economy. At least superficially, it pitches Piketty against the findings of Nobel Prize economist Joe Stiglitz.
On the one hand, the main argument in Piketty’s book is that the rate of return on capital is much faster than the growth of the economy. He calls this “r>g”, simply meaning that people get more money back on their capital each year than the economy seems to be growing in productivity. This mechanism is as strange an affair as it is dangerous, because it means that the super-rich (top 0.01%) get exponentially richer and accumulate a growing portion of the total global wealth. The fruits of our labor and development increasingly fall into these deep pockets. In the US, it looks something like this:
Oh, and this is just the salaries, the incomes. The distribution of wealth is considerably more dramatically unequal. These changes in “income” seem to be a function of the accumulation of capital paying off CEO:s and top analysts. We’ll get back to that.
On the the other hand, Stiglitz has long showed us that the return on investments are consistently shrinking in the US. In this narrative, the world is overcapitalized, saturated with capital. To be clear, this is a finding that, superficially at least, seems to oppose Piketty’s r>g. You get less and less back on invested capital. Just look:
How does this compute? If investors in wealthy economies like the US are getting less back on their capital, how can capital rapidly be outgrowing the growth in productivity? Of course, our culprits should be globalization and the financial sector.
I want to make a few points along the way to clarify this.
The relational nature of profit
Profit is not really the same as economic growth. Profit means, seen as a relation between human beings, that somebody gains a relative power to decide what work should be done. The economy grows, and then somebody makes profit by leveraging their relative position in the economy, so that they gain the power to get others to do their bidding, simply by paying them.
Profit is something that happens in the spur of the moment, when there is a certain imbalance or inequality to profit from. Profit is a relative and relational thing. The US seen as an economy in the global system has a declining relative position, compared to the rest of the world. That would be a hypothesis to account for the declining return on investments on the American market.
With more capital saturating the American market, and faster growth happening elsewhere in the world, and less of a relative advantage compared to the world at large – each new dollar now competes with other dollars for the allocations that “hit the right moment in time and space” and make profit on the American market.
The ceiling of the global system
The global system as a whole seems to have a certain technological-social-cultural ceiling for what can be produced and bought. The global system as a whole has a certain level of development, and it largely sets the limit for each country or local economy. That is, getting richer can mean more swimming pools, perhaps, but by and large still the same computers, cellphones, human development, theories and social security systems that have been invented in the world at large.
Consider Norway. This country is, because of its oil reserves, about twice as rich as Sweden. Still: The human development and living conditions are largely the same in the two countries. Yet the streets and houses look the same, no flying cars, and similar working conditions. This is because both Norway and Sweden can afford pretty much the best the world market has to offer, and that’s that.
“At the roof of the global economy, money increasingly goes boom. Literally. And everyone on the ground, gaping and ooh-ing for 20 minutes, are left with the same smartphones and social security as in Sweden. “
Where does all that money go? Norway just made the Guinness World Record for largest firework displays ever. They just topped a recent record by Dubai, another oil economy, launching 540,382 fireworks in a spectacular 20-minute show. Dubai’s display was 94 km (58 miles) long, along a coastline, just to get the proportions.
At the roof of the global economy, money increasingly goes boom. Literally. And everyone on the ground, gaping and ooh-ing for 20 minutes, are left with the same smartphones and social security as in Sweden.
That may account for Stiglitz, but we have yet to account for how Piketty fits in.
Globalization as a scale-free network
While certain national economies can be saturated with capital and see a decline in return on investments, the global system as a whole is increasingly interconnected, with capital moving more and more freely. This means that the opportunities to make large profits on the world markets increase, as mentioned, by leveraging imbalances and inequalities.
The simplest way of understanding the growth of the capital of the top one percent is to view the world economy as a scale-free network. Discussed by network and complexity theorist Barabási and explained by Danish writer Lene Andersen in relation to the world economy, the scale-free network describes a fundamental mathematical mechanism that we should all be aware of. While it is difficult to accumulate considerable wealth in an economy of say 150 people (a small tribe), a global economy of 7 billion interconnected people offers huge potential for wealth accumulation.
This is because if you gain a central position in an economy that large, you simply make so many more people dependent on the resources that you hold. Consider Google, Apple or Microsoft. That is, the world economy is a relational system that does not grow like this:
No, my friend. That’s not how the world economy grows, like a mushroom, with every new developing cell touching a roughly equal number of neighbors as everyone else. It grows by some actors taking a central stage and gaining high centrality on the market. Like this:
As the world system becomes increasingly interconnected, it also gives higher and higher centrality to a lower and lower proportion of the world’s population. Globalization is the growth of a scale-free network. When it comes to money, this centrality belongs to the major corporations, to info-tech – and to finance and banking establishments. We are looking at the growth of an info-financial-industrial complex.
Maybe, brothers and sisters, we are all connected through the Internet. Maybe, as some claim, we are even connected by a transcendent all-pervading spirit. But much more tangibly, and concretely, we are connected by and through a global info-financial-industrial complex. It connects us, by crude mathematical necessity, to the same scale-free network, and thereby to the strictly upheld power relations of the global market.
“But much more tangibly, and concretely, we are connected by and through a global info-financial-industrial complex. It connects us, by crude mathematical necessity, to the same scale-free network, and thereby to strictly upheld power relations of the global market.”
The growth in size and density of this global scale-free network is what makes capital grow faster than the productivity of the economy. As the scale-free network becomes greater and denser, the relative financial power of those at its center to make profit, from their relational advantage, increases.
Let us take a look at the mechanisms at play.
Risk Is King
What are the “relational” aspects that grow together with the global scale-free network of the economy? What is it that makes money increasingly powerful, so that it can make more and more money? To make this as concrete as possible, it is important to see what advantages you can buy for money once you get really, really rich.
- Buy risk. Making profit is a lot about affording to buy high risk assets. The richer you get, the more risk you can afford. Whereas anyone who is not a multi-millionaire or above simply has to reduce their risks, the super rich can buy into all the war zones, the hi-tech companies, the startups, the third world growth zones, the financial experiments. Risk is revenue, and being the risk taker means that others buy risk reduction from you. The banks carry the risks, are propped up by states. But other than that, you end up owning all the really high-yielding assets.
- Buy information. In a bigger and exponentially more complex world economy, there is simply more information to be possessed, giving a relative advantage to the rich over other actors on the market. The world market is increasingly difficult to overview. Capital can buy this information and also buy the competencies and computing power to process much greater quantities of information. With computing power growing exponentially as well, you can increase your advantage over all normal or average investors. In this regard, global finance and the information economy are part of the same complex. Central actors like Google own incredible amounts of information. Not only are you buying higher risk, you are doing it with better information.
- Buy financial analysis. We are seeing a global brain-drain by Wallstreet (at least in the US, where even McKinsey can’t get their hands on the brainiest analysts). The brainacs hired en masse are all working feverishly to find the best algorithms and computational solutions to outsmart the world markets and increase the profitability of capital. They are very well paid, and only the very, very rich can afford them. These are the people that would otherwise be revolutionizing theoretical physics, a painful thought.
- Buy escape from taxes. And on the bit less super-brainy side, we have an even greater army of lawyers and the like who work with corporate taxes, allied with a network of financial rouge states – the tax havens. These are also expensive and work for the central agents of global capital. Ernst & Young is perhaps an emblematic example.
- No nasty brokers. Perhaps a trivial point, but important nonetheless, is that the capital growth of common savings is taxed by all the brokers and fund managers. This means that a solid percentage of such growth is taken away each year. None of this applies to the super rich, of course, and their profit grows without being robbed by pension funds.
“We are seeing a global brain-drain by Wallstreet (at least in the US, where even McKinsey can’t get their hands on the brainiest analysts).”
Ulrich Beck, the German sociologist who coined the term “risk society”, passed away the other week. Beck described a time where managing risk becomes more and more central. I agree, and I wish to pay my respects to his work. But I almost feel that Beck was not radical enough in his vision. Risk really is king. Much more so than cash ever was. Risk is king in this day and age, because, all the points above can be summarized with the point that the ability to manage risk (with good information, from an advantageous leverage-point, with some help of your world-class brainiac friends and information technology) is what makes capital increasingly powerful in the world. That is the chief mechanism that creates the increasing inequality: gaining a central position means getting rich, getting rich means you can manage much more risk, and that makes you richer and increases your centrality yet more.
Globalization and the mechanisms of the financial-informational-industrial complex are what drive Piketty’s r>g. They work past the national limits on return on investment described by Stiglitz.
The Simplistic and the Complex Reading of Piketty
To bring this home, I would like to challenge the simplistic reading of Piketty and propose what I see as a more complex, and above all, relevant one.
Is global inequality really growing?
The simplistic reading of Piketty is that “inequality is growing”. And in many ways, this is also what Piketty and famous economists such as Paul Krugman have stressed as the main take away, together with the mainstream media, and pretty much everybody else.
Is that really true, for all practical purposes? Well, not exactly. At least the claim needs to be explained and analytically qualified. Consider the following arguments.
First of all, while capital has rushed ahead of growth in income in middle and lower classes, these classes have still been dramatically enriched during the 20th and early 21st century. This is because of the development of the overall technological-social-cultural global system. Your pocket money after inflation may not have grown that much, but what you can actually buy for that money has just exploded. The same money can now buy cell phones, last year’s flat screen TV:s, computers and whatnot. Even the rickshaw drivers in rural India now have cell phones, even the unemployed immigrants in Sweden have bigger TV-sets than the millionaires of the 1960:s ever had.
With the Internet and the MOOC:s so many more people gain access to basic information and education.
The global middle class, especially in China and India, has been booming. Global poverty has been more than halved since 1990. The global gini-coefficient has peaked the year 2000 and slowly turned downwards since, towards a more equal distribution of global wealth. The UN Millennium Goals of poverty reduction were met ahead of schedule. Poverty reduction has also been becoming increasingly efficient, leaving behind neo-classical economics and becoming more anthropologically sensitive and adaptable to different local circumstances – the academic field of development aid is thriving.
Other than that global food has increased in quality over a long time. When Piketty compares today to Victorian times, he means it only when speaking of wealth distribution comparing the richest and the rest. While we still have a suffering bottom billion, a disparaging tragedy, these are not Victorian times.
“No, the reading of Piketty as an alarming “inequalities are growing” is a simplified one that requires further analysis.”
No, the reading of Piketty as an alarming “inequalities are growing” is a simplified one that requires further analysis. You might be called to wonder, why his claims about inequality (where some few get really rich and the rest have stagnating real incomes) shook us so hard, when for many years we have already heard of a much greater horror, namely global poverty?
I suspect it has something to do with the fact that this time it is the Western middle class that is at the short end of the stick. Somehow, it is more shocking to us, that some few greedy bastards have run off with the party leaving you and me making 1000 grand less a month. Somehow, this hit us harder than all those boring books about the wretched of the earth, the great tragedy of those less fortunate than ourselves. I would say there is a pretty nasty undercurrent to this whole debate – suddenly inequality is more revolting, because someone got away with my extra money.
Don’t worry. And don’t get mad at me. Global inequality is growing. But this claim means something quite different than what we usually make it out to.
A better reading of Piketty
Piketty’s analysis changes little about the current view on inequality in the world. The main problem is not, and hasn’t been for long, that you and I have too low salaries and that some people are rich. Compared to a problem like global poverty that stuff is just peanuts.
But Piketty’s work is an empirical masterpiece in that it shows us perhaps the most pertinent political challenge we face today as a global community. What we see is a global political crisis.
We see a global system where the top 1% hijacks our collective distribution of work priorities, allocation of attention and symbolic value. We have so many governments forced to suck up to global capital, so many lobbyists, so many geniuses doing mean and harmful work, so much competition for a piece of those heights of humongous capital investment. We even have wars fought and conflicts resulting from politics derailed by the crude logic of capital. And this top 1% is growing rapidly in structural power, with its own interests in high risk societies and upheld imbalances and inequalities.
Piketty’s own solution to the “central paradox of capitalism” r>g is to create a tax on capital. In his conclusion he writes (p. 572):
“The right solution is a progressive annual tax on capital. This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.”
I agree. But for this to be able to happen, we must have a global coalition of states working together transnationally. And with the scale-free network in place and all the political power it brings to global capital, transnational, global policies are very difficult to achieve.
This spills over to other problems: security, migration, poverty reduction, sustainability, and alienation in the modern world.
What Piketty describes is not a new shocking disclosure of growing material inequality. What he describes is one of the main hindrances to the achievement of a global metamodern society. A more social and political analysis of Piketty’s contribution is necessary, where we find ways to politically work around the destructive power relations that the accumulation of wealth means.
For that we must venture beyond Piketty. Far beyond.
Today’s tune, ‘Pursuit’ by Gesaffelstein:
Hanzi Freinacht is a political philosopher, historian and sociologist, author of ‘The Listening Society’, ‘Nordic Ideology’ and the upcoming books ‘The 6 Hidden Patterns of History’ and ‘Outcompeting Capitalism’. Much of his time is spent alone in the Swiss Alps. You can follow Hanzi on his facebook profile here.