Fables of Neoliberalism

The central claim that runs through Thomas Piketty’s new book, Capital and Ideology, largely just repeats the argument of other books in recent years on both the political left and the political right that take issue with “neoliberalism”: The West, if not the world, came under the grips of a resurgent “neoliberal” regime (a.k.a. Hayekian liberalism) since at least the early 1980s. The result is increasing economic inequality, poverty, and social disruption, at least in the West—if not worldwide. On the left, scholars such as Wendy Brown presents a resurgent Hayekianism as a central feature in her account of what ails current times, as does Eugene McCarraher. On the right, Patrick Deneen and R. R. Reno do likewise.

And while Piketty graphically reports many, many pieces of data in his mammoth book, the central fact that he repeatedly returns to is this one: In the 1950s, the U.S. and other industrialized countries had a) very high marginal income tax rates on very high incomes, b) lower inequality than at the start of the century, and c) high levels of economic growth. Therefore, Piketty tells us, we can rest assured that significantly redistributive governmental policies do not really hinder economic growth.

So governments took a decidedly wrong turn in readopting Hayekian liberalism in 1980s, and liberal-left parties, in particular, wrongly capitulated to the era’s Hayekian sentiments. According to Piketty, to return to the egalitarian Eden of the 1950s, we need only take more from the rich and give it to the poor. To be sure, Piketty throws in more spending on education, more restrictions on international capital flows and the like. Basically, however, we need only return to the policies Western governments implemented prior to the wrong Hayekian turn in the 1980s, and problem solved.

It’s difficult to choose where to begin with a book that presents a meandering argument ranging over a thousand pages and hundreds of graphs. I’ll start with Piketty’s stylization of the Hayekian turn in the 1980s, then work outward from there.

The Neoliberal Disaster

As Piketty tells it (as well as other postliberal critics), the Hayekian turn in the 1980s was a long planned ideological triumph. It was ideological in the worst sense of the word, in the exaltation of ideological abstraction over human needs and reality. Exemplified by the political ascensions of Margaret Thatcher in Great Britain and Ronald Reagan in the United States, it influenced governments throughout the West and, ultimately, moved even left-liberal and social democratic parties significantly to the right. While Hayekian neoliberals began planning their resurgence as early as the 1940s, the collapse of communism in the Soviet Union (and later in China) catalyzed the electoral resurgence of neoliberalism. This activation in turn cowed progressive, labor, and social democratic parties into ceding their traditional commitment to redistributive economic policies, such as those they advocated in the 1950s and 1960s.

There are at least three problems with Piketty’s story: First, the chronology doesn’t quite work. The Berlin Wall fell in 1989. Margaret Thatcher was elected in 1979, and Ronald Reagan in 1980. While the weakness of communist economies may have been apparent to some observers in the 1970s, it was hardly a predominant view.

Hence, something else other than the demise of the Marxist economics of the Soviet bloc had to give rise to the electoral success of the policies advocated by Thatcher and Reagan.

Less convenient to Piketty’s argument that abstract ideology led the way, this “something else” that led to Thatcher’s and Reagan’s success was the poor economic performance of the 1970s across the U.S. and Western Europe. While the 1950s and 1960s are Piketty’s poster child for the claim that heavily redistributive policies are consistent with both lower inequality and robust economic growth, it came to be commonly accepted across the partisan board that the economic problems of the 1970s resulted in no small measure from the policy excesses of the 1950s and 1960s. It was the economic problems of this decade that prompted voters and politicians to rethink the heavily redistributive and regulatory policies of the 1950s and 1960s.

This rethinking was not limited to conservative parties. As Piketty laments throughout the book, even leadership in leftist and social democratic parties, perhaps forced by electoral concerns, felt it necessary to revise their traditional commitments to heavily redistributive policies. According to Piketty, that was a mistake for these groups. (He offers no alternative for these parties except that they should have stuck to their redistributive guns and, presumably, rode their principles to even more consistent electoral defeat.)

Finally, as I have pointed out elsewhere, it is absurd to think there was really a serious Hayekian turn in the 1980s. This belief conflates the era’s campaign slogans for what really happened. Perhaps Thatcher and Reagan, and their intellectual supporters, desired a thorough-going Hayekian revolution. Whatever the intentions, it never occurred. What happened was a modest tweaking in the mix between government and markets in the modern “mixed economies” of the U.S. and Western Europe. No matter what was proposed and discussed, these economies remained significantly mixed, with substantial amounts of redistribution and plenty of continuing economic regulation overall. If anything, neoliberals complained later that Thatcher and Reagan in fact failed to bring about the Hayekian revolution for which many hoped.

If anything, the policy shifts of the 1980s and 1990s were a considered response to the 1950s and 1960s. Even left-liberal parties departed from 1950s and 1960s orthodoxy not because of ideological cooptation, but because they concluded that national experience gave cause to doubt the sustainability of those policies without some sort of corrective. Tweaking back redistributive and regulatory overreach, however, never entailed jettisoning continuing commitments to fairly serious redistributive and regulatory policies.

Here’s the upshot that ought to have complicated Piketty’s argument: The marginal policy changes of the 1980s were never Hayekian enough to account for the increase in economic inequality that developed after this period.

Unseen Forces

The theoretical focus of Piketty’s analysis works as set of blinders, causing him to ignore rival accounts for the rising economic inequality during the period after 1980. For the most part, Piketty derives his analysis by focusing on the intra-national political and economic dynamics of a handful of nations. His approach largely ignores the way international and intra-national factors can affect one another in the post-1980s environment. (He does, however, consider this interaction historically, in looking at colonialism and slavery.)

Take a central claim early on, in which Piketty discusses the significant decrease in poverty in poorer countries with the rising inequality in richer countries. Here is how he responds to the suggestion that the massively decreasing global poverty of recent decades is linked to the increasing economic inequality of the same period:

[F]or some observers the most striking fact is that the remarkable growth of certain less developed countries has so dramatically reduced global poverty and inequality while others deplore the sharp increase in inequality at the top due to the excesses of global hypercapitalism….

Everything depends on the causes of inequality and how it is justified.  . . .  If one believes that greater inequality always and everywhere leads to higher income and better living standards for the poorest 50 percent, can one justify the 27 percent of world income growth capture by the top 1 percent—or perhaps even at higher percentages . . . ? The cases mentioned earlier—the United States versus Europe and India versus China—suggest that this is not a very persuasive argument, however because the countries where top earners gained the most are not those where the poor reaped the largest benefit (emphasis added).

First, we need to unpack a little bit what Piketty refers to regarding “the remarkable growth of certain less developed countries.” Despite a book crammed full of data, he actually doesn’t mention the number of people who have moved out of extreme poverty world wide over the last thirty years or so. The number is remarkable. An Oxfam press release noted a few years back:

Between 1990 and 2011, almost a billion people escaped extreme poverty, a number equivalent to the combined population of North and South America. Extreme poverty was halved in the 15 years from 1996 . . .  This is in many ways a staggering success, the fastest reduction in poverty in human history.”

More to the point of the argument in his book is the italicized line from Piketty quoted above. Piketty concludes that the claim there is a relationship between the staggering decline in global poverty and economic inequality in the West “is not very persuasive . . . because the countries where top earners gained the most are not those where the poor reaped the largest benefit.”

The problem is that while he nods at the possibility in the introduction to his book, throughout the remaining body of his book, Piketty focuses his analysis on intra-national dynamics. Given his analytical blinders, a historic decline in poverty in the world’s developing countries cannot be causally related to the rich getting richer in the world’s developed countries.

Piketty’s inductive-case study approach to social scientific conclusions, however, leads him astray. There in fact is a well-known theoretical reason to hypothesize a link between the gains of rich people in industrial countries and the spectacular income gains among the very poorest workers in less-developed countries.

Scarcity or Abundance?

The Stolper-Samuelson theorem from economics provides a straight-forward account of why we could see significant increases in incomes for workers in lesser develop countries at the same time we see significant increases in incomes for the richest people in developed countries. They are, theoretically, two sides of the same coin.

What the theorem suggests is that declining costs to international trade—”globalization”—has varied effects in different countries: With declining costs, returns will increase for a country’s relatively abundant factor of production and will decrease for a country’s relatively scarce factor.

Note this is with respect to a “relatively” abundant or scarce factor. In the United States and the Western industrialized countries, for example, capital is relatively abundant and labor is relatively scarce. So declining costs to international trade will increase the returns to capital in these countries. Because rich people own more capital in these nations, in the U.S. and Western Europe, rich capital owners will get even richer.

Piketty throws away a lot of morally-relevant data in his discussion of economic inequality both historically and in the present.

But in lesser developed countries labor is the relatively abundant factor of production and capital is the relatively scarce factor. So, income for workers in lesser developed countries will increase as a result of globalization as the flip side of a process the makes rich people richer in already developed nations.

Piketty’s data-driven analysis provides a picture perfect match to the theoretical expectation. He observes that “the global middle class did not benefit much at all from the global economic growth [since 1980]. By contrast, the groups above and below this global middle class benefit a great deal.” That is, the poorest and the richest.

The Stolper-Samuelson theorem provides precisely the theoretical account for Piketty’s data. Piketty’s singularly intra-national approach to economic inequality, however, blinds him to any connection between cross-national and intra-national phenomena.

His discussion here also highlights a real problem with the normative orientation of his book around inequality. As Piketty observes, “Everything depends on the causes of inequality and how it is justified.” He notes something very similar at the very end of the book, “A just society in no way requires absolute uniformity or equality.” (Here he endorses a sort of Rawlsian difference principle.)

Yet for the broad middle 950 pages of the book, Piketty’s analysis amounts to little more than describing inequality with little serious leverage provided to competing answers to the question, “why?”

Consider Piketty’s argument discussing of the stunning decline in global poverty. Aside from not mentioning the datum itself of one billion souls moving out of extreme poverty in the last few decades, Piketty frames the issue in terms of abstract economic inequality rather than in terms of absolute human flourishing.

Wealth vs. Inequality

The problem with this is that measures of bare economic inequality are a poor proxy for measuring human flourishing.

To be sure, “inequality” can certainly represent a bad outcome: If Peter takes from Paul, either by theft or by rent-seeking through the government, then the resulting inequality is a bad thing. On the other hand, if Peter builds a better mousetrap, one that Paul values and desires to purchase, then the resulting inequality actually reflects a good thing: Both Peter and Paul are better off.

So, too, if the economic pie gets bigger, and both Peter and Paul eat more, but the relative size of the respective slices diverge, then, well—let’s say there are competing intuitions. For example, say at time T1 Peter and Paul each have $50,000 in assets, and so are economically equal to each other. How much should we worry then if at time T2 Peter has $75,000 in assets and Paul has $100,000 in assets? Both are better off in absolute terms—they both eat more—but Peter’s relative share of wealth in this two-person society has decreased over seven percent relative to Paul’s share. It is common to phrase the change in relative wealth this way, as in “Paul’s wealth has declined by seven percent.” And Piketty regularly writes this way, as if Peter’s wealth has declined in absolute rather than simply relative terms.

The problem is that the change in Peter’s wealth can be simultaneously, and truthfully, characterized as having increased by 50 percent. Again, why the relative share of wealth became unequal can be morally significant. Whether Peter is the producer of real economic value, but Paul redistributed much of Paul’s surplus to himself through theft or rent seeking.

This is important for Piketty’s normative argument as well. Piketty throws away a lot of morally-relevant data in his discussion of economic inequality both historically and in the present.

For example, Piketty provides an account of three historically important economic transitions: from feudalism to a private property and ownership society, from colonial status to private property or ownership societies, and from communist economies to private property ownership economies.

The thing is, he then treats the resulting outcomes of these transitions as though the inequalities resulted from market transactions. Piketty argues that these transitions “sacralized” property rights. In criticizing the distributive outcomes of these transitions, Piketty writes that those outcomes are regarded as “natural . . . inequalities produced by the ‘market.’” The problem with this is that the transition to a market system is not itself a product of the market.

The irony is that Piketty himself discusses these transitions as patently (and necessarily) political processes often replete with egregious cases of rent seeking. To be sure, there are heroic practical difficulties in transitioning from feudalism or communism to a market economy. But that these very political transitions are rife with rent seeking means that inequalities that exist after initial assignment of property rights in these transitions result not from market transactions but rather from the political transactions necessary for the transition itself.

So, too, Piketty seems to assume that once the transition is over, rent seeking no longer exists. All inequality results from the market. Yet, particularly in Europe, there was a long and continuing tradition of what we might call state capitalism, with politically cozy relationships between large capital owners and the government. This certainly had an impact on the distribution of economic wealth in these societies. This is not to exclude the United States. Yet while almost everyone will concede that rent seeking exists in the U.S., the overall impact of rent seeking on economic distribution, and the magnitude of that impact on measures such as economic inequality, is unknown.

For all the data presented in his book—so much that the bibliography for the data is posted on-line rather than published in the text of the book itself—there is precious little discussion of “context” or alternative constructions.

The irony is that Piketty’s own historical argument outlines a robust case that inequalities in the 19th century and early 20th century were politically generated. He nonetheless blithely ascribes the economic inequality that arose during those times to the working of market exchange rather than to the workings of political exchange, the very opposite of market exchange. Even more so, it is possible that free markets would have decreased the inequalities created by rent seeking. Price competition results in the dissipation of economic profit to society at large, despite the desire of capital owners to keep it to themselves. Piketty conflates one of the cures for the disease.

Finally, there are the data issues. Not simply with what data he uses, but how he styles them. Early on Piketty writes that “‘facts’ are themselves constructs. To appreciate them properly we must understand their context, which consists of complex, overlapping, self-interested interactions between the observational apparatus and the society under study.”

To be sure, as my old macroeconomics teacher used to say, “one person’s theory is another person’s data.” That is inescapable. Yet the phrase of note above is the “self-interested” bit. Piketty no doubt excepts himself and his data—his “facts”—from this skepticism. For all the data presented in his book—so much that the bibliography for the data is posted on-line rather than published in the text of the book itself—there is precious little discussion of “context” or alternative constructions.

For example, almost smack in the middle of the book Piketty discusses the impact on income distribution for the United States if “taxes or transfers” are taken into account. He observes that with these taken into account “the situation of the bottom 50 percent improves only slightly.”

Well, first, his data show that income for this group increased by a third since 1970. That is, to be sure, a modest increase on an annualized basis. Yet considering the change over time, few of us, I think, would turn our noses up at a raise of 33.3 percent as being a “slight” increase in our incomes.

Secondly, however, is the choice of grouping the poorest people with the lower middle class in reporting data for the “bottom 50 percent.” After all, Piketty observed earlier that the global middle class largely stagnated over recent decades, while the poorest and the richest improved their positions.

For example, data from the Congressional Budget Office reports that since 1979, when taxes and transfers are included, the income of the poorest fifth of Americans increased in constant dollars by a whopping 85 percent. (The CBO study also suggests that middle class incomes increased by almost 50 percent since 1979 when taxes and transfers are taken into account.)

Note that the starting date for the CBO data—1979 rather than 1970—is precisely the start of the supposed Hayekian policy turn. That is, the incomes of the poorest Americans almost doubled since the start of the period Piketty laments in his book. (Recall also the striking decline in extreme poverty globally during this period as well.)

Piketty’s grouping of the poor with the middle class as the “lower fifty percent” results in statistically averaging out the uniquely significant increase in the incomes of the poorest members of American society since 1979.

I am not suggesting that Piketty should have reproduced the CBO data and ignored his own. Yet what is sauce for the goose is sauce for the gander. It would have behooved Piketty as a scholar to apply to his own data and discussion the approach he ostensibly applies to the data constructed by others, “To appreciate them properly we must understand their context, which consists of complex, overlapping, self-interested interactions between the observational apparatus and the society under study.”

A lot more could be discussed. I didn’t expect that I would necessarily agree with the argument Piketty advanced in the book. I did, however, expect it to be more challenging than it is. It is a meandering work that, centrally, advances an already well-known claim. The handful of national case studies he considers, and data he constructs with an eye to what he wants them to say, are unable to provide the empirical leverage he needs to create a persuasive scholarly case for the conclusions he wants to draw.