Garvan Walshe was National and International Security Policy Adviser to the Conservative Party until 2008.
Thomas Piketty’s Capital in the Twenty First Century is a frustrating read for a free marketeer. Frequently willing to find fault with the human institutions that are markets, the author’s scepticism evaporates when the target is the equally human institution of politics. He quite reasonably attacks excessively abstract mathematical economics while completely ignoring the work of those who have studied the importance of institutions for economic development. His account of the accumulation of economic power, and his justified fears that it can pervert politics, are much poorer for not acknowledging that political control of the economy leads to insider cartels of the well connected, the capture of policymaking by what we call stakeholders, and the stifling of enterprise and innovation as governments “pick winners” based on what worked in the past – not what might work in the future.
Nevertheless, Piketty’s main argument is sound and, uncomfortably for us, supported by plentiful evidence. Accumulated wealth is growing more important, and notwithstanding the tendency for it to be wasted on £15,000 bottles of vodka, personal concierge services and items advertised in the Financial Times’s “How to Spend It”, is creating more inequality. It is simply a mathematical fact that if the return on capital exceeds the rate of economic growth, the share of national income generated from capital will grow and that produced by wages and salaries will fall. And since the people with the most capital are the better off (either directly or through their pensions, which being linked to salary or contributions are larger when they belong to the affluent), the share of income going to the rich is set to increase.
He accepts that new technology shakes things up: creating new wealth and new products whose profits will accrue to what Victorians called the “new men” of the age, but doesn’t think there will be enough of it. In this he is at one with Tyler Cowen — very fast growth, of four per cent or more, only occurs when a country is catching up, as China is now, or is replacing the destruction wrought by major war. At the technological frontier, where advanced countries are now, the best we can hope for, they both say, is about 1.5 per cent.
Fast population growth (through birth or immigration, it doesn’t really matter) can push the figure up, and is the reason why Piketty is reluctant to apply his theory to the United States. On this side of the Atlantic, London – which despite the best efforts of the Home Secretary still serves as Europe’s combine harvester of wealth, taking hundreds of thousands of people in every year and producing wealth, new businesses and remittances on colossal scale – can’t hope to do the everything on its own.
If growth only manages two per cent, and the return on capital more: in the long run property provides around four per cent and shares between six and eight per cent, holders of capital will come to own almost everything and pass this down to their children. That these averages are riddled with exceptions – from the highly paid manager who earns money through her salary, to the spendthrift playboy who wastes his father’s painstakingly accumulated wealth – should not obscure Piketty’s central point. Income comes and goes, but wealth accumulates.
Despite Piketty’s frequent recourse to nineteenth century literature, western countries won’t see the kind of appalling poverty and squalor associated with the industrial revolution. Wages will be enough to live on and a welfare state will provide a floor below which wages can’t fall. If anywhere resembles the self destructive capitalism that Marx imagined, it is China, ironically run by people who claim him as their prophet. Yet wealth in large quantities provides the freedom of the rentier – and, in smaller amounts, the security to overcome the loss of a job; the effects of divorce or some other calamity without falling into debt, and the capital to start out on your own. Its excessive concentration in fewer hands renders many people’s lives precarious and by stunting enterprise reinforces its own concentration.
Sympathy for the poor is not, however, why his book is so popular. That derives from a new upper middle class anxiety about globalisation and resentment at the nouveau riche types who are inevitably prominent in its early stages. Real money these days is made at international scale and real culture produced by languages, not nations. That’s why the Financial Times and New York Times are becoming global English-language papers, and the Guardian is trying but probably too anti-American to catch up. If you find yourself inside the international economy you are paid more, your contracts are more lucrative and your audiences bigger. But this smug world (Monocle magazine is its house journal) is still shallow. Not everyone will get in.
The Capital-buying public feel this anxiety. Their jobs at newspapers, universities, or the elite departments of the civil service, or even as criminal barristers, bankers focused on the domestic economy, or solicitors at middling law firms don’t get them the house in a nice part of the city or places for their children in independent schools that they had expected. If this is felt most strongly in London, it’s not unknown in Paris, Frankfurt, San Francisco and Tel Aviv.
These well-heeled indignados are exceptionally influential. Though not the richest, they are are central to the dissemination of ideas and determine the environment in which politicians operate. They usually lean a bit left, but now have, in Piketty, an agenda that appeals to their class interest in a way that traditional socialism never could.
The housing and schooling crunch has a lot to do with temporary shortages that can in time be rectified by educational entrepreneurs or property developers when they are not blocked by counterproductive restrictions on planning or educational provision. This rectification will take rather a long time. Facing years of navigating the state school system from a pokey maisonette in Finsbury Park, an apartment near the “up and coming” Place De Stalingrad or a flat on the wrong side of the Ayalon freeway, Pikettyian wealth taxes on the super rich start to look very attractive.
Those wealth taxes will do little for the poor. In western societies, deprivation is less about the lack of money and more about living within a social environment in which incentives and practices encourage behaviour that isn’t attuned to success and where support structures – mostly extended families, and the communities that grew up alongside large-scale industrial employment that fight against them – have decayed or disappeared entirely. It is not even mainly about the lack of connections or knowledge of how the society works. The systematic social and economic success of almost all immigrant groups show that. They usually arrive poor, unfamiliar with the society they have come to and victimised by xenophobic locals. Their children emerge as doctors, lawyers, accountants and Secretaries of State for Culture.
The attraction of wealth taxes is the hope that they would reduce the money available to the super rich and limit their wherewithal to compete for scarce schools and homes. Piketty’s book has been taken up because it lends respectability to their fears. It will be abused to justify a large number of populist stratagems of redistribution – as found in inexhaustible quantity at Labour HQ – to which it doesn’t lend support, and which will damage the economy and make everyone except the vested interests whose lobbyists can subvert them much poorer.
Despite all this Piketty’s message is urgent. The higher returns to capital will produce grotesque inequality and stagnation. We shouldn’t rest our hopes in Vladimir Putin to engineer the destruction of the capital stock.
It was the Conservative Party that carried out the last major redistribution of wealth in Britain. By allowing people to buy their council houses, it shifted wealth that had been produced by using money taxed from the rich to build housing to the poor who lived in it. We have been quite rightly criticised for making this a one-off. Shouldn’t we have spent the proceeds on new housing?
But more state investment in housing is not the best way of doing it. We live more mobile lives now, and people shouldn’t be given an overpowering government incentive to stay put.
A Labour welfare state seeks equality of condition, is at best indifferent to permanent dependence on state handouts (it secretly prefers them because their recipients can be deterred from voting blue even if they support conservative policies through dread of Tory cuts) , and redisributes income.
A Tory welfare state aims for a safety net, wants people to prosper without the state and redistributes wealth. The principle behind council tax sales is extended with a savings credit. This is a government top-up for the savings that people make. The trick is to top up poor people’s savings extremely generously: by a factor of eight or nine for someone on the minimum wage (the top up fall as income rose). The top up would have to conditonal on the money being left there for a few years but the incentive to save and the resulting increase in equality of wealth would be significant. As time went on, the benefits and pensions bill would fall as, rather than having their wages supplemented by tax credits, income from their own savings invested productively would enrich them. The more radical version of the idea would have these savings replace health and education spending, too (the budgets are large enough to do so), but that is likely to be too strong meat to a British public that still worships at the NHS cargo cult.
To cut inequality, concentrate first on the taxes raised from investment income, property transactions and capital gain, and divert the money towards the credit. Dismantle tax credits and in work benefits at the same time. And put the accumulation of capital within everyone’s reach.