Overview

Why did we read this?

First, it exposes the logic of Piketty’s theory. Piketty’s theory is that we are returning to historical rates of inequality generated by the inequality between the rate of return on capital and the rate of growth in the economy as a whole: r > g. But the slides Prof. Brown put up in our last class that show inequality increasing from the 1980s through the present day do not illustrate this theory. They show that the labor markets have, for whatever reason, rewarded some people with extraordinary salaries. The inequality we see now is due to unequal returns to labor, not r > g. So we need the part of the story that explains how we are going to get to the r > g world. Piketty himself is clear about this (see Piketty 2014, 23–27).

Second, Piketty goes into his misgivings about patrimonial capitalism at greater length in this chapter. In the opening chapter, we got this:

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. (Piketty 2014, 1)

What does he mean by “arbitrary,” “unsustainable,” “meritocratic values,” and “democratic societies?” These terms clearly express his reasons for caring about inequality but he does not explain what they mean in the introductory chapter. I think he gives us greater insight into his normative thinking in the eleventh chapter.

Inheritance and r > g

Our first question concerned the relationship between the historical data and the recent data about inequality. The former are the result of r > g while the latter are the result of unequal returns for labor. The material on inheritance is supposed to show two things.

First, it shows that r > g is, in fact, starting to play a role in the distribution of wealth in our society. People who have stopped working have more wealth than people who are nearing the end of their working lives. That is evidence that investments can play a significant role in the accumulation of wealth. Inheritance is not driving the dramatic increases in inequality (yet) but we can see that it is starting to have a larger influence than it did during the middle part of the twentieth century.

Second, it suggests that capital is going to be a bigger source of wealth in the future. The fact that 80 year olds have a lot of wealth shows that they are not spending their wealth down as Modigliani’s life cycle theory predicts.

Instead of spending down their wealth, old people are saving it, presumably to hand it down to the next generation. (At least, rich old people behave this way; for all I know the Modgliani theory fits the savings behavior of the non-rich.) So even if the inequality that we see now is entirely driven by wages, we should expect that more and more people will start life with a lot of inherited wealth in the future.

Meritocracy and Democracy

Piketty thinks that greater inequality will be bad because it undermines meritocracy.

By meritocracy, he does not mean a system of government in which the best rule (as in Plato’s Republic, for example). He does mean that a society is a meritocracy if economic rewards go to those who earn them by using their superior training and skill. By contrast, Piketty thinks, it is arbitrary to distribute economic rewards through families; the person who is born into a wealthy family does not merit wealth in the way that a person whose skills command a high price in the labor market does, in his opinion.

What is so great about meritocracy? Piketty clearly thinks that it is rational and fair. By contrast, he says that non-meritocratic systems distribute wealth on an arbitrary basis. Those who are lucky enough to be born skilled should get financial rewards while those lucky enough to be born into wealthy families should not. That’s the idea.

It is not obvious that he is right. Here is Milton Friedman apparently denying that it is any more arbitrary to allow people to inherit wealth than it is to allow them to become wealthy through their inherited abilities.

Inequality resulting from differences in personal capacities, or from differences in wealth accumulated by the individual in question, are considered appropriate, or at least not so clearly inappropriate as differences resulting from inherited wealth.

This distinction is untenable. Is there any greater ethical justification for the high returns to the individual who inherits from his parents a peculiar voice for which there is a great demand than for the high returns to the individual who inherits property? …

Most differences of status or position or wealth can be regarded as the product of chance at a far enough remove. The man who is hard working and thrifty is to be regarded as ‘deserving’; yet these qualities owe much to the genes he was fortunate (or unfortunate?) enough to inherit. (Friedman [1962] 1982, 164–66)

I am not saying that Friedman is right and Piketty is wrong. What I am saying is that Piketty can’t take his understanding of what counts as arbitrary and rational for granted. We are going to return to some of these issues when we discuss Rawls.

Here’s at least one thing that I can contribute. Piketty might mean that people who inherit their wealth do not personally deserve it in the way that those who have to do something to earn their wealth do. Or he might mean that it is irrational for a society to allow the rewards of joining a wealthy family to vastly exceed those that come from creating goods or services that people want to buy.

A third thing to be said for meritocracy, as far as Piketty is concerned, is that it plays a valuable social role. He thinks that the belief that society is a meritocracy plays a useful social role. It helps to alleviate what he sees as a tension between the belief that everyone’s rights are equal and the observation that wealth is unequal.

Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. (Piketty 2014, 422)

In this paragraph, I don’t think he is using the term “democracy” to mean a system of government where those with political authority are chosen by popular vote. Rather, he means that a democratic society is one in which people think they have a chance to get ahead through their own efforts. Piketty thinks that democratic societies need their members to believe this to resolve the tension between equal rights and unequal wealth. I’m not sure what exactly he means, but my best guess is that he thinks the stability of the system requires people to think that the unequal holdings of wealth are due to talent or effort. He might also think that this belief is more important for the stability of a democratic society that officially subscribes to doctrines about equal rights, than it would be for aristocratic, monarchical, theocratic, or (maybe) communist societies. It’s too compressed for me to be sure what he’s thinking, but this seems to be the right neighborhood.

One thing that Piketty did not give much time to is the attitude of meritocracies towards those are unsuccessful or otherwise lack merit. On the face of it, a functioning meritocracy should treat those who do not succeed as deserving their station in life. I don’t know that Piketty is willing to endorse that. He uses the term “meritocracy” without saying what he means, other than that he approves of it. In this connection, I can’t help observing that the very term “meritocracy” was coined by Michael Young in his 1958 book The Ries of the Meritocracy (Young 1958). But Young’s point was to criticize the idea that social status should be accorded by merit and educational achievement not to celebrate it.

Our discussion

We started off by reviewing the basic parts of Piketty’s theory: what are “r” and “g” and what does “r > g” have to do with inequality?

I said that we should distinguish between what I called “absolute” and “relative” measures of how well people are going. The poverty line is an absolute measure while inequality concerns how people stand relative to one another. This matters to your assessment of inequality because while inequality has certainly gone up, absolute poverty has gone down. Here’s the Wall Street Journal

The global population living in extreme poverty has fallen below 750 million for the first time since the World Bank began collecting global statistics in 1990, a decline of more than 1 billion people in the past 25 years.

That’s mostly China and India. The distribution of wealth in China is a lot less equal now than it was in the past, but there is also a lot less poverty. That’s not obviously a bad tradeoff. (Note though that global inequality has gone down even as inequality within countries like China has gone up.)

Dylan B. asked why capital’s share matters. Prof. Brown said that he wants labor’s share to go up. Ryan and Agnes said that it runs up against the good parts of meritocracy. If the highest rungs of society are dominated by people who inherit their wealth, it’s hard for those who want to move up to those highest rungs to do so. Of course, one way of accomplishing this would be to marry into a rich family. But Agnes criticized that. Inheritance allows the rich to be lazy, she said, and marrying wealth isn’t exactly a productive thing to do either.

Dylan also noted that the chart on page 421 shows that a very large portion of the population is inheriting as much wealth as members of the bottom half make in their lifetimes. That seems interesting and unlike unequal societies in previous eras.

This is where I made the point about meritocracy and Michael Young that I referred to above. Daisy added that she thought Michael Sandel has articulated similar ideas in a book that will be published this week called The Tyranny of Merit. I would be interested in reading that.

Lilly said she didn’t think Piketty was clear about why meritocracy was important. At one point he says that it’s important that people believe that they get ahead on their own merits for the sake of social stability, which is different from saying that it’s actually important that they be able to do so (Piketty 2014, 422). She also correctly noted that Locke thinks it is desirable that the industrious be rewarded with material wealth: see Locke, §34, for example. So Locke had meritocratic ideas too.

Agnes referred us to Elizabeth Warren’s ideas that we all benefit from society and so owe something back. This led me to speculate about whether pre-modern societies thought more in terms of families than societies. (I want to emphasize that I was speculating; I don’t know enough about this subject to say anything with confidence.)

We ended with some economic concepts.

We showed a graph illustrating Modigliani’s life cycle theory (see above) and then we did a quick presentation on the Gini Coefficient as a measure of inequality.

Finally, Prof. Brown explained how Piketty’s use of the term “rent” differs from the use of the term “economic rents” in orthodox economics. An economic rent, as most economists use the term, is what we had earlier called producer or consumer surplus. It involves getting more than you were willing to take or to pay in an exchange. So, for instance, if I love teaching a Pomona College so much that I would do it for 60% of my paycheck, then my economic rent is 40% of what I make. Piketty uses “rent” to refer to income derived from what you own as opposed to income derived from what you do (see Piketty 2014, 423–24). As he uses the term “rent” 0% of my paycheck is rent even in this hypothetical example where I would gladly work for 40% less than I am paid.