GV4D4 - week 2

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These are my notes from October 03 for GV4D4 at the London School of Economics for the 2017-2018 school year. I took this module as part of the one-year Inequalities and Social Science MSc program.

The usual disclaimer: all notes are my personal impressions and do not necessarily reflect the view of the lecturer.

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Growing the State, Shrinking Capital: Democracy, Redistribution and Inequality

Readings

Inequality by Anthony B. Atkinson (chapter 2)

Only minimal notes (written after the fact), since I also read this chapter for SO478 last week (though I didn’t really take notes then either, tbh).

inequality fell in most developed countries during WWII, but then the gap in earnings began to widen again
can be explained somewhat by assortative mating
highly progressive tax system in the US post-WWII (mostly gone post-Reagan, in steps)

The end result of this process [of progressive taxation] was that, while the top decile of earnings in the US rose steadily relative to the median during the immediate postwar decades, this increase in earnings dispersion was not translated into increased overall income inequality, as measured by the Gini coefficient. There was also a salient fall in the share of the top 1 per cent. More unequal rewards in the labour market did not translate into greater inequality of incomes. That this did not happen was due in part to the expansion of social transfers and in part to the increased labour-market participation of women acting in an equalising direction. These forces counteracting the rise in wage dispersion did not apply in the final quarter of the twentieth century. (p62)

Briefly mentions the rise of financialisation: “One consequence [of popular wealth being held via financial institutions] is that part of the capital income now accrues to the financial-services sector that manages these funds.” (p71) Also briefly mentions the relationship between unemployment and inequality, though it doesn’t go into the details and certainly doesn’t frame it in terms of class power (maybe in a later chapter?); the focus is on social exclusion.

Capital in the Twenty-First Century by Thomas Piketty (chapters 3-6)

Chapter 3: we look at wealth over time in the UK and France, taking a brief detour though literature (Balzac, Austen) to illustrate. Early on, land comprised most of the value of capital, but now it’s mostly housing/industrial/finance. Recall that both the UK and France were imperial powers with large foreign assets, which allowed them to run up trade deficits without larger economic problems. In the UK, with cap-inc ratio of 6:1, public assets are worth one year of national income (slightly less than in France); this is balanced out by public debt so roughly zero net wealth. Thus most wealth is private.

One core difference between the two countries has to do with their treatment of debt. France defaulted on public debt (via inflation?) whereas the UK never did, and instead financed wars (etc) by borrowing from wealthy citizens, thus increasing public debt at the same time as private assets (the result of the British monarchy preferring to borrow money rather than raise taxes). Of course bondholders get paid interest, too. There was some inflation after both wars which lowered the value of public debts, but not to the same extent as in France. Still, this is what prompted Keynes’ famous 1936 claim of the “euthanasia of the rentier”, which was influenced by him seeing a collapse of rentierism as a result of inflation. The UK moved toward a more mixed economy (stronger welfare state and socialist policies like nationalisation) in the post-WWII era, which was influenced partly by the success of the Soviet Union and partly due to suspicions that the economic elite had collaborated with Axis Powers (mostly true). This resulted in both govts owning around 25-30% of their nation’s wealth by 1950s (though since the UK had massive debts, their net public wealth was negative until the 60s/70s). In the 70s, of course, things started to shift: cracks were visible in the Communist bloc, and stagflation + a tricky geopolitical situation paved the way for increasing liberalisation.

Chapter 4: Now we look at Germany, which is slightly different from the two cases above mostly because of important distinctions re: its colonial empire (basically, it was confiscated after WWI, as part of the Treaty of Versailles). Its capital consisted mostly of agricultural land. Hyperinflation in the 20s shrank the value of its post-WWI public debts, but of course that experience also had the effect of scarring the nation. During/after the wars, asset losses (mainly foreign) were more significant than physical destruction (revolutionary expropriation, nationalisation like that of the Suez canal). Plus firms went bankrupt during the depression, meaning stock/bondholders lost out, which had the effect of lowering the cap-income ratio and thus inequality.

The US: lots of farmland (which meant value/acre wasn’t very high) + populated mostly by recent immigrants who couldn’t bring much capital with them, so capital low at first. This reflected structural differences in inequality compared to Europe, as landlords and wealth owners had less power in such a large country with plenty of arable land for the taking. After WWII, asset prices remained low, and we saw extremely progressive taxation and lots of government spending (New Deal), but no nationalisation (unlike in Europe—wonder why?). Recall that the US was never a true colonial power (at least not in the same way as the trailblazers over in Europe), and in fact had a negative net foreign capital during the 19th century. Also note the role of slavery in US wealth. Canada was similar to US but slightly different politically due to the legal influence of the UK (no tea partying for us).

Chapter 5: notes from SO478 last week.

Chapter 6: mostly on the capital-labour income split in the 21st century. Most salient idea: α=r*β computes the share of income from capital.

Lecture

Just going to start off this recap with a bit of heavy editorialising: these lectures are a ton of fun. If you’re at all interested in the politics of inequality, and have the opportunity to attend these lectures, you should. The lecturer is very engaging, despite material that can be quite dry at times. Bonus: he’s personally very left-leaning politically, which might not endear him to any Conservatives in the class, but works for me (and, really, if you’re teaching a class on inequality, you’d better be left-leaning—otherwise, what would you say, “inequality is fine because I’m rich and I don’t really care that others are poor”?).

Some paraphrased quotes to give you a sense of what the lecturer is like and what his political views are:

On Twitter: he’s growing increasingly despairing of the level of public discourse lately, and exhorts us to be critical of everything we read and hear, even if it comes from him
On Catalonia: lots of misleading information and really total nonsense out there (Spanish politics is one of his research areas)
On political bias: he recently received anonymous feedback from his summer school students, some of whom accused him of political bias (probably due, he says, to his frequent anti-Trump remarks). Thus he will clarify his political views for us: he believes inequality is bad, and that political institutions should attempt to lessen it; as a result, he is biased against political institutions that increase inqeuality. Everyone is biased, but at least we know what his biases are.
On trust: we should be wary of everything he says, just like you should be wary of everything said at the Conservative party conference … though of course he thinks we should agree with him more often than we agree with what’s said at the Conservative party conference
On capitalism: he’s not going to give us much Hayek in this course. If we want an even-handed treatment of the values of capitalism, we’re not going to find it in this course; instead, we should try the economics or management departments instead (he amended this by saying that was mean, and apologising). That doesn’t mean we should uncritically accept his views—he’s open to debate, and challenges us to disagree with him (though he recognises that it’s not that easy given his professorial authority)
(At this point God Save the Queen started playing in the room next door, and as we were separated from that room only by a very ersatz and lossy partition, we were all bombarded with its dulcet tones.) “I’m not moved by it. Is that a problem? I guess I’m part of the cosmopolitan liberal elite.”
(Now we’re listening to the Sex Pistols.) He goes on a brief tangent on the Sex Pistols here—he remembers when the Sex Pistols first came out, and ruminates on the fact that all those rebellious former youth are now probably pensioners

Inequality and the welfare state in the 20th century

the intersection of capitalism and democracy: we managed to build societies that assured most people a decent standard of living (at least in rich countries)
followed a massive growth of the state during the industrial age (in terms of the % of national income)
trend of decreasing inequality until the 70s/80s, when it started to rise again (hello neoliberalism)
two different and opposing approaches to explaining inequality changes:
- political: democracy gives power to the poor and thus pressure for redistribution
- economic: rising inequality is a structural feature of capitalism (the consequence of the tendency of capital to accumulate)
looking at income inequality in France vs America—very different
- France: dropped a lot mostly during WWII; went up a bit since then, peaked in 60s, started rising again in 80s but only barely
- US: dropped a lot in WWII, mostly stable until late 70s; rising rapidly since then (now higher than the max in the late 20s)
- these two graphs illustrate why this class is biased in favour of the political approach

Piketty’s book

“Piketty’s well-known, much-bought and probably less-read book”
- apparently the average Kindle reader doesn’t get very far (most people stop highlighting after page 26)
- since we’ll be reading it, at least we’ll be in the top 1% of readers
- his approach focuses more on the structural features of capitalism, specifically the power of capital to accumulate when r > g (and he proposes that it always is, at least when conditions are stable—return on capital is almost always higher than growth)
- and of course, capital is unequally distributed (inheritance only makes it worse, and Piketty likes to pick on inheritance a lot, especially in his newspaper columns)
- another corollary of low growth: labour income not growing as fast as capital
- capital is becoming a larger factor of production

What is capital? Adam Smith’s definition, “from the times before gender-neutral language was to be expected”:

That part of a man’s stock which he expects to afford him revenue is called his capital.

Piketty’s definition is a little more narrow: basically wealth. And his main purpose in looking at capital is in calculating the capital-income ratio. If we look at the composition of capital in the UK over the last three centuries, we see that the value of agricultural land eroded in the last century, and the value of domestic capital went down around WWI and has been climbing since then. Housing, of course, has gone up dramatically in value over the last half century.

Capital’s share of income has gone up somewhat steadily since around ‘75, though there has been a recent decline since the crash (capital defined as rent, profits, interest, dividends, capital gains, etc).

Piketty doesn’t do much justice to the poitical dimensions—his book is focused almost entirely on the structural economic features that result in greater inequality over time. Which is probably intentional (he is not trying to explain all the things that might affect inequality, but rather be meticulous about one particular component of it). Still, it means his take on inequality is very incomplete.

Other criticisms:

a lot of historical data is just estimates (probably not very precise)
he has a very narrow definition of capital as wealth (excludes human)
the rate of return is never actually uniformly constant, but he assumes it is for the purpose of making his calculations easier
the politics of redistribution, property rights, and financialisation are all incredibly relevant to the narrative but are mostly ignored

This includes: political party scene, constitution, pre- and redistribution, welfare institutions, macroeconomic policy. We’ll be looking at two core (compatible) factors that explain changes in inequality:

democracy leads to greater redistribution
political ideational change, from Keynes to Friedman/Hayek (Mont Pelerin)

The latter helps explain growth/reduction of government size as well as the difference between the distribution of votes and the distribution of (post-tax) income.

Meltzer/Richard’s simple model for explaining individual voter behaviour: individuals want to maximise income with a minimum amount of effort. Since the government taxes in order to redistribute, and the median voter has below average income, they vote for greater government spending as a way of getting more redistribution. Thus one could conclude that the government would grow and grow and grow. This prediction was made in 1980 and we all know what happened since then :(

Problems with this theory: it ignores institutional dynamics. For one, increased state spending doesn’t necessarily reduce inequality, depending on the political situation (maybe the money goes towards tax breaks for large corporate donors?). It also assumes that people are really “rational” in the sense proposed. But many voters act irrationally (according to an economist) or don’t have all the available information or believe in myths. Or they might prioritise other factors (cultural or religious ideas—national identity, pride, guns, abortion) over material factors! So they might end up voting in politicians that will take away their healthcare or otherwise do real material damage to them and still not regret it (partly because they might not have thought there was a better choice, and partly because they don’t understand the causality). In general, people tend to be “cognitive misers” who take mental shortcuts and vote out of habit. (Like the lecturer, who says he votes Labour “out of habit”.)

A summary of the ideational changes in macroeconomic policy:

19th century: classical econ (Smith, Ricardo?) w/ self-regulating markets and the idea that poverty is natural
then along came Keynes (early 20th) who challenged those ideas, suggesting that the government SHOULD intervene in markets when necessary (so the growth of the state isn’t just for greater redistribution, but also about the government taking a greater role in the wider economy)
then in the 70s some free marketers came along and the rest is neoliberal history
it’s kind of funny to think that a year ago, I wouldn’t really have understood any of this, but in the past year I’ve read approximately a million books about precisely this view of economic history so now it’s all old news (shoutout to Verso for their excellent sales)

We can think of political/economic ideas as having a key mediating role between forces (democracy and capitalism).

Seminar

(I’m in seminar group 3, which actually takes place the Thursday after the lecture. Run by the lecturer.)

Introductions

We started with introductions (where we’re from, and why we care about inequality). Pretty cool distribution of countries, mostly throughout Western Europe, the Middle East, and Asia (each country was represented by only 1 or 2 people). I mentioned my background in the tech industry and how I was radicalised partly by what I saw in the adtech space and partly by Trump, and that I’ve been reading a lot of critical theory and leftist political stuff since then. Hopkin’s response was encouraging—he’d never really gotten into critical theory (academia moves too slowly for him to switch topics easily), but he finds it interesting, and in general would like us to take a more critical approach to the texts we read.

Is inequality a political or economic phenomenon?

(Summarising the discussion.)

Obviously it’s both. There’s a bit of a chicken-and-egg element as well—political decisions are usually made in response to changing macroeconomic conditions, and these decisions further shape the economy. Piketty’s book is definitely more of an economic approach but he does mention some political elements. Atkinson’s book focuses more on social policies.

Other things mentioned:

one student brought up that the economy is a human invention, and if we treat inequality as a more economic phenomenon then we shift responsibility away from political actors and thus destroy our own agency
another student responded that the economy is actually quite a natural phenomenon, as people have always traded, and money/capital is a natural human thing (a POV I kind of disagree with but also kind of sympathise with)
someone else: political leaders are constrained in the choices they can make, given the ever-present of spectre of capital flight

Piketty’s argument

it’s all about wealth compounding—he deliberately removed the political component to show that the underlying economic forces are moving us toward greater inequality
if the capital-to-income ratio is growing then we automatically get greater inequality, with the obvious implications for social mobility with policies the way they are today (incomplete inheritance tax, increasingly privatised education, nepotism, etc)
that’s really the core of what Piketty is saying: the Kuznets curve is wrong
but of course this is all a pretax discussion, which means that an efficient redistribution system could theoretically manage the increasing inequality (sadly, we know that it doesn’t work in practice, thanks to tax evasion/avoidance)
Piketty’s proposal for a global wealth tax was brought up, and several students opined that it seemed too difficult to implement. I then brought up Slavoj Žižek’s pretty cheeky take on it, which comes from Trouble in Paradise (link goes to the specific quote). Žižek is implying that Piketty is proposing a solution that appears nearly impossible in our current capitalist world order precisely to point out the untenability of the current system. There’s a gap between what Piketty proposes and the fundamental contradictions within capitalism that (with Marx, though not in name) Piketty spends 600 pages pointing out. A very death-of-the-author take, tbf, since Piketty would probably vehemently disagree.
on Marx’s suggestion that the rate of profit tends to fall over time, which seemingly contradicts with Piketty’s assumption that r is always > g: my response to that is that Marx is talking about specific industries, but overall it’s true due to creative destruction (also due to financialisation but that’s a separate matter). I need to understand this better myself though

Leftwing vs rightwing governments

Another student mentioned that at least in the UK, left-wing governments tend to focus on income redistribution, whereas right-wing governments tend to focus on wealth redistribution (at least in theory) with the right-to-buy and similar practices. Perhaps this is because the Tories are trying to raise the status of capital to get everyone to buy into the collective capitalist dream? In any case, that’s an example of public policy affecting the distribution of capital (so it’s not just limited to market forces).

The US versus Europe

The capital-income ratio was significantly higher in Europe than in the US near the beginning of the charts, which would imply that the US would be more equal. And indeed it was, near the beginning! At least until the wars, when the value of capital was reduced dramatically in Europe (physically or otherwise). Think about why the trend has reversed since then. Did post-WWII American hegemony assure America’s current dismal place in the inequality rankings? Why did the political scenes of most European countries move so much more leftward?