10 April 2015

There is no evidence that capitalism is a threat to democracy


Thomas Piketty has caused a stir with his predictions about increasing inequality and private and inherited wealth growing at higher rates than incomes. His projections are far less certain than often implied in his book. They do not follow from his “two fundamental laws of capitalism” and historical trends. Increasingly, his empirical work has been called into question, too. However, even taking his projections for granted, would it send democracy on decline? This “grand narrative of capitalism” is no doubt what he considers his most important message. But it is also the weakest founded part of his theory.

It is no coincidence that his book is titled Capital in the 21st Century: Fundamentally, Piketty shares Karl Marx’s understanding of politics under capitalism as a class struggle between workers and capitalists. Picking up where Marx left off, the “grand narrative” in Piketty’s work is as follows: Democracy blossomed in the 20th century due to the relative displacement of capital, as aided by wars, depressions, and high economic growth. Therefore, according to Piketty, a future hike in the wealth-income ratio will force democratic institutions back on the defensive. Piketty presents these assertions with a certitude that belies his lack of supporting evidence. For instance, he writes:

“The rentier, enemy of democracy” (p. 422)

“Under such conditions, it is almost inevitable that inherited wealth will dominate … and the concentration of capital will attain extremely high levels – levels potentially incompatible with the meritocratic values and social justice fundamental to modern democratic societies” (p. 26)

”[C]apitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based” (p. 2)

Remarkably, the negative consequences postulated by Piketty here are mostly illustrated by references to 19th century literary authors, such as Austen, Balzac, and Tolstoy.

Despite the fact that “capital’s” share of incomes is unlikely to increase, even if the wealth-income ratio were to do so, it seems that the size of the wealth-income ratio is by itself enough to worry Piketty. Hence, in Piketty’s view, the wealth-income ratio practically becomes a measure of how poorly democracy will fare.

I see a number of problems with this “grand narrative.”

It is worth emphazising that rather than stifling it, the stock of capital complements labor. More capital makes labor more productive, which in turn increases the demand for it. Hence, the idea of seeing labor as being displaced by capital is misguided. Perhaps the most significant historical example of a sudden and dramatic spike in the wealth-income ratio was the advent of the Black Death in Europe that took place in the middle of the 14th century where the supply of labor declined precipitously in absolute terms as well as relative to the stock of land capital. In other words, the wealth-income ratio rose dramatically. Yet many economic historians (such as Acemoglu & Robinson 2012) identify this shock as a pivotal contribution to the development of the individual and political rights that we consider fundamental in the West today. Competition for labor intensified and landlords, cities, and states were forced to offer more appealing terms in their attempts to attract laborers. This increase in the wealth-income ratio did not aid the “capitalists” in intensifying their “exploitation” – quite the opposite, in fact.

Yet another problem with this narrative is its implicit assumption that “capitalists” share a common interest and that the concept of class is a relevant category in this context. It is hard to discern why this should be the case: The owners of farmland might have an interest in agricultural subsidies, while owners of manufacturing companies have the opposite interest. Some types of businesses might have an interest in open international trade, while others would be in favor of protectionism. Businesses compete against each other in several respects. Thus they have differing political interests by virtue of that competition. Frequently, businesses can even share a common interest with their employees. In such a case, employers and employees would thus have a common political interest that ran contrary to everyone else. And so on and so forth.

In any case, the distinction between capitalists and workers is purely functional. Marx was able to argue that the workers constituted a proletariat without capital and vice versa for the capitalists, since he expected workers’ wages to be pushed towards a subsistence minimum. Since Piketty cannot claim that modern workers are (or will be) entirely deprived of capital, it is harder for him to uphold the distinction between capitalists and workers. He thus finds himself having to resort to considerable sleights of hand in order to account for a series of circumstances including, for instance, the fact that the much-discussed richest “1 percent” in the United States is largely composed of highly paid executives (whom Piketty portrays as having practically cheated their way to a share of the capitalists’ earnings).

In contrast to his extensive collection of data on historical wealth levels, Piketty makes no effort to empirically substantiate his claims about the threat to democracy. Of course, measuring the degree of democracy within a given country is no simple task, but we do have one often-cited rating of world governments from 1972 to today (Freedom House 2014). As Figure 1 shows, there has been an upward trend in democratic rights in the period from 1972-2013 (note that 1 indicates the highest possible score for democratic rights and 7 the lowest). Figure 1 thus details a development in favor of increased democracy during a period which, according to Piketty, has also seen a general upward trend in the wealth-income ratio in the (albeit few) countries included in his analysis.

Nor will comparing private fortunes and democracy ratings across countries furnish us with any obvious pattern. As mentioned above, we do not have data on wealth-income ratios for a great many countries. Nevertheless, there are estimations of the values of total fixed capital inputs relative to GDP, which are presumably correlated with the wealth-income ratios of those countries. Figure 2 plots fixed capital inputs as a percentage of GDP against the country’s democracy score. The figure reveals that there is no apparent connection between the two.

All things considered, it is a pity that Piketty does not do more to substantiate his “grand narrative” about the threat to democracy. Perhaps it is because the book was intended for an audience of French intellectuals who were hostile to capitalism from the outset that Piketty did not feel the need to go further in convincing the reader of the negative political consequences of capitalism.

In summation, it is possible, but in no way certain, that the share of inherited wealth and the wealth-income ratio will increase. In all likelihood, the wealth-income ratio will fail to reach the heights that Piketty predicts. And even if it should do so, Piketty still fails to substantiate his “grand narrative” about the decline of democracy – his account is simply not persuasive.

Otto Brøns-Petersen is Director of Analytical Affairs at CEPOS