Lecture 5: Globalisation, occupational change, and changing class structure.

In this lecture we will analyse the socio-structural impact of technology and globalisation on social class, occupational change and voting behaviour.

We will argue that these structural changes have created new social class dynamics that shape socio-economic (left/right) and socio-cultural (libertarian/conservative) attitudes.

In turn, socio-economic and socio-cultural attitudes (demand) intersect to shape electoral politics (supply). Challenger parties increasingly mobilise the bottom quadrants.

This can be schematically mapped out in the following way:

 

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R – Parties (1)R – Parties (2)R – Voters (1)R – Voters (2)

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Lecture 5: Classical Political Economy

Introduction 

Last week we discussed the importance of economic and population growth in measuring the wealth of nations. We observed that there was a long period of stagnant economic growth from antiquity, and a limited improvement in aggregate living standards. The period from antiquity to 1700 is often referred to as the Malthusian era.

What we observed in the data was that it was only from the late 18th century, and the subsequent period of capitalist development from the 19th century onward, when economic growth really began to take off. What explains this divergence?

This was the fundamental question of ‘classical political economy‘.

Classical political economy is a term coined by Karl Marx in the first edition of Das Kapital, to describe those British economists that sought to explain the ‘internal framework [Zusammenhang]’ of the “bourgeoise mode of production”.

Classical political economy is a term usually associated with the normative defence of free markets (as opposed to state protectionism), and it’s origins are identified with the time period between 1750 and 1867.

Today, it is a term that primarily describes those group of political, moral and economic thinkers who drew upon and revised Adam Smith’s ‘An Inquiry Into the Nature and Causes of the Wealth of Nations‘. 

The objective of classical economic thinkers such as Thomas Malthus, David Ricardo, and John Stuart Mill was to analyze the production, distribution, and exchange of commodities in market societies.

But what really interested them was the impact of commerce on society; the role of the state in shaping the economy; and the emergence of industrial capitalism.

Put simply, they were interested in the politics of capitalist development, and the question why some countries are rich, and some countries poor?.

Adam Smith (and the division of labour):

Adam Smith’s Wealth of Nationspublished in 1776, opens with a discussion on the core concept that has shaped all theories of classical political economy: the division of labour.

For Smith, the division of labour explains the determinants of economic growth, as it is the key to productivity improvements in the process of capitalist development.

But what exactly does the division of labour mean?

  • It suggest that dividing the production process into different stages enables workers to focus on specialized tasks, which improves efficiency and enhances overall productivity. This, in turn, leads to technology improvements. In sociology, it is a concept that is used to describe the division of tasks in any given society.

One of Smith’s most popular examples to describe the division of labour is the manufacture of a pin. He describes each stage in the production process and shows that one person doing all 18 tasks can produce 20 pins a day, whereas if the 18 different tasks are divided among 18 different people they can produce over 300 pins a day.

For Smith, the most important outcome of the division of labour is skill specialisation.

The outcome of skill specialisation (which Smith describes as something that involves dexterity, tacit knowledge, skill and judgement) is a diversified economy, whereby each person is dependent upon the labour of another person.

In this context, everyone is compelled to co-operate freely in a process of exchange, as everyone is reciprocally dependent on everyone else.

This leads to his next observation:

The division of labour is wealth improving when the size of the market is bigger, and more diversified. Large markets increase the incentive to specialise.

Large markets, in turn, are made possible by “trust, reciprocity, good government, free trade and geography”.

It is often assumed that Adam Smith was a radical advocate of individual self-interest. But for Smith “man has constant occasion for the help of his brethren… he will most likely prevail if he can interest their self-love in his favour….it is by barter that we obtain from one another those mutual good office that we stand in need of“.

It is through individuals pursuing the satisfaction of human needs: food, clothing, hunger, which gives rise to commercial trade in a market society.

In summary: for Adam Smith, the wealth of a nations comes from the commercial expansion of markets, and productivity growth, which is dependent upon skill specialisation, and the division of labour.

Adam Smith (and the division of society):

Adam Smith’s labour theory of value led him to divide society into three different “classes” of person: landlords, wage-earners and capitalists.

Those who live by rent, those who live by wages and those who live by profits.

In Smith’s commercial society the hidden hand of the market acts a horizontal mechanism to ensure a diverse economy meets supply and demand. This horizontal market supplants a hierarchical model of society governed by elites.

Only productive labour, he argues, contributes to the wealth of nations. When citing unproductive labour he includes “politicians, poets, musicians, lawyers and economists”.

These are all necessary forms of labour but they are not wealth producing.

The hero of Smith’s tale of wealth accumulation (told in four historical stages) is the capitalist entrepreneur. Trade is considered more profitable than agriculture, even if the agricultural labourer is the most “virtuous of all persons” in craft and skill.

At the core of the human psyche for Smith, and classical political economy more generally, is need and desire (not rational optimal utility calculation associated with the marginal utility revolution of contemporary economics).

The desire to save and the desire to consume is what drives individual effort.

Free commercial trade, the division of labour and the expansion of markets is what enables this individual effort to come to fruition.

Contrary to popular conceptions of Adam Smith as the defender of vice and unfettered free markets he considers prudence the core virtue of capitalism.

For it is only through hard work and saving for the future that one can ensure the respect of their peers (sociability) and generate wealth (savings) for investment.

The role of the government, for Smith, is to get out of the way of commerce. But government in this context means protectionist, monarchic and authoritarian rule.

But Smith was also quite clear on what government (the sovereign) should do: provide security, infrastructure, administer justice and public education.

Adam Smith was under no illusion about the tradeoffs associated with commercial expansion, and capitalist development.

He states that commerce ultimately renders the merchant “deceitful”, whilst the idle landlord usually ends up “stupid”. If natural man is a “merchant”, then “the virtuous man is a farmer”.

Despite his romanticism for agriculture, he regularly points out that it cannot lead to aggregate wealth. A growth in national income depends on commercial expansion.

It is important to note that the Wealth of Nations is a historical and empirical text.

Smith examined both the historical predecessor to market society: feudal agrarianism, and the subsequent emergence of ‘mercantilism’.

Mercantilism was associated with state sponsored export-led growth and production (the promotion of exports over imports, and savings surpluses at expense of other nations).

Smith agreed with the French anti-mercantilist thinkers that mercantilism is consonant with absolutist rule, and a beggar thy neighbour strategy of commercial expansion.

Adam Smith (on self-love not selfishness):

For Smith, self-interest is the connecting force between ethical and economic conduct.

But self-interest is not to be confused with selfishness. It is better understood, in his words, as “self-love”, which is closely connected to reciprocity (exchange).

The term laissez-faire was never used by Smith. Further, he only ever used the term “hidden hand”, three times in his book.

For Smith, the expansion of commercial markets would ensure greater social and economic equality, which must be primarily understood as the dissolution of feudalism.

Finally, contrary to neoclassical economics, classical economic theory was built around the theory of labour value, and it’s impact on the material production of society (and the division of social classes: rentier, wage-earner and capitalist) that it gives rise to.

Remember Piketty’s core concern is that the rentier has replaced the capitalist in modern market economies. He’s arguing that the capitalist always becomes a rentier.

David Ricardo (on rent, profit and wages):

Building on the foundations laid by Smith, the classical political economists began to focus on the specialisation of the division of labor as the source of increasing wealth.

David Ricardo became interested in economic theory after readings Smith’s Wealth of Nations. In 1817, he published his famous Principles of Political Economy and Taxation.

The first line of the book states that the principal problem of political economy is that of sharing national income between rent, profit and wages (therefore he was interested in the distribution of income and not just it’s production or creation).

For Ricardo, the societal division between rent, wages and profit is the product of the commercial economic system; the volume of production within it, and the absolute income received by each person within the system.

In the late 18th century, national income was divided up between landlords, workers and capitalists. He takes this tripartite division of society directly from Adam Smith.

But unlike Smith he is deeply concerned with the rise and fall of real wages (what we would call purchasing power today) as a percentage share in national income.

He was concerned that too much of national income was being accrued in the form of rent to landowners.

As we will see Marx effectively borrowed, in total, Ricardo’s labour theory of value.

David Ricardo (and comparative advantage)

Ricardo is most famously known for his theory of comparative advantage.

This implies that a nation should specialise in the production of those industries in which it is most internationally competitive. It should then trade with other nations to import those products that it no longer specialises in at home. Swapping wine for bread.

Think about this today. What does Ireland specialise in? China? USA? France?

David Ricardo (on scarcity and rising rents)

But in his Principles (which is of most interest to us) he is primarily concerned with the long-term evolution of land prices and land rents.

His argument on scarcity and rising rents is as follows:

  • Once population and output grows, land becomes more scarce. The law of supply and demand suggests that the price of land will continuously increase (it will become scarce). This implies higher rents for landowners. Landowners will therefore claim a growing share of national income, at the expense of profit and wages.

In response to this, Ricardo called for a tax on land rents to control price increases.

His concern proved to be misplaced in the long term. Land prices increased but with the industrial revolution, the value of farm land declined relative to other forms of wealth in national income.

But his ‘scarcity principle’ is an important concept for understanding why certain prices might rise to very high levels over a given period of time (and the wealth accrued to those who benefit from rising asset prices).

Rising prices

To recognise the importance of prices, and how they are capable of destabilising entire societies and markets (and therefore benefiting certain economic interests over others), just replace the price of farmland in Ricardo’s model with the price of housing in Dublin, San Francisco or London today.

What is a reasonable price for a basic human need like housing?

Does this need to insure a reasonable price imply that the state should introduce price (rent) controls? Or is it something that should be left to the ‘market’? Should the state build houses, and therefore remove the profit motive for house building?

Adam Smith once wrote: “in times of necessity the people will break through all laws. In a famine they will break open the granaries and force the owners to sell at what they think is a reasonable price”.

In theory there should be a simple mechanism to avoid rent controls: the law of supply and demand. If the price of housing or rent in Dublin is too high, then demand should fall. People would rent property in those places where prices are lower. They would move to Donegal and commute. This is obviously not realistic.

As we will see in the coming weeks, one of Piketty’s core observations is that we should be concerned about the idle use of private wealth.

Hence, an obvious solution to the housing crisis might be a public investment project to build more houses. This means using taxpayers money, or borrowing on markets.

The general point is that Ricardo was trying to demonstrate that a long lasting divergence in the distribution of wealth is intimately linked to changes in certain relative prices, such as housing or land (the scarcity principle).

Thomas Malthus (and the diabolical trade off)

Thomas Malthus was also concerned about the scarcity of resources and how this might affect the distribution of wealth.

He published his famous essay on ‘Principles of Population‘ in 1798, and argued that the primary threat to society was overpopulation.

He based his observations on what was occurring in France, the most populous country in Europe at the time (20 million compared to 8 million in the UK).

The rapid population increases contributed to the stagnation of agricultural wages (more workers than jobs) and an increase in land rents (more people than land).

All of this fed into the growing unpopularity of the landed aristocracy, and fed the conditions that gave rise to the French revolution in 1789.

Malthus was concerned that the mass poverty, associated with rapid population increases, would ultimately lead to political revolution in England, where he favoured separate houses of parliament for aristocrats and commoners.

He was concerned it would end the rule of the elite.

For Malthus, as population increases, food per person decreases. He called this the law of diminishing returns. This meant that there is an inverse relation between wages and population growth. This is what some call the  ‘diabolical tradeoff’.

But there were natural adjustment mechanisms to deal with it: famine and war.

The Black death (1348-1350) was one of the largest determinants of population decline in history. In England, the Black Death wiped out 1.5 million people out of a population of 4 million.

In the absence of such natural adjustment mechanisms, Malthus called for an end to welfare assistance to the poor and proposed other mechanisms to reduce their reproduction habits.

Charles Dickens clearly disagreed with Mathus. His ‘Christmas Carol‘, published in 1843, can be read as an allegory against Malthusians.

If you remember, Scrooge repents in the end. There is no natural diabolical tradeoff between income and living standards/population increases.

But there might be a tradeoff about the rate of growth and the cost of public services i.e. people living longer cost the state more on pensions. Demographic changes put increased demand on public services, which raises the question: who pays?

This is a core fiscal problem that many European states are struggling to deal with today.

In fact, many argue that the crisis of contemporary capitalism is related to the crisis of fiscal democracy: public services require more investment, but everybody wants somebody else to pay.

Conclusion

Classical political economy is a term that is popularly used to describe a body of economic theory that advocates laissez faire, free market capitalism.

But it is more nuanced than this.

It is better understood as the beginning of a scholarly attempt to systematically analyze the emergence of commercial society, and the internal conflicts of capitalist development (particularly the determinant and destabilising effect of rising prices).

For the classical thinkers, the determinants of economic growth (and therefore increased living standards and the overall wealth of nations) is labour specialisation, human skill, productivity improvements, trade and the expansion of markets.

All of this was based on a particular political democratic theory of economic liberalism. Private property (against the state) was assumed to be the primary source of justice. Hence, it was what could be described as a normative political economy.

John Stuart Mill, for example, whom we have not discussed, favoured a different concept of private property. Markets provide an incentive mechanism to promote social utility.

Classical political economists assumed that greater social and economic equality would accompany the ever greater expansion of the market i.e. economic growth.

It was assumed more markets = more trade = more growth = rising tide lifts all boats. Whether this is true or not is what we will discuss on Weds.

The lecture slides can be download here. lecture-5

Lecture 4: What is economic growth?

Introduction

In rich countries individuals are healthier, live longer, have better access to public services and better educated. Why are some countries rich and some countries poor?

Why does this matter? Is economic growth coming to an end? What do economists mean when they talk about secular stagnation? Is economic growth always a good thing?

To explain these contemporary dynamics, and to answer some of these questions, it is worth taking a longer term perspective.

The first thing to note is that measuring “growth” requires examining both population and economic growth. It is the latter (better referred to as productivity growth) that tends to improve aggregate standards of living.

This data shows global economic growth since the industrial revolution.

The law of cumulative growth 

Albert-Einstein-8th-wonder

It is important to note that a small percentage change compounded over a long period of time accumulates very quickly. A generation of economic growth can spur huge social change. Just think about what Ireland looked like in the 1950’s, then compare it to the 1980’s. Now compare it to 2017. They are literally “generations” apart.

For example, an annual growth rate of 1 per cent is equivalent to a generational growth rate (30 years) of 35 per cent. An annual growth rate of 2.5 per cent is equivalent to a generational growth rate (30 years) of 110 per cent. For purely conceptual purposes, you can think of the latter as a 100% change over a generation.

In contemporary political discourse, politicians and policymakers often assume that a growth rate of 2 per cent per annum is small, and insufficient. But when compounded over 30 years, it can lead to a huge amount of socio-economic change.

Economic change can spur both positive innovation and social dislocation. But it can also create huge societal problems (i.e. housing stock not keeping apace with demand). Relying on the market is not necessarily good public policymaking.

Measuring compound change is called the law of cumulative growth.

When thinking about it in terms of wealth accumulation (as opposed to economic or population growth), it basically means that the annual rate of return (capital income) compounded over several years automatically results in a very large increase.

Hence, if wealth grows faster than wages, we tend to see a divergence in who benefits from economic growth.

  • Table 2.2 captures what this means in concrete terms and can be applied to anything from the rate of return on capital, population growth, household income or economic growth.

This is crucial for understanding Piketty’s argument on the inequality R>G.

A small gap between the aggregate economic growth rate (which gives a sense of wage growth) and the rate of return on capital (which gives a sense of wealth accumulation) can accumulate over many years, creating a deep structural divergence in society.

Most economists in the 20th century assumed that there would be a perpetual decline in wealth inequality, and assumed that economic growth would lift all boats (often called trickle down economics). Economic growth was considered something that equalised standards of living, as ultimately, in the end, everyone would benefit.

This is the normative foundation of democratic capitalism: everyone benefits, everyone gains, and not just the elite. Piketty is suggesting this is no longer the case.

Population growth

Let’s look at population growth for the moment, from antiquity to the present, to get a sense of just how much has changed over time.

  • Figure 2.2 depicts the growth rate of the population from year 0 to 2100. The demographic growth rate from year 0 to 1700 was less than 0.1 per cent. But in the end, much of this growth in the population was wiped out by famine and disease.

Population growth increased significantly with improvements in medical technology and sanitary conditions. Demographic growth accelerated significantly from 1700 onwards.

But there was huge variation between countries.

The USA went from a population of less than 3 million in 1780 to 300 million in 2010, whereas during the same time period, in France, it only doubled from 30 to 60 million.

According to UN forecasts the annual population growth rate will fall to 0.4 per cent in 2030 and then 0.1 per cent in the 2070’s.

This is not a course in demography, and we are not interested in demographic growth for its own sake. We are interested in population growth because it has implications for the structure of economic growth, and wealth and income distribution. As Piketty states:

Strong population growth, as in the USA, tends to play an equalizing role in wealth distribution. It decreases the importance of inherited wealth in the sense that every society must reinvent itself.

What does he mean by this? Put simply: if you are one of fifteen children, it is probably not a good idea to rely on inheritance from your parents to generate income and wealth.  Conversely, if you are one child, then you’re likely to benefit from inheritance.

The same logic applies on a population wide aggregate basis.

Economic growth

This observation (the equalizing role played by the law of accumulated growth) makes more sense when we extend it to economic growth. Ireland is a good example here.

If you live in a country that is growing rapidly, such as 4 per cent per annum (with wages growing 3 percent), over a generation (30 years), you would be wise to get working, to take advantage. Hence, inward migration to countries with growing economies.

Conversely, in a country with stagnant population and slow economic growth, and with poor employment and wage prospects, inherited wealth and capital accumulated from the past (i.e. from the hard work of your grandparents) takes on much more importance in society. Think about Italy.

This is why people emigrate to fast growing economies.

This is the crucial point for Piketty. The data suggests that western economies are slowing down rapidly but remain rich in wealth. They are capital-asset rich societies, with slowing productivity growth. Hence, the past impacts on the present.

Low growth economies are societies dominated by inherited wealth, and accumulated assets from the past (think Italy or France). Private capital that is owned tends to be saved and hoarded, rather than put to productive use in the real economy (i.e. investing in infrastructure). Think about an empty building in the city centre.

  • See table 2.5 for a breakdown of per capita economic output by global regional blocs.

Distribution

For Piketty, declining economic/productivity growth at the macro-level is the main factor leading to rising wealth inequality over the long-term (the inequality R>G).

Slow growth defined the 18th and 19th century. The fast growth in the 20th century changed this. Piketty suggests it has re-emerged today in the 21st century.

It is crucial to note that it was only during the 20th century that economic growth became a tangible benefit for everyone. Why? Access to health and education were central to this shared growth. The birth of the social state re-distributed growth to the benefit of society.

It was the birth and complement of liberal markets, and democratic welfare states.

In particular, the strong economic growth that swept Europe from 1945-1975 enhanced the possibility of social mobility for those whose parents did not belong to the elite of a previous generation. It also funded the emergence of the ‘social state’ in Europe.

The social state primarily refers to the brith of social rights: universal provision of education, healthcare, eldercare, and in some countries, childcare and social security.

In the post-war period of strong growth, new business models were created. New skills and capabilities were developed. Capital and labour were put to work in different ways.

Economics, however, tells us very little about the distribution of growth. This is a question of politics. Trade unions, for example, played a significant role in making sure the growth was compensated with a strong wage-productivity push, as pointed out by Larry Summers.

If societies want to ensure that the gains of productivity growth and technological innovation are distributed fairly (i.e. not captured through rents by the elite) then this requires an inclusive set of political institutions.

Democracy enables market capitalism because it widens the opportunity space for innovation and inclusion. See the work by Acemoglu and Robinson.

Discussion

What institutions and public policies are likely to lead to inclusive economic growth? Is it better to live under a dictatorship with a home and a job, than to be unemployment in a democracy?

It is this emphasis on democratic institutions, public policy and electoral choice that defines large parts of contemporary political economy.

Markets are viewed as variegated, and subject to radical mutations and adaptations (not a deterministic techno-economic paradigm), and primarily shaped by politics.

Conversely, Marxist economists anticipate a never ending crises of capitalism (such as the great recession) that will lead to its collapse.

But what about recent events? Does Piketty’s data suggest that perhaps Marx was partially right? Yes and no. We will discuss this next week.

Labour market

The major impact of technological growth in the 20th century has been in the structure of employment. The structure of economic growth has a huge impact on jobs.

  • See table 2.4 on changes to the labour market.

Over 70 per cent of the population in the western world now work in services; even in countries as diverse as France and the USA. This is a broad category and includes high-skill and low-skill service jobs, traded and non-traded.

The defining characteristic in all advanced capitalist economies of the western world  is the decline in manufacturing (and low to medium skills more broadly).

What we are witnessing is a growing divide between high and low skilled jobs, with medium skilled jobs (bank clerk, manufacturer etc) in decline. For economists, this is largely driven by the impact of globalisation, and technological change.

Think about the impact of technology on the labour market. For example, consider the impact of the Uber on taxi-drivers, robots on car manufacturing, computers on office clerks, washing machines on cleaners etc.

Here comes the bad news, most research would suggest that the structural shift from ‘manufacturing to services’ has significantly slowed down productivity growth rates, and that these are unlikely to increase in the near future.

Secular stagnation 

Most forecasts suggest that the thirty post-war years of strong economic and productivity growth in Europe were the exception rather than the norm.

The implication is that liberal democracies cannot rely on economic growth to realize their democratic aspirations. This has major implications for electoral politics.

Further, as we will discuss in later lectures, some economists suggest that the determinants of economic growth (technology and productivity improvements) may be in perpetual decline. This is often referred to as ‘secular stagnation‘.

Capital/wealth is running out of places to invest. It’s being hoarded/saved.

Since the 1990’s the policy response to low growth has been to remove the political constraints that inhibit free markets: liberalization, tax cuts, capital mobility, hard currency and austerity.

This is what popular commentators, such as Paul Mason, among others, call the crisis of neoliberalism.

The golden age

  • Figures 2.3 shows the comparative evolution of economic growth rates in Europe and North America.

Per capita output surpassed 4 per cent every year in most European countries between 1950-1970. If we exclude Britain it was even higher.

Now think about this in terms of the law of cumulative growth. This was the golden age of capitalism, it’s your parent and grandparents generation.

Note the difference between Europe and the USA from 1940-1975. This difference might explain why Americans do not have the same nostalgia for the ‘golden age of democratic capitalism’, or socialist democracy, as many Europeans do (again, think France).

UN and OECD data now suggests that Europe and the USA look set to enter a new period of low-growth.

Inflation 

Any discussion on the history of growth must, however, include an analysis of inflation. If growth is 3% per annum and inflation is 2% then we say real growth is 1%.

Between 1913 and 1940 inflation in Germany was 17% per annum. Prices rose by a factor of 300. Inflation was widely used to reduce the public debts accumulated during the world wars.

In 1720 England the average income was 30 pounds. Fifty years later, it was barely 40 pounds. Think about the average income in France today compared to the 1950’s.

The crucial point to remember is: monetary markers are stable when economic growth is slow.

Inflation is largely a 20th century phenomenon. It can be explained by distributional politics rather than economic science. See figure 2.6.

We will have more to say about this later in the course.

Conclusion

  • Figures 2.4 and 2.5 show that global growth over the past three centuries can be pictured as a bell curve with a very high peak.

Western economic growth peaked from 1940-1975 and then declined. With the ‘neoliberal’ revolution in the 1980’s growth picked up again in the 1990’s, and has since declined again.

As we will see, the period of liberalisation (post 1990’s) was made possible by FIAT money; new credit formation and the financialisation of debt.

The question many scholars are asking today, in the aftermath of the international financial crisis, and the subsequent “great recession”, is whether we will see a new paradigm shift in the architecture of our political economies?

If so, what will define the period of growth over then next 30 years? Will we see the emergence of a new economic paradigm? What will be the structure of economic growth? How will this impact upon the politics of economic inequality?

We have now mapped the history and explained the core concepts.

In the next lecture, I will discuss political economy theories on the determinants of capitalist development, before trying to explain why inequality has increased so rapidly since 1970.

The shortened lecture slides can be viewed here: Lecture 4

Lecture 3: How to Measure Income and Wealth

Introduction 

The field of political economy was born in the late 18th century when moral philosophers such as Adam Smith began to ask questions about how nations prosper? What kind of conditions ensure their wealth? and how should this wealth be distributed?

It is not a coincidence that the inception of ‘political economy’ coincides with the birth of the modern state and industrial capitalism in the 19th century. This was the beginning of what’s often called “capitalist development”.

Political economy studies the state-market relationship. In economics, the state is considered to “intervene” in the market to correct market failures, or to provide public goods. This is a rather restrictive definition. In political economy, the state is conceived as actively shaping the market, such that there is not such a clear dividing line between state and market, economy and society, economics and politics.

The contribution of the World Income Database to the study of political economy is to provide 200 years of data to track the history of ‘wealth and income distribution‘. The general conclusion that researchers have drawn from this data is that we are witnessing a level of within country inequality not experienced since the early 19th century.

But before we discuss the determinants of inequality, and the different theories of political economy that explain capitalist development (Lecture 4 and 5), it is important that we clarify some important political economy concepts, such as income and growth.

Part 1 of Capital in the 21st Century is titled Income and Capital. This is where the core definitions are laid out. These videos are a useful starting point:

National Income

The first concept to understand is national income.

  • This can be defined as the sum of all income available to the residents of a country in a given year. Or more precisely, it is the total amount of money earned in a country. In this course we will use “Gross National Income (GNI)” rather than “Gross Domestic Product (GDP). This is particularly important in the Irish case.

Try to think about national income in real concrete terms. All socio-economic activity, and socio-economic production (whether it is teaching students, driving a bus, serving coffee, providing customer support, designing websites, cleaning roads  or manufacturing iPhones) must eventually be distributed as earnings i.e. income.

There are two ways these earnings will be distributed: labour income and capital income.  It will be either distributed as labour income (in the form of wages, salaries, bonuses) or capital income (in the form of profit, dividends, and royalties).

National income = labour income + capital income in a given year.

The core critique of the 1% is that their wealth is increasingly accrued not through earnings or profit (entrepreneurs) but through unearned capital income.

Unearned income is the interest/rent accrued from owning property or financial assets.

The income/rent received by virtue of owning an asset (i.e. housing) tends to yield a higher return than income earned through work/employment. It is this observation that underpins Piketty’s theory of R>G, which I will explain later.

If the ownership and inherited power of wealth and capital matter much more than than hard work and human capital (skills), then the normative justification for liberal market economies becomes increasingly problematic.

We will come back to this later, as it’s a controversial argument.

Many economists argue that what matters today in shaping the trajectory of economic development is human capital skill (which is heavily influenced by talent/education/training). But what is corporate capital matters a lot more?

  • For now, the crucial point to remember is that national income = capital income + labour income (this is the same whether we are looking at the accounts of a multinational company, a small family firm, a government or the global economy). The definition of national income (all money available) is an accounting identity.

National wealth

But what exactly is wealth and why does Piketty used the term wealth and capital interchangeably? Capital is a stock, income is a flow. National wealth is the total amount of capital stock (buildings, real estate, land, stocks and bonds) in a country.

Think about it this way: capital/wealth is something you own, and which generates an income. For example, housing is capital (stock), and the rent accrued to a landlord is capital income (flow). The purpose of owning a house to rent is to earn an income.

When you go to work, you earn a monthly wage. This is a flow. When you put aside some of this money into a bank account, it becomes a stock. It’s small form of wealth.

This definition of capital as a stock of wealth is important because Piketty’s conceptualisation of capital has come in for a lot of criticism.

  • Capital is accumulated wealth. For definitional purposes, you can define it as the sum total of non-human assets that can be owned and exchanged on some market. It can be either publicly or privately owned. The value of capital is decided by the price someone is willing  to pay for it (the market).

Or more precisely:

  • Capital/wealth is the sum total of non-financial assets (land, buildings, real estate, industry, machinery) and financial assets (bank accounts, mutual funds, stocks, bonds, insurance and pension funds ) less debt.

Generally speaking, capital or wealth is something that is not immediately consumed. It is something that is owned, and therefore it is defined by property laws.

But not every country defines property in the same way (think about the ownership structure of German firms, and compare them to US firms). It’s a legal construct.

What capital is worth is ultimately determined by market value.

If the market collapses, so does the price of assets and the value of wealth. Think about the spectacular rise and fall (and rise again) of house prices in Ireland. The houses did not burn down. They remained in place. But their market value (price) fluctuated widely.

When the price of a house falls by thirty percent, the person owning that house is likely to feel less wealthy. When the price rises by 50 percent, they felt wealthier. This observation is important because it has a big impact on electoral preferences toward government redistribution policies. Nobody who owns a mortgages wants prices to fall.

Or to put it another way, nobody who owns any form of capital/wealth/property/asset wants the price value to fall, because they will, by definition, lose wealth. Hence, the policy response to the financial crisis was designed to stabilise market prices.

Other examples: think about recent events in Argentina and Turkey. Or think about the value of a Damien Hirst painting. What determines the price of the painting?

The market value might say 100 million, even if the aesthetic value is zilch.

Public/private wealth

Capital/wealth can be public or private. In theory, all capital/wealth could be owned by the state. In market economies, capital/wealth is almost entirely privately owned.

  • National wealth= public wealth + private wealth. Private wealth accounts for most national capital in all of the twenty countries mentioned or studied in the book.
  • Public wealth (such as UCD) constitutes a tiny portion of national wealth.

Figure 5.1 captures this disparity in private and public wealth.

Note something very important in this graph: the fluctuations in the value/price of national capital tends to correspond to fluctuations in private wealth.

Given that most wealth is privately owned, and most political economists are not communist, it is perhaps no surprise that scholars focus on fiscal policies to tax wealth, and unproductive assets, rather than calling for them to be nationalised.

Think about the current housing crisis in Dublin. In theory, the state can issue compulsory purchase orders (CPO’s) and take private property into public ownership (as was done in Mayo on behalf of Shell, when the state issues CPO’s on farming land). Alternatively, they can use the fiscal tools of the state, and tax derelict property, such that the owners are forced to sell the property into the market (rather than hoard it).

Wealth/income ratios

For Piketty, the best way to analyze the importance of capital/wealth in a society (i.e. capitalism) is to measure the amount of capital (stock) as it relates to income (flow).

Dividing the total capital stock (measured by the market) by national income gives us the wealth/income ratio (β). This is also called the capital/income ratio.

Imagine all the capital in Ireland (housing, land, financial assets). Now imagine the value of all that in terms of a price (billions). Now divide that price by national income. This gives you the ratio, which we tend to express in terms of percentages.

Wealth/income ratios provide us with a comparable quantitative measure to analyze capitalist development across time (history). It allows us to measure whether or not wealth has grown in importance when compared to wages and labour income.

It allows us to observe the structural importance of capital/wealth in society.

However, it tells us nothing about whether that capital/wealth is being put to productive use or not. Nor does it tell us anything about the ownership of capital. For example, housing-capital might be worth billions, but if these are empty, what use are they?

  • If a country’s total capital stock (wealth) is equivalent to 6 years of national income we write β = 600%. β is a shorthand to say the capital/income ratio. If it is equivalent to 4 years of national income, we write 400%.
  • This graph shows the evolution in the capital/income ratio for Germany, Britain and France.

Back to the case of Ireland, if income per capita is 33k, and wealth per capita is 200k we simply divide the two to find the capital/income ratio (i.e. 6, which we write as 600%).

On a macro-social level we find that, on average, wealth is 6 times average national income. We then say that the capital/income is 6 (or 600%). But remember this tells us nothing about the distribution of wealth. Most people don’t own any wealth at all!

Keep that in mind: 50% of the population are propertyless, or owe significant debt.

In theory, a high capital/income ratio (more wealth) is a good thing. What matters is how it is distributed, and how it’s used. This is the core critique of rising wealth inequality today. Societies are privately wealthy, but publicly poor.

Scholars are concerned that the rise in wealth-income ratios means that wealth is concentrated in fewer and fewer hands, and that it’s not being used productively.

R>G mechanism

In the book you are reading, Piketty proposes a theoretical mechanism to explain the rise and fall of the capital/income ratio. The theory is R>G.

He suggests the following:

  • When the rate of return on capital (r) is equal to economic/wage growth (g) then the capital/income ratio remains stable.
  • When the rate of return on capital (r) exceeds economic/wage growth (g) then the capital/income ratio rises. Wealth accumulates.

This is what we observe in the USA and Europe since 1980.

R>G leads to rising capital/income ratios. This suggests ‘private capital is back’. It’s is an implicit critique of the economic theory of skills-based technological change.

It suggests that those who own wealth and property may be entrepreneurs, but over time, they become rentiers. What this means is that over time, as wealth accumulates, inheritance matters more than hard work in the process of wealth accumulation.

Piketty has come in for a lot of criticism from those who argue that the rise in capital/income is mostly accounted for by rising house prices. It is the rise of a property-owning middle class that distinguishes the 21st century, and the type of wealth that most middle class people own is housing. As it’s price rises, so does national wealth.

For example, when we begin to analyse the structural transformation of the composition of wealth over time, from land (18-19th century) to industry (19th-20th century) to finance (21st century), what we will observe is that “financialisation” is intimately connected to the mortgage-debt market, and the buying/selling of houses.

House prices have been rising much faster than wages/income, leading to an increase in the capital/income ratio, and housing is the asset of the middle classes.

From a political science perspective, think about the following question:

What matters more in shaping electoral preferences: home ownership or labour income? Do people who own housing vote differently to those who do not own housing? Why might property owners vote differently to the propertyless?

Discussion 

Lets think about these definitions in real concrete terms. How much does the average person in Europe own in terms of capital/wealth?

  • In most western European countries, average private wealth is around €180,000.
  • This means that, on average, each person in Europe will own €180,000 worth of capital (think about your savings account/or your parents house).
  • This will be divided roughly into €90,000 from residential dwellings (housing) and €90,000 in stocks, bonds, savings and investments.

Remember, these are averages, and just give you a rough sense of what’s going on.

In reality, more than half the population own nothing at all. As we will see, in the US, the top 1% own 80% of all wealth. 50% of the population own nothing.

If the remaining 40% do own any wealth, it is usually nothing more than some savings in a local bank account, which they may have inherited, or received as a gift.

Most wealth/capital is highly concentrated at the very top of the income ladder.

As we will see, and which is completely intuitive, wealth is far more unequally distributed than labour income. Most people work. Most people don’t own capital.

In terms of income:

In France, Germany, Italy, Britain (reflecting an average for Europe) and the USA, national income per capita (per person) is around €30-35,000.

Again, this is an average and hides enormous disparities amongst the population.

Most people earn significantly less than €2,500 a month from their labour income.

Income and capital

  • Take the average Irish person.
  • If per capita national income is €30,000 per annum (it’s actually higher). According to Piketty this mean that €21,000 will come from labour income (70%) whilst €9,000 will come from capital income (30%).
  • If each citizen owns €180,000 in capital this figure of €9,000 equals a rate of return of 5%.

Most people obviously don’t earn €9,000 in capital income because they don’t own any wealth. These are averages.

Most people will pay their landlord rent, and/or pay interest to their creditors (banks) for borrowing i.e. to pay their mortgage debt.

Rate of return

But how exactly do we calculate the rate of return on capital (i.e. capital income)?

  • On the basis of historical analysis, Piketty finds that on average, in the long-run, economic growth averages 1-2%, whereas the rate of return on capital is 4-5%.

The book you are reading does not really explain why the average rate of return on capital is 5 percent, which is a major blindspot.

But one way to think about this is in terms of how much interest one can generate from owning a capital asset. Lets go back to the example of owning residential housing.

Owning real estate or property can generate a return of between 3-4 per cent interest. Owning stocks in a firm can generate between 7-8 per cent. Owning German issued government bonds can yield around 1-2 per cent interest. The yield varies.

In Dublin, housing can yield up to 12%! Hence, it should be no surprise that those with money (international investors) are investing in Dublin real estate.

Generally, the riskier the asset, the higher the yield (return). For example, investing in a start-up company. You could lose all your money, or if the firm becomes a success, earn a fortune. Just think about the value of a company such as Apple, or Alphabet.

Distribution

You should now have a clear sense of what it means to talk about national income, labour income, capital income, national wealth, wealth-income ratio’s, and the rate of return on capital assets.

But even if you know what national income is, this will not tell you about how national income is distributed. Similar, even if you know what national wealth is, it won’t tell you who owns the wealth.

In this course, when we discuss the distribution of national income, and national wealth, we will do so with reference to distributional tables.

In the study of inequality, researchers usually divide up the population into quintiles (bottom 15%, top 15% and so on), or deciles (top 10%, bottom 10%).

  • Quintile = 15% of the population
  • Decile = 10% of the population
  • Percentile = 1% of the population

We will mainly make reference to the bottom 50%, middle 40%, top 10%, and top 1%.

Discussing inequality with reference to distributional tables provides a much more visceral understanding of how income and wealth is distributed.

Summary

The most important concepts to remember for this course are:

  • Capital/income ratio, also called the wealth/income ratio
  • Public/private wealth
  • Capital income (income derived from owning assets)
  • Labour income (income derived from wages)
  • National income (the total income of a country, which flow from the factors of production)
  • The rate of return on capital (interest accrued from ownership of property)
  • Quintile
  • Decile
  • Percentile
  • Distribution tables (50/40/10-1).

Conclusion

To understand these concepts think about a 19th century Jane Austen novel, such as Pride and Prejudice.

The aristocratic characters in these stories revolve around the landed gentry of 19th century England. They constantly remark that the rate of return on land in their rural societies is around 4-5 per cent.

They are perfectly aware how much land/wealth they need to live well (or marry into). In this period, almost all wealth was bound up in land. Wealth was land.

How much does one need to live well today?

How would you generate that income: from work or from owning capital?

Next week will talk about the evolution of economic growth. This is crucial because the slow down in economic growth is often considered the most important determinant of the the re-emergence of a rentier society. Why?

  • Slow-growth economies are wealth-dominated societies. Think about Italy.

This is why many scholars argue that inherited wealth has become more important than hard work, much like the 19th century societies of patrimonial capitalism in Jane Austen.

In our democratic market societies this is difficult to justify, as it undermines a culture of meritocracy, which is the normative justification for capitalism.

The lecture notes can be found here: Lecture 3

Lectures 1/2: Capitalism and Democracy

Introduction

One core question permeates political economy scholarship: how is it possible to combine capitalism (free markets) with democracy (collective choice)? One produces stark inequalities in the distribution of income and wealth, whilst the other (the democratic state), in principle, is based on egalitarianism (one person, one vote).

So why don’t the poor soak the rich? There are a lot more poor people than rich people.

As we will see throughout this course, understanding the relationship between states and markets, under democratic rules, is anything but straightforward. A sizeable middle class can act as a buffer against radical demands for redistribution. Choices in the past create a path dependent effect, and the electorate often vote against their interests.

The puzzle

For the moment, all I want you to note is that the distribution of wealth and income is a big concern in the social sciences, and in particular, the study of political economy. For the next two weeks, I want you to think hard about the politics of inequality, and to ask yourself questions such as: what type of inequalities are justified? what are not?

The question as to who gets what, when and how (in terms of national income) is not just an academic concern. It has major public policy consequences.  As citizens, we want to know about wages, income, inflation, and cost of living. For example, you’ll certainly want to know how much you’ll be paid before you sign a contract to start a new job. You’ll also want to know how much tax you will pay on your income.

Whilst we all want to know about our personal income/savings and cost of living choices (i.e. at the micro household and individual level), social scientists also want to know about how these things evolve at the macro-level (i.e. across our societies).

There are two core concepts that permeate everything you’ll study for the next two weeks: income and wealth. Once you understand these concepts, you’ll then need to consider what they measure, and what type of indicators emerge from them.

We will define these systematically, next week. For the moment, use your intuition to try to understand these two basic concepts. National income is the flow of money in society (whether it is government spending, household spending, or wage earning).  National wealth is the stock of property as measured by market value in society (whether it is private housing, public roads, or shares in a multinational tech corporation).

Core questions

What do we know about the evolution of income and wealth distribution in the advanced capitalist societies of the western world?

Today, we know a lot more than we did 10 years ago, given revolutionary advances in technology. Three three basic questions that you should ask yourself are:

  • Do market economies inevitably lead to the greater concentration of income and wealth in fewer and fewer hands, as Marx thought in the 19th century?
  • Or, do the balancing forces of economic growth and market competition equalize the distribution of income and wealth, as Kuznets thought in the 20th century?
  • What is the role of the state, and other democratic institutions such as trade unions and collective bargaining, in shaping the distribution of market income?

In this course, we will use Thomas Piketty’s book, ‘Capital in the 21st Century‘, as a guide to answering these questions. His major contribution to the study of political economy, and social science, is to provide 200 years of data on the evolution of top incomes.

His core conclusion is that income and wealth inequality was exceptionally high in the 19th century (before democracy), then it declined in the 20th century (during the birth of the democratic state), but has since increased again in the 21st century.

Ask yourself why has inequality increased in the 21st century? Is it because of technological changes? Globalisation? Financialisation? Or politics?

Normatively, are these inequalities justified? If so, on what basis? If people get rich through inheritance, is it fair? If they get rich through hard work, is it fair?

Since the 1970’s, the income of the wealthiest (those who own large property portfolios), particularly in the USA/UK, has increased whilst the income of the majority has stagnated. But this was not the case during the 20th century. Why?

From a broader academic perspective, we are interested in the politics of who gets what, when and how. This is why it is called political economy.

Core theory: R>G

The data in the book covers three centuries and twenty countries.

This data has been carefully sourced from historical tax records, and is primarily concerned with measuring the incomes of the very top 1% of the population. These top incomes, usually involve wealth ownership, and are difficult to capture in survey data.

  • Piketty’s core theory to explain the rise of economic inequality is that when the rate of return on capital (think about the ownership of any property that yields an income, such as housing) exceeds economic growth, inequality grows (R>G).
    • Basically, what this means is that when those who own property earn more from the rents of that property ownership, than those who earn income from working (i.e. through earning a wage), inequalities grow.
  • The R>G inequality is not a market imperfection, rather it is built into the structure of capitalism and requires democratic intervention if it is to be avoided.
  • Basically, what this theory implies is that when left to it’s own devices, the free market will always end up being dominated by big corporate capital, unless the latter is restricted and regulated through democratic politics.

In the next 12 weeks, we will analyse the pattern of income and wealth, both historically within countries, and comparatively, between countries. What we will observe is that there is nothing inevitable about inequality. The changes that we observe reflect the changing relationship between the state and market, business and politics, property rights and social rights.  Or to put it another way, it reflects the ongoing tug of war between capitalism and democracy.

This is what I refer to as the history of democratic capitalism, or capitalist democracy.

Class discussion 

Most people are implicitly interested in the question of distributive fairness and usually have a preference toward how much tax they should pay, how much inflation is tolerable, how much the state should spend on education, healthcare and pensions.  the cost of housing, and the minimum wage, to name but a few public policy debates.

For example, just think about the following questions:

  • How much monthly income does a student need to live well in Dublin?
    • How much of your income do you try to save?
  • Do individuals have a social right o housing?
    • Should the state or the market provide this?

For the next week, I want you to do a mini-experiment. From the moment you leave this lecture hall, specify how much income you have to spend for the next week. Then keep note, and track precisely, how much of this income you spend.

Global

Now think about these questions from a global perspective. Average per capita monthly income in Europe is just over €2,000, whereas it is just €150 in sub-saharan Africa.

If all global income was equally distributed, how much would each person in the world get? How much does this vary by regional bloc (Africa, Asia, Europe and the USA)?

  • Take a guess. The answers are here.

Most people would not accept a world whereby 100 percent of all wealth and property (land, housing, finance, industry) was owned by 1 percent of the population. This would be not possible in a democratic society, with free and fair elections.

But what if 1 percent own 50 percent of wealth, or 60 percent, or 70 percent? Is there such thing as an optimal distribution of wealth and income? How much is tolerable?

If a country has extreme levels of income and wealth inequality, does it distort politics? Can we call a country with an extremely unequal distribution of economic resources a liberal democratic society?

We observe inequalities (good and bad) all around us, and these observations inevitably lead to political judgement. Normative interpretations cannot be avoided. There are no value free assumptions, regardless of what some of your econ textbooks might say.

Electoral preferences 

The bus driver who drove you to college this morning, and the Wall Street banker, experience the world in very different ways. Given their different socio-economic positions, they are likely to have very different political preferences toward taxation and government expenditure, trade unions and collective bargaining.

They will have different preferences toward economic redistribution. The question as to where political preferences comes from is a big theoretical debate. Are preferences a function of education, skill level, income, or occupation? Is this called social class?

However, one cannot assume that when voters go to the ballot box  that their economic preferences determine how they vote. They might vote on the basis of cultural grievances (i.e. because of their views of immigration or abortion).

Electoral preferences are heavily influenced by education, social class and income level. However, electoral theories that narrowly based on the “median voter” tend not to be very good at explaining aggregate distributional outcomes (and policy choices). Why?

Later in the course I will suggest that economic policymaking is less influenced by what the electorate want, and more influenced by the capacity of organised business interests to shape the agenda, and this varies significantly between countries.

Learning outcomes

The distribution of income and wealth inequality varies significantly across time (history) and space (country). A core objective of this course is to provide you with the tools, and critical thinking skills, to study the politics of inequality systematically.

Patiently looking for facts and historical patterns can inform democratic debate.

  • But perhaps more importantly, they enable us to ask the right questions.

The classical political economists of the 18th and 19th century (such as Adam Smith, David Ricardo, Thomas Malthus and Karl Marx) were deeply concerned with the question of income and wealth distribution, and the societal effects of capitalism.

They were experiencing the radical transformation within their societies brought about by increased demographic growth, the industrial revolution, rising poverty, and mass migration out of rural communities into emerging industrial towns.

To give a historical example of these debates, think about the abolition of the Corn Laws in England, in 1846. This was a dispute about the price of grain, and reflected a political struggle between aristocratic landlords and an emergent manufacturing class in Britain.

The repeal of the Corn laws reflected an ideological debate within Britain about how to manage the changing relationship between the interests of the state and private markets, and how this would affect the political equilibrium of European society.

  • It was against this political and ideological background that over 1 million people starved in the Irish famine. The British state chose not to intervene in the market.

The societal changes brought about by market technological change are all around us. Just think about the impact of automation on low and medium skilled jobs today.

Relevance

As we will see over the duration of the course, few doubt that wealth and income inequality has increased in rich countries from the 1970’s, particularly in the USA.

  • The empirical dispute is how to explain this change.

In the study of economics, the rise in inequality is usually explained by changes in globalisation and technology (and what’s often called, skills-based technological change).

In political economy it is usually attributed to the fiscal policies of government, the weakened power resources of left parties and trade unions, and rising corporate power.

However, before discussing the politics of inequality, and the politics of advanced capitalism, we first need an agreed quantifiable measure of things. A large part of the debate on inequality centres of different ways to measure similar phenomenon.

This is the part of the course you will probably find most difficult. Be patient.

Measuring capital and income

Piketty uses two sources of data in his book: the distribution of income (I) and the distribution of wealth/capital (w). Wealth and income are not the same.

He then analyses the relationship between these two (capital/income ratios).

It is important to note that he uses the terms wealth and capital interchangeably in the book: a problem we will discuss later.

At the most basic level, there are two ways to earn an income: selling your labour (earning a wage) or owning capital that yields an income (renting out a house).

The data on top incomes (the 1%) is gathered from historical tax records whereas the data on national/average incomes is taken from national government accounts.

The total stock of wealth (capital) in a country equals all the land, real estate, financial and industrial capital that can be traded on an open market.

The richest in society tend to earn their income from owning capital not from working.

All of this income data is then collated into the World Top Incomes Database (WTID).

Main findings:

  1. We should be wary of economic determinism. The historical distribution of wealth and income is a deeply political process.
  2. The shocks of WW1 and WW2 reduced the inequalities of the 19th century.
  3. The subsequent post-war period of strong economic growth and the emergence of the welfare state in Europe was a very temporary period in the history of capitalism.
  4. The long term dynamics of capitalist development reveal powerful mechanisms of convergence (a decline in inequality) and divergence (growth in inequality).
  5. The forces that lead to convergence are investment in education and training; the expansion of public goods; and tax regimes aimed at redistributing market income.
  6. The forces that lead to divergence in income inequality are associated with the capacity of top earners to increase their incomes through lobbying and tax cuts. This means that the growth in inequality is not associated with having better skills.
  7. The dominant force that leads to a divergence in wealth and capital inequalities is R>G (where the rate of return on capital exceeds economic growth).
  8. R>G means that when the economy is growing slowly, inheritance and wealth accumulated in the past becomes a powerful force of inequality.
  9. The implication is that inherited wealth grows in importance relative to merit.

Think about the following question: if inequality keeps rising, as Piketty suggests it will, what are the likely political consequences? Will democratic societies accept a level of inequality that undermines a culture of meritocracy? What will the electorate vote for?

Main findings of the book you will read

  • Figure 1.1 shows the rise in income inequality in the US. The top decile claimed 45-50 percent of national income in 1910 before dropping to 30-35 percent at the end of 1940. By 2014 it had risen to a historical high of 52 percent.
  • Figure 1.2 shows the rise in capital/income ratios in Europe. This is more difficult to understand and I will explain it in more detail next week.

Both graphs depict a U-shaped curve, which illustrates that income and wealth inequality decreased in the 20th century and then increased in the 21st century.

A core part of this course is to try and explain this change over time.

Let me explain two things about figure 1.2.

  • First, it shows the total market value of aggregate private capital/wealth (primarily real estate and financial assets) net of debt, expressed in years of national income from 1870-2010 (you’ll understand this language soon!!)
  • Second, capital income equals all the income generated from profits, dividends, interest, and rents. The growth of an economy (G) = growth in national income or output, which is often best considered in terms of productivity growth.

In a capitalist society, where R is greater than G, inherited wealth grows faster than income from labour. For Piketty, when this occurs, the entrepreneur becomes a rentier i.e. wealth is primarily accumulated through the ownership of assets rather than work.

  • The growth in capital/income ratios are important because they illustrate the structural influence of capital in society. Think about this in terms of housing

For Piketty the increase in the inequality associated with R>G has nothing to do with market imperfection. It is the logical outcome of a free market.

Conclusion

All of these technical terms will become familiar to you as the course unfolds. Don’t give up at first sight. Every discipline has its own language and it takes time to learn this.

  • Understanding statistics on income, wages, inflation, prices, expenditure, revenue and wealth is essential in a democratic society. Study hard and be patient.

The PPT slides to the lecture can be viewed here: lecture-1-2