Few isms endure. Most are perishable. Not capitalism. From the dawn of the industrial age in the late-eighteenth century, capitalism has delivered, creating spectacular wealth wherever it has been adopted. It’s the only game in town—the only viable economic system around which a prosperity-seeking society can organize.
And yet capitalism’s arc, originating from feudalism, may bend back around towards a modern-day manifestation of the medieval economic system, with wealth so concentrated as to effectively create two classes, landowners and serfs. In such oligarchic conditions, democracy isn’t sustainable.
Noted French economist Thomas Piketty does not make this precise point in Capital in the Twenty-First Century, widely praised as one of the most important books on economics in years, but it’s his unavoidable conclusion. Piketty argues that income inequality is not an aberration but rather the consequence of a “well-functioning” market.
The more efficient the market, he says, the higher the rate of return on capital, or any asset that generates monetary returns like real estate, factories, stocks and bonds, compared to the overall economic growth rate. It’s a law of sorts that has held for most of history. It also fuels income inequality.
How so?
Because when capital returns outpace economic growth and attendant salary and wage growth, wealth accrues to those who own capital. If capital were evenly distributed this might be of little concern. It’s not. In America, for example, roughly 10 percent of households own 70 percent of the country’s wealth.
The savvy observer might point out that capital rates of return must eventually align with overall growth rates, since the former is intrinsically linked to the latter. This may be true—in the long run. Yet as the economist John Maynard Keynes famously quipped, “In the long run we are all dead.”
Typically, such rate deviations are the norm. Piketty finds just a few exceptions over several centuries, and those involved extraordinary circumstances when wealth was destroyed or expropriated, such as during the two world wars and the postwar boom when economic growth was robust and tax rates highly progressive.
Today, capital returns are again at pre-World War One levels and, not surprisingly, so are levels of income inequality. The US now has the most unequal distribution of wealth of any advanced country: the richest 400 Americans’ $2 trillion net worth, an amount more than the GDPs of Italy, Mexico, or Canada, exceeds that of the bottom 155 million Americans.
Such disparities might be tolerable if a rising tide was lifting all boats, albeit unevenly, or if class mobility was great, providing the less fortunate the opportunity to improve their fortunes through pluck and drive. Neither is the case. The overwhelming majority of US income gains are being sopped up by a tiny minority—with 95 percent going to the top one percent since 2013—while social mobility is flagging.
Piketty’s thesis is a dagger pointing at the heart of neo-liberal economic theory, which deifies free markets. Left to its own devices, as Milton Friedman once said, free markets “[distribute] the fruits of economic progress among all people.”
This is demonstrably untrue. Free markets may be marvelous things, but equitable distributors of affluence they are not. The historical application of neo-liberal policies in places like Chile after the Allende coup resulted in similar outcomes.
Laissez-faire capitalism’s compatibility with democracy is thus brought into question, as a system of government based on the egalitarian principal “one man, one vote” is incompatible with a system of economic organization that is fundamentally oligarchic. Such a formulation isn’t theoretical.
Consider recent work done by Princeton researchers Martin Gilens and Benjamin Page. The two compiled data from 1,800 policy initiatives from a 20-year period ending in 2002. They then compared them against the policy preferences of three groups: those in the 50th and the 90th percentiles of income, and those championed by major lobbying or business groups.
Gilens and Page found that the government hewed closely to the preferences of the latter two. For example, the “average” American by income supported background checks on guns and climate change legislation, yet these were not enacted into law. Rolling back inheritance and corporate taxes (via loopholes) were, however. “The preferences of the average American appear to have only a miniscule, near-zero, statistically non-significant impact upon public policy,” they conclude.
Gilens and Page’s findings almost perfectly correlate to a period of accelerated wealth concentration ushered in by the corporate-friendly “Reagan revolution.” The implications are clear: unleash the free market and wealth concentrates; concentrate wealth and democracy withers.
A scholar like Piketty would not endorse such a coarse summation, though he does conclude extreme inequality “threatens our democratic institutions.” And just what constitutes extreme inequality? Judging by Gilens and Page’s work, we’re already there. The question now is whether our frayed democracy can prevail over the ascendant oligarchy. It is a co-existence that is fundamentally incompatible. In other words, something’s gotta give.
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