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What Piketty misses in his critique of capitalism:the imbalance of power between capital and labor
http://inthesetimes.com/article/16722/taking_on_capital_without_marxwhy does this trend towards greater inequality over time occur? From his data (spiced up with some neat literary allusions to Jane Austen and Balzac) he derives a mathematical law to explain what happens: the ever-increasing accumulation of wealth on the part of the famous one percent (a term popularized thanks of course to the “Occupy” movement) is due to the simple fact that the rate of return on capital (r) always exceeds the rate of growth of income (g). This, says Piketty, is and always has been “the central contradiction” of capital.
But a statistical regularity of this sort hardly constitutes an adequate explanation, let alone a law. So what forces produce and sustain such a contradiction? Piketty does not say. The law is the law and that is that. Marx would obviously have attributed the existence of such a law to the imbalance of power between capital and labor. And that explanation still holds water. The steady decline in labor’s share of national income since the 1970s derived from the declining political and economic power of labor as capital mobilized technologies, unemployment, off-shoring and anti-labor politics (such as those of Margaret Thatcher and Ronald Reagan) to crush all opposition. As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.” The disparity in remuneration between average workers and CEO’s stood at around thirty to one in 1970. It now is well above three hundred to one and in the case of McDonalds about 1200 to one.
But in Volume 2 of Marx’s Capital (which Piketty also has not read even as he cheerfully dismisses it) Marx pointed out that capital’s penchant for driving wages down would at some point restrict the capacity of the market to absorb capital’s product. Henry Ford recognized this dilemma long ago when he mandated the $5 eight-hour day for his workers in order, he said, to boost consumer demand. Many thought that lack of effective demand underpinned the Great Depression of the 1930s. This inspired Keynesian expansionary policies after World War II and resulted in some reductions in inequalities of incomes (though not so much of wealth) in the midst of strong demand-led growth. But this solution rested on the relative empowerment of labor and the construction of the “social state” (Piketty’s term) funded by progressive taxation. “All told,” he writes, “over the period 1932-1980, nearly half a century, the top federal income tax in the United States averaged 81 percent.” And this did not in any way dampen growth (another piece of Piketty’s evidence that rebuts right wing beliefs).
By the end of the 1960s it became clear to many capitalists that they needed to do something about the excessive power of labor. Hence the demotion of Keynes from the pantheon of respectable economists, the switch to the supply side thinking of Milton Friedman, the crusade to stabilize if not reduce taxation, to deconstruct the social state and to discipline the forces of labor. After 1980 top tax rates came down and capital gains – a major source of income for the ultra-wealthy – were taxed at a much lower rate in the US, hugely boosting the flow of wealth to the top one percent. But the impact on growth, Piketty shows, was negligible. So “trickle down” of benefits from the rich to the rest (another right wing favorite belief) does not work. None of this was dictated by any mathematical law. It was all about politics.
But a statistical regularity of this sort hardly constitutes an adequate explanation, let alone a law. So what forces produce and sustain such a contradiction? Piketty does not say. The law is the law and that is that. Marx would obviously have attributed the existence of such a law to the imbalance of power between capital and labor. And that explanation still holds water. The steady decline in labor’s share of national income since the 1970s derived from the declining political and economic power of labor as capital mobilized technologies, unemployment, off-shoring and anti-labor politics (such as those of Margaret Thatcher and Ronald Reagan) to crush all opposition. As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.” The disparity in remuneration between average workers and CEO’s stood at around thirty to one in 1970. It now is well above three hundred to one and in the case of McDonalds about 1200 to one.
But in Volume 2 of Marx’s Capital (which Piketty also has not read even as he cheerfully dismisses it) Marx pointed out that capital’s penchant for driving wages down would at some point restrict the capacity of the market to absorb capital’s product. Henry Ford recognized this dilemma long ago when he mandated the $5 eight-hour day for his workers in order, he said, to boost consumer demand. Many thought that lack of effective demand underpinned the Great Depression of the 1930s. This inspired Keynesian expansionary policies after World War II and resulted in some reductions in inequalities of incomes (though not so much of wealth) in the midst of strong demand-led growth. But this solution rested on the relative empowerment of labor and the construction of the “social state” (Piketty’s term) funded by progressive taxation. “All told,” he writes, “over the period 1932-1980, nearly half a century, the top federal income tax in the United States averaged 81 percent.” And this did not in any way dampen growth (another piece of Piketty’s evidence that rebuts right wing beliefs).
By the end of the 1960s it became clear to many capitalists that they needed to do something about the excessive power of labor. Hence the demotion of Keynes from the pantheon of respectable economists, the switch to the supply side thinking of Milton Friedman, the crusade to stabilize if not reduce taxation, to deconstruct the social state and to discipline the forces of labor. After 1980 top tax rates came down and capital gains – a major source of income for the ultra-wealthy – were taxed at a much lower rate in the US, hugely boosting the flow of wealth to the top one percent. But the impact on growth, Piketty shows, was negligible. So “trickle down” of benefits from the rich to the rest (another right wing favorite belief) does not work. None of this was dictated by any mathematical law. It was all about politics.
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