Author: Thomas Piketty
Capital and ideology:
Every society justifies its inequality – this is how a variety of economic and social rules arise, designed to strengthen the established order of things. These rules can be summed up in one word – ideology. The market and competition, profits and wages, capital and debt – all of this is not the economy in its purest form, but ideological images that have developed in some specific circumstances. Behind them lies a certain notion of social justice. And this performance was the result of some historical experience – and nothing more. History does not move according to predetermined rules: this is the answer to all those who lament the “revenge of geography” (Robert Kaplan) and the “burden of inequality”.
History, however, is not linear, and many important trends are not obvious. The progress in the field of science, medicine, and education over the past centuries is very great, but it hides the huge inequality and vulnerability of modern society. This stratification promises much more serious consequences for the whole world than it seems at first glance. How did it happen and what to do? Famed economist Tom Piketty has the answer.
The birth of property rights
Trinity societies of the Middle Ages
The study of the phenomenon of inequality Piketty begins with medieval societies, which he calls trinity: the society composed of three classes – the nobility, the clergy, and the peasants. The nobility guaranteed protection on earth, the clergy – God’s protection, the peasants worked, providing food and goods for both, in fact exchanging labor for security. Both things and people were property, while the right to own property was inextricably linked with status, and primarily at the local level: the order was determined by the life of the community, castle, monastery, and social life were highly decentralized, coordination between territories was limited.
As states became more centralized and were able to guarantee the security of people and goods over a large area, the rights of the nobility were reduced. And as the knowledge of scientists undermined the religious view of the world, the power of the clergy also decreased. Between 1500 and 1800, the leading states of Europe increased their tax revenues from 1-2% of national income to 6-8%, which was accompanied by enrichment both within the countries and outside – at the expense of the colonies (the ongoing wars between the powers were a significant reason for the development of financial opportunities). ). All this led to the formation of a modern type of society – a society of owners.
It is wrong to oppose the “arbitrary” society of the Middle Ages to the “harmonious” modern democracy. In any society, inequality cannot be based on pure coercion: at least a minimum of responsiveness is required from society. What distinguishes ternary societies is the way in which inequality is justified: each class is assigned a function that other classes cannot do without, while social mobility is minimal. Modern society by default offers everyone a lot of opportunities, but in practice this is usually nothing more than political rhetoric.Capital and ideology
Europe rethinks property rights
The main owner in medieval times was the church. Of course, she achieved considerable ingenuity, formulating various principles for the management of lands and other wealth. The most important attempt to revise property relations took place on the night of August 4, 1789, when the French National Assembly voted to abolish the privileges of the clergy and nobility. It was the year of the French Revolution, which went down in history but still did not change it as dramatically as it is commonly thought.
The new French legislators were faced with the difficult task of determining what privileges meant and how to separate those that should simply be abolished from those that remained fully legal. Strictly speaking, everything that noble lords own today was once captured by force. Any property right that has existed for a sufficiently long time can be considered legal. As a result, the social role of the church was completely abolished, and instead of the redistribution of wealth, powers were transferred from the noble and clerical elites to the centralized state. And what? On the eve of the First World War, a century after the abolition of privileges, the concentration of wealth in France was even higher than during the revolution! At the end of the 19th century, about 5% of the population of France lived in Paris, while the inhabitants of the capital owned 25% of the country’s private wealth. The French tax system up to the First World War offered ideal conditions for the accumulation of wealth: tax rates on the highest incomes were purely symbolic. Balzac Vautrin 1 not without reason teaches the young Rastignac that it is better not to rely on the study of law if he wants to succeed in life: the only way to achieve a comfortable position is to take someone’s fortune into his hands. When the French finally adopted the progressive tax in 1914, it went not to finance schools or hospitals, but to go to war with Germany.
In different countries, the concept of ownership has changed in different ways. Thus, Britain avoided a revolution like the French, and met the changes that took place there without approval, but by the 20th century, even the aristocratic House of Lords succumbed to the struggle for progressive taxation and suffrage. Since 1911, it is the will of the majority that has the force of law in the United Kingdom, in 1921 Ireland seceded from Britain, reclaimed land ownership, and in 1945 Labor first came to power, whose goal was to represent the working class – all this led to fundamental solutions for the poor. Such examples convince us that changes in property rights are only a matter of political will.Capital and ideology
Since the end of the 18th century, every European has known that private property is sacred (but equal rights to it do not mean equal opportunities). The sacralization of property became the key to new stability. Previously, God was such a guarantee: everything rested on the authority of the church. Now society was inventing new rules. However, young property rights were often at odds with justice: when, under the influence of revolutionary ideas, slaves began to be freed in the colonies, it was not they who received compensation, but the slave owners. Slavery and the colonial policy of Europe deserve special attention – this is one of the most important reasons for its rapid enrichment and deepening of inequality.
Europe: slavery and colonies
The abolition of slavery, which defined new ideas about property, did not proceed smoothly:
- In Britain, Parliament passed an act to abolish slavery in 1833, with full reparation to slave owners, who were paid about £20 million (a huge sum: the government would have to allocate €30 million to each slave owner today).
- In the French colonies, slavery was abolished in two stages. The first abolition was adopted by the Convention in 1794 after a slave revolt in Haiti, but slavery was restored under Napoleon (finally abolished in 1848). For the Haitian slaves, the desire for freedom cost too much: Charles X secured a promise from the island government to pay 150 million gold francs in compensation to slave owners – 40 billion euros at the current rate: a debt that the tiny republic paid off until the middle of the 20th century.
- The American states found themselves in a difficult situation: slaves were considered private property, the inviolability of which was guaranteed by the new constitution (adopted under the direct influence of the French Revolution). The opinions of the state governments diverged, the contradiction was too sharp, and as a result, the United States is the only example of the abolition of slavery caused by the Civil War (1861-1865). And yet, initially, the North was not going to demand the immediate emancipation of the slaves in the South, Lincoln persuaded Congress to pass the corresponding amendment in order to enlist the support of the Allied armies. Slave owners did not receive compensation only because of the monstrous damage caused by the war. Legal racial discrimination persisted in the country until the 1960s.
- In Russia, the abolition of serfdom also involved compensation to the landowners. At the same time, the government required the serfs to pay the former masters a ransom for 49 years (instead of providing monetary compensation from the public debt, as in Britain and France). The terms of this law were repeatedly revised, and the ill-conceived reform came to naught by the 1880s, leaving the peasants in the same bondage.
So, formal slavery was abolished, but there remained a milder (and more profitable) version of violence – colonial policy. There are two eras of European colonization:
1) the first era begins around 1500 with the discovery of America and sea routes from Europe to India and China and ends by the 1850s, including in connection with the abolition of slavery. It relied on violent military domination;
2) the second begins in the period 1800–1850, reaches its peak between 1900 and 1940, and ends with the independence of the colonies in the 1960s. Often – and quite unreasonably – talk about the noble civilizational aspects of this phase of colonial rule; in fact, any investment in the life of the indigenous population was very limited.
In the 1850s and 1960s, European empires reached far greater proportions than during the first colonial era (the famous image of Britain as an empire on which the sun never sets). In fact, their development was interrupted only by world wars. What unites these eras is the factor of hard power, which allowed Europe to subdue even those countries that did not become colonies, for example, China, with which England unleashed the opium wars. At the same time, it is wrong to believe that such tactics are a thing of the past: remember the United States with its sanctions policy.
East rethinks property rights
It is all the more important to talk about the peculiar path of the Eastern states, since they have been outside the attention of European scientists for too long and too persistently influence the political life of the planet today, in the age of globalization.
India. The development of a country with a very complex socio-religious heritage – not a class system, but a caste system – was interrupted in the middle of the 19th century by British colonialism. In an effort to establish complete control over a subordinate society, the British once every 10 years, from 1871 to 1941, conducted a thorough census of the population. Its result, however, was an even more rigid caste system (Indian society consisted of hundreds of overlapping social categories – the colonial administrators had no idea how to group all this diversity). Fundamental social changes began to occur in India only from the middle of the 20th century when the country gained independence. The 1950 constitution began with the abolition of all caste privileges, and an end to untouchability.
The “affirmative action policy” then adopted is still being implemented today, among its successes are a significant reduction in inequality between the old disadvantaged castes and the rest of the population, the involvement of the lower classes in electoral politics, the emergence of new parties oriented to the lower castes, significant educational benefits for the lower strata of the population. At the same time, far from all the measures that could seriously contribute to the reduction of social inequality have been implemented – for example, over the past half-century, there has never been talking of land redistribution. The country’s total health budget in the mid-2010s was only 1% of the national income. And yet, the lessons of socially unequal India, with its principle of small but consistent actions, are extremely useful for a complacent Europe, in which formal equality of rights reigns and which,
Japan. Japan in 1600–1868 (during the Edo period) was a highly hierarchical society headed by a shogun. This order was discredited in 1853 when a US fleet arrived in Tokyo Bay. Japan was forced to grant trade privileges demanded by the West. National humiliation led to a series of reforms, as a result of which in 1868 a new era began – Meiji, with its pathos of competition with Western powers. The national idea was to accelerate socio-political modernization: huge taxes were levied to finance investments in the development of the country, and the level of education was growing. By the end of the 20th century, Japan had become a country with one of the highest living standards in the world. Here is an example of how active politics can overcome long-standing status inequalities in just over a century. However, Japanese modernization went hand in hand with the rise of militarism, which resulted in Pearl Harbor and Hiroshima. And the Asian peoples, once occupied by Japan, remember the Japanese not as liberators, but as cruel colonizers.
So, there is nothing natural in social inequality, whether we are talking about classes or centuries-old castes. The experience of states outside Europe shows that positive changes are always real and can be achieved in the shortest possible time. But such experience is always contradictory – this became fully clear in the 20th century.
Unlearned lessons of the 20th century
From capitalism to social democracy
The 20th century was a century of hope for a more just world, and this hope was partly justified. By 1945, private property had ceased to exist in the USSR, China, and Eastern Europe. Colonialism was ended. European states were forced to reconsider their strategies. At the same time, the experience of the two world wars played only a partial role, much more important were the growing social-democratic sentiments since the end of the 19th century, criticism of the colonial order, and independence movements in different countries. All this led to the transformation of the idea of property in the 20th century. The tools for change were:
- redistribution of private property (in a more severe form – in the USSR in the 1920s with its expropriation, in a more civilized form – in Germany and the Scandinavian countries in the 1940s-1950s, where representatives of workers occupied up to half of the seats in the boards of shareholders of companies);
- relative equality in access to education;
- a change in investment policy (most of the private savings were provided by the rich to governments to pay for wars in exchange for bonds that lost value due to inflation);
- change in tax principles, first of all – the widespread adoption of a progressive tax. Europe resorted to exclusive taxes on private property to reduce debts incurred during the world wars (although such taxes had been used before to reduce public debt – in Italy, Austria, Hungary in the 1920s). New tax revenues funded social spending.
The changes were fundamental: in fact, in the 1950s–1980s, capitalist states were turning into social democratic states. However, this process came with reservations.
- Countries adopted progressive taxes on income and inheritance but were very inconsistent with regard to wealth tax: Germany and the Scandinavian countries were the first to introduce such a tax (largely under pressure from trade unions and strong social democratic parties), in the USA and France this idea was met with hard resistance from large owners. By the end of the 20th century, the wealth tax had been abolished in almost all countries.
- The new governments focused on building financial order within the narrow confines of their nation-states. A new international order like the obsolete colonial one never took shape, and by the end of the century, this had led to fierce fiscal competition and a lack of transparency in tax policy.
- The establishment of more coherent social measures was hampered by the constant confrontation between capitalism and communism.
Russia. Communism has become the most radical challenge to proprietary ideology—and the most ill-conceived. The Bolsheviks easily proclaimed the abolition of private property, but they did not have a detailed alternative plan. At first, it was not difficult for the Soviet Union to present itself as a state with high hopes for equality: accelerated modernization brought the USSR closer to Western European levels. However, the price of this was millions of dispossessed and repressed. In addition, the Soviet leaders simply replaced one type of inequality (capital income) with another – access to valuable goods.
At the beginning of the 1990s, the choice was made in favor of “shock therapy”: supposedly only ultra-fast privatization could ensure the impossibility of returning to communism. As a result, a small group of people, future oligarchs, got the opportunity to take over most of the country’s wealth, and this situation was reinforced by the adoption in 2001 of an income tax – strictly proportional, only 13%, regardless of income (no other country has gone as far as Russia, abandoning the very idea of a progressive tax). This coincided with the adoption of non-transparent fiscal principles (however, the global order also contributed to this: it was already mentioned above that no one in Europe took care of clear tax mechanisms in the international space). So Russia has become one of the most inegalitarian countries.
Europe, however, shows little interest in the origins of Russian wealth, as it itself benefits from capital invested by wealthy Russians in Western European real estate and business. Her interest is also constrained by the fear of a harsh reaction from the Russian government. At the same time, Europe’s retaliatory aggression in the 2010s is also not quite adequate: instead of imposing trade sanctions that affect the entire country, the best solution would be to freeze financial assets of dubious origin.
China. This country learned from the failures of the USSR by settling on a mixed ownership structure: the country is no longer communist (70% of all ownership is private), but not capitalist either (state ownership is still about 30%). This has not saved China from a sharp rise in income inequality. The economic reforms implemented in the 1970s helped primarily the city, while the countryside was left with almost nothing. Chinese income data is very opaque. In theory, China has a progressive tax (marginal rates reach up to 45% – compare with 13% in Russia). However, it is impossible to know how many taxpayers pay taxes each year, or by how much the number of high-income taxpayers in a given city has increased. There is no inheritance tax in China, which means the long run, China is no more protected from a corrupt fate than post-Soviet Russia. However, his criticism of Western democracy is worth listening to. Can the majority pass laws that completely redefine property rights (the European path), or is it better to leave the matter to a competent minority (the Chinese path)? The Chinese version of the development of events makes one think that the answer to this question is not obvious.
The day before is unknown
The period from 1950 to 1980 was one of the happiest in European history: a new social policy was defined to reduce real inequality. At this time, the political system was built around the class conflict between “left” and “right”. The Social Democrats (Democratic Party in the USA, Laborites, Communists) relied on the support of socially disadvantaged classes, while the “right” (Republicans in the USA, liberals in Europe) relied on the support of the wealthy sections of the population.
But since the 1980s, the less educated and well-to-do classes throughout Europe have stopped voting for the “left.” The agenda of the Social Democrats was falling apart, they could not adapt to the new reality, where universal education became more and more universal, and the economy more and more international. The deep crisis of the USSR convinced many that it is necessary to be more careful with the policy of redistribution of wealth – it is much more reliable to rely on self-regulating markets. The collapse of communism proved to be the collapse of hopes for social justice. Criticism of the rich and calls for equality grew quieter. Political life, previously organized by a rigid division into two camps, was now controlled by diverse parties representing a highly educated and well-paid social elite. Since the 1980s, the economy has been fueled again by the familiar anti-egalitarian ideology of the 19th century. And the lower classes feel left out, often finding an outlet in nationalism and racism.
Meanwhile, the world is globalizing, countries are becoming more and more interdependent. The problems left in the legacy of the 20th century are becoming stronger and stronger. We see countries that have only recently emerged from the slavery trap (South Africa, which ended apartheid in the early 1990s). We also see countries where inequality has more modern roots but is no less fatal: such is the Middle East with its concentration of oil in small countries (Egypt with a population of 100 million people annually spends 1% of the total oil revenues on schools Saudi Arabia, UAE, and Qatar, which have a very small population). The abolition of racial discrimination in the United States has not removed the problem as such and threatens new conflicts. Every now and then emerging crises, including the largest ones, like the crisis of 2008, are overcome in deceptively easy ways – by creating a new money supply. At the same time, such decisions cause justified indignation of ordinary citizens, because the printed money was sent not to them, but to large corporations. The world entered the 21st century with the same problems as 100 years ago, but it seems to have become even more careless.
What to do?
The most natural way to avoid economic collapse is the development of social federalism. It is based on the notion of a just society – one where access to the widest range of benefits is provided to all members of society, and income inequality is explained only by different life aspirations. A number of settings will help achieve this:
- Revision of voting rules in corporations, which would include the right to vote not only for the most wealthy shareholders (the successful experience of Germany and the Scandinavian countries in the middle of the 20th century).
- A return to the progressive inheritance and income tax of the role it played in the 20th century when rates reached 70-90% on the highest incomes.
- Inheritance and income taxes should be supplemented by a progressive wealth tax. It is a key tool for the fair treatment of capital: it is more difficult to manipulate than income tax, especially for the very wealthy, whose taxable income is often a small part of their wealth, while the actual income is accumulated in family holdings. There is no need to immediately tax the largest fortunes at rates from 60 to 90%: rates of 10-20% will achieve the same result within a few years, while 90% of the poorest people are guaranteed a significant tax reduction.
- Progressive taxes on wealth can provide funding for a general investment fund for every young adult (say, age 25) for various social needs.
- The principle of a progressive tax can be extended not only to property and finances but also to carbon dioxide emissions (the problem is very serious: global warming in the coming years could reduce world GDP by 5-20%). So far, all emissions are taxed at the same rate, regardless of the amount of damage.
- The key goal of the new social order is not the distribution of income, but of opportunities. In this regard, the most important direction is the reform of the education system: today, in most countries, the distribution of expenditures in this area is not transparent, privileged schools and universities often receive much larger state subsidies than educational institutions of a lower level.
- The development of new fiscal forms may require constitutional changes; for example, the main document of the country can spell out the minimum principle of fiscal justice, according to which the income tax for the richest stratum of the population should not be lower than the proportional burden for the poorest stratum.
- The free circulation of goods and capital in the world should not limit the budgetary policy of states, as is happening now. The agreements of the 1980s that liberalized capital flows did not provide for a clear mechanism for financial cooperation or automatic transmission of information about cross-border asset flows, which allowed oligarchs of all countries to transfer wealth offshore with impunity. The solution could be the creation of a European Assembly (EA), composed partly of representatives of national parliaments and partly of members of the European Parliament. Each participating country would be represented in proportion to its population, and each political party would be represented in its national delegation in proportion to its representation in the home country’s parliament. Thus national political life would be profoundly Europeanized. EA could decide to pool member countries’ debt into a joint refinancing fund, accelerate debt liquidation through specific measures such as exclusive progressive taxes on private wealth (such a measure had already been taken in the 1940s, creating opportunities for investment in the reconstruction of Germany and Japan), to decide on the rules for the movement of immigrants (an acute problem of the 2010s).
Two principles will help implement these plans:
1) it is important to propose a new international legal framework before dismantling the old one. Otherwise, the world is in for another Brexit, when British politicians asked voters if they wanted to leave the European Union, but did not indicate how they plan to organize future relations with Europe in the event of an exit;
2) do not wait for the consent of the whole world before moving forward. Several states can move towards social federalism on the basis of a number of common solutions while remaining open to other countries.
Whatever politicians choose from this, they need to remember: in history, there are no once and for all approved principles, alternatives have always been and will be, everything can be changed, and especially society’s ideas about social justice: today this is the most urgent task.
Top 10 Thoughts
1. Every society justifies its inequality – this is how various economic and social rules arise, designed to strengthen the established order of things.
2. The phenomenon of inequality begins with trinity medieval societies, consisting of three classes – the nobility, the clergy and the peasants. The nobility guaranteed protection on earth, the clergy – God’s protection, the peasants worked, providing food and goods for both, in fact exchanging labor for security.
3. Since the end of the 18th century, every European has known that private property is sacred (but equal rights to it do not mean equal opportunities). The sacralization of property became the key to new stability. Previously, God was such a guarantee: everything rested on the authority of the church.
4. The 20th century was a century of hope for a more just world, and this hope was partly justified. In the 1950s-1980s, the capitalist states actually turned into social democratic ones.
5. Communism has become the most radical challenge to the proprietary ideology – and the most ill-conceived. The Bolsheviks easily proclaimed the abolition of private property, but they did not have a detailed alternative plan. The collapse of the USSR convinced many that it is necessary to be more careful with the policy of the redistribution of wealth – it is much more reliable to rely on self-regulating markets. The collapse of communism proved to be the collapse of hopes for social justice.
6. Since the 1980s, the economy has been fueled again by the familiar anti-egalitarian ideology of the 19th century. And the lower classes feel left out, often finding an outlet in nationalism and racism. And, as the experience of many states, including Eastern ones, shows, there is nothing natural in social inequality, whether we are talking about classes or centuries-old castes.
7. Today the world is globalizing, and countries are becoming more and more interdependent. Every now and then emerging crises, including the largest ones, like the crisis of 2008, are overcome in deceptively easy ways – by creating a new money supply. Such decisions cause justified indignation of ordinary citizens because the printed money is not directed to them, but too large corporations.
8. The most natural way to avoid economic collapse is the development of social federalism. It is based on the notion of a just society – one where access to the widest range of benefits is provided to all members of society, and income inequality is explained only by different life aspirations.
9. A progressive wealth tax is a key tool for the fair treatment of capital: it is more difficult to manipulate than an income tax, especially for very wealthy people whose taxable income is often a small part of their wealth, while the actual income is accumulated in family holdings.
10. The world needs a new international legal framework, and it must be offered before the old one is dismantled. However, states should not wait for the consent of the whole world before moving forward. Several states can move towards social federalism on the basis of a number of common solutions while remaining open to other countries.
1. We are talking about the novel “Father Goriot” (1834) by the French writer Honore de Balzac (1799-1850). The novel is part of the multi-volume cycle “The Human Comedy”, describing the social life of France in the 19th century.