The British Journal of Sociology 2014 Volume 65 Issue 4 Piketty’s capital and social policy David Piachaud Abstract Piketty’s Capital (2014) primarily describes and analyses changes in the distribution of wealth and annual incomes. This paper focuses on his policy proposals that make up Part Four of the book. Piketty defends the ‘social state’ but he discusses it largely in terms of distribution and redistribution between tax units. This neglects the important role of social policy in promoting recognition and redistribution of income and opportunities that is related to gender, race, disability and sexual orientation. Nor does Piketty consider inequalities in health which effect life-time incomes, nor the impact of housing policies on house prices and the distribution of wealth. It is argued that Piketty’s approach to social security is simplistic and plays down the complexity of competing policy goals. On taxation, Piketty defends progressive taxation and proposes a global capital levy. The latter proposal runs into formidable problems in seeking global taxation in a world of nation states. Rather than seeking a policy that is, for the foreseeable future, wholly politically impractical, a case is made for less idealistic but more practical and urgent tax coordination between nations to address the widespread avoidance of taxation that large corporations and the very wealthy are now permitted – taxation on which the future of the social state depends. The importance of human and social capital, which are largely set aside by Piketty, are discussed. Finally,it is argued that his approach to policy is to describe trends and propose amelioration of growing inequality rather than to identify causes of the trends and propose policies that might address the causes. Nevertheless, the importance of his work in bringing issues of inequality to the fore, especially among economists, is recognized and applauded. Keywords: Social policy; redistribution; inequality; taxation; income; wealth Introduction Social policy in Britain has, until recently, been dominated by a Fabian tradition. This was evidence-based – letting ‘facts’ speak for themselves’ – Piachaud (Department of Social Policy, London School of Economics and Political Science) (Corresponding author email: [email protected]) © London School of Economics and Political Science 2014 ISSN 0007-1315 print/1468-4446 online. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA on behalf of the LSE. DOI: 10.1111/1468-4446.12109 Piketty’s capital and social policy 697 ‘statist’ – believing in government solutions to problems – much concerned with social justice and rather idealistic. Piketty is Fabian in much of his approach, especially when it comes to policy prescriptions. While most of the book is descriptive and analytic, in Part Four he offers far-reaching policy proposals. Here his proposals relating to the social state, government spending and taxation in Chapters 13, 14 and 15 are discussed; the very broad discussion of issues such as public debt, the Euro and climate change in Chapter 16 go beyond the scope of this essay. Piketty’s book is the product of immense and elaborate scholarship; its breadth is remarkable and its boldness is stimulating. It has in a short time since its publication been ‘agenda-changing’. While this essay will concentrate on its limitations with respect to social goals and policies it does so not just because that is what academics do but more importantly because Piketty raises questions that need answers, not necessarily the ones he offers. The social state Piketty documents the growth of social spending: during the nineteenth century and up to World War I . . . the state had at that time very little involvement in economic and social life. (214: 475) By the end of the twentieth century, the situation was transformed: all the rich countries, without exception, went into the twentieth century from an equilibrium in which less than a tenth of their national income was consumed by taxes to a new equilibrium in which the figure rose to between a third and a half. (2014: 476) Most of this increased taxation went on the social state, to pay for social security, health, education and housing. On the basis of more recent data than Piketty’s, in the 34 OECD countries between 2008 and 2013, social spending as a proportion of gross domestic product has risen on average by 2 per cent; in not one country has it fallen (OECD 2014). This does not of course mean that social spending has in all cases risen fast or risen at all since gross domestic product has been stagnant or has fallen in many countries. Nor does it imply that the effects of recession on social spending are now over and that it will in future return to its former growth path. In the UK, for example, the bulk of the cuts in social spending have yet to take effect. But the common impression that the recession led to massive cutbacks in social spending as a proportion of gross domestic product is not, at least so far, correct. Piketty sees the social state as indispensable for modern developed economies: British Journal of Sociology 65(4) © London School of Economics and Political Science 2014 698 David Piachaud . . . in all the developed countries in the world today, building a fiscal and social state has been an essential part of the process of modernization and economic development. (2014: 491) The modern social state is primarily concerned with equity or social justice. While it has in general tended to reduce inequality, uncomfortable facts must be recognized. Social spending has had only a limited impact and great social inequalities persist and, while it was increasing, social inequality has also been rising. In addition, parts of the social state may sustain or enhance inequality; for example spending on higher education may increase inequality in earnings. Thus, while social spending may have served to legitimate the state, it has had only a limited impact on economic inequality. Piketty’s discussion of the future of the social state is almost entirely in terms of distribution and redistribution. Much of this draws on studies based on tax data which is based on tax units, normally the nuclear family. It is questionable how far women, for example, have been recognized in the data on which Piketty’s work is based. The data do not show what happened to those not covered by the tax system nor do they reveal what happened in terms of inequality within the tax unit. As a result, much less is known about women’s position than men’s. (Although Piketty cites the French Declaration of the Rights of Man and the Citizen of 1789 – ‘men are born free and remain free and equal in rights’ – he does not mention that women did not achieve universal franchise in France until 1944, which may in part explain why so much less is known about women’s income and wealth than men’s.) Some have argued that the state’s role in relation to equality in the modern state is also one of recognition. For example, Nancy Fraser argues that: justice today requires both redistribution and recognition. The need for a two-pronged approach is especially clear given bivalent differentiations such as gender, which entrench both economic and cultural injustices. But it applies far more broadly than that. Thus, I have argued for a comprehensive political framework that encompasses both redistribution and recognition so as to challenge injustice on both fronts. (Fraser 1996: 66) Fraser envisions: Social arrangements that can redress both economic and cultural injustices. Only by looking to integrative approaches that unite redistribution and recognition in the service of participatory parity can we meet the requirements of justice for all. (Fraser 1996: 67) The focus only on social spending and social benefits that Piketty adopts only reflects part of the modern social state. The status and rights of women and girls, of ethnic minorities, of disabled people and of sexual ‘minorities’ have all been advanced, to some degree, by education and anti-discrimination policies. © London School of Economics and Political Science 2014 British Journal of Sociology 65(4) Piketty’s capital and social policy 699 These are all part of the ‘social state’. In considering the history and the future of inequality it is a start, but not enough, to consider inequality between rich and poor, as Piketty does. In addition, inequality related to age, sex, disability, ethnicity and sexual orientation are all important; they cannot be assumed to be covered by differences related to income and wealth, crucial though these are. Given the importance that Piketty attaches to the social state, it is not surprising that he proposes it be modernized rather than dismantled. It is convenient to discuss in turn some of the main activities of the social state – health, education, housing and social security and taxation – and what Piketty writes about policy in these areas. Piketty does not include health and education within his concept of capital, which will be discussed further below. Health Piketty has little to say about health or about the inequality in life expectancy. But it is important for his analysis. Piketty focuses on inequalities in annual income but in terms of life-time income there is far more inequality. For example, pensions received by social groups with low life expectancy are far below pensions of those who live longer. If life expectancy was unrelated to wealth there would be an issue; but those with least financial capital also tend to have the least health capital and die soonest. The differences in life expectancy are stark. For example, in London the number of years a person can expect to live in very good or good general health – termed disability-free life expectancy – is in a prosperous west London area 71 years; on the other side of London it is 55 years. Heading east on the Central Line average life expectancy falls by one year at each stop. Those in the most prosperous areas have on average one-quarter more life. With growing health inequality, it is all the more important to take into account life-time differences. If inequalities in income and wealth are to be addressed, it is important also to address inequalities in health. The causes of health inequality are complex; it is not clear that social spending on health, which predominantly goes on ill-health services towards the end of people’s lives, makes a great difference. The range of social policies that can affect health inequality should be central to the health policy agenda. Education The one aspect of education on which Piketty focuses is higher education and its impact on social mobility. As he observes: British Journal of Sociology 65(4) © London School of Economics and Political Science 2014 700 David Piachaud The average income of the parents of Harvard students is currently about $450,000 which corresponds to the average income of the top 2 per cent of the US income hierarchy. Such a finding does not seem entirely compatible with the idea of selection based solely on merit. (2014: 485) Contrary to widespread beliefs that the USA is the land of opportunity, the available data suggest that social mobility has been and remains lower in the United States than in Europe. (2014: 484) Piketty interprets educational opportunity as related to the inequality of income and wealth and writes: It would be naïve . . . to think that free higher education would resolve all problems. (2014: 486) What Piketty proposes is far greater transparency in selection processes, although he acknowledges that this can have only a limited impact. What seems indubitable is that there will never be equal opportunity in education in a highly unequal society. Piketty does not discuss in any detail inequalities in education at lower levels, but these also affect inequalities in income. Continuing problems of basic literacy and numeracy, particularly among white working-class boys, are important factors in their dismal employment prospects. Part of modernizing the social state needs to involve the achievement of basic standards of employability for all. Housing Piketty discusses the changing value of land and its historical role in fascinating or excruciating detail, according to different reviewers of his book. Housing is not given the same attention. Yet the current price of housing and the problems of young people getting access to housing in London, for example, show the importance of housing as part of total wealth and the importance of family wealth in gaining access to the ‘property ladder’. Many postwar ‘baby boomers’ who bought property in the 1970s or 1980s have enjoyed large and wholly unearned increases in net wealth as their property increased in real value and their nominal mortgage debt declined in real terms. Piketty does not, unfortunately, disaggregate capital in a way that would reveal how much of the recent growth in the capital: income ratio that he documents was due to the rise in property prices. This growth in housing wealth has clearly benefitted those who own property at the expense of those who are aspiring to become owner-occupiers and those who rent. Housing is then a prime example of Piketty’s thesis that the wealthy have got wealthier faster than average incomes have increased. © London School of Economics and Political Science 2014 British Journal of Sociology 65(4) Piketty’s capital and social policy 701 There are clear reasons why housing wealth has increased. The cost of housing is in part the cost of building but in many areas the biggest cost is land. Location determines house prices and the best locations are limited. Yet while the supply of land is in total rather fixed – subject in some places to the impact of climate change and in the longer run the movement of tectonic plates – what matters for housing is the supply of land available for housing. This is determined in part by geography but far more significantly in most countries by government regulation or zoning. In Britain, regulation to prevent encroachment and protect green belts and to restrict housing density in urban areas have had the effect of restricting the supply of land for housing and increasing its price. In many congested areas this has been the main cause of the rise in house prices. A policy introduced on environmental grounds and strongly favoured by those concerned about the impact of new building on their environment – on congestion, on schools, on hospitals and on the social composition of their neighbourhood – has resulted in boosting housing wealth. Central government may wish to expand the housing supply but localities respond ‘not in my back yard’.The result has been that, in areas where housing demand has increased, property prices – and wealth inequality – have increased. The social policies that would increase the supply of land for housing development – which may be by increasing density and by using ‘brown-field’ sites as well as using ‘green-field’ sites – are thus key to the future of housing wealth. Social security Piketty focuses on the future of retirement and the finance of pensions – a subject which for many is a near-death experience. He does not discuss child support, which is crucial for child poverty, or benefits for unemployed or disabled people. Essentially pensions can be paid on a pay-as-you-go (PAYGO) basis or from funded, capitalized schemes. PAYGO based on intergenerational solidarity pays pensions directly out of contributions. Funded schemes invest in assets – or pension capital – which then pay for pensions. PAYGO contributions rise as earnings rise; pension funds grow in line with the rate of return on capital. Since the basis of Piketty’s thesis is that in the future the rate of return will exceed the growth rate, he favours funded pensions. He recognizes, however, a fundamental problem. To move from PAYGO to funded pensions requires one generation to lose out: either those retired would be left with no pension as contributions went into a pension fund or those at work would have to pay double – for existing pensions and to build up their own fund.Thus Piketty sees a continuing future for PAYGO pensions. Piketty proposes: British Journal of Sociology 65(4) © London School of Economics and Political Science 2014 702 David Piachaud one of the most important reforms the twenty-first century social state needs to make is to establish a unified retirement scheme based on individual accounts with equal rights for everyone, no matter how complex one’s career path. (Piketty 2014: 490) Would that it were that easy? How are ‘equal rights’ to be established for those whose career paths are interrupted to raise children, or by disability or unemployment? What of immigrants who may have limited time in the country before retirement? What of the impact of political decisions, when elderly voters are increasing in number and have a higher turn-out in elections than younger voters? In the UK since 1960 there has been at least one major pension reform each decade – each reform being proclaimed as the long-term solution that would last a life-time. Stability may be desirable for pension schemes that take generations to come to fruition but why should it suddenly come about? Social security in most countries has become the biggest component of the social state and a complex system serving many conflicting goals. While Piketty seeks equity and simplicity, policy in practice is unlikely to be straightforward or durable. Taxation a) Progressive income taxation It is easy to forget how far top tax rates have been reduced in the last 25 years.; Piketty makes the change very clear. It is also easy to neglect the extent to which means-testing of benefits results in marginal effective tax rates on some of the poorest that far exceed those faced (and often avoided) by those far better off. Piketty presents an enthusiastic defence of progressive income tax on grounds of equity. Although he does not go into the evidence on behavioural effects, these are clearly relevant. While opinions differ, there seems little convincing evidence that top income earners are significantly disincentivized by the rates they face, even when they actually pay them. The reported exile of Gerard Depardieu due to recently increased tax rates in France does not appear to have reduced his productivity nor done lasting damage to French cinema. b) A global capital levy Undoubtedly the most radical policy proposal made by Piketty is for a global capital levy which would work as a form of global redistribution of wealth. This may be seen as idealistic or as naïve and impractical. Some political © London School of Economics and Political Science 2014 British Journal of Sociology 65(4) Piketty’s capital and social policy 703 philosophers, such as Nozick, see any form of taxation as a form of enslavement; others see government taxation and spending as a form of social contract between government and voters. A democratic state must retain public acquiescence, if not enthusiasm, for the tax system. To achieve a global tax system without a supra-national body which has authority over national governments seems impossible. There is for the foreseeable future no prospect that democratic national governments, let alone undemocratic regimes, will cede this authority. However idealistic,Piketty’s proposal is not helpful. Indeed it is damaging because it diverts attention from more pressing and feasible progress. All democratic states are to some degree social states. All face the problem of raising taxes to pay for social spending. In a globalized world in which the super-rich and multi-national corporations can choose where they are based and taxed, there is in relation to tax a race to the bottom.Amazon, for example, is simply free-loading on the social states where it trades and makes its profits. Tax havens are thriving and many large corporations are relocating simply to reduce taxation. In many respects the impact of tax havens is as disruptive and lawless as were privateers that preyed on shipping in the fifteenth to sevententh centuries, often with a largely specious and certainly corrupt ‘legitimation’ from a major nation. The British government loses billions in tax revenue to an assortment of islands – the Isle of Man, the Channel Islands and the Cayman Islands – which on any realistic reckoning it should control. Tax coordination between the powerful social states of the world is an urgent requirement if these social states are not to be seriously undermined. This might simply involve making offers to the tax havens which they could not refuse. Or it might involve preventing corporations trading if they operated out of piratical tax bases. There are many options and some very slow steps are being taken to coordinate some accounting practices and tax policies. But it is a matter of urgency to prevent a race to the bottom. Thus it would have been preferable if Piketty had focused on what could and needs to be achieved, rather than on a global capital levy which is the stuff of dreams. Human and social capital Having briefly reviewed some key areas of social policy, this section returns to Piketty’s use of the term ‘Capital’. While one can applaud Piketty’s critique of economics, he is in many respects a rather old-fashioned economist. It is strange that half a century after the concept of human capital was expounded by Gary Becker and others Piketty sets it aside. He decided to leave human capital aside and does not discuss its distribution and how its distribution effects overall inequality. Why does he do this? British Journal of Sociology 65(4) © London School of Economics and Political Science 2014 704 David Piachaud The most obvious [reason] is that human capital cannot be owned by another person or traded on a market (not permanently at any rate). (Piketty 2014: 46) Yet human capital is fundamental even if it cannot be traded. For example, how can the West German ‘miracle’ of recovery after 1945 when physical capital had been so devastated, as Piketty describes, be explained without considering human capital? The distribution of human capital is fundamental to understanding the distribution of personal incomes, especially as mental capacity has replaced physical strength as the main attribute of labour. Advanced economies rely on maintaining comparative advantage based on higher productivity; human capital is fundamental to their competitiveness. Nor does Piketty have anything to say about social capital. While he has much to say about the effects of wars on physical capital and financial wealth, he does not discuss the human cost of war and its effects on social capital. The effects of, particularly, civil wars on social capital have in many cases been devastating. Controversy over capital is not new. Piketty writes of the debate between Cambridge, England and Cambridge, Massachusetts in the 1950s and 1960s that it did more to cloud economic thinking than enlighten it. . .. In my view, the virulence – and at times sterility – of the Cambridge capital controversy was due in part to the fact that participants on both sides lacked the historical data needed to clarify the terms of the debate. (2014: 232) Yet, even with the mass of historical data presented by Piketty, the valuation of capital remains a central issue. As David Harvey reviewing Piketty, wrote: Unfortunately there is no way to value it independently of the value of the goods and services it is used to produce or how much it can be sold for in the market. The whole of neo-classical economic thought (which is the basis of Piketty’s thinking) is founded on a tautology. The rate of return on capital depends crucially on the rate of growth because capital is valued by way of that which it produces and not by what went into its production. (Harvey 2014) Capital is valued in the market based on expectations regarding the future – not on past investment in that capital. Thus steel or car plants in which huge investments have been made in the past are worthless, except for scrap or heritage sites, if they cannot make products that sell and make a profit. Many IT companies have been valued at colossal prices based on their perceived prospects even when they still were making losses. The fact that the value of capital is based on future expectations has been crucial for government policy. In the past industrial policies sought to ‘pick © London School of Economics and Political Science 2014 British Journal of Sociology 65(4) Piketty’s capital and social policy 705 winners’ and assist investment in them. But if picking winners is virtually impossible what can government do to assist industry and other sectors of the economy. So far, the response of most governments has been to invest in education and research in the hope that this will yield future returns to the economy and society. This is an example of why social policies affecting the quality and distribution of education are, in the long run, more fundamental than redistributive policies. In discussing the prospects for future inequality, as Piketty boldly does, far more attention needs to be given to inequalities in human capital and to policies that affect these. Tackling symptoms or addressing causes The study of social policy has always, of necessity, been multi-disciplinary – economics, sociology, history, politics, philosophy and more contribute to understanding how social policy has developed, what impact it has and what options there are for better or worse futures. Therefore, Piketty’s attitude towards economics is not only wise and brave but in tune with the academic approach to social policy; he wrote: the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained . . . There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything. This, in any case, is the charm of the discipline and of the social sciences in general: one starts from square one, so that there is some hope of making major progress. In France, I believe, economists are slightly more interested in persuading historians and sociologists, as well as people outside the academic world, that what they are doing is interesting (although they are not always successful). (2014: 31–2) Piketty’s approach starts with the available evidence: I began this work by collecting sources and establishing historical time series pertaining to the distribution of income and wealth. As the book proceeds, I sometimes appeal to theory and to abstract models and concepts, but I try to do so sparingly, and only to the extent that theory enhances our understanding of the changes we observe. For example, income, capital, the economic growth rate, and the rate of return on capital are abstract concepts – theoretical constructs rather than mathematical certainties. (2014: 33) British Journal of Sociology 65(4) © London School of Economics and Political Science 2014 706 David Piachaud Yet, ‘the facts’ are always value-laden. As discussed, defining capital excluding human and social capital may be convenient given the availability of data but it is certainly value-laden. Social research that collects ‘facts’ but lacks a theoretical framework or hypotheses that can be tested is unlikely to shed light on what causes inequality (or on any phenomenon under investigation). However elaborate and extensive the data, however refined or obscure the statistical techniques used, however multi-coloured or animated the visual presentation, unless there are clear questions there can be no clear answers. Unfocused social research is no basis for policy. While Piketty’s work assembles a mass of data it offers no clear answer to underlying questions. For example, why did income inequality remain broadly constant in Northern and Southern Europe since 1950 (2014: Figure 9.4), whereas in Anglo-Saxon countries it remained constant from 1950–1980 and then rose rapidly (2014: Figure 9.5)? Part of the difference is accounted for by the growth of incomes of supermanagers on the USA and UK where they have the power to set their own remuneration; but why did this power change or have so much more impact after 1980? Piketty describes crucial changes, but often he offers no clear explanation as to why they occurred. Without understanding ‘why?’ it is hard to advance policies that might alter future prospects. A clear explanation of what was driving changes in inequality is needed if policy is to be effective in altering the extent of inequality. Piketty’s two ‘laws’ are descriptive identities rather than causal explanations. His approach to policy is not to seek means of changing the causes but to redistribute incomes through progressive income tax and redistribute wealth through a global tax on capital. Desirable though these policies may in principle be, they do not address the causes of growing inequality but rather seek to mitigate or ameliorate its extent. Piketty’s work certainly provokes questions, which is of itself valuable. But he does not really offer answers. A global levy on capital is akin to saying ‘I would not start from here’. In short, while Piketty has significantly increased knowledge of how the inequality of wealth and income has changed, there is much yet to be understood about why it has changed. Nevertheless, it must be repeated that Piketty’s achievement is immense in shifting economic debate significantly towards inequality and the goal of social justice. Following in the footsteps of other scholars, most notably Tony Atkinson, he has seriously and successfully brought to the fore issues which have for too long received scant attention from economists and policy-makers. He deserves the last word: There are a thousand and one ways to do social science, and accumulating data is not always indispensable or even (I concede) especially imaginative. Yet it seems to me that all social scientists, all journalists and commentators, © London School of Economics and Political Science 2014 British Journal of Sociology 65(4) Piketty’s capital and social policy 707 all activists in the unions and in politics of whatever stripe, and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it, and its history. Those who have a lot of it never fail to defend their interests. Refusing to deal with numbers rarely serves the interests of the least well-off. (2014: 577) (Date accepted: September 2014) Bibliography Fraser, N. 1996 Social Justice in the Age of Identity Politics: Redistribution, Recognition and Participation, Tanner Lectures on Human Values, Stanford University. Harvey, D. 2014 Afterthoughts on Piketty’s Capital, Downloaded 7.7.14 from http:// davidharvey.org/2014/05/afterthoughtspikettys-capital/ British Journal of Sociology 65(4) OECD 2014 Government Social Spending: Total Public Social Expenditure as a Percentage of GDP, Social Issues: Key Tables ISSN 2074-3904. Paris: OECD. Piketty, T. 2014 Capital in the Twenty-First Century, Cambridge Mass.: Belknap Press. © London School of Economics and Political Science 2014
