Why inequality matters

Why inequality matters

Indholdsfortegnelse1. Introduction.......................................................................................................................................32. Epistemic approach...........................................................................................................................5

2.1. Sociology and economics..........................................................................................................52.2. Justification and immanent critique...........................................................................................72.3. The experience of inequality......................................................................................................8

3. Piketty's theory on capital and inequality........................................................................................113.1. The economic theory - On laws and mechanism's...................................................................11

3.1.1. The first law: Capitals share of total income....................................................................113.1.2. The second law: Capital/income ratio..............................................................................13

3.2. Types of Inequality..................................................................................................................143.2.1. Inequality across work and capital...................................................................................14

3.2.1.1. The stability of the return rate..................................................................................163.2.2. Inequality across people...................................................................................................18

3.3. The political theory - On institutions, politics and war...........................................................203.3.1. The exception of 1915-1945: War, politics and the deterioration of capital....................203.3.2. Institutions and politics....................................................................................................23

3.4. Predicting inequality - Patrimonial capitalism?.......................................................................264. Normative foundations of capitalism..............................................................................................29

4.1. From Description to Cure........................................................................................................294.2. Normative foundations of inequality.......................................................................................30

4.2.1. On social order and inequality.........................................................................................304.2.1.1. Political upheaval and a repressive state apparatus..................................................304.2.1.2. Economic Crisis.......................................................................................................324.2.1.3. An instrumental critique...........................................................................................33

4.2.2. On justice and inequality..................................................................................................354.2.2.1. Hyper-meritocracy and inequality of opportunity....................................................374.2.2.2. Inheritance and rents................................................................................................384.2.2.3. Education..................................................................................................................384.2.2.4. Politics......................................................................................................................40

4.2.3. Justificatory principles of inequality................................................................................424.3. A global tax on wealth.............................................................................................................454.4. Will a tax on wealth work?......................................................................................................47

4.4.1. Social order......................................................................................................................474.4.1.1. Political upheaval and repressive apparatus.............................................................474.4.1.2. Economic crisis........................................................................................................49

4.4.2. Equality of opportunity....................................................................................................494.4.3. Social utility.....................................................................................................................514.4.4. Political inequality...........................................................................................................514.4.5. Concluding on the capital tax...........................................................................................53

4.5. Reflections on ownership.........................................................................................................544.5.1. Concluding on ownership................................................................................................57

5. Beyond public and private capital...................................................................................................595.1. Coming up with answers..........................................................................................................59

5.1.1. On utopias and thinking about alternatives......................................................................59

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5.1.2. From justice to institutions...............................................................................................625.1.2.1. Justice.......................................................................................................................625.1.2.2. Institutions................................................................................................................64

5.1.3. General political strategies...............................................................................................665.2. A democratic economy.............................................................................................................70

5.2.1. Share-levy wage-earner funds..........................................................................................705.2.1.1. Hybrid ownership structure?....................................................................................725.2.1.2. Justifying wage-earner funds....................................................................................735.2.1.3. Challenges................................................................................................................74

5.2.2. Cooperative Democracy...................................................................................................755.2.2.1. Mondragon...............................................................................................................795.2.2.2. Justifying cooperative democracy............................................................................805.2.2.3. Challenges................................................................................................................81

5.2.3. Fusing wage-earner fund and cooperative democracy.....................................................825.3. Social consequences of Inequality...........................................................................................83

5.3.1. Inequality of outcome......................................................................................................835.3.2. Inequality of recognition..................................................................................................865.3.3. The principles of justification revisited............................................................................87

6. Conclusion.......................................................................................................................................907. Bibliography....................................................................................................................................928. Abstract............................................................................................................................................97

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1. IntroductionInequality was finally declared a thing of the past 60 years ago. In the 1950s western societies,

capitalism had ripened, in Simon Kuznet’s words, as income inequality seemed to automatically

decrease (Piketty 2014: 261). Adam Smith's invisible hand eventually got the job done: In just forty

years the European societies had been transformed from an aristocratic ownership structure with

nearly feudal distribution of wealth into a thriving middle class rule (Piketty 2014: 4290). By the

mid-1970s, the Scandinavian countries could call themselves the most equal countries to have

existed in the history of industrial society (Piketty 2014: 4423). The Marxist analysis and the Soviet

critique of Western market capitalism had suffered defeat. That appeared to be the final verdict.

But in the late 1970s, the economic and political tide changed in Western countries and inequality in

both ownership and income have, with only a few exceptions, been climbing ever since. Thomas

Piketty's book “Capital of the 21st century” (from now on Capital) makes an empirical case about

rising inequality and a bleak prediction that the prosperous and egalitarian thirty years following

World War Two is all but an exception in the history of capitalism. Contrary to what Kuznets

thought, market economies, or capitalism as Piketty calls it, harbors divergent forces that, if left

unrestrained, will lead to extreme levels of inequality. Piketty thus presents us with three things:

Overwhelming statistical proof of the rise of inequality in income and possession of capital, a simple

economic theory to explain it and a political theory that shows how to curb it.

Moreover, 'Capital' opens a space for critique of the very economic logic that underlies the growing

inequality, by showing that its ethical justification can no longer stand empirical scrutiny.

The intention of this thesis is not to engage in a thorough criticism of the nature and validity of

Piketty's data, which has been the purpose of many before me, nor is the aim to strike a definitive

blow to Piketty's 'theory of capitalism'. 1

Instead, I wish to turn my attention to what happens when Capital ventures beyond the data and

analysis and into the realm of political prescriptions. I hereby mean what we may call Capital's

move from diagnosis to cure, from empirical proof of rising inequality to the proposed global tax on

wealth. Here entirely new questions arise: What are the economic and social implications of the

1 So far it seems that no one has been able to pinpoint a fatal mistake that should make Piketty withdraw his empiricaland theoretical conclusions (Milanovic 2014; Unlearning Economics 2014; Irwin 2014; Roine 2014; The Economist 2014 may 31

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rising inequality? What are the ramifications of the specific solution Piketty proposes, and does it

adequately confront the hazards of inequality?

In fact, Capital does not offer a single chapter that systematically explains why inequality must be

prevented or at what cost. This renders Capital without a clear lodestar for a proper solution. This

thesis aims to fill this gap.

The paper consists of three sections. The first is an introduction to Piketty's project and a description

of the “general laws” governing the dynamics of wealth and how they interact with social dynamics

to aggravate inequality among individuals. This section will also address some of the critiques of

Capital.

The second is both an attempt to analyze the normative foundations of inequality presented in

'Capital' and reconstruct what I tentatively call “the missing chapter” in Piketty's book on why

inequality matters and calls for global attention. This thesis argues that four justificatory principles

can be extracted from Capital, and can be used to assess Piketty's global tax on wealth and other

potential solutions. The principles are: social order, equality of opportunity, social utility and

political equality. From the analysis it becomes clear that the global tax is far from adequate with

regards to the four principles.

The third is an examination of other potential solutions. If we follow the logical path lit by Piketty's

four principles where does it lead us? This section will, with the help of Rawlsian ethics combined

with insights on alternative economic institutions, assess share-levy wage-earner funds and

cooperative democratic institutions. Lastly, the section will discuss Piketty's focus on inequality of

rights instead of inequality of outcome and ask what the implications are of Piketty ignoring the

social experience of inequality.

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2. Epistemic approach

2.1. Sociology and economics

The sociological reader of this thesis may initially shrug their shoulders by reading something that in

their eyes does not seem very sociological. Equalities, formulas and entire passages where economic

wisdom is debated on the very terms of the economists. This is often not the sociological way.

Sociology has a long tradition of critiquing economic wisdom of capitalism by its fundamental

assumptions and drivers in order to seek out the systematic character of capital flows and capitalism

(Harvey 2010: vi). Marx once showed how prices and commodities in capitalist markets appeared to

have a life of their own, divorced from the real exploitative social relationship that lies behind (the

fetishism of the commodity) (Marx, Karl 1978a). Max Weber attempted in his famous historical

work to show how the spirit of capitalism was in fact not a fundamental natural human driver but a

remnant of a religious protestant ethic (Weber 1995). This way of critiquing has its advantages, as

economic science often gets stuck in very blunt assumptions on human nature and social reality, and

at times risks naturalizing the very economic forces they were meant to examine (Harvey 2010: vi).

However, mainstream economics also offers reflections and observations that should be taken

seriously on their own accord. I believe this to be the case with Piketty's “Capital of the 21st

century”.

The mathematical models used in economics (a tendency Piketty goes as far as calling childish and

ideological) make believe that every analysis claims a truth value that highly exceeds its credentials

(Piketty 2014: 677, 10158). Instead, what sets economics apart from other social sciences, to Piketty

that is, is that it always has a political, normative and moral purpose (Piketty 2014: 72, 10146). This

is why he thinks that economics should instead reclaim the name of political economy (Piketty

2014: 72). Nevertheless, Piketty simultaneously urges social scientists not to neither discard every

accumulation of economic facts as a social construct, nor judge economic studies (especially the

historical ones) only by referring to invalid assumptions and political intentions. He fears this will

mean abandoning an important empirical terrain to the economists, resulting in economics loosing

out on important insights from other social sciences (Piketty 2014: 10169). We must instead engage

from all sides of the social science spectrum in discussing “Political and Historical economics”

(Piketty 2014: 10134). I tend to agree with Piketty that sociologists have often taken a safe position

that ignores economic findings with reference to flawed epistemic assumptions. I would even make

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an unusual alliance with the economist Milton Friedman to argue that sometimes critique of

assumptions risks missing the scientific point:

“Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).” (Friedman 1970: 14)

This does not mean that we should accept deceptive assumptions on human nature. However, we

must accept that at times even a theory with inaccurate representation of reality may succeed in

making good predictions about social reality. It may thus be fruitful also to relate to the realities in

question relatively independent of imprecise assumptions. What we can learn from Friedman is that

by merely raising a critique of the fundamentals we risk loosing momentum and sight of both the

possible strengths of the empirical observations, a theory's predictive power as well as its

implications and effects. A sociological reading of Piketty's work is not exempt from that risk.

Piketty adheres to a great extent to a classical economic framework (Foster and Yates 2014). This

has made critical voices devote time and energy to critiquing the definition of capital as something

fixed and countable instead of a social relationship (Foster and Yates 2014; Harvey 2014). Also

some have evoked the debate between the Marxist school and the 'School of Marginalism' (which

Piketty partially subscribes to), thematizing the problems of understanding wage differences and the

return to capital as a result of marginal utility or dependent on the marginal rate of substitution

(Clarke 1982)2. That is, the debate about inequality being a result of an exploitative social

relationship as opposed to a natural result of a fair distribution of marginal utility. But in this authors

mind it is not the most fruitful way to proceed with regards to Capital. Instead we should be attentive

to the opening Piketty has created for a critique within the mainstream economic realm. We should

focus our attention on the serious fissures that are revealed in the normative foundations of

capitalism and the interesting inconsistencies in Capitals move from the descriptive statistics to a

political solution. In this way, sociology may empower economic knowledge production on the issue

by sharing important insights on ethics and inequality. This does not only have implications for

science but also for politics, as will be underlined later in this chapter.

2 Piketty reluctantly problematizes the theory of marginal rate of substitution between capital and labor, suggesting that it does not exclusively explain the constant return on capital (Piketty 2014 6099+6241). I will shortly comment on this in the first section.

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2.2. Justification and immanent critique

From “The German Ideology” we learn that only too often it happens that the justificatory principles

'employed' or simply at work to legitimate particular ways of political or economic organization, are

not actually fulfilled (Marx 1978: 173)3. The principles may simply be out of sync with the political

reality, and can, if made publicly available, open up the possibility of change (Marx 1978: 188).

Though this writer is reluctant to embrace the Marxist conceptualizations on ideology and its

implications, there is an important merit to the overall logic. Some of these thoughts are, I believe,

particularly well developed in the work of Max Horkheimer, who described the task of critical

theory as to “(...) assess 'the breach between ideas and reality'” (Held 1980: 183). The particular

method used, that of immanent criticism, is described as follows:

“It starts with the conceptual principles and standards of an object, and unfolds their implications

and consequences. Then it re-examines and reassesses the object (the object's function, for instance)

in light of these implications and consequences. Critique proceeds, so to speak, 'from within' and

hopes to avoid, thereby, the charge that its concepts impose irrelevant criteria of evaluation on the

object. As a result, a new understanding of the object is generated – a new comprehension of

contradictions and possibilities.” (Held 1983: 184)

Through this exercise, Horkheimer believed, the method of immanent critique can make the object

of study aware of how it fails by its own standards, and thus open it up to “radical change” (Held

1983: 185). An investigation of social institutions and their aims and ends, will thus be undertaken

without acknowledging the validity of these aims and ends (Held 1983: 187). However, the method

of immanent criticism is not purely “negative”: “a critique of ideology based on immanent criticism

derives a certain positive character by pointing to the limits and therefore, the closed-off

possibilities, immanent in the existing order.” (Horkheimer 1983: 185). In this way an immanent

criticism harbors a belief in the potential of reason to create advances in human empowerment and

freedom while simultaneously renouncing on having to identify what precisely is needed to ensure

it.

3 Ideological is by David Held described as “Individual (or sets of) claims, perspectives and philosophies that can be regarded as ideological if they conceal or mask social contradictions on behalf of a dominant class or group.”(Held 1983: 186)

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Perhaps by chance,4 Piketty himself makes use of a logic very similar to the one in immanent

critique, when he initiates a critique of capitalism's “meritocratic worldview” for not delivering on

its promise5 (Piketty 2014:7353). However, Capital is not systematic enough in its depiction of the

failure of the justifications mentioned, and Piketty almost entirely ignores the very implications and

consequences these principles have for economic reform.

In short, this thesis aims to finish the job Piketty commences and take the normative foundations of

capitalism (in the spirit of Capital) seriously. That is, I will first reconstruct the argumentation on the

normative principles in Piketty by showing how reality does not live up the standards set by the

principles. Then, I will confront the global tax on wealth with the justificatory principles and ask: If

the current order of things does not live up to the principles, will the global tax on wealth then

reestablish a just and stable society? As this does not seem to be the case, I instead pursue the

question: If the global tax on wealth is not the logical solution to the rising inequality, then what is?

Surprisingly we shall see that Piketty has intuitions leading us in a promising, but radically different,

direction. In the spirit of immanent criticism, I attempt to follow Piketty's justificatory principles to

their very end, where the contours of a very different economic reality is distinguishable. This

without adding anything new to the equation. But over the course of this project it becomes clear

that something must be added to the principles Piketty has suggested.

2.3. The experience of inequality

The principles of justification raises several questions: What is their relationship with individuals in

society and why are they important? Are they abstract ideological creations void of any direct

relation with social reality and experience, or are they on the contrary intricately interwoven with

social life, and perhaps stemming from a connection to personal moral experience? The idea of a

personal moral experience of domination on which to build critique was an important piece in

critical theory at the time of Horkheimer's writing, but somehow it slid in the background.

Horkheimer simply capitulated faced with modern capitalist domination and cultural manipulation

that left no space for a practical moral critique (Honneth 2003: 27). That is, the power of ideology

was considered so strong that no authentic social experience of problematic social circumstances

could realistically be relied on. In this thesis I will take a less fatalistic stand.

4 Piketty himself has admitted that even though he mentions Marx in Capital he has not actually read any major parts of Marx's works. (Chotiner 6/5-2014)

5 This will be clearer later when reading the section on justice and inequality.

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I argue with inspiration from Boltanski's Sociology of Critique that the justificatory principles

evoked in Capital can be seen as sorts of justificatory regimes of critique (Boltanski 2011; 57). They

thus place themselves somewhere in between impersonal social structures and personal experience.

They will be considered principles in the sense of “silent reservoirs” referring to different versions

of the public good, which are intuitively known and can be used by individuals in legitimate critique

of people and institutions (Boltanski 2011; 51). They are thus, in a certain sense collective, but at the

same time personally incorporated or socialized into the very perceptual structures of a persons mind

and corporal attitude. We are talking about entities very similar to those evoked by Bourdieu as

'Habitus' or Habermas 'Lifeworld'. But contrary to lifeworld it is not directly structured according to

universally applicable linguistics and the potential of reasoned agreement, nor are they as Habitus

dependent on privately situated tastes acquired through longstanding experience with particular

social strata (Habermas 1999: 70; Bourdieu 1994: 60). The justificatory principles are historical and

thus contingent, and fundamentally work to maintain widespread acceptance of important social

institutions. Simultaneously they open up a space for corrective critique, when institutions fail to

adhere to the principles (Boltanski 2011: 48, 223). A justificatory deficit in a social institution will

potentially give rise to indignation and anger that triggers denunciations. However, there is reason to

believe that we need one more component in our theoretical framework to fully understand the

social dynamics of inequality. That is, the experience of inequality is not only a function of its

justification. In fact in some circumstances justification is of very little importance when we talk

about inequality.

I foment Boltanski's insights with those of Axel Honneth, claiming that to fully understand the

individual experience of inequality in western societies today, we must understand the close

affiliation that exists between material distribution and the distribution of recognition (Honneth

2003: 36). In other words, the 'need' for recognition as a sort of more general pre-scientific human

requirement may be violated under certain regimes of distribution (or systems of appreciation as

Honneth calls them) and therefore also under certain regimes of justification (Honneth 2003: 46).

The experience of mis-recognition is thus, as Honneth suggests, a factor in explaining and

understanding political struggle (Honneth 2003: 39).

The project of adjusting Piketty's framework with a component of the distribution of recognition will

not be given a major place in this paper. I believe this omission is only the natural consequence of an

attempt to reconstruct Piketty's arguments as undistorted as possible. The purpose of this thesis is

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first and foremost to take Piketty's own principles seriously 'on his own terms'. This allows the

reader to follow both trajectories without having to accept one in order to follow the other.

In sum this thesis assumes that it is fruitful to take shared public justifications to their out-most

extreme in an effort to open up a space for democratic and social change. I thus, with inspiration

from Boltanski, consider Piketty's Capital as a piece of data on the justificatory principles of

inequality (Boltanski 2011: 56). It is my hope that this data will bring us closer to an understanding

of the justificatory principles of inequality, and where to look for relevant alternatives to the growing

material divide in society.

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3. Piketty's theory on capital and inequality

3.1. The economic theory - On laws and mechanism's

The perhaps greatest accomplishment of Piketty and his fellow researchers on the economics of

wealth distribution has been to compile decades worth of heterogeneous data from more than twenty

countries yielding comparable wealth statistics (Milanovic 2013: 2; Stiglitz 2011 xxiii). Capital in

the 21st century adds to the empirical effort labeled “a general theory of capitalism”, a model or a

general framework to understand the economic machinery of the capitalist model and to explain the

unequal distribution of wealth (Milanovic 2013: 2). This section examines the nature of this theory

and the fundamental logic, or with Piketty's words, the fundamental 'laws'. But what kind of truth is

it that Piketty suggests to have dug out of the complex and sometimes nasty machinery of

capitalism? What are the mechanisms that disputably lead to rising inequality in every corner of the

world?

Piketty claims that the inequality r>g sums up the argument (Piketty 2014: 549). When real return on

capital (r) gets higher than the general real rate of growth in the economy (g) (real growth pr capita

+ population growth)6 capital will accumulate over time and result in high inequality between

people. However, this simple statement rests on complex drivers and has vast ramifications.

3.1.1. The first law: Capitals share of total income

According to Piketty, the stock of capital (K) was high in Europe prior to the First World War,

averaging around 7 times the annual flow of income (Y). Ownership of capital was highly

concentrated, which meant that a small class of rentiers, comprising 10% of the population, could

live affluently from the returns on their capital stock (see figure I.2) (Piketty 2014: 2832). However,

during both World Wars capital was either destroyed or taxed to the extent that the total capital stock

in Europe was halved. This meant the ratio of capital (β) compared to national income (Y), fell

significantly (figure I.2).

6 r and g define real growth rates, which means that inflation has been subtracted.

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Piketty then examines how to determine what affects the size of β. To do this we must understand

the relationship between: (1) The share of a country’s total income flow that goes to capital (and not

to labor) (α); (2) the real average rate of return on capital (r) after taxes and administration costs

have been paid; and (3) the capital/income ratio (β) (Piketty 2014: 988).

Piketty then introduces what he calls the first fundamental law of capitalism: By definition the share

of capital income in total national income is equal to the rate of return on capital multiplied by the

capital/income ratio or α =r*β. The first fundamental law of capitalism is however less a law than a

pure accounting identity that expresses a relationship between variables (Piketty 2014: l0988). This

means that it is true regardless of the value of the variables, and that it applies “to all societies in all

periods of history by definition.” (Piketty 2014: 988). In other words, it does little more than

describe “(...) a simple, transparent relationship among the three most important concepts for

analyzing the capitalist system” (Piketty 2014: lo988). When the rate of return on capital (r) remains

higher than the average rate of growth of the economy (g), the share of capital income in total

national income (α) will increase. Consequently, labor's share of total income will fall. To

understand this dynamic we will move on to the second 'law' of Capitalism.

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3.1.2. The second law: Capital/income ratio

Piketty first explains the dynamics that are working to push up the ratio of capital (β) and

subsequently the mechanisms that leads to higher inequality between people.

To answer the first issue, Piketty introduces the relationship between the savings/investment rate (s)

and the rate of growth (g) (Piketty 2014: 2860). This leads to the second fundamental law of

capitalism: “The higher the savings rate (s) and the lower the growth rate (g), the higher the

capital/income ratio (β)” or β=s/g (Piketty 2014: 1039). In sum, a country that saves or invests a

high percentage of total income, and at the same time experiences relatively low growth, will have a

tendency to boost the stock of capital relative to total income. The second law, in contrast to the first,

determines a dynamic process towards a state of equilibrium. Moreover, it exemplifies how a very

small variation in growth may strongly affect the capital/income ratio. However, as Piketty also

explains, this equilibrium is never directly realized in practice, as savings and growth rate fluctuate

(Piketty2014: 2894). It may nevertheless give us an idea of how capital may grow to very high

levels, when the savings rate is kept constant and growth rate falls below it. In current Europe with

low demographic growth and a real growth rate between 1.5 and 2 percent per year (a level Piketty

claims to be something of a historical constant) and a savings rate in the order of 10-12 percent, we

should expect a capital stock as large as six to eight years of national income over the long run

(Piketty 2014: 2860).

Piketty's fundamental laws show that there is no 'one' specific development for capitalist economies.

The two laws are 'neutral' - they do not in and by themselves make capitalist societies inegalitarian.

However, as we will see later, Piketty finds reason to believe that two of the variables, the return to

capital and the real growth rate, both carry law-like features that, together with descriptive traits of

today's society, will move us in a more inegalitarian direction. In this context it makes sense to talk

about capitalism as an economic regime that in practice harbors “divergent forces” that favor a

systemic high concentration of capital and a high level of inequality.

To sum up, a country that saves a lot while experiencing slow growth will over the long run

accumulate a very high stock of capital. As a result, “(...) in a quasi-stagnant society, wealth

accumulated in the past will inevitably acquire disproportionate importance” (Piketty 2014: 2843).

So far we have not made any real connection between the rising importance of capital and a higher

degree of inequality. In fact, a higher capital/income ratio could in theory benefit everyone. As long

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as ownership of capital is distributed relatively equally in the population, everyone would stand to

profit from a rising capital stock. Nevertheless, as we shall see shortly, Piketty demonstrates that this

is far from the case.

3.2. Types of Inequality

3.2.1. Inequality across work and capital

The first type of inequality Piketty pinpoints is the inequality that arises between capital and labor's

share of total income.

This requires a return to Piketty's simple prediction for the future state of the economy: r>g. When

we examine the situation where capital rent stays constantly above growth of the economy, we

realize that the two 'fundamental' laws harbor a sort of positive feedback loop (Milanovic 2013: 4).

When return on capital is higher than the total growth in a society then by definition capitals share of

total income (α) will rise. But this also makes capital owners more wealthy, and unless they decide

to consume the entire return on their capital, they will be left with a larger amount to invest. Higher

investment will make the capital income ratio rise (as follows from the second law: β=s/g), and

further strengthen capitals share of total national income (as follows from the first law: α =r*β). An

increase in the capital income ratio (β) thus leads to a higher capital share of total income (α) but a

higher α also leads to a higher β (Milanovic 2013: 4). If this development continues, the pure

possession of wealth will encroach on what has for some time been labor's relatively fixed share of

total income (Piketty 2014: side 3432-3458). For example, if we expect an overall savings rate of

about 10 % (which is close to the historical average) and use the capital/income ratio equation (s/g)

with growth averaging 1-1,5% we will sometime in the 21'th century be reaching a capital/income

ratio around 7 on a world basis (Piketty 2014: 3016, 8060). It can then be deduced from the first law

of capitalism (α =r*β), that capital will eventually take home a minimum of 30% of total national

income. This is a raise since 1945 from around 20 % (α =4,5*7 as opposed to α =4,5*4,5) (Piketty

2014: 6246)7. However, this level is already a fact in some rich countries today. Labors share of

national income is in other words falling.8

7 What should be focused on here is not the actual percentages of capital share, which will not be entirely accurate, as there will be other determining factors as well. The important part is the theoretical tendency of capital to take an increasing share of total income.

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Why should we expect the rate of capital return to surpass general growth and stay that way? If we

turn to historical experience and project the current development into the nearest future, we are

returning to an epoch with constant capital yields and low overall growth rates (see fig 10.10):

“The key point is that there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.” (Piketty 2014: 6178; also see figure 10.10: 6166).

We should therefore not expect future growth rates of much more than 2.5 % per year in advanced

economies (with real growth at 1.5% and population growth around 1%) (Piketty 2014: 2860, 1420).

A similar regularity adheres to the real return rates to capital if we look to history for advice. By

examining real return rates in Britain going back to 1770 and France going back to 1820, Piketty

concludes:

“The pure return on capital has oscillated around a central value of 4–5 percent a year, or more generally in an interval from 3–6 percent a year. There has been no pronouncedlong-term trend either upward or downward (...)” (Piketty 2014: 3547)

As can be seen in figure 10.10, return on capital being higher than general growth has not been the

reality for much of the 20th century (Piketty 2014: 6166). On the contrary, growth has trumped

capital. Nevertheless, over the long term, data shows that a g greater than r seems to be a truly

exceptional and temporary condition in economic history, confined to the period following World

War I to the present (figure 10.10).

8 Piketty has changed his mind on the importance of short term capital/labor split of total income from his book “Ulighedens økonomi” (2014a: 65) to “Capital” (2014). In “Uligheden økonomi” he explains the short term fluctuations as a result of political conditions that over the long run will result in a steady distribution between capital and labor. This is rejected in Capital where Piketty seems to believe that the last 35 years rise in capital share may very well continue.

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(Piketty 2014: 6166)

3.2.1.1. The stability of the return rate

Even though Piketty stresses that there are no deep reasons or “logical necessity” to why the return

rate on capital should be systematically higher than the rate of growth, he nevertheless takes it as a

historical fact (and an essential cause of inequality) robust enough to be taken into account when he

cautiously makes a forecast of the future of inequality (Piketty 2014: 6246). Although he emphasizes

that this fact is dependent on a “variety of mechanisms”, he does not make any solid explanations

for why this is (Piketty 2014: 3547, 6178)9. This is why critics like Milanovic hold that ”The

’stickiness’ of the rate of return is obviously a weak point of Piketty’s machinery.” (Milanovic 2014:

9).

The first reason why one should not think that r would remain constantly high has to do with the

assumption on what in classical economy is called the production function10. The assumption is that

if the capital/income ratio (β) increases to a new higher level, the marginal return to capital will

diminish and rewind or in the least stabilize concentration and diminish the importance of capital

(Piketty 2014: 3744). Piketty, however, questions this common assumption by once again drawing

9 He does however make a point to argue why there is a logical necessity in r being at least a little greater than g in thelong term.

10 Piketty describes it in this way: “(...) it defines an elasticity of substitution between capital and labor; that is, it measures how easy it is to substitute capital for labor, or labor for capital, to produce required goods and services.” (Piketty 2014: 3744)

16


our attention to the historical 'reality' of capital return (Piketty 2014: 6171)11. In other words, Piketty

is convinced that history has proven that even a very high capital/labor fraction can be highly

productive, and that machines and technology can substitute labor easier than classic theory predicts.

Piketty suggests that the phenomena is partly caused by capital having many different uses in the

long run. In other words that the elasticity of substitution between capital and labor in the long run

turns out to be greater than one (Piketty 2014: 3823). This allows for the capital/income ratio to rise

to a new high level and for capital to take a larger share of total income. Piketty admits that over the

long run we should see a slight decrease in the rate of return on capital (Piketty 2013: 6261). But

such a mechanism could take decades to operate, and we may not even be close to reaching capital

proportions that would unleash this force. But then again Piketty suggests that there are factors other

than substitution and productivity which that increase capital return.

In a rather vague passage, Piketty argues that the constantly high return rate on capital does not have

any economic “deep reasons” but may in part be explained by a number of technological,

psychological, social, and cultural factors (Piketty 2014 6099+6241). What these factors are, with

which force they operate, and how they magically ensure an almost constant r as if set by an

invisible hand, is not at all clear. But it seems that Piketty thinks we still know too little to legitimize

further speculation on the issue. We should stick to facts and they are clear to Piketty: r is as a rule

always higher than g which means that capital will accumulate and inequality rise, given that the

taxes on capital returns and wages are unchanged (Piketty 2014: 6195).

To sum up, decreased growth, lower demographic growth and a return on capital that stays

constantly above general growth, will catalyze a process where capital accumulates and take an

increasing share of total income. This will simultaneously diminish labors share. Piketty bases his

assumption of a constant return to capital strictly on historical sources, but explains that the

capital/labor elasticity of substitution may be higher than one and that perhaps other technological,

psychological, social, and cultural factors play a role.

11 Data shows a steady return to capital even at much higher capital/income ratios than we are witnessing today (at least at a national level) (Piketty 2014: 6171, 2832)

17


3.2.2. Inequality across people

According to Piketty it turns out that capitals rising share of total income leads to inequality across

people. But capital rent is not the only reason that this happens. As it is, inequality is aggravated by

two social facts and two important mechanisms.

First, we learn from historical evidence that return from capital is always more concentrated on the

few than is return from labor, which is far more widely distributed (Piketty 2013: 4217). That is

capital ownership is historically very unequally distributed. When capital “takes over” labor's share

of total income, the extra share is funneled to the wealthy part of the population (where the capital is

concentrated) and not to the poor who earn their income mainly from labor.

Second, over the past decade the remunerations of the highest paid have skyrocketed (particularly

but not exclusively in the US and UK) while the lower 50% on the wage-ladder, have observed

stagnation or low growth (Piketty 2014:5178; Dill 2014).

Third, evidence shows that the more capital you own the higher the yield you get on your capital

(Piketty 2014: 7817). Piketty attributes this to the mechanism of economies of scale, where holders

of very large fortunes can afford to pay the best financial specialist's, thus opening access to a much

wider range of investment opportunities (Piketty 2014:7496).

Fourth, there simply is a limit to how much money one person can spend. Therefore when personal

fortunes reach a very high level, nearly all income can be plowed back into investment increasing

future gains from capital. This means that inequalities in wealth and income tends to perpetuate

themselves, but it also means that clear cleavages exist not only between rich and poor but also

among rich people and super rich people. By combining the income from work and capital, the

richest 10 percent, could in the future be taking home more than 60 % of total national income (See

Figure 7.3) (Piketty 2014: 4281).

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In the US, the richest decile (the richest 10 %) already takes home 50 % of total income, with many

European countries following a similar trajectory (Piketty 2014: 4281). As of the moment of writing,

the United States may very well have surpassed the extreme levels of inequality that reigned in the

society of rentiers and aristocrats in the 1910's Europe.12 Furthermore, Piketty projects that if the US

continues its current course, by 2030 it will be the most inegalitarian of all nations at the forefront of

technological development ever to have existed on the surface of this planet13. According to the

World Bank, the US already surpasses countries such as India and China when it comes to inequality

(World Bank 2011). These developments amount to a 'vicious circle', where extremely high levels of

concentration of capital will work to increase the savings rate for the owners and thus make capital

grow. This will enforce a positive feedback effect that will lead to an even more skewed distribution

of wealth and income.

12 In Europe in 1910 the richests ten percent took home around 50 percent of total national income on par with todays USA (Piketty 2014: 4281) figure 7.3

13 It is indeed possible to find more inegalitarian countries than the US, but not among what we usually consider the technologically advanced and developed nations. (Piketty 2014:4281)

19


However, to this day what seems to have been the main driver behind inequality is the difference in

wages that have surged in most western countries since the 1980s (Piketty 2014: 4279, 4563).

Piketty argues, that capital and capital return in the future will take on a much more important role.

However, Piketty also shows how the present “hyper-meritocracy” with extreme wage-differences in

many countries can explain as much and likely much more of the change in inequality over the last

30 years (Piketty 2014: 4279). Thus, it is not yet (as it was in the 1910's aristocratic society) capital

ownership and rent, which is the sole or even primary cause of extreme inequality. In short: It is not

always clear if the inequality Piketty is talking about is stemming from capital income or labor

income or a mix between the two. This however does not necessarily weaken Piketty's overall

conclusion of capital becoming the main driver behind inequality in the future (therefore the name

capital of the 21st century and not 20th century) (Piketty 2014: 6455). I will give some thoughts on

the possible consequences in a later chapter.

In sum, capital accumulation and capital's rising share of total income will result in a steep rise in

inequality across people as a result of: (1), capital income always being more concentrated than

labor income, (2), the wages in the higher end of the wage-ladder are rising much faster than in the

lower end, (3), there is a tendency to increasing returns to scale with regards to capital return, and

(4), people with much capital tend to save more.

3.3. The political theory - On institutions, politics and war

Capital's theory on the forces behind inequality in individual income can, as some observers have

noted, be understood as a political theory (Milanovic 2013: 13). This stems from the fact that Piketty

claims that even if capitalism holds fundamental divergent forces, politics can still make a

substantial difference. However, there are more than a few challenges to this theory.

3.3.1. The exception of 1915-1945: War, politics and the deterioration of capital

World War One came not only as a shock to the populations of Europe, but also shook the

foundations of capital accumulation. A very long period with low growth and a stable capital gain

created a society of extreme inequality, dominated by a tiny but enormously wealthy elite who lived

off their fortune; an elite of rentiers in Piketty's words. On the eve of World War I the capital/income

ratio in Europe was around 7-8 and the richest 10 percent owned around 90 % of total wealth

20


(Piketty 2014: 4281). Even by today's standards this was a very inegalitarian society. But, this was

all to change as the first world war broke out and instigated a process of high inflation, confiscatory

tax rates and destruction of capital, which, with only small deviations, continued till the end of

Second World War:

“All fortunes suffered multiple shocks in the period 1914-1945 - destruction of property, inflation, bankruptcy, expropriation, and so on.” (Piketty 2014: 6877)

The very wealthy still had a very large stock of capital, but it was heavily decimated. As the rich

during the two wars refused to reduce their expenses sufficiently to compensate for the shocks their

fortune had sustained, they saw themselves forced to eat into their capital to finance current

expenditure (Piketty 2014: 6407). These measures only further diminished personal fortunes and

thus the capital/income ratio. On the eve of World War Two, income taxes in all major western

countries had already soared to very high levels, and they reached an all time high during the war. In

this period Britain and the US imposed marginal tax rates of more than 80 % for the top earners (see

figure 14.1) (Piketty 2014: 8706)

The Second World War was in many European countries followed by nationalizations (especially in

France) and redistribution of wealth, which affected the largest fortunes disproportionately (Piketty

2014: 6438). The high income taxes introduced in the war period were in most countries kept high in

21


the three decades that followed World War Two (see figure 14.1), with taxes levied on capital return

averaging 30% (Piketty 2014: 6478). The two together (income and capital tax) did not help to

prevent accumulation of capital “(...) but to modify the structure of wealth distribution over the long

run.” (Piketty 2014: 6478). Piketty is here alluding to the fact that progressive taxation does not

simply make the total amount of capital disappear, but it helps to distribute it more evenly. This was

what happened after 1945, and the decrease in the richest's share of wealth (in particular the

wealthiest one percent) is enough to explain the historical rise of the middle class (Piketty 2014:

6483).

What caused these radical changes in distribution seems clear to Piketty. The answer he gives is a

geopolitical one; the breakout of war and the interwar depression seems to have instigated a process

of economic convergence:

“In addition to physical destruction, the main factors that explain the dizzying fall in thecapital/income ratio between 1913 and 1950 were on the one hand the collapse of foreign portfolios and the very low savings rate characteristic of the time (together, these two factors, plus physical destruction, explain two-thirds to three-quarters of the drop) and on the other the low asset prices that obtained in the new postwar political context of mixed ownership and regulation (which accounted for one-quarter to one-third of the drop)” (Piketty 2014: 2536)

Although the physical destruction of capital is hardly contestable, Piketty offers only sparse

evidence for the war being the sole instigator for this “exception” of mixed ownership and

regulation. One might ask if the reason for introducing progressive taxation was purely to raise

much-needed funds for military engagement, or if there were other reasons as well? That is, why

were the taxes primarily leveled on the rich and not the poor or the middle segment? It seems

reasonable to suggest that these were measures taken to gather support among the lower classes for

the war. It was perhaps partly a result of political tensions in a time, where the working classes

increasingly controlled the political agenda (Krugman 2014).

The reason why these questions are relevant to ask is that Piketty on one hand advocates for political

institutions and policy as a determining force of inequality in society and on the other claims that the

policy decisions taken to curb inequality were a direct or automatic consequence of the first and the

second world war. One could polemically ask Piketty if this means that politics of equality can only

happen when war is upon us, in what Piketty describes as “an ephemeral product of chaos” (Piketty

2014: 8682)? This, however, does not seem to be his intention as he acknowledges different political

22


regimes' influence on inequality. But Capital's 'historical political theory' does not leave much space

for change.

3.3.2. Institutions and politics

Piketty claims that the r>g position is currently the best description and explanation of the

transformations of capital and inequality over the last century. But this does not mean that Piketty

thinks the future should be written merely from the perspective of previous economic development.

It may therefore come as quite a surprise that some of the harshest critique of Piketty's stance targets

just that. The economists Daron Acemoglu & James Robinson claim in their paper “The Rise and

Fall of General Laws of Capitalism” that Piketty's general laws woefully ignore the central role of

political and economic institutions:

“(...) all of these laws were formulated in an effort to compress the facts and events of their times into a grand theory, supposedly applicable at all times and places with little reference to institutions and the (largely institutionally-determined) changing nature of technology.” (Acemoglu & Robinson 2014: 4)

They continue by adding

“This is not just because Capital's interpretations do not seem to provide a satisfactory account of observed inequality dynamics and their causes as we next document, but evenmore so because economy, society and institutions will continue to evolve, so it is unlikely that such general laws can be reliable guides for the future of inequality.” (Acemoglu & Robinson 2014: 10)

Though they do have a point, the critique as a whole is not entirely fair. This should be clear from

the above where Piketty actually stresses the “laws” as historical and non-deterministic as they have

always fluctuated according to regulation from political institutions14. Institutions were what kept

inequality low for much the 20th century and are represented by the regulations and taxation of

capital and wage (Piketty 2014: 5823)15. His analysis also illustrates that government action makes a

difference, as policies have created much smaller differences in disposable income across people in

Europe than in the US (Piketty 2014: 4281). Capital even has a chapter dedicated to discuss future

institutional designs that may change the current development (Piketty 2014: 8164). Piketty's

14 Piketty writes: “Its truths depends, however, on the shocks to which capital is subject, as well as on what public policies and institutions are put in place to regulate the relationship between capital and labor (Piketty 2014: 6191)

15 The fist economist to review “Capital”, Branko Milanovic presents a similar argument in support of Piketty, but to my view is too quick in all together rejecting insights Acemoglu and Robinson might have (Milanovic 2014).

23


'institutional perspective' prudently holds that the “laws” are only used to show under what

conditions inequality will rise. However, though Piketty does not altogether ignore institutions,

Acemoglu and Robinson have a point in saying that it ignores particular kinds of institutions and

that institutions should in fact be thought “prior to” and not after r>g:

(...) the central role of political factors, such as who has political power, how it is constrained and exercised, and how this shapes technology and society, was entirely ignored. This theoretical lapse also meant that his interpretation of history was off-target.” (Acemoglu and Robinson 2014: 6)

One could say that Piketty sees institutions as important arbitrators after the divergent forces have

created a high concentration of capital, while he ignores political influence and relations of power in

shaping the return on capital and growth (Acemoglu & Robinson 2014: 4). r>g is thus left as a kind

of natural law that must be dealt with after the fact. This very issue has also led Paul Krugman to

criticize Piketty's theory for lacking an understanding of how relations of power partake in the

distribution of wealth and pay (Krugman 2014). Commenting on the inegalitarian society of the

1910's he writes:

“Why didn’t the universally enfranchised citizens of France vote in politicians who would take on the rentier class? Well, then as now great wealth purchased great influence—not just over policies, but over public discourse.” (Krugman 2014)

He thus calls into question Piketty's use of capital as a sort of objective measure of wealth instead of

understanding it as a social relationship. That is, Piketty gives us no reason to believe that active

political forces were behind the initial stable rate of return in Europe. This way of reasoning is

perhaps most clear in Piketty's description of what caused the 'rolling back' of the state in western

countries in the 1970's and 1980's:

“With the end of postwar reconstruction and the high growth rates of the Trente Glorieuses, it was only natural to question the wisdom of indefinitely expanding the role of the state and its increasing claims on national output.” (Piketty 2014: 2392).

As the economy slowed it was, so it seems to Piketty, automatic and largely natural that different

ideas would be introduced in the political domain. He thus attributes little importance to the

particular interests that may have been carried out. Although Piketty's outspoken aim is to advocate

for the importance of politics and although his theory leaves room for politics in regulating the

24


economy, Capital paradoxically risks depoliticizing the domain of economy by ignoring structures of

power. In the second section we shall see that Capital does have some considerations on the role of

political interests when talking about hyper-meritocracy (Piketty 2014: 7267).

On a finishing note, it may also be in order to make a comment on how modern liberal democracy

was in it's very youth, at the beginning of the period that Piketty perceives as the great 20th century

exception to the rule of r>g. This is a fact that may very well be important in understanding how and

why institutions were introduced to curb inequality. It may be relevant to consider the economy in

the new democratic world order apart from centuries of autocratic state economies16.

To summarize, according to Piketty history shows that the exceptional equality that pursued the two

World Wars was secured through high income taxation, confiscatory politics, destruction of capital

and the rich spending more than they earned. Piketty explains this as a result of geopolitical

circumstances but this thesis suggests that political tensions and a turning political tide also had

influence. Piketty perhaps 'wisely' places himself between two chairs: on the one hand he engages

with an economic theory derived from historical evidence that predicts the level of inequality

assuming r>g. On the other we learn that inequality is a product of government action and

institutions. Nevertheless, economy and politics seem “divorced” in his book, and we do not get a

good theory of how the two might be interlinked. Piketty thus risks ignoring the importance of

political struggle and power-relations in affecting the return on capital. However, the theoretical

critique does not necessarily undermine the historical evidence or Piketty's empirical predictions, it

only serves to show that other mechanisms may lie behind.

3.4. Predicting inequality - Patrimonial capitalism?

The following will briefly provide an overview of the state of inequality in Europe and The United

States today and in the future from the perspective of Capital.

In the eyes of Piketty, the western world is on the brink of returning to a patrimonial capitalist

society (inheritance based capitalism) (Piketty 2014: 6554). Over the last 35 years, capital has taken

an increasing share of total income. As can be seen in figure 6.5 capital income absorbs 15-25% in

rich countries in 1975 and 25-30% in 2000-2010 (Piketty 2014: 3860).17

16 It has also been argued that we do not have much reliable economic data (apart from novels) from before the 19th century's policies and institutional arrangements (Allegre & Timbeau 2014: 8).

25


The capital/income ratio is nearing the level of the aristocratic 1910's 7-8, and the annual flow of

inheritances as a share of national income in today's France, UK and Germany is quickly rising (In

France from 5% in the 1950s to 15% in 2010)(Piketty 2014: 6584,6926). But as Capital is highly

concentrated only a few are blessed with the wealth of the past. In France of today almost 70% of all

capital consists of wealth inherited from previous generations and it is rising, as can be seen from

figure 11.7 (Piketty 2014: 6984). A similar tendency can be seen in most Western countries.

17 These numbers should not be overestimated. As Piketty writes in “Ulighedens Økonomi:”, we must be careful not seeing a short term development as a longterm trend. Here expressed "Imidlertid må man endelig ikke undervurderegrænserne for denne historiske regelmæssighed i profittens andel, der kan virke så imponerende set over en lang periode, for den gælder imidlertid sjældent på kort sigt og er reelt kun til stede på mellemlang og lang sigt..." (2014a). In other words, the tendency shown in figure 6.5 may just be a fluctuation around a long term average.

26


This is why Piketty writes, that we are already living in a society where “the past devours the future”

(Piketty 2014: 10106). However, society today is in many ways different from what it was in the 19th

century. We are not (yet) living in a society dominated by Rentiers. As can be seen in figure 7.2

(Piketty 2014: 4290), property today is more widely spread among the top half of the income

distribution; there is a lower concentration of property at the very top18, the middle class has

acquired some property and labor incomes received by top managers are high enough to place them

in the top 1% (more so in the US than in the EU) (Piketty 2014 6462; Milanovic 2013: 11).

18 In the 1910s Europe the top centile owned 60-70 % of all wealth. Today the equivalent number is 20-30 % and in the

US 40% (Piketty 2014 6462).

27


It is politics and taxation that so far have prevented the distribution of wealth on a world scale from

becoming as concentrated in the top centile as it was in 1910. However within the last couple of

decades there has been a global tendency to lower taxes on income, corporations, inheritance and the

possession of wealth, which has increased the pace of development towards an inegalitarian society

(Piketty 2014: 9889). Recent studies show that Piketty may be overly careful when projecting

numbers for inequality: The economists Wojciech Kopczuk and Emmanuel Saez argue that we

should perhaps be talking about the wealthiest 0.1 % instead of the 1 %. In the United States the 0,1

% have over the past 35 years been claiming a rapidly increasing share of total wealth (surpassing

20% today), which is as much as the lower 90 % all together owns (The Economist 2014 nov 8;

Saez 2013).

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4. Normative foundations of capitalism

4.1. From Description to Cure

In the social sciences the question of sickness or health, bad or good, is not as easily settled as for

example in the world of medicine. The social scientist is therefore required/forced to make a

convincing case for why the symptom may or may not be a disease that needs curing, before turning

to the cure. Though not explicitly stated, Piketty's move from a description of a fact (rising

inequality) to a prescription of a solution (global tax) includes normative considerations. However,

these considerations are not represented in a coherent normative framework that could explain the

problems of rising inequality. Neither do the normative reflections nor the solution he suggests.

Piketty's thinking in Capital simply stops short of an adequate normative marker with which to

choose the adequate solution to the problem of inequality.

It is my argument that in order to suggest a solution to a social issue an explanation of the forces that

gave rise to it does not suffice; we must also develop an understanding of why this issue needs to be

dealt with, of why equality matters.

Following this logic, it is not primarily the social fact in and of itself (inequality in distribution of

wealth and income) that will be our main focus, but rather the legitimacy of the particular forces that

lead to it, and the desirability of the social consequences that ensue. This recipe will enable us to

evaluate Piketty's suggestions on how 'the problem of inequality' (in his own terms) can and should

be solved.

In the following I will attempt to follow and clarify Piketty's own logic as to why the rise in

inequality must be stopped. This will lead us down a path where we must ask what kind of

inequality Piketty is actually challenging and denouncing. However, Piketty is neither very explicit

in this matter nor does he dedicate much space to discuss the issue (Wade 2014: 9). Nonetheless, a

close reading of Capital reveals that it has normative considerations, but that Piketty’s foray into the

normative realm is sporadic and unsystematic. This section will thus attempt to weave the existing

normative threads into a tight fabric of normative principles forming a system of justifications. The

outcome is, so to speak, a version of the “missing” chapter on inequality in Piketty's book. This

leads me to an examination on how well these insights correspond with Piketty's proposed solution;

29


a global tax on wealth. The last part of this chapter will scrutinize Piketty's take on the topic of

ownership.

4.2. Normative foundations of inequality

I believe that Piketty makes at least two overall attempts to show the ills of inequality or the

illegitimate mechanisms leading to it. On the one hand he makes a range of instrumental arguments

that focus on the consequences of material inequality. On the other he activates a normative

framework based on equalities of particular rights. The instrumental arguments evolve from the idea

that a very inegalitarian society risks societal disturbance and disintegration (political upheavals, a

repressive state power and economic instability) and that this should be avoided. The normative

arguments state that current inequality is driven by forces that can not be legitimized from the

“invisible” principles of justification or rights, on which the market economy and our liberal

democracy is build (Equality of opportunity, social utility and political equality).

4.2.1. On social order and inequality

For Piketty, the matter of inequality is not purely a matter of poverty and wealth, good or bad; it is a

fundamental question of political, social and economic order. If inequality is left to soar there is a

very real risk, in Piketty's eyes, that it will disintegrate the current shape of our societies and leave us

in a world haunted by, unstable political environments, a repressive state apparatus and economic

crises.

4.2.1.1. Political upheaval and a repressive state apparatus

“Is it possible to imagine societies in which the concentration of income is much greater? Probably not. If, for example, the top decile appropriates 90 percent of each year’s output (and the top centile took 50 percent just for itself, as in the case of wealth),a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening.” (Piketty 2014: 4531)

Such a situation occurred in Europe shortly before World War One, when one percent of the French

population owned approximately 70 percent of all wealth, while the bottom 50 percent owned a

meager 5 percent (Piketty 2014: 5884,5900). This is inequality of dystopian proportions, but

according to Piketty a similar situation may very well be the future scenario for many developed

countries. It is worth noting that concentration of wealth has not yet reached the same heights in

30


today's Europe, where the very richest ten percent own 'only' 60 percent of wealth (Piketty 2014:

5899). However, in a relative perspective the poor are as poor as ever, with the bottom 50 percent

claiming barely 5 percent of total wealth (Piketty 2014:4496). But Piketty argues that there are limits

to what people will accept. Especially when it comes to the very richest' share of total income.

Piketty argues that higher inequality will result in a higher risk of political upheaval, and he in

particular mentions the threshold where the top ten percent claim more than 50% of total national

income as too high or too risky (Piketty 2014: 4541). Although, in Piketty's mind this is the very

limit, that if crossed, may lead countries into serious trouble, it may already have been surpassed in

the US (Piketty 2014: 4541).

Piketty’s point is oblique but lends itself to a straightforward interpretation. We haven't witnessed

such extreme levels of inequality since the Europe of 1914, which subsequently experienced the

devastation of fascism and two World Wars. Yet one might ask if it is the absolute deprivation of the

poor that causes the tendency to revolt, or if it is the dissatisfaction with injustice in a small group

prospering undeservedly? To Piketty it seems to be primarily the latter. He is not talking about the

risk of absolute impoverishment, or what Marx saw as capitalism's inherent tendency to exploit the

workforce to the brink of survival; leaving the worker with only one option, that of revolt (Marx

1978: 192). It is not the abject poverty of the masses that will push revolt, but the indignation that

arises from extreme and illegitimate inequality, or perhaps unfulfilled expectations19. Piketty

therefore focuses his attention on the unjust concentration of wealth and income in the hands of a

small group (the top decile and centile). Simultaneously Piketty revives one of Marx's famous

claims, namely that capital or Capitalism sustains the forces that eventually will lead to its

destruction. In stark contrast to Marx, Piketty finds such a development neither viable nor desirable.

Piketty there argues that we must therefore use the instruments of the state to find a way to amend or

forestall the instability in the system by redistribution through taxes.20

On a different note, it may seem odd that Piketty connects political upheaval with repressive state

control. It is unclear if Piketty treats them as equivalents because one (civil unrest) potentially

causes the other (repressive apparatus), or because both disturb the functioning of a liberal

19 Bourdieu has written on how the political movement of 68 partially was caused by expectations of a better, different and freer life (Bourdieu 1990a: 170). This discussion will not be taken up here. I will settle with assuming in accord with Piketty that too high differences in equality may lead to political revolt.

20 Piketty's focus on the problem of a 'small' very wealthy group has led to criticism saying that Piketty applies the ethics of envy, making a few people's well-deserved fortune the aim of defamation (McCloskey 2014: 51). Such criticism is excessive, especially as Piketty spends a good amount of time explaining how much of the rich elite's income does not derive from merit or effort, to which we will return shortly.

31


democracy. The distinction is important, since civil revolt could be seen as an important factor in

changing political systems for the better (Marx 1978: 192). Perhaps Piketty fears that any revolt may

lead to an autocratic system of government, which is simply too great a risk compared with the

possible gains from a positive change in the political system (Piketty 2014: 9337). As explained

earlier though, this papers aim is to clarify Piketty's normative foundations and not primarily

question his fundamental assumptions.

4.2.1.2. Economic Crisis

The upper deciles' share of income and wealth has peaked twice in the last century. Once in 1928 on

the eve of 'The Great Depression' and again in 2008 shortly before the banking crisis and the period,

which is now often called 'The Great Recession' (Piketty 2014: 5142). This is not just a coincidence

according to Piketty. Inequality and economic crisis go hand in hand. One of the consequences of

the high concentration of capital in the US was stagnation in purchasing power among the middle

and lower classes. Piketty's data shows that from 1977 to 2007 the richest 10 percent took home

three-quarters of the total growth in income, while the richest one percent absorbed nearly 60

percent (Piketty 2014: 5144)21. This might have been legitimized if the new economic situation

simultaneously led to higher overall growth rates, but the economy grew more slowly than in earlier

decades, leaving the grand majority of Americans with no economic gain. Modest households thus

saw no remedy to raise their living standards other than taking out debt (Piketty 2014: 5160). This

tempted “unscrupulous banks and financial intermediaries” to give out bad loans and paved the way

for a financial crisis as Piketty writes (Piketty 2014: 5142).

In short, an unregulated and hence very concentrated capital will lead to a crisis ridden economy,

where the minority will have more money than they can spend, while the vast majority will be eager

to loan beyond their means to maintain the often illusory impression of progress. As Piketty says this

was a major force in creating the necessary conditions for the 2008 financial crisis.

The idea of a connection between high levels of inequality and economic instability is far from new

in the social sciences. John Bellamy Foster and Fred Magdoff wrote an article in 2006 called “The

Household Debt Bubble” where they cunningly predict the financial crisis in 2008 with reference to

the exact problems Piketty mentions about excessive loan taking (Foster and Magdorff 2009: 27).

Additionally, the seminal work of James K Galbraith “Inequality and Instability” has done much to

21 Studies by Piketty's fellow researcher Emmanuel Saez shows that this number is even greater after the financial crisis, with the top one percent taking home more than 95 percent of the wage gain since 2008 (Saez 2013).

32


substantiate a relation between the financial crisis in 2008 and the rapid rise of inequality in the

decades leading up to it (Galbraith 2012: 292). In fact Galbraith argues that the 'good times'

preceding the financial crisis was a result of a model of economic growth cynically based on a high

level of inequality (Galbraith 2012: 293). Piketty, therefore, does not stand alone, when he claims

that “It is hard to imagine an economy and society that can continue functioning indefinitely with

such extreme divergence between social groups.” (Piketty 2014: 5159).22

Piketty does not present any particular level of inequality that might create the necessary conditions

for an economic crisis. He thinks that if a small group gains disproportionately from growth than

others, it may cause an explosion in the willingness to borrow among the ones left behind, thus

increasing the risk of bad loans. This is a very complicated chain of arguments to make. It is, for

instance, an open question under which conditions people will feel a stronger urge to borrow; is it

disappointed expectations, bad financial standing or questions of social status that make people more

willing to borrow? This paper will not go any further into this topic, but merely state Piketty

maintains that if not everyone is prospering considerably from economic growth we will see an

increasing risk of a financial crisis happening again.

4.2.1.3. An instrumental critique

Piketty's critique of inequality and instability has an instrumental, conservative sound to it. As an

echo of Edmund Burke in his reflections on the Revolution in France in 1790: “A state without the

means of some change is without the means of its conservation (...)”(Burke 1790: 29). We could

paraphrase Piketty's point of view in this way: A state without the means of repressing inequality is

without the means of avoiding political and economic disaster. In this context Piketty speaks of

inequality as an indicator of general societal cohesion and health, thus seeing a particular 'mix' or

distribution of wealth and income in a society as an instrument or parameter that must be properly

adjusted to avoid civil unrest and financial crisis. This will only succeed, it is argued, if everyone

gets a substantial share of national growth, and if concentration of wealth is lowered or held

constantly below the threshold where the ten percent richest take home 50% of total income. The

proposed limit is relatively arbitrary, and is not based on any scientific studies, but the threshold of

50 % is a particularly strong symbol in a political context.

22 Piketty is far from alone in holding this view, which was forcefully presented by both former chief economist of the IMF Raghuram G. Rajan in his book: “Fault Lines - How Hidden Fractures Still Threaten the World Economy” (2010) and Joseph E. Stiglitz in “The Price of Inequality” from 2012.

33


Piketty's perspective thus subscribes to the idea that inequality per se is unproblematic, as long as it

is within certain limits, as long as it does not meddle with the stability of our democratic societies. It

may be no coincidence that Piketty also mentions Durkheim23, who thought society's preeminent

purpose was “(...) to eliminate or at least to moderate warfare among men, by subjecting physical

law of the strongest to a higher law.” (Durkheim 1997: xxxiii). An interpretation of his argument is

that the muscles of capitalism must abide by the law not only of morality but of the state in order to

secure stability.

In the US the majority of growth in total income over the last 30 years has been accrued by the top

decile, with total share of income now surpassing Piketty's 50% threshold. This makes one tempted

to ask why the 90% of the Americans still do not seem to be set for rebellion, nor the country on the

verge of autocracy? This of course, may seem like a silly question from a sociological perspective,

as it can only be answered with regards to the specific historicity, culture and social dynamics of the

American people and institutions. It could for example, in line with Piketty's considerations, be

argued that the US historically and presently has been quite capable and even brutal at repressing

social resistance in the shape of protest movements, and that the history of immigration partially

limits the potential for protests (Zinn 2003)24. But Piketty nevertheless seems to acknowledge the

need to confront the issue of absence of political unrest in very unequal societies. He subscribes to

the idea that sustainability of extreme inequality “(…) depends not only on the effectiveness of the

repressive apparatus but also, and perhaps primarily, on the effectiveness of the apparatus of

justification.” (Piketty 2014: 4542).

23 Piketty mentions Durkheim once in his work in a short passage: “Durkheim predicted that modern democratic society would not put up for long with the existence of inherited wealth and would ultimately see to it that ownership of property ended at death.” (Piketty 2014: 7356) The state therefore had an important function of ensuring social order untill “(...) wealth has completely ceased to be hereditary.” (Durkheim 1997: lv).

24 The political eruptions in Spain with the movement called “los indignados” supporting Podemos and the landslide election in Greece where the new party Syrizia took the majority of votes can in part be understood as a dissatisfaction with the way the financial crisis unequally affected people's lives on a national basis as well as on a European. This can be interpreted as sort of empirical evidence for the logic of instability Piketty is advancing.

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4.2.2. On justice and inequality

“Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. (This belief and this hope play a verycrucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies.) Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible in reality as well.” (Piketty 2014:7353)

In Piketty's words the only permissible inequality is the one that exist only after rational and

universal principles have been followed. He is here invoking at least two principles. On one hand a

utilitarian or “usefulness” principle and on the other a social justice principle. The utilitarian

principle is relatively straightforward. It claims that inequality is only legitimate if it is “useful” to

everyone; that is if a rise in inequality will be making everyone better off than they were before the

change. The principle of social justice, however, is more complex. Piketty's use of “just” and “right”

seems to refer to what can reasonably be attributed to individual choice, merit and effort. Inequality

is legitimate only if it is the result of a personal decision or a consequence of hard work or

developed skills. This means that Piketty does not give priority to some sort of absolute right to

property or income, he is however prioritizing the right of opportunity. That is, as long as everyone

has the same opportunities in life to use their talents to transform their living conditions, it is only

fair that a society has some degree of inequality because that reflects an inequality of merit. This

idea commonly goes under the name of equality of opportunity.

Instead of directly calling forth the work of philosophers25 or complex theoretical systems of morals,

Piketty refers to principles of legitimation or “apparatus of justification” as inherent in the very

fabric of our liberal democratic market economy (Piketty 2014: 4541). This means that he is

assuming that the framework of justifications for wealth differences is intrinsic to our society and

thus to our very way of reasoning. A justification is as such a general theoretical insight or a

commonsense notion available to all citizens when thinking about a fair capitalist society.26

25 Piketty is clearly influenced by John Rawls but he is mentioned only once (Piketty 2014: 8342) and rather carelesslyas a reasonable interpretation in an analysis of the French “Declaration of the Rights of Man” of 1789. However the “Declaration” and Rawls seems to be the originators of the principles Piketty highlights. This will be addressed later in this section and the next.

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The idea of an apparatus of justifications resonates with the work and thoughts of the renowned

French sociologist Luc Boltanski and the economist Laurent Thevenot in their sociology of

justification (Boltanski 2011). Boltanski and Thevenot have with equally ingenious use of data

(novels included) described how 6 regimes of justification exist as a form of collectively accepted

resources on which we draw when we criticize and legitimize the way society is constructed

(Boltanski 2011: 44). They for example mention how the “Civic Regime” is coordinating actions in

the political and public sphere through an aim to reach the 'common good'. Here relations like

solidarity and qualities like equality are particularly salient. The “Industrial Regime” which is

coordinating economic relations along the lines of productivity and efficiency, values human

qualifications like merit and expertise in associations of functionality (Boltanski 2011: 60, 62). The

regimes are what legitimates action and establishes order in the given spheres people move across,

but when phenomena within a given societal sphere do not live up to the given principles they

warrant critique (Boltanski 2011 62, 223).27

With clear similarity to the work of Boltanski and Thevenot, Piketty activates two trains of thought

to understand the type of justificatory model associated with today's democratic capitalism. On the

one hand he looks to the justificatory principles (which resembles the Civic Regime's idea of the

collective good and the Industrial regimes idea of merit) that demands social utility and equality of

opportunity, and on the other he is denouncing these principles for not corresponding to the reality of

Western democracy today. It is not clear however where Piketty derives these principles from or in

what situation(s) he thinks they become particularly relevant. Also there is a curious tension

concerning the status these principles acquire in Piketty. Are they real, true and desirable (with a

fundamental kernel of rationality and progress) or are they merely strains of ideology creating false

consciousness? Piketty does on one hand have faith in these principles as holders of the potential for

advancing common good, but in a world of imperfect information and distortion of knowledge they

may also be used to legitimize conditions of extreme equality.

26 However, in practice disagreements do not easily reconcile: “(...) At a purely theoretical level, there is in fact a certain (partly artificial) consensus concerning the abstract principles of social justice. The disagreements become clearer when one tries to give a little substance to these social rights and inequalities and to anchor them in specific historical and economic contexts.” (Piketty 2014: 8342). Piketty thinks that such disagreements can only be reconciled through “democratic deliberation and political confrontation” (Piketty 2014: 8353).

27 The critique mentioned is called corrective critique. Boltanski and Thevenot mentions one more; the radical critique that fundamentally questions the validity of a justificatory test (Boltanski 2011: 224)

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4.2.2.1. Hyper-meritocracy and inequality of opportunity

Piketty writes that the early 20th century view on inequality “(...) deserves credit for not describing

itself as meritocratic, if nothing else.” (Piketty 2014: 7233). Today things are different, and the idea

of meritocratic justification for inequality is strong in all layers of society, not only as an ideal but

also as a perception of reality. In very inegalitarian societies, there is a need for a strong apparatus of

justification to avoid disruptions caused by indignant citizens. According to Piketty such strong

apparatus exist in particular in the US. There it takes the shape of an ideological layer, which he

calls “Meritocratic Extremism” or “Hyper-meritocracy” (Piketty 2014: 5791, 7267). This framework

justifies inequalities

“(...) because they seem to be a consequence of a choice by the rich to work harder or more efficiently than the poor, or because preventing the rich from earning more would inevitably harm the worst-off members of society.” (Piketty 2014: 4553).

It works as a sort of social clause where, in the words of economist Joseph Stiglitz, the rich would

provide the poor with jobs and prosperity, if the poor would let the rich walk away with the bonus

(Stiglitz 2011: xvii). In this way, especially, but not uniquely in the American society, big gaps

between income groups are experienced as just so long as they are a result of an effort and in general

socially productive. As a paradigmatic example, Piketty draws on the widespread idea that there is a

connection between super managers' very generous paychecks and their actual marginal

productivity. The case is that the remunerations of US super managers have no foundation in real

marginal productivity:

“In fact, it becomes something close to a pure ideological construct on the basis of which a justification for higher status can be elaborated.” (Piketty 2014: 5734).

So far, no study has been able to show a connection between the CEO's efforts or merits and how

well a company performs (Piketty 2014: 5723). Quite on the contrary, very high remunerations most

likely stem from a flawed system of corporate governance where managers virtually have the power

to reward themselves as they are faced with an institutionally weak board of directors (Piketty 2014:

5746). This stands heavily opposed to the principles of equality of opportunity and social utility.

The steep rise in inequality we have seen since the 1970 in most western countries is primarily

caused by exorbitant wage hikes among the already well remunerated (Piketty 2014: 4279, 4563). It

is therefore important for Piketty to stress that this development can not be justified from the

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existing assumptions underlying capitalism. But according to Capital this may not be the biggest of

our concerns in the future. Instead we should highlight inheritance and capital rent.

4.2.2.2. Inheritance and rents

The recent increase in the importance of inheritance and rents in Western societies adds to the

justificatory problem of high differences in income and wealth. Piketty holds that the relatively high

and steady yield from the mere ownership of capital lacks justificatory basis, and there seems to be

increasing returns to scale the larger the fortune that is held (Piketty 2014: 7815). This means that

wealth has a tendency to perpetuate itself while augmenting inequality (Piketty 2014: 7717). As

Piketty writes, successful entrepreneurs tend to turn into rentiers, and with a very high return to

capital they have no clear incentive to continue working (Piketty 2014: 7732). Also if capital rate of

return will continue at the historical rate of 4.5% it will soon, or may already, surpass the growth in

labor income (Piketty 2014: 6166). The same problem holds for the heirs of 'once entrepreneurs' that

now and in the future will be able to live affluent lives from the rent of their inheritance.

This is of course a clear violation of the principle of opportunity. None of the “two types” of wealth

(from capital rent to inheritance) can be justified with relation to merit or hard work. But it also

violates the principle of social utility:

“No matter how justified inequalities of wealth may be initially, fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility.” (Piketty 2014: 7717).

In fact, we may be seeing a move towards a state where the payoff to 'idle' capitalists is much higher

than the payoff to the average hardworking entrepreneurs with no benefits to society at large.

Although Piketty does not give any exact numbers, we must remember that exorbitant paychecks

have had perhaps the largest influence in shaping inequality the last thirty years (in particular in the

US) than has income from capital (Piketty: 5356). This is, however, something that will change if

the current development continues as described in the previous section.

4.2.2.3. Education

There is one other important aspect of inequality of opportunity that may not seem as directly linked

to economic relations as it actually is. This is the question of education and it's connection to the

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logic of meritocracy. Emile Boutmy founded the L'institut d'etudes politiques in Paris in 1872 with

the declared goal of consolidating the position of the elite:

“(...) obliged to submit to the rule of the majority, the classes that call themselves the upper classes can preserve their political hegemony only by invoking the rights of the most capable.” (Piketty 2014: 8486).

Boutmy thus became one of the very inventors of the meritocratic justification as we know it today,

which changed the way we talked about inequality. Perhaps surprisingly, the idea of legitimizing

economic and social positions according to merit did not pertain to a class' democratic pursuit of

power and position. On the contrary, it was the wealthy elite that conceived and embraced this 'new'

idea of education to retain their wealth:

“(...) the upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprive of everything they owned.” (Piketty 2014: 8486).

In France as in the rest of Europe, education thus became a generally accepted entrance barrier to

prominent positions in society as nobility of birth had once been. The upper classes used education

to invent a new way of legitimating a high level of inequality, knowing that education might sound

democratic. Nevertheless, actual access to elite institutions was highly restricted. It is a paradox that

education, when coupled with high entrance costs, only works to maintain a persistently high

inequality in mobility. Even an institution, which in theory professes the virtue of merit and effort,

may in practice far from support the principle of equality of opportunity and social utility:

“(..) defining the meaning of inequality and justifying the position of the winners is a matter of vital importance, and one can expect to see all sorts of misrepresentations of the facts in service of the cause.” (Piketty 2014: 8486).

The school system thus worked to legitimate inequality as a result of lack of a willingness or effort

to educate oneself, while the upper classes simultaneously concealed the fact that actual access and

the opportunity to get good results was all but equal. This, which we also learned from Bourdieu in

the 1970's, does not merely have to do with the actual access to good schools, but also with schools

favoring the socio-cultural Habitus of the upper classes (Bourdieu 1970). It still seems to hold true

today as the world’s most prestigious schools are overwhelmingly dominated by students of a

wealthy background (Piketty 2014: 8443). Summing up, an education system may actually solidify

existing structures of inequality.

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4.2.2.4. Politics

Some scholars have argued that Piketty totally ignores how economic wealth is at the same time

social and political power (Foster and Yates 2014). This is not strictly the case. In fact Piketty

several places considers the power and influence of wealth:

“The decrease in top marginal income tax rate led to an explosion of very high incomes,which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.” (Piketty 2014: 5823).

Piketty argues that there is a connection to be drawn between the economic power and the policies

decided on. The cut in marginal tax rates all over the western countries in the 1980s have only

enforced the power of capital. Also we must recall that it took the outbreak of World War One to

crush capital concentration and raise taxes in Europe and the US, not the common interest of the

great majority:

“(...) the history of the progressive tax over the course of the twentieth century suggests that the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed. It was war that gave rise to progressive taxation, not the natural consequences of universal suffrage.” (Piketty 2014: 8993).

As people who previously had earned a lot became even wealthier, they had more incentive and

money to direct towards getting taxes lowered, triggering accumulating of even more wealth28.

Moreover, capital seems to have an inherent logic that threatens democratic sovereignty not only

from the inside of nation states, but also from the outside. Countries see themselves forced to

implement certain policies as they compete internationally with one another for capital. This

depoliticizes decisions on taxes which are no longer shaped according to public opinion, thus

creating a “feeling of dispossession” among the populations in the rich countries today (Piketty

2014: 8101). Democratic sovereignty is at loss.

However, Piketty does not take any inconvenience explaining how exactly wealth bestows power. If

Piketty had proceeded with the analysis of Honoré de Balzac's books on the adventures of the young

Eugène de Rastignac and his struggle to secure higher social status within political life in 19th

28 Piketty writes that “The experience of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interests—and that includes economists, who currently occupy an enviable place in the US income hierarchy.” (Piketty 2014: 8992).

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century France (which is a cornerstone in Capital's descriptions of wealth disparities in 18th century

France), we would perhaps have gotten clearer picture. Let me shortly explain why this is. Rastignac

is living at a time when the king of France, Louis XVIII, had just introduced a charter, which

ensured that only a handful of the very richest landowners could be represented in parliament (Wiki

2015-26/01). The very access to parliament was restrained on account of ownership.

A similar kind of restraint prevails today. Only a year ago the New York Times announced that now

half the members of congress had a net fortune of more than 1 million dollars (Lipton 2014). If we

compare this to the American people at large, only 4,2 % can compete with this kind of claim to

wealth (the median net worth in the US is 44900 dollars) (Luhby 2014; Valenti 2014).

But why and how does money get you a seat in parliament? A study by the political scientists Martin

Gilens and Benjamin Page from Princeton University suggests a few causes (Gilens and Page 2014).

By looking into 1800 policy initiatives through the last decades, Gilens and Page found that the vast

majority of initiatives mirrored the preferences of the upper 95th percentile of income as opposed to

the opinions of the average American at the 50th percentile of income: “When a majority of citizens

disagrees with economic elites or with organized interests, they generally lose.“ (Giles and Page

2014: 576). They explain the power of money with reference to the lobbying capacity and promotion

that money can buy through interest groups. There may be good reasons to be cautious in

universalizing these findings as a direct consequence of inequality. However, with an American

political system that has very few restraints on the use of money in campaigning, the study may still

be a good indicator on the influence of money in a very unequal society.

The above reflections give us at least two insights that seem to align with Piketty's considerations.

First, wealth can have a democratically distortive power when individuals or firms spend money on

lobbying for particular political decisions. Second campaigning or other use of economic resources

facilitate access to politically important positions.

It should be clear that economic power can not be reduced to the parliamentary process and the work

of politicians. Piketty thus ignores the power that lies in control of important economic sectors

within a country and the power to funnel investments to particular directions. Furthermore we might

also think of the power to hire, fire and manage wages and profits to be a considerable power with

very little democratic basis. In short, economic power is also power to control both local, national

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and international social relations without recourse to democratic legitimacy29. In sum, Piketty clearly

concerns himself with the power of capital but does not have a developed theory of power. In the

section on ownership we shall see how Piketty's concern with democratic decay, political equality

and his allusions to a future with a more democratic economy has implications that he himself may

not have fully realized.

4.2.3. Justificatory principles of inequality

After having presented Piketty's considerations on why inequality matters and the justifications to

which it corresponds, it is time to make a more schematic presentation of what can be called “the

normative foundations of capitalism” or “the justificatory principles of inequality”. The question is

whether Piketty's own proposal for a solution to the 'problem of inequality' follows naturally from

the principles listed beneath.

What are the fundamental justificatory principles that must be complied with if liberal democracy

and capitalism are to be legitimized and survive far into the 21st century? Piketty's claims on why

inequality should be reduced can be divided into two categories: One is instrumental and raises

questions about social order and inequality. The other is normative, closely tied to the idea of

equality of rights, and handles concerns of the inner consistency of capitalism. From these two

categories we can infer four fundamental principles of justification concerning inequality as listed in

table 1.

29 I will briefly mention a perhaps important paradox that these reflections seem to harbor. On the one hand Piketty alludes to how capital concentration carries the reins to political power. But on the other, as we learned earlier in the chapter on social instability, further concentration of capital may lead to social revolt and thus the overthrow of existing 'power-structures'. These seems to be irreconcilable oppositions (which Marx called the inner contradictionsof Capitalism) but nonetheless must be kept in mind when assessing the political future.

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Table 1: Justificatory principles of inequality

Principle Description Type of Argument

1. Social Order.

Inequality can only be permitted to the extent that it

does not raise the risk of political upheaval, autocratic

state control or financial crisis putting general social

order and liberal democracy in jeopardy. A clear warning

sign of inequality getting too high is (i) when only a few

prosper from economic growth, (ii) the lower 50 % has

no prospects of a brighter future, (iii) and the top 10

percent take home more than 50 percent of total national

income.

Instrumental

2. Equality of

Opportunity

Inequality must be fair. Existing inequality is legitimized

only if it is the result of personal effort or merits.

Everyone must have the same initial opportunity to

reach their goals.

Normative, Rights

based

3. Social Utility

Even if inequality is the result of personal effort and

merit, it can only be just, provided that it adds to general

social utility. That is, no one must be worse off

economically, as a result of some having more than

others.

Normative, Rights

based

4. Political Inequality

Political inequality. There must be equality of access to

and influence in political30 processes and decisions.

Even if personal wealth is legitimized along the other

principles, it should not authorize a larger political

influence.

Normative, Rights

based

30 'Political' here stands undefined as it does in Capital. However throughout Capital it seem to be perceived broadly asthat which concerns the state.

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This thesis claims that if we took Piketty's normative considerations seriously, existing inequality

and any reform or alternative that tries to solve the issue of inequality must be assessed with regards

to these four principles.

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4.3. A global tax on wealth

“(...) if democracy is to regain control over the globalized financial capitalism of this century, it must also invent new tools, adapted to today's challenges.” (Piketty 2014: 9011)

Piketty's proposal for the “ideal tool” to do this is both simple and clear; we should introduce a

progressive global tax on wealth. What should be taxed is first and foremost the total possession of

wealth. This should be done progressively so that people owning less than one million euro would

go clear or only be taxed 0.1%. Fortunes above this level should be taxed by one percent a year

letting the tax rise progressively according to the ownership of capital, perhaps taxing the larger

fortunes of +5 million with 2 percent a year (Piketty 2014: 9044)31. This will indirectly target the

real return rate of capital and simultaneously give a stronger incentive to find the most productive

place to funnel ones wealth. The tax will not have the effect of necessarily making fortunes much

smaller but relatively weaken income from capital versus income from labor. It will furthermore

limit the amount of idle capital and level out the degree of concentration possible in a society. Let's

recall one of the 'fundamental laws': α =r*β. A falling return rate will make capitals total share of

income fall, thus reestablishing the macro-structural logic of work being more important than wealth

in order to gain wealth. The positive feedback loop that exists between r and β will also work the

other way around as a lower r likely will mean a fall in reinvestment and savings, which according

to the second law of capitalism (β)=s/g will lower β accordingly. The global tax on wealth would

thus in a perfect scenario lower capitals share of total income and possibly the capital/income ratio.32

By introducing a global tax on wealth, Piketty goes against the tendencies in international politics of

introducing protectionist policies and direct capital controls in order to control capital flow. Piketty

believes these are mostly dysfunctional and reduce the total benefit of a globalized economy:

“Protectionism and capital controls are actually unsatisfactory substitutes for the ideal form of regulation, which is a global tax on capital— a solution that has the merit of preserving economic openness while effectively regulating the global economy and justlydistributing the benefits among and within nations.” (Piketty 2014: 9025)

31 Piketty even suggests that a steeply progressive tax for the very largest fortunes may be in order (between 5-10% onassets above 1 billion euros). (Piketty 2014: 9044)

32 By taxing instead of demanding that labor be remunerated more generously, we avoid negative consequences of generally lower employment (Piketty 2014a). In fact a tax on wealth will not only lower r but will also make capital more expensive relative to labor, which may raise employment. Also, a higher tax on capital means that the rich, if decided on keeping the same lifestyle, can not save as much as they did before, thus lowering savings and capital accumulation

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As such, the tax does not only limit the concentration of wealth but it also makes sure that everyone

benefits from globalization thus bolstering support for a globalized economy that Piketty thinks

eventually will benefit all (Piketty 2014: 8663).

To Piketty the progressive global tax on wealth may not be directly politically feasible, as it would

require an “unrealistic” level of international cooperation (Piketty 2014: 9022). To avoid capital

seeking refuge from taxes in other countries, the tax must be global. This is a perspective that faces

much the same political challenges, as does the current move to reach a global agreement to stop

climate change, and has met much critique for being utopian (Galbraith 2014). But in fact Piketty

himself believes it to be utopian. The global tax is an “ideal tool” that can serve as a standard against

which alternative proposals can be measured (Piketty 2014: 9022). A tax introduced on a regional

level in 'super powers' such as China, The US or Europe would point in the right direction.

For the tax to be introduced it will first require a high level of transparency from the banking and

financial sector (Piketty 2014: 10087). This entails that all banks and individual persons should be

required to file how many assets a particular person holds to the tax authorities. Piketty holds great

hopes for a transparent banking sector, which would not only give the states a tax-tool, but also

make the actual distribution of wealth more apparent to the public; a wealth that is only too often

hidden from the public's eye's (Piketty 2014: 10087).

But is this “ideal tool” actually the right one in the given situation? And more important, how well

does this global tax on wealth correspond to Piketty's four principles?

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4.4. Will a tax on wealth work?

Much of the discussion on the global tax on wealth has aimed to show how it clearly lacks feasibility

in a world ruled by national interests and private profit. It has been deemed “hopeless utopianism”,

“impractical”, “technologically unfeasible” and so forth (Galbraith 2014; Vinik 2014; McCloskey

2014). However, few have asked if the proposal would actually bring the desired situation about. In

other words, none have so far taken up the task of thinking through, if the proposal Piketty makes is

actually consistent with his own normative thoughts on the matter. To do this one must analyze if the

tax on wealth addresses the four principles of social order, inequality of opportunity, social utility

and political inequality. This chapter will not focus on the technical challenges concerning the

introduction of a global tax on wealth, of which there undoubtedly are several. Instead it will focus

on to what extent the tax effectively targets the four principles.

4.4.1. Social order

4.4.1.1. Political upheaval and repressive apparatus

If people will not accept that a small group takes too large a share of national total income, and if we

say that such excessively skewed income distribution may lead to public uprising, then is Piketty's

global tax on wealth the right measure to avoid it? The issue of social instability is the point that

Piketty's tax on wealth targets most clearly.

By redistributing funds from the richest's fortunes to the poorer half, society could be moving away

from Piketty's 50% threshold (Piketty 2014: 4542). We should ask, though, how a tax of no more

than 2 percent on the very highest capital concentrations should in fact make at big difference.

Piketty himself stresses that wealth on this scale is seeing return rates sometimes above 10%, thus a

two percent tax will only mildly change the concentration of wealth. It may therefore seem that only

a much more progressive taxation would obtain the goal of stopping or reversing the trend of a small

groups rising share of income. It must be granted that Piketty exceptionally does mention the

possibility that very large fortunes (over one 1 billion dollars) could be taxed in the order of 5-10%

which seems to be the amount necessary to reach Piketty's professed goal. However, he does not

seem to think this option to be a necessary precaution. One may be tempted to think that his basic

proposal of 2 % may over time allow wealth and income to become even more polarized. That is,

the 'small time' savers (those earning between 5 million and 1 billion euros) have a more difficult

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time securing high return rates than the very rich. We may therefore with a mildly progressive tax

see an additional increase in the gap between the super wealthy and the wealthy, perpetuating an

extremely rich elites fortunes. We should therefore perhaps worry more about the top 0,1 percent as

Emmanuel Saez has shown in a recent publication (Economist 2014-9/11)

This means that although a global tax will very likely have an effect on the top decile's share of total

income, it will have to be higher than Piketty initially suggests, if the very largest fortunes are to be

adequately redistributed in the long run. Also, we should not forget the surprising fact, given

Piketty's disproportionate attention to wealth, that current inequality has less to do with income from

capital, than it has to do with income form labor. As I discussed earlier, the wage gap between the

top decile and the “poorest” 90 percent has been widening in the western world since the 80's, and

explains the body portion of the rise in inequality. A global tax on wealth does very little to alter this

problem. Even a considerable drop in income from capital may not change the current development

towards higher paychecks for top managers, and thus will not alter the very high share of total

income of the very rich.

Perhaps therefore, Piketty sees himself forced to suggest that progressive income taxation may be

complementary to the global tax on wealth (The optimal rate being 80%) (Piketty 2014: 8970). He

argues that the systematic rise in top wages beginning from the 80's can be explained by the rapid

fall in progressive taxation in many western countries (Piketty 2014: 8703). Thus a high marginal

tax rate will make it much harder for top executives to justify high salaries, as they will incur high

costs for the firm and relatively little reward for themselves. Therefore, according to Piketty a more

progressive taxation will make pre-tax wages fall. However, research on this topic is not

unanimously in favor of Piketty's thesis, and some studies in fact suggest the opposite effect for high

earners33 (Lockwood et al. 2000: 709). Furthermore Piketty's 'general' theory of capitalism offers no

systematic explanation of the widening wage gap. You could say there is a serious blind spot in

Piketty's theorizing here, that needs to be filled in.

It is important to add that the revenue from taxes from both capital and labor do not alone change the

distribution of wealth and income in a society. The extra revenue in taxes must be redistributed in a

33 Research on progressive taxation and wage setting in Europe are in agreement that mid-level income groups will experience a fall in pre-tax wage when progressivity is raised; however, the opposite is the case for high-income groups where an increase in progressivity tends to increase and not decrease the pre-tax wage (Lockwood et al. 2000: 709).

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smart way that favors the ones worse off, instead of for example subsidizing businesses, elite

educational institutions or prestige projects. This may be evident for Piketty but may not be obvious

for policymakers that could see the extra revenue as an option to appease business interests.

Lastly it seems very likely that a higher transparency in asset holdings would actually work against

Piketty's aim of securing social order. When the very unequal distribution of wealth becomes

apparent for the public to see, it may very well create considerable outrage. This was recently

exemplified with the scandal concerning the Luxemburg leaks where it was revealed that companies

on a large scale avoid paying taxes by funneling profits via tax havens (ICIJ 2015).

4.4.1.2. Economic crisis

Are higher taxes going to ensure us against imminent financial crisis? Piketty suggests that the

financial crisis of 2008 was a result of uncritical loaning behavior in the lower classes, whom had

not gotten their fair share of general growth in society. If this is in fact the case, the most reasonable

solution must be to favor this group with revenue from taxation. As already discussed, the global tax

on wealth is not directly making sure that wealth is redistributed towards the poorest half of the

population.

In sum, although the global tax on wealth does directly target the principle of social order it does not

have the necessary scope, and falls short of solving the problem of very high wages. A global tax on

wealth will provide higher tax revenues to the state, and put pressure on the wealthy middle of the

top decile. But only a much higher progressive taxation both on capital and income plus a social

policy of redistribution will stop concentration of capital on private hands and diminish overall

inequality. A global tax on wealth has potential for mitigating the very skewed distribution of wealth

and perhaps strengthen social cohesion. However, if it is not ambitious enough and if redistribution

is not done properly it may be more well suited for curing the headache of budget deficits than the

“disease” of inequality and social instability.

4.4.2. Equality of opportunity

If Piketty himself was to raise a critical question to his own proposal it would have to be this: How

does a global tax on wealth ensure that income and the possession of capital for individual persons is

the result of merit and effort? That is, how does the tax ensure that all have the same opportunity to

become wealthy? At first glance it seems to make sense. By taxing capital it becomes harder to live

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off capital return, and thus makes life without having to work rare. The return on capital is indirectly

lowered, and less funds can therefore be reinvested. This means that big fortunes will grow slower

and have a larger risk of defaulting if managed poorly. In theory this makes it easier, for the less well

off to catch up with the well off. But several problems presents themselves.

One, a capital tax will only very slowly change or perhaps not at all alter the access to becoming

capital owner. Piketty's proposal will considerably reduce capital return for some, but will change

capital mobility over generations for all but none. With a return rate on 4.5 % a 2% tax simply is not

enough to reduce big fortunes, put capital into redistributive circulation and to make the excess

capital 'accessible' to more people. Ownership will still be something near to monopolized. Two, as

larger fortunes tend to earn higher returns on capital, the tax proposed risks affecting the semi rich

disproportionately as explained above34. Three, Piketty's proposal would in the best case scenario

make the very rich less rich and gather a substantial revenue (he estimates 2% of the national budget

in the EU) that could be distributed in form of social services and compensation for the poorest. But

how would this modest redistribution make it easier for the poorest 50 percent to become capital

owners? That is, even if the global tax is introduced, capital will still largely be owned by the same

people, it will still be growing (though slower) with no effort spend, and worse still it could be

inherited without considerable change to its size. Four, the global tax on wealth does not ensure that

income from labor is more justifiable distributed as argued above. Piketty argues that a progressive

taxation on income would moderate wages, but he indirectly questions this in his reflections on

Americas hyper-meritocratic tendency. Hyper-meritocracy may legitimate very high salaries even

though much of it is appropriated by the government. A higher tax may even make salaries rise as

we learned earlier (Lockwood et al. 2000: 709). Perhaps it is the myth or “ideology” of meritocracy

that must be punctured rather than the taxes that are in need of inflation. Five, a tax on capital seems

very far from the idea of ensuring social mobility, which must be the core in ensuring equality of

opportunity. Piketty himself suggests that free access to education is an important but non-sufficient

factor in supplying social mobility. According to many social scientists, education must be combined

with equality in absolute economic outcome to obtain high social mobility (Pickett and Wilkinson

2009; Therborn 2012; Stigliz 2011: 18). We will return to this topic in section three.

34 Piketty does have technical amendments to his basic suggestion that makes it more smoothly progressive: “The simplest and fairest procedure would be to set rates on the basis of observed returns in each wealth bracket over several prior years. In that way, the degree of progressivity can be adjusted to match the desired level of wealth concentration.” (Piketty 2014: 9297). However he does not seem to think that much higher rates are strictly necessary.

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To recap, even if Piketty's global tax on wealth is feasible, capital will still be concentrated and the

opportunity for an average person to gain capital very limited. If you have no capital you will still

find it hard to acquire it as capital is mostly monopolized and increasingly transferred from one

generation to the other through inheritance. The global tax on wealth is simply too low and often

targets the wrong things. Piketty is with the global tax not aiming for a very high degree of equality

pr se. In fact a global tax on wealth could be introduced without getting anywhere near the level of

equality of opportunity we see in some countries today (Pickett and Wilkinson 2009; Stigliz 2011:

18)35.

4.4.3. Social utility

Does a capital tax serve to adjust the workings of capitalism so that when some get richer, everyone

are better off? James Galbraith writes in his review of Piketty's capital tax:

“(...) if such a tax fails to discriminate between fortunes that have ongoing “social utility” and those that don’t—a distinction Piketty himself has just drawn—then it may not be the most carefully thought-out idea.” (Galbraith 2014)

This is true and does pose a problem for Piketty. The tax does not discriminate between capital as

investments that work to create jobs, progress or higher social welfare and investments that do not.

However, Piketty mentions that there will be other forces working to ensure social utility. By taxing

wealth, people are at the same time encouraged to place their capital in the most productive assets,

whereas unprofitable ventures will have a much harder time to find investments. Also if the revenue

from a tax on wealth is funneled into the 'lower layers' of society then they will also indirectly profit

from capital growth. In other words Piketty's global tax could have positive effects for social utility.

4.4.4. Political inequality

Finally, Piketty's reflections on the role of politics encourages us to ask if a global tax on wealth

curbs the excessive influence of accumulated capital? Piketty mentions two things that might ensure

this kind of restrain on money: Making ownership transparent and reducing capital concentration.

The natural first step in introducing a tax on capital would be to require banks and other financial

institutions to open up their accounts to public authorities. This would, according to Piketty, have at

35 In this context equality of opportunity is operationalized as 'social mobility' in different countries. However this is only one way of measuring inequality of opportunity.

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least two positive democratic consequences: First, it would offer the public and the government the

necessary knowledge on which to act (Piketty 2014: 9044)). Piketty often talks about the current

inequality as relatively invisible, for the untrained eye. To actually see the distortions in power one

must know who possesses the capital. Second, transparency in ownership would open up the

possibility of democratic control (read tax regime) that regulates the flow and ownership of capital.

It would not only empower tax authorities, but would also eliminate inter-national tax competition

(Piketty 2014: 10087). But Piketty seems surprisingly aware that the global tax is not sufficient to

reach the goal of democratic rule:

“Conversely, without a real right to intervene in corporate decision-making (including seats for workers on the company’s board of directors), transparency is of little use. Information must support democratic institutions; it is not an end in itself. If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again” (Piketty 2014: 10087)

This quote should be puzzling to the reader of Capital. Because, is Piketty in fact saying that he does

not see the global tax on wealth nor transparency as a sufficient tool to avoid capital powers to

influence politics in the long run? Also he adds that we need to reinvent new democratic institutions,

without being clear about which ones that are not working. Is in fact the system of taxation not

sufficient to restrain capital? We will later return to what Piketty might think of when saying that the

institutions in which democracy and capitalism are embodied must be “reinvented again and again”.

Piketty's global tax on wealth can, with the words of the American political theorist John Rawls, be

considered a sort of welfare-state capitalism that ensures fair distribution by means of taxes and

transfers (Rawls 2003: 137). It is as if Rawls was speaking directly to Piketty when he wrote:

“Welfare state capitalism also rejects the fair value of political liberties, and while it hassome concerns for equality of opportunity, the policies necessary to achieve that are not followed. It permits very large inequalities in the ownership of real property (productive assets and natural resources) so that the control of the economy and much of political life rests in few hands. And although, as the name “welfare-state capitalism” suggests, welfare provisions may be quite generous and guarantee a decent social minimum covering the basic needs, a principle of reciprocity to regulate economic and social inequalities is not recognized.” (Rawls 2003: 137).

In other words, even if we assume that the global tax on wealth is global, that it succeeds to tax even

the 'hidden' wealth, and that funds are redistributed to the poorer half of the population, it is still far

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from sufficient to obtain the goal of political liberty and equality for the people that do not own

capital. To Rawls there are three reasons why this will not happen: For one, capital is power both in

the economy and in politics, two, the rich will have enough influence to prevent a tax from reaching

the necessary level, and three, the system of transfer and tax undercuts the possibility of an equal

relationship between citizens as some become 'receivers' and other 'givers' (Rawls 2003: 138;

O’Neill and Williamson 2012: 21). Thus, as long as “very large inequalities in the ownership of real

property” is allowed, it seems hard to believe that a political equality can be realized. Piketty does

acknowledge that other initiatives should be introduced and that the tax can not stand alone. But

simultaneously he ignores that his primary choice of instrument (global wealth tax) only meekly

advances the justificatory principle of a far more 'democratic' distribution of wealth. Piketty seems

quite divided on this issue, which I will discuss in the following chapter on ownership.

4.4.5. Concluding on the capital tax

As mentioned in the introduction, Piketty's solution of a global tax on wealth may come as a surprise

to the thorough reader. Piketty's paramount focus is how financial transparency can make capital

amenable to government regulation and how a tax on capital may cap the steep accumulation of

capital. The global tax on wealth is thus first of all targeting the social instability, the risk of a

financial crisis and the right and power of the democratic nation state to tax, in order to secure a

decent minimum to the ones in need. However, it is not as much aiming to secure equality of

opportunity and political equality. In other words it seems that a global tax on wealth is primarily an

instrument to maintain order in the fabric of society, more than it is meant to restore justice to the

people of which the fabric is woven.

A global tax on wealth is sympathetic and could be a reformatory step to open the path for more

democratic control of capital. Nevertheless it is a reformatory step that does not in itself bring about

the just and egalitarian society Piketty seems to call for. Piketty should thus, if he was to be

consistent with his normative ideals, aim for something quite different. Interestingly, as I have

alluded to throughout this analysis, 'Capital of the 21st Century' harbors intuitions on where to look

for alternative proposals.

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4.5. Reflections on ownership

“(...) the idea that free competition will put an end to a heritage-dominated society and will lead to an ever more meritocratic world is a dangerous illusion” (Piketty 2014: 7395).

If a global tax on wealth is not an altogether adequate solution, might it be that the intuition of

Piketty harbors a more satisfactory answer to the problem at hand? His meditations in chapter fifteen

give us a few hints, which naturally leads us to the question of property ownership.

Piketty clearly states that the principles of private property and the open free market serves as the

best coordinator of human actions in the economic realm. At first his position seems to be, that there

is little to learn from known alternative economic experiments:

“Unfortunately for the people caught up in these totalitarian experiments (the Soviet Union), the problem was that private property and the market economy do not serve solely to ensure the domination of capital over those who have nothing to sell but their labor power. They also play a useful role in coordinating the actions of millions of individuals, and it is not so easy to do without them. The human disasters caused by Soviet-style centralized planning illustrate this quite clearly. A tax on capital would be aless violent and more efficient response to the eternal problem of private capital and its return. A progressive levy on individual wealth would reassert control over capitalism inthe name of the general interest while relying on the forces of private property and competition.” (Piketty 2014: 9337)

According to Piketty, the totalitarian experiments undertaken in the Soviet Union should have taught

us this much: That private property and market economy are decisive for a proper coordination of

actions. But is that really what there is to learn from these experiments? And does Capital not teach

us that alternatives exist between a system based on individual inviolable private property and State

ownership and planning? My argument here is that an inadequate treatment of historic experiments

(no matter how overall intimidating) should not make us imperceptible to alternative former and

current forms of ownership (The Cooperative movement, Mixed ownership of businesses, Social

economy and so on)(Wright 2010). I think that Piketty makes a mistake and even contradicts himself

in an attempt to put distance between Capitl and Marxist legacy. He writes that:

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“The solution to the problem of capital suggested by Karl Marx and many other socialist writers in the nineteenth century and put into practice in the Soviet Union and elsewhere in the twentieth century was far more radical and, if nothing else, more logically consistent. By abolishing private ownership of the means of production, including land and buildings as well as industrial, financial, and business capital (other than a few individual plots of land and small cooperatives), the Soviet experiment simultaneously eliminated all private returns on capital.” (9322)

To the sociological observer it may not be entirely fair equating the ideas of Marx and other socialist

writers with the authoritarian and often perverse Soviet regime. It remains, however, that Piketty not

only rejects Marxist ideas and alternative experiments in Communist regimes but also cuts himself

short of more than a century of critical theory and ideas and experiments on alternative ownership

structure. Perhaps the “logical consistent solution”' to the problem of return on capital should be

given more attention.

For one thing, the abolition of private ownership in The Soviet Union was never complete, and

interesting experiments took place in the socialist countries, which Piketty correctly writes but

surprisingly ignores (Piketty 2014: 9322). Also some of the best current day studies on cooperatives

in Yugoslavia reports how they were well functioning and productive and far more democratic than

their capitalist counterparts (Pateman 2000: 102). More important, today several cooperatives

manage to survive and thrive under fierce competition from privately owned capitalist firms as well

as a range of efficient, decentralized social institutions administrating important social services

(Wright 2010: 191).

Indeed as Piketty readily admits, we have never lived in a strictly capitalist market economy; instead

we have what he calls a mixed economy (Piketty 2014: 8384). Perhaps this is why, after his

preliminary stabs at Soviet Experiments and praise of private property, Piketty turns to refute the

myth that nationalization and public ownership should be a brake on growth. An example is in order.

The Trente Glorieuse in France was initiated by extensive nationalizations of important sectors in

the economy (Piketty 2014: 2371). This would according to conventional wisdom severely damage

the economy. Nevertheless, the following almost thirty years were characterized by persistently high

growth. The highest ever experienced in France. This development was mirrored in many other

European countries as well (Piketty 2014: 2382). In the 1980's when growth had stalled,

conservative forces around the western world made way for tax cuts and liberalization of the

economy (Piketty 2014: 2394). It was believed that such measures would bring back the previous

55


booming growth figures. This did not happen. Evidence even suggests that there is no statistical

significant relationship between the decrease in top marginal tax rates and the rate of productivity

growth in the developed countries since 1980 (Piketty 2014: 8919). Piketty surprisingly concludes

that:

“In fact neither the economic liberalization that began around 1980 nor the state interventionism that began in 1945 deserve such praise or blame. France, Germany, andJapan would very likely have caught up with Britain and the United States following their collapse of 1914-1945 regardless of what policies they had adopted (I say this withonly a slight exaggeration).” (Piketty2014: 1741)

What is important here is that Piketty convincingly argues that advanced countries have fair room

for maneuvering in politically diverse ways with concern to public ownership. To Piketty, history

has taught us that extensive public ownership of important industries does far from cripple growth or

wealth.36 In fact, new ways of organizing may be helping to spread wealth more equally:

“It is perfectly possible to imagine that new decentralized and participatory form of organization will be developed, along with innovative types of governance, so that a much larger public sector than exists today can be operated efficiently.” (Piketty 2014: 8381).

With these forms of institutions, it would even be possible to have a larger public sector than the

record holders in the Scandinavian countries (Piketty 2014: 10055). In other words there is still in

Piketty's eye's room for experiments with intermediate forms of ownership that exists somewhere

between the private and public.

“The dividing line between public capital and private capital is by no means as clear as some have believed since the fall of the Berlin Wall. As noted, there are already many areas, such as education, health, culture, and the media, in which the dominant forms of organization and ownership have little to do with the polar paradigms of purely private capital (modeled on the joint-stock company entirely owned by its shareholders) and purely public capital (based on a similar top-down logic in which the sovereign government decides on all investments)” (Piketty: 2014: 10071).

But is Piketty not being inconsistent here. How are we to invent new forms of ownership if private

property and competition are imperative to coordinating the actions of the masses? It seems that

Piketty himself sees an increased mix and democratization or even a marginalization of the purely

36 The economist Will Hutton has pointed out that productivity in the nationalized British industries matched or even outdid the private sector (Prickett and Wilkinson 2010: 246)

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capitalist economy as a much more ideal solution to the problem of capital concentration. Perhaps,

what Piketty is getting at is that we must experiment as long as it is not a centralized totalitarian

experiment. But if this is true then it seems that the best and most long term solution may not lie in a

global tax on wealth, but instead in an effort to support the creation of democratic practices in the

very core of the economy.

Also Piketty calls for ”New forms of participation and governance [that] remain[s] to be invented.”

(Piketty: 2014: 10071), but it does not take more than a quick survey of the literature on existing

alternative forms of participation and governance to understand that Piketty is not as knowledgeable

about real economic utopias as he perhaps should be (Wright 2010; Schweickart 2012, Graham

2009; James 2009; Pateman 2000).

It seems to me that Piketty may have felt pressured to come up with a solution that was for one,

simple, two, within pragmatic standards and three, would align or help create potential for other

reforms. But perhaps if had Piketty been more attentive to new critical theory, historical experiments

and recent literature on alternative participatory governance, he would have changed his conclusion.

4.5.1. Concluding on ownership

In sum Piketty is not entirely clear when it comes to alternative forms of ownership in the economy.

On one hand he rejects the idea of experiments with fundamental change in ownership as a means to

ensure a more egalitarian society, by taking recourse to the failures with planned economy in the

Soviet Union. On the other he dismisses the accusations raised against nationalizations negative

effect on growth and applauds the development of new forms of local organization, governance,

ownership and democratic control over capital. But then why is Piketty suggesting a rather

centralized global tax on wealth as the only and best solution?

This thesis does not carry any misconception that a single policy initiative would make everyone of

Piketty's normative principles come true. But we need not go all the way back to Marx to find an

initiative that seems logically consistent and better serves Piketty's justificatory principles. In the

next chapter we will see how Rawls portrays a quite different solution to the principles of justice

Piketty raises. Or as Piketty as the prophet of his own theory's inadequacies writes:

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“If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again”” (Piketty 2014: 10087).

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5. Beyond public and private capital

“If Democracy is justified in governing the state, then it must also be justified in governing economic enterprises; and to say that it is not justified in governing economicenterprises is to imply that it is not justified in governing the state.” (Dahl 1985: 111)

5.1. Coming up with answers

So far we have seen how capitalism harbor forces that show tendencies towards concentration of

wealth. Although a liberal capitalist society can legitimize material inequality by ensuring social

order, equality of opportunity, social utility and political equality, it fails in delivering just that. This

contradiction is not overcome by Piketty's global tax on wealth, which inadequately targets equality

of opportunity and political equality.

What does a reinvention of important economic institutions in capitalism mean? In fact, if Piketty

were to be logically consistent he would likely envision a reinvention not only of how ownership is

distributed, but of how things are owned. This section will pursue the question of what such

alternatives might look like, if we were to take the four normative principles Piketty poses seriously.

First I will discuss what it means to theorize about institutions that do not already exist in contrast to

institutions that do. I will argue that desirable, viable and achievable alternatives are best thought

within a framework of practical utopias (Olin wright 2005: 96).

Subsequently I will discuss, with the help of Rawlsian ethics, how we can move from Piktty's

principles to establish a general economic/political framework in which we can find solutions better

suited to address the problems of inequality. This will lead to the discussion of two institutions that

materialize the vision of Rawls and the principles of Piketty: Share-levy wage-earner funds and

cooperative democratic institutions. Finally, I confront the absence in Capital of considerations on

inequality of outcome and the personal experience of inequality. This will make me suggest an

additional principle to Piketty's justificatory framework.

5.1.1. On utopias and thinking about alternatives

In the first pages of Capital Piketty raises the question of utopias, conveying the interesting opinion

that the task of economy is not primarily to suggest a reformatory practice within the bounds of what

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is pragmatically possible. Instead the economist should propose truly utopian politics (of course

within the world of viable solutions), which should then serve as a common metric against which

actual policies of reform could be evaluated (Piketty 2014: 9022). This may cause confusion, as

Piketty at the same time defends the idea of refraining from abstract speculation and a return to

historical data (Piketty 2014: 72, 10146). However, to Piketty this is no contradiction, indeed the

contrary would be so. This means, that to Piketty a political economy has two masters: historical

reality and the public good, and therefore must study “which public policies and institutions bring us

closer to an ideal society” (Piketty 2014:10146). However, as I showed in section two, Piketty did

not have a clear idea of how to set up ideal scenarios or principles, and far less a systematic way of

studying which policies and institutions arise from these principles. This requires some theorizing on

utopias.

The American sociologist Erik Olin Wright suggests that thinking in real utopias is both helpful and

necessary when trying to decide on an ideal institutional setting. Utopias are not only

phantasmagorical pieces brought out of a storytellers twisted mind, they have, if constructed

properly, the potential to advance democratic egalitarian goals (Wright 2010: 1). In the following I

will explain how Wright suggests, that modeling utopias can work as a point from where theories on

institutional alternatives can be evaluated.

To evaluate a theory of alternatives we need three criteria: Desirability, viability and achievability

(Wright 2005: 20). Desirability is the criterion which asks to what extend a proposal delivers the

most desirable result. Desirability is often seen as the purely utopian element which is completely

decoupled from the actual “(...) practical task of institutional building or [works] to add credibility to

challenges of existing institutions.” (Wright 2010: 21). For example, the task of posing desirable

political scenarios is important in making us conscious about our values and commitments to the

“task” of change. However, desirable ideas may at times come up short when attempting to

transform into alternative political projects, that are expected to function in the real world (Wright

2010: 21).

We have already shown how Piketty's global tax on wealth does a relatively poor job at delivering

on the normative expectations in “Capital”, but at least it was a viable suggestion. This brings us to

the concept of viability. Ideas for alternatives and in particular more radical egalitarian proposals,

are often met with the reaction, “sounds good on paper, but it will never work.” (Wright 2010: 22).

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This can be a valid objection. It is thus important for alternative designs to be not only logically

consistent and desirable, but also to have a fundamental foundation in actual human and social

realities. History and culture must be taken into account in what Wright calls the “contextual

conditions-of-possibility” (Wright 2010: 22). Furthermore, an alternative may carry quite

unexpected consequences or may just not function the way it was planned.

In the situation where a both desirable and viable proposal is brought forth, should it be sacked for

lacking achievability? That is, if it seems evident that the current political climate would not allow a

particular policy design to be introduced, should the scholar discard it and refrain from developing it

further? According to Wright we should stick to it. As Wright writes, we do simply not know the

pace of time well enough to predict what may be feasible in a sudden change of political winds

(Wright 2010: 22). Very few people in 1987 would have predicted an imminent collapse of the

Soviet Union and the transition to capitalism over just a few years (Wright 2010: 22). This

uncertainty gives us at least two reasons to continue the utopian quest: First, we must remember that

having constructed consistent and credible alternatives to the current institutions, also makes it more

likely that such designs will be taken up as viable alternatives when things change. Second, the very

essence of the creation of new designs for social institutions lies in part in the conviction and belief

people have about the desirability and viability of such institutions. The fundamental sociological

insight that “(...) social limits of possibility are not independent from the beliefs about those limits”

is important in this context (Wright 2010: 23). By constructing solid alternatives we are at the same

time constructing reasons to believe.

It became clear in the discussion of the global tax on wealth in section two, that as soon as an

alternative is judged undesirable, it matters little if it is viable, and it is of no interest to find out

whether it is achievable. It is therefore surprising that so many words have been spent discrediting to

discredit Piketty's proposal for being unrealistically utopian (Vinik 2014). I will suggest quite the

opposite: Piketty is too realistic and not utopian enough.

We have thus far gained some theoretical ground in understanding how to proceed in developing a

desirable and viable answer to Piketty's four justificatory principles. As Wright might say, Piketty

has given us the normative motor and subtle sense of direction necessary for the functioning of the

'utopian' compass, but we still need a sketch of the utopian designs, towards which our compass

arrow can point (Wright 2006). In the following I will make an attempt to present such points.

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In sum, I take a similar position to Wright, in claiming that any initiative that will move us closer to

the utopian compass points that will be discussed in the following, are desirable alternatives (Wright

2010: 150; Piketty 2014: 9022). Furthermore the alternative designs are meant to live up to both

desirability, viability along the lines of Capitals fundamental four justificatory principles in order to

ensure 1. Social order, 2. Equality of opportunity, 3. Social utility and 4. Political equality.

To do this, we must first seek out higher theoretical grounds of justice. As we once moved from the

sketches of Piketty to a justificatory framework, we now need to move in the opposite direction from

the four justificatory principles to the creation of concrete and just institutions. To to this we ally

ourselves with John Rawls who has surprisingly much to say on what political regime and

institutions would be relevant in the case of Piketty.

5.1.2. From justice to institutions

The ideas expressed in the ethical reflections of John Rawls are very closely related to the ones

advanced in Capital. However, it is clear that Rawls proceeds along a more theoretically stringent

course when deciding what must be done to create the institutions that will satisfy Piketty's

principles of equality, of opportunity and of political equality. I will first introduce Rawls' principles

of fairness, and then proceed to describe what he thought would be the right political answer to these

principles.

5.1.2.1. Justice

Shortly before his death Rawls wrote “Justice as Fairness – A restatement” where he revisits his

ethical theoretical framework that explains “the duties” of the modern state (Rawls 2003). It was,

however, also meant to correct past mistakes and add some reflections on what kind of political

constitution his principles of fairness called for. Rawls' theory is fundamentally arranged around two

principles of justice. The first principle, the liberty principle writes:

“a. Each person has the same indefeasible claim to a fully adequate scheme of equal basic liberties, which scheme is compatible with the same scheme of liberties for all;” (Rawls 2003: 42)

The first principle's denomination of liberties consists of: freedom of conscience, association, and

expression as well as democratic rights. The spirit of Piketty's fourth principle of political equality is

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captured by Rawls' first principle, and although small differences exist they are negligible to the

discussion at hand37.

The second principle reads:

“b. Social and economic inequalities are to satisfy two conditions: First, they are to be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest benefit of the least-advantaged members of society (the difference principle).” (Rawls 2003: 42)

Social and material inequalities are only permissible when they arise from positions that are open to

all and benefit the ones worst off (Rawls 2003: 42). One must be hard-pressed not to see the second

two-part principle as more or less equal to the justificatory principles I have called “Equality of

opportunity” and “Social utility”. The similarity is striking, and not entirely coincidental as Piketty

admits in Capital (Piketty 2014: 8344). However one thing sets Piketty's and Rawls' principles apart.

Piketty is addressing material inequalities and not directly “social inequalities”38. However, I believe

the following discussion will make it clear that the word 'social' does not yet force us to part ways

with either Piketty or Rawls39.

37 It may be argued that Piketty's fourth principle says nothing directly about freedom of conscience, association and expression. But it is hard to see how Piketty or any one else in a democratic setting would not agree on these. I thus maintain that they are very much in the Spirit of Piketty's fourth principle.

38 It is clear that social inequalities giving rise to material inequalities are accountable to Piketty's principles. But this may not be the case when material inequalities give rise to sociel inequalities.

39 What is meant with “part ways” is that a discrepancy between Rawls and Piketty's thoughts on inequality has arisen.Accepting social inequality as an element equal to material inequality has consequences. Buy social inequalities are harder to define and the actual difference between the two will depend on interpretation. This issue of social inequality will be discussed later as a blind spot in Piketty's justificatory framework.

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5.1.2.2. Institutions

Rawls, as Piketty, ventures further to ask what kind of political design such principles would call

for: “We ask: what kind of regime and basic structure would be right and just, could it be effectively

and workably maintained?” (Rawls 2003: 137). But Rawls does not envision a global tax on wealth

as the logical solution to the principles. Rawls sees only two overall regimes living up to the

principles of justice: One, a liberal (democratic) socialism, a system of government ownership of all

productive assets where the institution of a free open market is retained to determine prices, and two,

a property-owning democracy, a system that through radical redistribution ensures widespread

ownership of the means of production (Rawls 2003: 136) (See table 2 for elaboration on the

different regimes).

Rawls expressively refuses (as has already been mentioned) that what we normally think of as

welfare-state capitalism lives up to the principles of fairness. It does as Rawls says, and as Piketty

has proven, not offer a just distribution of capital (Rawls 2003: 139). But contrary to Piketty who

thinks this can be mended by supplying more of the same – more welfare-state through higher taxes

– this is frowned upon by Rawls. The reason for this is that welfare-state capitalism “(...) permits a

small class to have near monopoly of the means of production.” (Rawls 2003: 139). This does not

happen in a property-owning democracy where productive assets and human capital must be

widespread at the beginning of “each period”, or in liberal socialism where all productive capital is

owned collectively (Rawls 2003: 139) (See table 2 for elaboration on the different regimes).

What Rawls means to say is two things. First, the severe unjust concentration of capital will

continue under welfare-state capitalism, even when relatively strong redistribution through taxes

prevails. Taxing wealth at even relatively high levels only serves to stop the wealthy from getting

even more wealthy, but it does not considerably change the way productive resources are allocated

in the beginning of an individuals life (Rawls 2003: 139). Even at a very highly progressive taxation

of capital we are still holding on to a system where a few hold property while many hold none40.

Second, under welfare-state capitalism the wrongs are addressed only after they have already been

committed. In the case of Piketty's wealth tax, it will redistribute only after some have earned

'unjust' income. Instead:

40 This does not change the fact that a capital tax could be used to redistribute property. However this is not an expressed intention in Piketty's solution. It rather aims at limiting the concentration of capital and setting it back to amore 'suitable' level.

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“The background institutions of property owning democracy work to disperse the ownership and wealth and capital, and thus to prevent a small part of society from controlling the economy (…) Property owning democracy avoids this, not by the redistribution of income to those with less at the end of each period, so to speak, but rather by ensuring the widespread ownership of productive assets and human capital (that is, education and trained skills) at the beginning of each period, all this against a background of fair equality of opportunity. The intent is not simply to assist those who lose out through accident or misfortune (although that must be done), but rather to put all citizens in a position to manage their own affairs on a footing of a suitable degree of social and economic equality.” (Rawls 2003: 139)

In addition Rawls sees a risk in a welfare-state that unjustly creates a welfare proletariat/underclass

chronically dependent on government transfers, and who does not participate in public political

culture because of the stigmata that comes with living on government funds (Rawls 2003: 140). This

is nothing short of outrageous to Rawls as the transfers, some may experience as stigmatizing, are

far more justifiable than are the rents the rich earn from capital rent. All the more they need to be

taken into account. According to Rawls we should create institutions that from the outset “(...) put in

the hands of citizens generally, and not only of a few, sufficient productive means for them to be

fully cooperating members of society on a footing of equality.” (Rawls 2003: 140). We will return to

how such institutions might look like.

And liberal socialism? It is clear from reading “Justice as Fairness” that Rawls prefers property-

owning democracy to a liberal socialist model, though Rawls admits that the socialist model lives up

to the same normative standards (Rawls 2003: 138). But why does Rawls prefer one to the other?

Rawls himself comes with quite a curious answer as he tries to refute objections that would naturally

arise from a Marxist critique of liberalism. To Marx any regime that permits private ownership over

the means of production will also in one way or another exploit employees, and therefore not satisfy

the two principles of justice (Rawls 2003: 178). Rawls replies that even if liberal socialism did a

better job at satisfying the two principles, it does not have the same actuality as property-owning

democracy:

“(...) we must be careful here not to compare the ideal of one conception with the actuality of the other, but rather to compare actuality with actuality, and in our particular historical circumstances.” (Rawls 2003: 178).

Rawls' argument here is not very convincing. As we learned from Wright, actuality or as he phrases

it “achievability” is contingent on social conviction and history. Conviction is swayed by ideas and

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ideals while history can changes instantaneously. What remains is that there is not justificatory

reason to choose the property-ownership democratic model over the liberal socialist model.

The above discussion has allowed us to proceed in our thinking on what theoretical alternatives

Piketty's four normative principles should call for. Much points in the direction of either a property

ownership democracy or liberal socialism, depending on the theoretical approach. Wright argued,

that in order to fruitfully engage in Utopian theorizing, the alternative design in question should not

necessarily be clearly achievable. It is sufficient to theorize for the sole reason that the alternative in

question is highly desirable and viable. Rawls on the other hand seems to be more reluctant to

engage in theorizing about a project (liberal socialism) that does not have the wind of history in its

favor (Rawls 2003: 139). This thesis favors Wrights view on Utopian thinking, that the 'unthought'

needs to be thought even when it lacks actuality.

In the following section, when discussing alternatives, I will not be discussing a system level

alternative, that is an entirely new political totality41 which is thought to correct all the ills that

Piketty shows inhabits capitalist economies. However, I do believe that the process of designing

utopian alternatives and reforms with a great degree of actuality may learn from the more

historically “distant” utopian frameworks. But neither space nor scope of this thesis allows for a

thorough presentation and discussion of such wide-ranging alternatives. Instead, I will discuss two

important institutional designs that may help move us a great distance down the “pathway to social

empowerment” as Olin Wright writes (Wright 2010: 246). Let it be said again that there are

indisputably other ways of thinking alternatives to Piketty's global tax on wealth, than the ones

discussed here, and that the ones suggested may not be the ideal solutions of all solutions. Before

describing the concrete designs let us shortly recap what we have learned so far on the diverging

forces of capitalism and the viable political strategies that could be pursued.

5.1.3. General political strategies

As we learned in the first section, Piketty claims that the overall tendency points towards the return

rate on capital exceeding general growth in society (r>g). This will, other things being equal, lead to

an increased capital accumulation in relations to the total annual income (β). For various reasons this

41 I do not believe an exercise of a system level alternative is in any way sterile, rather it leads to important theoretical insights as can be seen in the work of John Roemer on Market Socialism, Michael Albert on the non market participatory economy Parecon or in the same spirit David Schweickart's Economic Democracy (Roemer 1994; Albert 2003; Schweickart 2012)

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will lead to an explosion in inequality with capital being concentrated in the hands of a small

percentile of the total population. Furthermore, if capital rent is kept constant we will also

experience an increase in capitals share of total income (α) leaving labor with proportionately less.

Below, I have portrayed an overview of some of the most important strategies of coping with 'unjust'

distribution and concentration of capital as described in Piketty and Rawls (see table 2)42.

42 Other strategies that are often pursued by politicians but with a different aim: 1. Raising g: Getting the world economic motor to work faster and more efficiently and thereby making the general growth higher than the average return rate. 2. Raising demographic growth will make the importance of inheritance less so when distributed among more heirs.

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Table 2. Different strategies of restraining capital concentration. With inspiration from Rawls and

Piketty.

Strategy ofrestraining capital

Description Political regime

(1) Redistribution of

capital

Ensuring that ownership in the beginning of every cycle

is distributed equally. This means that every child born

should directly or indirectly own as much as everyone

else by birth. Institutions must therefore be set up to

ensure a profound redistribution of property among

individuals in society.

Property-ownership

democracy

(Rawls)

(2) Eliminating capital

return

(1)The socialist solution where ownership of capital is

monopolized by the Government and investments are

entirely removed form the market place into a scheme

of planned production

State-socialism with a

command economy

(2)Ownership over private assets are abolished but

private personal property prevails and firms can carry

on their activities within a system of free and workably

competitive markets (Rawls 2003: 138)

Liberal (democratic)

socialism

(Rawls)

(3) Lowering capital

return

Capital return is lowered relative to national growth

through mechanisms of taxation. This could be obtained

by making profit sharing mandatory (sharing return

with labor), by minimum wage or by directly taxing

capital return or capital possession.

Welfare-state

capitalism43

(Piketty)

43 Welfare-state Capitalism is Rawls' denomination not Piketty's.

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Before we proceed, it should be recalled that option 3, lowering the return on capital through a

global tax on wealth, was found unfit to ensure the normative principles Piketty raises. It is perhaps

reasonable to also discard 2.1. This entirely abolishes the possibility of state socialism as it was

found in the Soviet Union or early China. As Rawls says, state socialism:

“(...) with a command economy supervised by a one-party regime violates the equal basic rights and liberties, not to mention the fair value of these liberties (…) and makes relatively little use of democratic procedures or of markets”(Rawls 2003: 138)

This of course also implies that state socialist command economy does not live up to Piketty's

principles. Although a democratic version of the socialist command economy might be justifiable,

this thesis will not take it any further. A command economy simply has too wide ranging economic

consequences that can not be dealt with properly here, and it seems far removed from the

“contextual conditions-of-possibility” of Wright's viability criteria (Wright 2010: 22).

Finally, this leaves us with 1. Redistribution of capital (Property-ownership democracy) and 2.

Removing capital return (liberal socialism). These must be the founding theoretical principles for

institutional alternatives to the inherent inegalitarian and unjust divergent forces (r>g) in the

economy Piketty has so finely sketched. Discarding the welfare state capitalism regime does not

mean that certain tools inherent to this logic should be wholly avoided. They may in fact, as we shall

see later, be supplementary.

From here, I move on to discuss two institutions or alternative designs that I find live up to Piketty's

demands and which to a certain extent have already turned out to be not only viable but also

achievable at a national and regional level in many democratic countries. They offer a mixture of:

distribution of capital (by cooperatizing) and elimination of capital return (by collectivizing through

a system of wage-earner funds). I'm here thinking of the introduction of share-levy wage-earner

funds, and cooperative democratic institutions.

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5.2. A democratic economy

The aim of the following discussion is to present and analyze the design of wage-earner funds

through share-levy and the institution of cooperatives. The idea is that both contain important

advances along Piketty's four principles, towards what we might call a democratic economy.

5.2.1. Share-levy wage-earner funds

In the 1970s the idea of Economic Democracy (ED) (a form of share-levy wage-earner funds) swept

through Scandinavia. A strong nearly hegemonic social democratic rule had strengthened the

cunning of the labor unions and their demand for equality in ownership of the productive assets. In

Denmark in the 1974 run-up to the introduction of a proposal on ED in parliament, not a single party

claimed to disagree that the ownership of productive assets were too unequally distributed (Toft

1979: 84). This was quite surprising as Denmark in line with the rest of Scandinavian countries at

this point in time could be counted among the most equal countries ever to have existed in the

history of modernity (Piketty 2014: 4423). However the different parties did not agree on the

methods of reform. After a disastrous election for the Social Democrats that resulted in a severely

reduced political representation (which was not a consequence of the ED proposal), the plan of ED

was all but put on a hold never again to emerge. But why were the unions and the social democrats

so eager to introduce the share-levy wage-earner funds?

In the 1970s Denmark, industry was characterized by underinvestment which combined with the

trade union's desire to create workplace democracy and democratic control of capital rule created

backing for the idea of ED (Toft 1979: 3, 10). Not only would ED make industrial sectors more

democratically run, it would also ensure an additional capital flow for the company to invest.

The fundamental idea is to introduce a share-levy on profits from all companies of a certain size.

Smaller firms would continue to pay ordinary taxes directly to the Government which would be say

20 % of their corporate profits (Wright 2010: 30; Toft 1979: 50). Conversely, the share-levy tax

would not be a portion of money paid directly to the state, instead it is to be paid out as new shares

to democratically controlled funds. In this way the tax would not affect the immediate income

available to a firm, and would therefore leave the firm with its entire monetary profits; thus more to

invest. The tax would as such function as a wealth tax on shareholders “calibrated on the basis of the

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corporation's profitability.” (Wright 2010: 230).By increasing the number of shares, the value and

influence of individual member shares would be diluted.

But who should own the shares? The idea is to create a wage-earner fund, which would be

representing all employees in the economy (Toft 1979). It would be the entity to receive the shares

and it should be controlled through some democratic process.

One of the most discussed experiments of ED happened in Sweden in the 70s, where the idea was

not only well developed but also became a reality (although in a highly limited form). Wright writes

on the Swedish proposal that:

“In Sweden the proposal was for the fund to be organized through a network of local and workplace funds largely controlled by the unions, but the fundamental principle is that the wage-earner fund is controlled by democratically accountable popular associations, and other associational arrangements besides unions would be possible.” (Wright 2010: 230)

It is not clear what would be the best way of organizing such funds, but it may be relevant to

consider different democratic proposals. In Denmark a mixed ownership between the government

and labor unions was suggested, but it has been argued that the quarrel between them, and the fear of

centralizing power in the hands of the labor unions, was the reason for the eventual fall of the

Danish ED (Toft 1979: 90). A similar proposal in Sweden caused a political backlash, as people

(even within the trade unions) felt uneasy by excessive centralization of power in the hands of trade

union leaders (Blackburn 2007: 44). This could perhaps have been avoided if the board of directors

of the funds were responsible to the citizens of the locality, so the people were the ones to decide on

electing or sacking the directors (Blackburn 2007: 44)44. Also if the locality got to decide over a

substantial part of the income from shares to communal projects this might have stimulated support

of the proposal. A decentralized democratically elected management may thus be preferable for a

number of reasons.

The fund is constructed such that shares transferred to the fund can never be sold. They confer the

same rights as usual: rights to dividends, rights to vote for the board of directors and occasionally

44 The wage-earner funds were eventually set up in Sweden in 1982, but with very modest firm contributions and with no means for the citizens to direct funds to social projects or regional growth (Blackburn 2007: 43). Perhaps this wasthe reason why they were also very short lived, dismantled by a conservative government in 1992 (Wright 2010: 233). In spite of the weakened form of the wage-earner funds, they comprised 7 percent of the total stocks quoted onthe Swedish stock exchange in time of their dismantling (Blackburn 2007: 43).

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vote on company policies (Wright 2010: 2031). With time, as private shares are marginalized, the

wage-earner funds will gradually take over the control of firms. Through this form of indirect taxing,

ownership will increasingly be socialized and democratic influence over large firms be secured

without eliminating either market or competition. Moreover this measure would not be “(...)

reducing the financial profits of corporations and their capacity to invest those profits (...)” only

ownership would change (Wright 2010: 232)

5.2.1.1. Hybrid ownership structure?

How large a share of the company should wage-earner funds be allowed to own? Would it perhaps

be reasonable if the funds were only allowed to own no more than 51 percent of the individual firm,

thus creating a basis for a more hybrid ownership model? Or should private ownership of large firms

largely be eliminated, thus perhaps making it more interesting to invest in small firms? To me it

seems that such decisions must be taken with reference to Piketty's second and fourth principle of

“Political Equality” and “Equality of Opportunity” and of course with the economic consequences of

companies becoming increasingly owned by the funds in mind45. If the wage-earner funds can

manage to hold a very large share of the individual company, undisturbed by unintended economic

damage and simultaneously facilitating democratic control of the funds, then this would be the ideal.

However there could be advantages in allowing for example employee controlled firms to retain a

majority share in their own firm (as will be discussed later). Also there might be benefits from

letting private shareholders keep a considerable share to raise market trust46. With the meager

experience we have of this institution in practice, implementation must rest on careful practical

experiments that can be adjusted continuously.

Another intriguing idea is the suggestion, as was the case for the Swedish idea, of creating not one

big fund but a network of regional and local funds. The British historian Robin Blackburn explains:

45 Piketty discusses how the lower market valuation of German firms can be contributed to “the stakeholder model” “(...) in which firms “are owned not only by shareholders but also by other interested parties known as “stakeholders,” starting with representation of the firms' employees (Who sit on the board of directors of German firms not merely in a consultative capacity but as active participants in deliberations, even though they may not be shareholders) as well as representatives of regional governments, consumers' organizations, environmental groups, and so on.” (Piketty 2014: 2500). A lower valuation may also affect the wage-earner funds.

46 Market trust could be a considerable problem if a share-levy wage-earner fund is introduced in a single country, as this might with time create an outflow of capital. This can never be avoided entirely but may be forestalled by lettingprivate shareholders retain a certain share of every individual firm.

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“A portion of these funds would go to an enterprise-level body run by the employees, who would thereby acquire a growing stake in their employer. But the bulk of the funds would be channeled to the regional network, representing local communities and trade unions.” (Blackburn in Wright 2010: 232).

Such measures would not only avoid the possible problems of centralized power and planning, but

would also create the opportunity for the employees of the individual firms to decide for a

cooperative takeover, thus introducing democratic management within the firm. In this context, the

important thing is that the associations “(...) rooted in civil society have democratic control over

corporations via their control over these funds.” (Wright 2010: 232). There may indeed, as

mentioned earlier, be reasons to open up the funds and detach them from too powerful entities in

society.

In sum, a share-levy wage-earner fund offers an alternative to normal corporate taxing and

suppression of market forces. Over time ownership is slowly socialized and surplus is funneled back

into the local economy through a democratic process (Blackburn 2007: 43). Together with a strong

democratic profile and a decentralized power-structure the wage-earner funds may radically alter

wealth disparity.

5.2.1.2. Justifying wage-earner funds

A network of wage-earner funds will contribute to remove capital return from private hands into

public, local ones through a collective ownership of productive assets, making sure that the profits of

economic growth are shared by the many. Also, as experienced from Sweden shows, the funds seem

to have a stabilizing effect on employment and general growth (Blackburn 2007: 44). A study by the

economist Phillip Whyman from 2005 evaluates the effects of the Swedish wage-earner fund and

finds:

“In macroeconomic terms, their introduction and expansion was associated with increased collective savings, capital formation, economic growth, moderated labour costs, higher industrial employment and an improved inflation–unemployment trade-off.” (Whyman 2005: 64)

Even if the Swedish funds were not arranged in a democratically sufficient form to reach the goal of

direct democratic empowerment over capital, it did secure higher collective savings and higher

industrial employment and economic stability favoring Piketty's first principle of social order.

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The wage-earner fund ensures redistribution across localities and a considerable shift in the

ownership pattern on a large scale. Much wealth will be put in public hands while people in their

local setting would be able to allocate funds for social activities or local necessities. This ensures

that economic growth will profit not only a small group of people but the population at large, thus

making everyone better off along the lines of the third principle of social utility while democratic

access may also indirectly help ensure the principle of equality of opportunity.

By redistributing capital from rich shareholders to a network of democratically run funds, excess

profits can be redistributed according to public interest. It might with time be possible to finance an

unconditional basic income, sometimes referred to as a negative income tax (Wright 2010: 217).

This would likely strengthen social mobility, and certainly ensure that every time the economy was

doing well the least well off would also prosper, as the wage-earner funds would be accumulating47.

Income from the funds could also be funneled to fund free access to secondary and higher education.

In this way the likelihood of individuals growing up with the same opportunities in life are

additionally enhanced. As will be discussed later there are indications that the higher the equality of

economic outcome for people the higher the social mobility (Pickett and Wilkinson 2010: 160). The

Share-levy wage-earner funds thus make for a better foundation for equality of opportunity, Piketty's

second principle, than does a global tax on wealth.

With the funds growing into a major shareowner of big companies they ensure that private capital

does not get an in-proportionate say in politics. This can be further stimulated by the funds taking an

active role in channeling profits into socially desirable projects of all sorts, getting a major say in the

future climate of investment. This could be infrastructure, investments in a greener production or

fair working conditions and the like. This satisfies Piketty's fourth principle of political equality.

5.2.1.3. Challenges

What happens if capital is funneled out of the country, either to seek higher returns or lower taxing?

How are we to introduce share-levy without experiencing capital flight or aggravation of tax

evasion? These are very real problems, and are already a threat to national taxing of international

corporations (Piketty 2014: 10087). Piketty's suggestion of a tax on wealth was faced with the very

47 However return on capital would of course be subdued to the ups and downs on the market which makes it risky to let a minimum allowance depend entirely on the returns from publicly held capital. Instead such measures should be decided upon with additional securities if a financial crisis was to happen.

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same issues and the wage-earner fund does little to amend this. It will, as Piketty suggests, be

convenient with a higher level of transparency and international agreements to restrict banking- and

tax-havens. Hereof the global tax and not national tax. Although such measures may eventually be

necessary we do not know how much greater capital flight will be under a share-levy regime

compared to a regular corporate tax, which exists in most countries. However, we are already

experiencing competition on cooperate taxing among nations, which according to Piketty may push

tax levels down to unprecedented levels (Piketty 2014: 10087). This does not mean that a new tax

regime or relatively high corporate taxes will push the majority of capital to leave a particular

country. There are high transaction costs involved in moving a firm from one country to another, and

investing in companies with share levy taxation is still profitable.

We must recall how the wage-earner funds do not by themselves ensure democratic rule of the firms,

far less influence of the employees working there. We may very well expect that wage earner funds

will leave individual firms to continue with traditional firm management, as long as they are

profitable and do not directly affect the region or locality. This could be countered by also shifting

power within the firm, by facilitating a shift to cooperative production. To create actual political rule

of the firm, a share levy wage-earner fund should be combined with of a cooperative component.

While wage-earner funds ensure overall democratization of capital, employee-managed firms or

organizations would ensure a leveling of wage differences within the firm and direct employee

access to decision making in the governing board committee.

5.2.2. Cooperative Democracy

In northern Spain, in the rebellious Basque Country, a completely peaceful phenomenon has the last

30 years drawn the attention of foreign scholars and leftist dreamers. Mondragon, an association of

firms that employs approximately 80.000 people in Spain and abroad and whom, until the financial

crisis had experienced continued growth without a single bankruptcy since its inception in 1956

(Wright 2010: 240; Mondragon 2015). Firms affiliated with Mondragon are twice as profitable as

other Spanish firms and have the highest productivity in the country (Prickett and Wilkinson 2010:

251). However, Mondragon is not an ordinary association; Mondragon is the worlds largest

association of democratically controlled firms. Before saying more about Mondragon, which is a

particular kind of cooperative, I will dwell at the notion of employee-controlled firms or

cooperatives.

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A cooperative is not much different from a regular firm with shareholders, apart from one important

fact, the shareholders are all employees in that particular firm. The firm is thus controlled by labor

suppliers instead of capital suppliers (Gregory K. Dow 2003: 2). This means that employees have

the equal rights of voting, electing or getting elected for the managing board of directors. Employees

are both governed and governing with a position to decide over firm management and overall firm

strategy (Wright 2010: 238). Cooperatives vary considerably in institutional and cultural practices.

Some cooperatives are not employee-owned firms but supply or consumer cooperatives. This is the

case in the consumer owned cooperative “COOP Danmark”, the biggest chain of convenience stores

in Denmark with 42 % of the market and 1.4 million owner-members (Wikipedia 2015).

Cooperatives vary with regard to democratic institutions. Some are governed along the lines of

direct democracy with one or two general assemblies every year, where major decisions are taken on

the overall strategic lines of the company (Wright 2010: 238). Others have a more representative

structure where a group of members are elected to the board of directors to direct and oversee the

firm executive. However, the point is that whatever way the cooperative is governed there is no

direct individual ownership of the capital involved.

It has often been argued, that cooperatives, through the cumbersome democratic processes are less

efficient and productive than their 'autocratic' counterparts. However, a wide range of empirical

studies have concluded that there are many reasons for employee-cooperatives to be as much or even

more effective than the regular firms (Wright 2010: 239; Dow 2003: 20; Schweickart 2011: 61). For

one, the interests of employee and manager is much more closely aligned in a cooperative, which

can increase engagement and diligence of the employee (Dow 2003). This solves the problem of

employees being averse to sharing knowledge valuable to the firm, and it may incentivize a more

collaborative process, which can enhance problem-solving capacities (Wright 2010: 239;

Schweickart 2012: 207). Studies show that employees in cooperatives with considerable

decentralization of decision-making, make the middle leaders segment superfluous and therefore

considerably lowers transaction costs of monitoring (Wright 2010: 239, Pateman 2000: 63). It is thus

not surprising that evidence suggests that cooperatives also in practice tend to be at least as

productive or even more so than regular firms (Schweickart 2011: 61). These benefits can not be

reaped by merely introducing participation in management in a privately owned firm. A review of

research on the issue concluded:

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“We can say with certainty that when ownership and participative management are combined, substantial gains result.” (Pickett and Wilkinson 2010: 249)

There is scores of examples of fully employee-owned companies with good results (Pickett and

Wilkinson 2010: 251). But also consumer owned cooperatives seem to flourish. This is illustrated on

the Danish retailer market where, despite fierce competition, the cooperative convenience chain

COOP has been expanding its market share every year from 2007-2013 (COOP 2013).

But there are other reasons why cooperatives may be a better way of running a company. The

political theorist Carol Pateman wrote the book “Participation and Democratic Theory” which is

now considered a classic in political science (Pateman 2000). Here she indirectly poses the

following paradox: In times where support for democracy and self-government has rarely been

stronger, the vast majority of democratic citizens still spend most of their waking hours in

oligarchical and hierarchical institutions. Pateman argues that work life makes up for an important

public activity that should, as most other public activities, be put under democratic control (Pateman

2000: 55). She argued that work, apart from being an economic undertaking also refers

“(...) to activities that are carried on in co-operation with others, that are 'public' and intimately related to the wider society and its (economic) needs; thus we refer to activities that, potentially, involve the individual in decisions about collective affairs, theaffairs of the enterprise and of the community.” (Pateman 2000: 55)

To be sure, what Pateman here advocates is that the control of the company and the means of

production also has an important public and thus a political role to play. Pateman would say that in

order to ensure political equality the means of production must also be ruled democratically. One

may consider if it is then enough to concede all power to the employees in a firm. That is, it would

perhaps be reasonable to include other stakeholders of local or perhaps national or particular NGO's

in the board committee, as is practice in German firms today (Piketty 2014: 2500).

Of equal importance for the cooperative model is the indication that employees in cooperatives have

more political self-confidence. Such confidence is known to raise participation and engagement in

politics (Pateman 2000: 46). Assuming that political equality is closely connected to the actual

participation of people in civic and political society, cooperatives could be an important factor in

enhancing not just access, but participation in political decisions (Pateman 2000: 46). Contrary to

this, a regular firm retains authority structures that, according to Pateman, inhibit self-esteem and

self-confidence (Pateman 2000: 52). As a side note, studies also suggest that working conditions

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tend to be better in cooperatives (Pateman 2000: 65). This aligns with studies showing that

employees in charge of their local working conditions are generally more happy and gratified in

their everyday work (Fisher 2005; Magnani 2009: 88). However this effect should not be

exaggerated as a study by Sharryn Kasmir in one of the cooperatives in Mondragon shows (Kashmir

1996: 166)48.

All this may seem very appealing, but if an employee-controlled firm has so many qualities then

why are cooperatives not more predominant in today's economic landscape? Why have they not long

outmatched the capitalist firm? One might be tempted to think that there is a very clear reason for

this; cooperatives can simply not compete with capitalist firms on production. However this is far

from the truth according to economist and expert in employee managed firms Gregory Dow:

“Nothing thus far implies that the relative economic efficiency of KMFs [Capital Managed Firms] and LMFs [Labor Managed Firms] must play a central explanatory role.” (Dow 2003: 11)

He points to other much more mundane reasons for why cooperatives only represent a small

percentage of all firms today. First of all it is a problem of funding. In transitions from regular

company to a cooperative, it often happens that transition-costs rest heavily on single employees.

This inhibits growth and bifurcation of cooperatives and thus makes them what Dow calls under

supplied (Dow 2003: 17). Dow explains it this way:

“(...) it is difficult for anyone to privately appropriate the potential social benefits from transforming a KMF [Capital manged firm] into an LMF [Labor manged firm]. To do so, buyout organizers would need to know what value employees place on control rights and then insist that they pay corresponding prices for continued membership in the transformed firm. This is generally impossible, and thus employee buyouts are likely to involve free-rider problems in which the benefits are widely diffused among workers while the transition costs are concentrated on a few individuals (Dow 2003: 17).

48 In “The Myth of Mondragon” Sharryn Kasmir points out that cooperatives are no guarantee for employee participation or satisfaction in the workplace (Kasmir 1996: 166). Quite on the contrary, she finds that employees in private firms, where there is a strong trade-union presence, may fare better than employees in cooperatives. In other words, although a cooperative offers a democratic and participatory superior model to that of the private firm, it still seems to require active external and internal employee organization to stay cooperative in practice. To be sure, Kasmir's overall conclusions should be taken with a grain of salt. By comparing a Mondragon cooperative with locally similar private firms, she fails to detect the potential positive effects the enormous cooperative employer mayhave for average employee welfare in the region.

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This makes it very difficult to arrange a buyout as people seem to have different interests at stake.

Such uncertainty simultaneously makes it hard to find capitalization on markets, as cooperatives are

seen as high risk by banks. Dow's conclusions are supported by the very strong presence in Danish

economic life of cooperatives (among them the largest dairy company (Arla) the largest convenience

store (COOP Danmark), and many large housing agencies) that were either started out of necessity

or, as is the case for many cooperative housing agencies, with the help of public funding (COOP

2013; Arla 2015, Gyldendal 2015). It is thus a lack of “economic infrastructure for cooperative

activity”, imperfections in credit markets and high internal transition costs that inhibit the natural

spread of cooperatives today (Wright 2010: 239). In the following I will depict an example of how

these obstacles, have been solved by forming a network of cooperatives in Mondragon very similar

in structure to a network of wage-earner funds.

5.2.2.1. Mondragon

Mondragon is composed of 257 employee owned cooperatives and is as such a solidarity association

of cooperatives (Mondragon 2015). Internally the cooperative is governed by various councils and

boards to which elections are held once a year. The sovereign body of the cooperative is the The

General Assembly, which is normally held once a year, appoints the managing director and has the

power to decide on the broad strategies of the cooperative (Wright 2010: 242). Externally the

cooperative chooses people to sit in the Representative Councils that comprises the entire

Mondragon Association (MCC). The role of these councils at higher organizational levels of the

association are to “(...) coordinate activities across individual cooperatives, and formulate long-term

strategic plans for Mondragon as a whole.” (Wright 2010: 242). A very important institution in The

Mondragon association is the central bank, the Caja Laboral, which since its founding in 1959 has

been supplying much needed capital and other financial services to the cooperatives. In addition to

this, a crucial institution for the success of Mondragon is the solidarity fund. In the MCC each

cooperative contribute a part of their profits to various functions in the association, among them a

university and a hospital, but the lions share goes to the solidarity fund (Wright 2010: 241). This

fund ensures that redistribution takes place, from those cooperatives that have been experiencing

high profits in a given period to those who have been struggling to stay in business. This mechanism

together with an “employee exchange” system that, in times of crisis, allows employees to be

temporally transferred from one cooperative to another, has made Mondragon surprisingly resilient.

Let's look at the numbers. The MCC has obtained a remarkable economic stability with low

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fluctuation in employment and no bankruptcies until the great recession of 2008 where one big

company was let go (Wright 2010: 241) (Schweickart 2011: 68). This resilience is mirrored in the

steady performance of cooperatives all over the world, throughout and after the financial crisis as

compared to regular firms (ILO 2009). However, the MCC is no ordinary association of firms: “The

MCC constitutes a social infrastructure for the reproduction and expansion of cooperative ownership

which partially insulates each cooperative firm from the full force of the competitive, profit

maximizing pressures of capitalist markets” (Wright 2010: 242).

The case of the MCC gives us some indications on what measures that must be taken if a

cooperative economy is to be expanded beyond its present scope. We must in other words ensure

proper economic infrastructure with adequate funds for start-ups and perhaps create networks of

cooperatives that work together to minimize economic fluctuations and maximize employment. This

can almost instantaneously be ensured by combining cooperative democracy with share-levy wage-

earner funds.

5.2.2.2. Justifying cooperative democracy

In light of Piketty's thesis of capital accumulating in the hands of the few and capitals capture of an

increasing share of total national income, the cooperative model of profit sharing seems far more

relevant than ever. In the words of Gregory Dow:

“Greater capital mobility may mean that KMFs [Capital Managed Firms] will appropriate or destroy rents and quasi-rents traditionally captured by labor, stimulating greater interest in workers’ control as a countervailing strategy.” (Dow 2003: 289).

This is much the process Piketty is depicting as a fact. In this situation Dow thinks that the

cooperative model would have an advantage to taxation by its efficient redistribution of profit

among employees (Dow 2003: 289). As wealth and general growth in society would be distributed

more equally people would not be in dire need of borrowing money beyond their means making

economic crisis less likely, and no one would be under such economic distress as to destabilize the

political realm. This supports Piketty's first and third principle of social order and social utility.

A more cooperative sector furthermore has the potential to ensure higher economic resilience and a

stable employment if and when an economic crisis was to occur (Co-operatives UK 2012; ILO 2009;

Schweickart 2011: 68). It was also argued that cooperatives may enhance the feeling of community

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and coherence in a society by securing dignity (Pateman 2000: 52; Fisher 2005, Magnani 2009: 88;

Dow 2003: 19).

The cooperative model aligns with Piketty's second principle of equality of opportunity by ensuring

that employees are more equally remunerated. Experience shows that cooperatives put a break on

very high wage-levels, but that they are not adverse to pay differences. In Mondragon most

companies have wage differences of no more than 4,5 times between the highest and the lowest

paid, and suggestions to have that raised are often defeated by employees (Schweickart 2011: 68).

Compared to the 331 times the American CEO earns relative to the lowest paid, and the 127 times

the Spanish CEO earns compared to the average employee, the MCC's pay-difference is miniscule

and shows the cooperatives considerable potential for redistribution and justice (Dill 2014). Lastly

and importantly, cooperatives are the most politically equal way, Piketty's fourth principle, of

arranging a labor market. Equality is secured firstly through the redistribution of ownership of the

means of production, and secondly by ensuring direct democratic influence in individual firms.

5.2.2.3. Challenges

When employees own the company they work in, they are also more vulnerable to economic

fluctuations or bankruptcies. If a crisis occurs they might end up loosing a great portion of their

savings tied up in the company. In this way a cooperative employee would thus be risking more than

she would be in a regular firm, but also stands to profit much more if things go well. Also, employee

ownership of cooperatives means that people in thriving companies will earn much more than

people in companies that are barely profitable. This allows relatively big pay-differences between

equally skilled employees in different companies and industries.

The first problem is a challenge for Piketty's first principle of social order. However it seems that

this could be overcome with a kind of solidarity fund modeled after the one in Mondragon or ideally

via the share-levy wage-earner fund, to ensure that cooperative risk, is shared in a network of

unequal industries. The second issue could also be seen as an argument for ownership sharing in a

network of wage-earner funds. Here profits can be distributed and shared with less fortunate

employees. However, redistribution could also be managed within a system of taxation, the

important part being to avoid high concentrations of capital.

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Although other measures may exist that improve income and wealth distribution more efficiently,

cooperatives will spread capital ownership more equally without aggravating existing inequalities

and may indeed have further equalizing effects (Dow 2003: 19). If constructed properly with a

solidarity function of transfer of excess profit to other cooperatives the level of equality would be

highly improved. Furthermore there is no reason to believe that a system as proposed would make

all taxation superfluous. It will still, although perhaps to a lesser degree, be necessary to redistribute

by taxing income and capital.

Finally, it would be a disservice to employee cooperatives to see them as merely a competitive

democratic alternative in a market economy. On market conditions alone it is unlikely that

cooperatives will find funding, gain the upper hand and outperform the private firms. This is partly

because access to investment and initial start-up is much harder in a conventionally thinking

investment regime, and because of the competition cooperatives face from low-wage countries

(Wright 2010: 236). As can be seen now the expanded model of cooperative democracy with a

solidarity mechanism, which is here advocated, is very similar to the wage-earner funds suggested

earlier.

5.2.3. Fusing wage-earner fund and cooperative democracy

Are the discussed alternatives the new decentralized participatory forms of organization that Piketty

has called for (Piketty 2014: 10055)? And can levy-share wage-earner funds and a cooperative

democracy go hand in hand? This thesis believes it to be so, and that the two can even work to

empower each other.

Considering the above, it may not be immediately feasible to change the entire corporate structure

with the wave of a wand. Instead, in order to make the economy locally accountable and

controllable, governments may want to pursue several egalitarian strategies as Wright suggests, that

will lead us in the direction sketched above (Wright: 2010: 269). The share-levy solution has the

advantage of advancing an egalitarian society and fundamentally alter the existing ownership

patterns without direct distortions to the way the economy functions today. In fact, share-levy wage-

earner funds can be seen as a way of getting to a cooperative economy without taking recourse to

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direct expropriations. All that is actually done is a slow mixing of private ownership with public and

communal types of ownership.49

5.3. Social consequences of Inequality

So far, as much as words allow, I have tried to stick as close as possible to the principles inferred

from Capital. I wish to believe, and I hope the reader will agree, the deductions made and the models

suggested could have been undertaken by Piketty, had he decided to take his own justificatory

principles to their logical conclusion. I have brought little more to the analysis than the insight of a

political theorist into the implications of particular ethical principles and a sociologist's thoughts on

real utopias. But this is where we must part, or in the least add to the 'new' path of Piketty. The issue

is that although Capital's justificatory model may address commonly shared justificatory principles

concerning inequality, it has an important deficiency. It does not address the actual social

consequences, inequality has for the public, nor does Capital have anything to say about how

inequality is experienced by 'regular' people50. In the closing part of this thesis I will therefore look

into Capital's lack of emphasis on inequality of outcome and the social consequences that may

ensue.

5.3.1. Inequality of outcome

Advances in the area of research with regards to inequality's social impact seems almost remarkable

in their absence in Capital. The problem can be framed as follows: Even if material inequality in a

society is small enough to prevent civil revolt and can generally be justified according to the

normative principles (equality of opportunity, social utility and political equality), inequality may

still have severe effects for citizens, making it desirable to curb it even more.

The scholars Kate Pickett and Richard Wilkinson wrote “The Spirit Level” in 2010 with the

argument that it is not the level of income that matters when trying to predict social problems and

health related issues across developed countries. When countries reach moderately high income

levels, a rise in total average income seizes to be relevant in improving a large number of health

related issues (Pickett and Wilkinson 2010: 6). Instead it is the “scale of material differences

49 There is however a weak spot that complicates the analysis. This is the issue of free movement of capital across borders, and therefore the possible difficulty for a country to implement the above mentioned alternatives.

50 As discussed in the theory of science chapter with Honneths position on pre-scientific element or recognition (Honneth 2003: 27).

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between people” within a society that considerably affects health and social 'dysfunctions' in a given

country (Pickett and Wilkinson 2010: 25). Pickett and Wilkinson's study found a curious tendency.

The more inegalitarian51 a country is the more drug abuse, violence, homicide, imprisoned citizens,

teenage mothers, obesity and mental illness exists among the population of that particular country

(an accumulation of their results can be seen in figure 1) (Pickett and Wilkinson 2010: 20).

Furthermore, inegalitarian countries tend to have higher infant mortality, lower life expectancy and

worse educational performance among children. Material inequality simply seems to be a better

predictor of public health than does average income level.

Surprisingly, Pickett and Wilkinson also found that lower inequality not only improves 'life quality'

for the poor part of the population, but also appears to have benefits for the top of the income ladder

(Pickett and Wilkinson 2010: 181). The public health scholars suggest that everyone would be better

off if inequality was lowered, at least on the parameters they are testing. However, the correlations

between inequality rate, health and social problems must be taken with some reservations. The data

points only amount to 25 countries, as the total number of countries living up to the principles of

high average income level, a population of +3 millions and good data on income inequality is simply

limited (Pickett and Wilkinson 2010: 267). This makes it hard to talk of statistical proof. But as the

study more or less spans the entire population of developed countries there is no real alternative52.

51 Inequality is measured as “(...) how much richer the richest 20 per cent of the population is in each country compared to the poorest 20 per cent.” (Pickett and Wilkinson 2010: 15). This measure is very similar to the one Piketty uses and thus makes comparing according to the international standard the Gini-scale, and not as in Piketty according to adherence to percentiles.

52 To strengthen their claim, they make the same comparisons between the US states and find a similar relation between inequality and health (Pickett and Wilkinson 2010: 22)

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Figure 1. (Pickett and Wilkinson 2010: 20)

Although we should be careful when talking about any direct causality between inequality and social

problems, the data presented in “The Spirit Level” shows a robust relationship that can not be

ignored. Pickett and Wilkinson reflect, that although each social problem and health issue can be

explained with recourse to a unique causal mechanism activated by the level of inequality, there still

seems to be a more general relationship at play. Material differences have a tendency to create a

subtle status hierarchy which effects not only our opportunity to move freely across income groups

(social mobility), but also alters the social structures of recognition and status (Pickett and Wilkinson

2010: 36). It turns out that status and recognition has directly measurable effects on our psycho-

social well being (Pickett and Wilkinson 2010: 40, 71). A high level of inequality creates a society

where a high level of threat to the social self prevails, and where self esteem and social recognition

is constantly at risk. This suspicion is supported by the professor in Sociology at Cambridge

University Goran Therborn, who calls this the lethality of status:

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“Social status hierarchies are literally lethal. Why should the lowest rungs of Whitehall [British government center] have a four times higher probability of dying before retirement age than the top rungs?” (Therborn 2012: 586).

5.3.2. Inequality of recognition

The answer to Therborn's question is perhaps partly to be found in the concept of recognition53. As

mentioned in the theory of science chapter, the sociologist Axel Honneth's theory on the struggle for

recognition presents an important addition to Piketty's thoughts on inequality (Honneth 2003: 36).

Not only does it explain how distribution of wealth is at the same time a matter of distribution of

recognition, it also offers a general theoretical frame for understanding the dynamic effects of

inequality in creating the individual experience of mis-recognition (Honneth 2003: 39). To recap, by

applying the insights of Honneth, the experience of low social esteem or mis-recognition (and

perhaps even the experience of difference in social and personal health) is put into a framework of

political struggle that explains the concrete social experience as a consequence of the material reality

of rising inequality.

It is not obvious if the justificatory system of Piketty merely needs an addition in shape of a fifth

principle, or if the very definition of inequality must be expanded. It is true that inequality can not

merely be seen from the perspective of material distribution, but that it also designates things like

existential and vital distribution (Vital inequality is here understood as the difference in the span of

life and general health of people and existential as the difference in recognition and respect)

(Therborn 2012: 580). However, this thesis has explicitly, which is only naturally when analyzing

Capital, been focusing on the inequality that arises directly from or in conjunction with material

inequality. It would therefore be wrong and logically incorrect to suddenly impose from without a

different definition of inequality, which was never the subject of study. However, material

distribution does cause vital and existential inequality, and it is very likely that the reverse is also the

case. I will therefore stay within the frames of material inequality and suggest, that in order to more

fully grasp the implications and causes of material inequality, Capital's justificatory framework with

53 The connection that is here drawn between difference in social outcome and recognition deserves a few comments. It seems clear, that material remuneration in the professional sphere, in Western countries, is widely recognized as a sign of status. However, this is far from exclusively the reason for differences in recognition (Bourdieu has shown ushow cultural capital is equally important in other societal fields (1994)). We can thus talk of recognition as both having a connection to material outcome but also existing as a parallel issue in terms of for example culture. Here I primarily intend to address the difference in recognition that stems from material inequality.

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the four principles should be expanded with at fifth one. The fifth is the principle of equality in

recognition, which in a certain sense is a reformulation of Piketty's third principle of social utility:

Table 3. The fifth justificatory principle of inequality

Principle Description Type of Argument

5. Equality of

recognition

Even if inequality is the result of personal effort and

merit, it can only be just, provided that it attributes to

general social recognition. That is, no one must be worse

off in the system of appreciation as a result of some

having more than others.

Normative, pre-

scientific/experience

based

The nature of a principle of justification (as a legitimation inherent to the social fabric) does not

allow a scholar to suddenly add a principle, if it did not already exist in peoples mind prior to this. In

this case I attribute the new principle two meanings: 1. An abstract principle of justice (in the spirit

of Rawls) against which any political and economic system of material distribution of wealth must

be measured and 2. A partial Boltanskian principle of justification (Boltanski 2011; 51). I choose to

say partial as a principle of equality of recognition is perhaps yet too new to be fully engraved in the

consciousness of society as a relatively indisputable public good. On the other hand, it seems to

pertain to a clear public experience, and the theoretical groundwork needed to build a principle of

recognition has already been done by Honneth (Honneth 2003).

5.3.3. The principles of justification revisited

It should be obvious that a concern for material inequality can not be reduced to a focus on rights

and justice as is primarily the case in Capital. Though this is a serious limitation in Piketty's

perspective, the addition of a principle of equality of recognition supports the general conclusion

Piketty makes: too much inequality is unhealthy for society.

But, it goes further than this. If relatively small differences in paychecks are accomplice in creating

strong social status hierarchies, it must also be taken into account in a theory of why inequality

matters. This means that it is highly questionable if substantial difference in income can be

legitimated from the perspective of social utility (that everyone is better of economically when

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inequality rises), if we take the effects of social recognition and the thoughts of Honneth into

account. This may in practice make one of Piketty's principles superfluous.

According to professor in political economy Robert Wade, we are experiencing an era where the

importance of general redistribution has slid in the background in favor of an idea about reducing

poverty and securing basic social and health services. To Wade this has sprung from a debate where

equality of rights are put above equality of outcome on the center stage of politics (Wade 2014: 12).

To an extent Piketty exemplifies this development by putting a strong emphasis on the claim that the

right of opportunity, political liberty and social utility should stand in the foreground when deciding

on the level of inequality in a society. These justifications are assumed embedded in liberal

democratic mindsets and as in-congruent with the existing level of inequality.

The question is if this way of thinking simultaneously conceals the particular social consequences of

inequality? Piketty himself mentions how meritocracy was invented by the upper classes to

legitimate their superior position in society. The problem that arises is thus a fundamental problem

of the character of Piketty's four principles. To what extent are they good and true descriptions of the

general interests and socially shared values of the population, and to what degree are they

ideological properties or myths that work to ensure the continued existence of unjust practices?54

These are questions that this thesis has fully explored, but which the fifth principle of equality of

recognition has made relevant. As Wade describes the debate on regulation:

“The issue is not regulation or deregulation, because there is no such thing as a free or unregulated market. The crucial but neglected question is: regulation to benefit whom, regulation in line with broadly shared social values or in line with the preferences of the wealthy elite?“ (Wade 2014: p14)

This thesis has taken the position that the principles can be used both ways, as was mentioned in

section two. But future studies may consider how and by whom the four principles of legitimation

are used. It should also be investigated if the four principles in fact come in conflict with the fifth

principle, or if they can exist along side each other in a fruitful theory of the normative principles of

material inequality.

54 They may in fact be both at the same time. What determines if they work as true descriptions of the public good or as an ideological tool is the way they are applied and by whom, and the social material reality of the situation in which they are used.

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These years we see attempts to raise minimum wages in countries where inequality is most rampant

(The UK and The US) (Sandbu 2015). Is it, as Wade has eloquently put it, an effort to put the poor in

center stage that incidentally blurs the vast inequality that still exists between the well off and the

poor. Or will this in fact help to solve the problem of inequality? This thesis suggests the former.

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6. ConclusionPiketty has shown how divergent forces in capitalism are leading to a more inegalitarian society. The

tendency for the rate of return to stay above general growth level (r>g) among with other factors,

such as an already polarized distribution of ownership serves to accumulate capital and concentrate

it in the hands of the few. Though Piketty's claim of a constantly high return on capital has a

historical founding it is unclear what the underlying mechanisms are. That is, Piketty seems to

ignore that power-relations stemming from capital possession and the social and political struggles

may have an important role in defining the exact level of r.

Piketty's normative framework contains four principles of justification that will have to be fulfilled if

inequality under capitalism is to be legitimated. They are 1. Social order, 2. Equality of Opportunity,

3. Social utility, and 4. Political Equality. I show how Piketty does not seem to take his own

normative principles seriously as he moves from diagnosis of the problem of rising inequality to the

solution of a global tax on wealth. A wealth tax simply does not live up to the principles two and

four. Instead I show how his thoughts on the four principles open up for at very different way of

thinking ownership, which Piketty himself surprisingly seems to affirm when talking about the need

for “new decentralized and participatory form of organization”. We should, according to Piketty, lay

away prejudice of the inefficient public economy and instead look at intermediate forms of

ownership that exist somewhere between the private and public. Through a dialogue with Rawls I

find that two political regimes will serve to fulfill Piketty's justificatory system: A property-

ownership democracy and a liberal (democratic) socialism. On the basis of these I extract two

political strategies, that of 1. redistribution of capital and 2.elimination of capital return. The

political institution of a network of share-levy wage-earner funds and a cooperative economy

combines the two strategies into a whole that seems much more logically consistent with Piketty's

four principles. In addition to the four principles a cooperative economy also has the benefits of

giving employees higher self-esteem, satisfaction in work and is likely to improve political

engagement in the wider community.

Through our discussion on alternative designs it became clear that the absence in Capital of a focus

on the social consequences and experiences of inequality makes his justificatory framework

incomplete. Inequality of outcome is as much a problem as is inequality of rights, as it changes the

structures of recognition and status, which affects our psycho-social well being. I thus suggest a fifth

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principle that must be added to the normative framework Piketty casts; that of “equality of

recognition”. Again, this raises the question of the character of the normative principles, and if the

four instrumental or rights based principles (for example the meritocratic world view) is in fact

concealing inequality's link to social dysfunctions and individual experience, or if they are true

reflections of a public will or emancipatory potential? This thesis argues that the principles

paradoxical can be used both ways, but call for further study. To sum up: If Piketty was to take his

own justificatory framework seriously, he should choose institutions related to share-levy wage-

earner funds and a cooperative economy.

91


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8. Abstract

This thesis seeks to make an immanent critique of Thomas Piketty's book ”Capital of the 21st

century” (referred to as Capital from now on) by taking the justificatory framework presented to its

logical conclusion.

Piketty presents us with a general theory that shows how inner divergent forces tend towards

higher concentration of wealth in the hands of relatively few owners of capital. The theory can

be summed up by the formula: r>g. When return to capital (r) surpasses total national growth

(g) then inequality will have a tendency to rise. But Piketty also offers a political theory

explaining how different governmental interventions can prevent inequality from rising to

problematic levels. This thesis shows that Piketty, however, has an inadequate grasp on how

institutions may be prior to (r>g) and that he all but ignores political power-structures. Piketty

claims that the “ideal” solution to the problem of inequality is a global tax on wealth. But he is

unsystematic and inconsistent in explaining why inequality on the order he has exposed it is a

societal problem in need of a solution. The main exercise in this thesis consists of

(re)constructing the missing chapter in Capital on why (in)equality matters. It is argued that

this is imperative in order to establish a proper marker according to which concrete proposals

for a solution can be assessed. Four principles of justification are inferred from Capital: 1

Social order, 2 Equality of opportunity, 3 Social Utility and 4 Political equality. Inequality in a

given society must live up to the four principles, in order to be legitimized. It is argued that

Piketty's global tax on wealth advances the first and third principle, but fails to adequately live

up to the second and fourth. Furthermore it is pointed out that Piketty's reflections on the need

for “economic democracy” with new types of ownership that are decentralized and

participatory is inconsistent with a perspective that promotes a global tax on wealth as the

ideal solution. In the last part of the thesis it is attempted to take Piketty's four principles to

their logical conclusions, in order to match them with alternative economic institutions.

Building on Rawlsian ethics combined with insights on alternative economic institutions, it is

argued that instead of aiming for a global tax on wealth Piketty should wager for a

decentralized network of wage-earner funds created through share-levy combined with

cooperative democratic institutions. The thesis closes with a comment on Capital's blind angle

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concerning inequality of outcome. Capital focuses on equality of rights instead of equality of

outcome. Piketty entirely ignores the experience of inequality, which renders his justificatory

system incomplete. With inspiration from Honneth it is suggested that a fifth principle be

added: Equality of recognition. It must be considered if the four other principles naturally

function to conceal the fifth.

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