Juncture interview: Thomas Piketty on capital, labour, growth and inequality (with Nick Pearce), Juncture 21 (1), (May 2014)

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Audio and video clips of this interview are available online here: http://bit.ly/pikettyinterview
  interview4  Juncture’s  Nick Pearce and Martin O’Neill of Renewal   interviewed Professor 1   Piketty on a recent visit to London. 2  Nick Pearce:  Your book has received a huge amount of attention. Can we  start with some of the central critiques of your core arguments? There are those on the left who say that your treatment of the category of capital is  a fairly orthodox one. It essentially puts together assets and their relative  prices, instead of treating capital conceptually as constituted through  relations of production and other structures of power, as it would be in Marxian and other heterodox traditions. Thomas Piketty:  I have read that. I think that it is a bit unfair in the sense that I really try hard in the book to do justice to the multidimensionality of capital. The history of real estate is not the history of land, it is not the history of financial assets or business assets, or the public debt; all these different assets come with different power relationships, and with different social compromises to determine their rate of return, and the labour return that is used together with these assets.  At one point in the book I also take the sum of all of these assets, and use the market prices of these different assets to compute the total capital stock of the economy. But I try to make clear that while this may be fine for some purposes – this addition of different kinds of capital, in computing the capital stock – one always needs to keep in mind that this is a pretty abstract operation. I certainly don’t claim that you can summarise the multidimensionality of capital, and the inequality and power relationships that go with it, by making this gigantic operation of adding all of these categories together. In fact, there are long parts in different chapters where I try to tell the story of the public debt, the story of real estate bubbles, the story of ‘slave capital’, which of course is a very particular kind of wealth, and of the power relationships that go along with it, and this all plays a role in the book. So, I find that this critique – although I can hear 1 Piketty T (2014) Capital in the Twenty-First Century  ,   Cambridge MA: Harvard University Press; translated from the French by Arthur Goldhammer.2 Professor Piketty appeared at a Juncture event at King’s College, London, 30 April 2014. To listen to an audio recording of his speech visit www.ippr.org/events/capital-in-the-twenty-first-century-with-thomas-piketty. Juncture interview:Thomas Piketty  Capital in the Twenty-First Century  1  is the most talked-about work of political economy to have appeared in recent years, if not decades. In this interview, Tomas Piketty   discusses his acclaimed book and answers some of his critics. Juncture \ Volume 21 \ ISSUE 1   © 2014 The Authors. Juncture © 2014 IPPR  © 2014 The Authors. Juncture © 2014 IPPR   Juncture \ Volume 21 \ ISSUE 1 Interview5 it – is not really justified in the sense that I do perfectly agree that capital is a multidimensional concept. In particular, the market value of assets may not always coincide with their social values, so this does not mean that it is the only way to measure the value of capital. For instance, I have a long discussion about the value of German manufacturing companies and the fact that their market value may not be as large as British, American or French corporations, but apparently that does not prevent them from producing good cars. The market does a number of things well, but there are also a number of things that the market does not do so well, and putting a price on assets is always a complicated business. Sometimes you put a higher price on an asset just because you have less access to power than other stakeholders or groups in society, and that might not be a good thing. So I try to do justice to this multidimensional view of capital and when I use the standard textbook economic model, with one type of capital and one type of good, and no relative price issues, I always try make clear that I do not believe that this is a model that can adequately describe the structure of capital in any country. Still, I think that it is useful to use this model from time to time to refute the claim that even if the world were  operating like that, in this simple, benchmark textbook model then everything would go fine. One central point of the book is that even if you didn’t have real estate bubbles, even if you didn’t have any capital market ‘imperfection’, and even if you didn’t have all this complex multidimensionality of capital assets, we would still have this fundamental inequality – that is, ‘r > g’ – of the rate of return to capital being greater than the growth rate, and we would still have big problems of inequality to solve. I do not pretend that this model is sufficient to explain the world, but I am trying to make the point that even if it were, we would still have a complex inequality problem to solve. I think it is important that the way I use the benchmark of orthodox neoclassical economic models in this way is in order to refute some claims that are often made about the implications of this model, not because I believe in it, but because I believe that this is an accurate description of the structure of ownership in any country.  Martin O’Neill:  Another issue that has come up in the reception of your  book, in Paul Krugman’s very positive review in the New York Review of Books  , is that the phenomenon of the very high salaries of managers in the corporate sector, and particularly in the financial sector, is something that does not fit so easily with a model that is about returns increasing to capital, rather than to labour. Krugman suggested that you don’t have as  much of a story about that phenomenon as you do about increasing returns to capital. 3  What is your response to Krugman? TP:  I think that he has a point. I think that the book is too short – I should have made it longer [laughs] so that I could have spoken about all of this. Now, there is not enough on this, but I do talk about financial deregulation and about the impact of finance on inequality. In particular, there are two important impacts to which I refer. One is that clearly financial deregulation 3 Krugman P (2014) ‘Why We’re in a New Gilded Age’, New York Review of Books , 8 May 2014. http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/.  Interview6 is a big contribution to rising top incomes in the financial sector. And the other part of the story, which plays a big role in the book, is the fact that increased financial sophistication has probably increased inequality in asset returns between different groups of people. For example, there is the fact that a very large portfolio can manage to get 7 or 8 per cent return, whereas people with £100,000 can hardly get the inflation rate. I think that this huge inequality in rates of return to assets has a lot to do with the increased sophistication in financial markets.  According to the textbook model, it should not be like that. According to the textbook model, the perfect system of financial intermediation should give the same high return to everyone, so everyone should come with £100,000 and have their money invested in the highest yield project in China. Reality doesn’t seem to work this way. Apparently some people can get very sophisticated products at a high return and then they sell to the mass of the population assets that do not yield the same return. That plays quite a big role in the book – and I think that is quite novel and it’s fairly important.On the rise of high-end income in the finance sector, I could have spent more time talking about that, so Krugman has a point. Although if we look at the numbers for the United States, finance is about 10 per cent of GDP, and the share of finance in the top 0.1 per cent of income earners is about 20 per cent – so that’s twice as much as their share in the economy. So, Krugman is right, but at the same time that means that 80 per cent [of the top 0.1 per cent] is outside finance, and is to do with very top managerial compensation in large non-financial corporations, so I think we should not overestimate the importance of the financial sector. We have a paper with Emmanuel Saez and Stephanie Stantcheva where we try to explain the compensation packages of top executives in large companies across European countries, and in the US and Japan, and have tried to explain why it is that we have higher top managerial pay in the US and UK in particular. 4  The financial sector indicators or company-size indicators do not seem to get you very far in explaining why the rise in top-end managerial compensation has been so much larger in the US (and also, but to a lesser extent in the UK). The change in incentives due to the huge decline in top income tax rates seems to be more important, in the sense that we see the elasticity of managerial compensation with respect to windfall profits to rise specifically in these two countries when the top tax rate was reduced a lot. So – yes, finance is important, but there is more to it than just finance.  MO:  Do you think it might be conceptually difficult to divide labour income from capital income for top managers, given that it is hard to see their  incomes as a reward for their marginal productivity, but where it instead  looks more like a de facto capture of something that seems more like  a capital return. Do you think that puts any pressure on the distinction? TP:  I think that the distinction is always difficult to draw; labour and capital are abstract notions. In the real world, it always takes some labour to manage 4 Piketty T, Saez E and Stantcheva S (2014) ‘Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities’,  American Economic Journal: Economic Policy  , 6(1): 230–271. “ On the rise of high-end income in the finance sector, I could have spent more time talking about that, so Krugman has a point … But there is more to it than  just finance.” Juncture \ Volume 21 \ ISSUE 1   © 2014 The Authors. Juncture © 2014 IPPR  © 2014 The Authors. Juncture © 2014 IPPR   Juncture \ Volume 21 \ ISSUE 1 Interview7 your capital, and this has always been an important justification – even back in the 18th or 19th centuries you had land or capital owners who would insist that they undertake a great deal of hard labour in order to get a return. In some ways, the distinction is indeed always hard to draw.In the case you mentioned, I think at least initially, at the beginning of the careers of top managers, the distinction is pretty clear – in the sense that this is not capital income because, although I’m not sure that it rewards productivity, it rewards some input that is not related to the capital stake in the firm, at least initially. Then of course, as time passes, through their compensation package they are able to have a capital stake. It then becomes complicated because they will be part of the shareholder board and decision-making process of the firm, as well as working for the firm. So there the distinction is difficult. Initially most top managers do not have a capital stake in the company, and even later on in their careers their capital stake can remain quite small. So, it is a reward for labour in the sense that it rewards being there as manager of the firm. Now, are they able to get more than their marginal contribution to the firm as suppliers of labour? Yes, I think that sometimes they are. I think that it is excessive remuneration for the labour, but it is still labour income. I think that is clearer to analyse it as excessive remuneration for labour income rather than calling it a return to capital. It is not because it is excessive that it is capital; capital income means that it corresponds to the remuneration of the initial capital stake that you have in the firm.  NP:  One final point on the analysis. In this post-crisis era, the case  has been made that advanced economies may be experiencing secular  stagnation, as Larry Summers has put it. 5  And so the argument posed to your book, is that ‘r’ [the rate of return on capital] is going to be low, or could potentially be very low, for a long period of time to come. I wonder what your response to that is. Do you think that this is just a temporary phenomenon and that the historical trends that you empirically document will return, or that we may be experiencing structural problems with demand in the advanced economies, which would mean that rates of return on capital will be harder to secure? TP:  I think that there is some confusion in these critiques between the interest rate and the rate of return to capital. The rate of return to capital is a much broader concept than just interest rates. If the rate of return on capital were really going to zero, as Summers seems to argue, then the capital share in GDP and the capital share in the economy would be going to zero. This has not been happening at all. Right now, including five years of total crisis, the capital share is much higher than it was 20 years ago in most developed countries.So, what’s in the capital share? With the capital share you can have interest payment, dividends, corporate profits (with some of it going into retained earnings which feeds capital gains), and you have rental income. If you make a sum of all these forms of capital payment, then the capital share has not been going to zero at all. 5 Summers L (2013) ‘Why Stagnation May Prove To Be The New Normal’, Financial Times , 15 December, 2013; Summers L (2014) ‘Washington Must Not Settle For Secular Stagnation’, Financial Times , 5 January 5 2014. “ I think that there is some confusion in these critiques between the interest rate and the rate of return to capital. The rate of return to capital is a much broader concept than just interest rates.”  Interview8 I think that it is just wrong to take the interest rate on public debt as an indicator of the rate of return. Public debt is a very particular kind of asset: it provides liquidity services – that is, you can easily sell your Treasury bonds – and that is partly why people accept having relatively low returns in comparison to other assets. Also, we are not completely out of the financial crisis yet and we have had a lot of creative monetary policies that have kept interest rates low.I think that where Summers is right, and this is where he wants to get, is that we have been asking too much of creative monetary policies in recent years, pretty much everywhere – in the US, in the UK, and in the eurozone – because at the end of the day we have this very low interest rate on some assets such as public debt or certain categories of short-term or medium-term loans, but this is creating bubbles in other assets – in real estate and in some segments of the stock market – and so you have huge return on some other assets at the same time as you have zero interest rates on the public debt. So in fact, this is probably amplifying the inequality in rates of return, in this huge heterogeneity of rates of return.My bottom line is that the average rate of return for all assets combined is not going to zero. It has been going down a little bit over the past 20 to 30 years because of the rise in the capital-to-income ratio, but it has declined less than the increase in the capital–income ratio, so that the capital share has actually increased. My second point is that you have a huge heterogeneity in rates of return between assets, and that having very low interest rates on certain assets, such as public debt in particular, is not necessarily a good thing because it stimulates very high bubbles in capital gains and rates of return on other assets at the same time.  MO:  Moving on to how we could fight back against rising inequality  and ‘patrimonial capitalism’, you have a fascinating footnote in which  you describe your project as ‘following in the footsteps of James Meade’. But one interesting difference between your approach and Meade’s is that you spend more time talking about strategies involving redistributive taxation, whereas Meade also gives a lot of weight to ways of dispersing ownership over capital, and also finding ways of having public capital or forms of democratic wealth. 6  You discuss that very briefly in part four of  your book, but do you think that the response to the increase in inequality  might be one that explores the sorts of avenues that Meade opened up, and doesn’t just rely on mechanisms of redistribution through the tax system? TP:  Yes, I think that you are right – I am glad that you have asked this question. First I would like to pay tribute to James Meade and this long tradition of British economists, including Tony Atkinson, with whom we have been working with a lot and who is largely the godfather of historical studies of income and wealth. Tony wrote a great book in 1978 on the history of the 6 Meade J (1964) Efficiency, Equality and the Ownership of Property  , London: George Allen & Unwin. On Meade’s ideas, see the chapters by Ben Jackson and Martin O’Neill in O’Neill M and Williamson T (eds) (2012) Property-Owning Democracy: Rawls and Beyond  , Chichester: Wiley-Blackwell, and the chapters by Angela Cummine and Stuart White in White S and Seth-Smith N (eds) (2014) Democratic Wealth: Building a Citizens’ Economy  , London: openDemocracy. “ I think that where Summers is right, and this is where he wants to get, is that we have been asking too much of creative monetary policies in recent years, pretty much everywhere.” Juncture \ Volume 21 \ ISSUE 1   © 2014 The Authors. Juncture © 2014 IPPR
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