The Trump victory in the United States was a reaction, at root, to the real and perceived costs of globalization: inequality and immigration flows. Now that he is in office, there are serious possibilities of disruptive changes to the global trading system, as we saw with his instant dismissal of the Trans Pacific Partnership. For Xi Jinping, head of state of the world’s most mercantilist country, to stand up at Davos and extol free trade, while Donald Trump, head of the supposedly most ideologically free trade state on the planet vowing to set up tariff barriers has been a remarkable turn of events in the first weeks of 2017.
More than ever, we must get our collective minds around the roots of inequality, the best data on the subject and the structures that undergird world trade. French economist Thomas Picketty has been contributing path-breaking work on the trends in economic inequality for some years. He made a name for himself in 2014 with Capital in the 21st Century, an instant best-seller, arguing that inequality is increasing across the developed world and that something needs to be done to arrest this trend. Trump’s rise to power was plainly premised on both those claims, though his prescriptions for change may not align with Picketty’s social philosophy.
Picketty was in Australia some months ago, speaking at Melbourne Town Hall. His speech was notable for three things: his delightful – or as John Cleese famously expressed it in Monty Python and the Holy Grail, his ‘outrageous’ – French accent; the lucid presentation of his data on income, taxation and inequality around the world in general; and his completely daft statements about the history and causes of inequality in the Middle East. The first was enjoyable; the second fascinating; the third deeply puzzling. The third set off alarm bells in my mind. If Picketty could be so demonstrably wrong and wrong-headed about the Middle East, what else might he be getting fundamentally wrong?
His core claim regarding the growth of inequality was that the era of ‘neo-liberalism’ has seen income differentials widen, taxation become less progressive and wealth disparities widen, across the OECD. He and his research team have gathered long-term data on inequality and its causes. That’s why his book is interesting. There is a hunger out there for such data, based on a widespread sense that inequality has, indeed, increased and that this is due to questionable macro-economic policies.
Piketty points out that both Karl Marx and Simon Kuznets were mistaken in their prognoses (one hundred years apart) about how development would affect income distribution. Marx, in the mid-19th century, forecast growing immiseration and revolution. This is not what happened. Instead, growing wealth and moderate social policies contributed to a narrowing of income inequalities in the capitalist world and the rise of a broad middle class. Kuznets, in the mid-20th century, forecast growing equality and prosperity, but for thirty years now his prediction, also, has been falsified. Piketty’s data set data set shows this and also points to some of the underlying causes. This is much the most interesting aspect of his research.
His much older and smaller book, The Economics of Inequality, first published in 1997, but republished last year, centred on the claim that, in the industrialized world, the ratio of national income going to capital and labour has hovered around one third to two thirds over the long run, varying only marginally. He added that, while distribution could modify this to a certain extent, there seemed very little scope for radical alteration of the ratio. Attempts to radically alter it, in the case of communist states, had simply led to economic gridlock and entrenched poverty.
In Capital in the 21st Century, he greatly deepened his enquiry, under four basic heads: Income and Capital; The Dynamics of the Capital/Income Ratio; The Structure of Inequality; and Regulating Capital in the 21st Century. His speech last year covered much of this ground in brief and was notable for its moderate tone, largely sensible observations and emphasis on the role of sound institutions in fostering growth, constructive fiscal policy and a modicum of egalitarianism. Unfortunately, of course, it is precisely the failure of such institutions, in both the US and the EU, that has led to the present impasse at which we find ourselves. Indeed, institutional failures in Japan and growing ones in China point o very serious challenges to global economic governance for the foreseeable future.
However, Piketty’s work contains a strange omission with regard to the factors behind the recent increases in inequality. Kuznets argued, in the 1950s, that industrialization generally sharpened inequalities at first, then stabilized, then caused them to diminish, with the growth of a broad middle class and higher wages for workers. Piketty claims that this trend held true only until the 1980s, then went into an unexpected reverse. What he does not appear to consider is that globalization and the surge in technological innovation may well be causing a second wave of the phenomenon suggested by Kuznets: widening inequalities on an at least temporary basis due to the successes of the capitalist system, rather than its failures.
Just to the extent that Kuznets was correct about the first wave of industrialization, it is possible that a sharp increase in inequality would be a natural corollary of the globalized surge of industrialization and urbanization – China leading the charge – since the 1980s. The collapse of the Soviet bloc and the integration of Eastern Europe and Russia into the world economy, the abandonment of socialism by India and much of Africa and their rapid growth have all contributed to this second wave Kuznets phenomenon. This has had indirect flow-on effects in the ‘advanced’ world. Moreover, the massive shifts in resource allocation and the dynastic fortunes being made in new technologies surely mean that the recent growth in inequality in the United States and elsewhere is not particularly surprising.
This is the issue I had hoped Piketty would discuss in his talk. He didn’t. But what was even more disturbing was that, having specified the Middle East as the most economically and socially inegalitarian region of the world, he completely flubbed the question of its historical and institutional causes. He stated flatly that the problem in the Middle East was ‘oil and finance’ and not culture or historical social stratification. He is demonstrably in error on both counts. The strangest moment in his speech came when he made the gratuitous assertion that ‘there has been no slavery in the Middle East since the rise of Islam’, so that slavery could not be seen to be (as he claimed it to be in the United States) a root cause of inequality.
This was an astounding claim. Slavery was endemic in the Muslim world from the start. The Arabs enslaved so many Berbers in the Maghreb, for instance, in the late 7th and early 8th centuries that they triggered a massive rebellion. They ran a large scale slave trade along the coast of East Africa for a thousand years. The Ottoman slave trade in the Mediterranean was only ended by European and American intervention in North Africa in the 19th century. Slavery persisted in Saudi Arabia into the 1960s. Piketty’s statement, in short, was so at odds with reality that one is left wondering whether he has any grasp of Islamic history at all. How can he have made so grave an error? One is left with the disquieting thought that it was due to that endemic ‘political correctness’ which shys away from any criticism of the Islamic world as inadmissible ‘Orientalism’ or ‘neo-colonialism’.
As for ‘oil and finance’ causing inequality in the Middle East, one has only to ponder the facts that he himself drew attention to about oil and finance fuelling American growth and the reduction of inequality in mid-20th century America to appreciate that these things do not, in themselves, cause inequality. Oil is widely seen as inducing macro-economic inertia and corrupting political systems, enabling reactionary elites to buy off their peoples and avoid structural reforms. This did not happen in the United States. But it has happened right across the Islamic world, to varying degrees. The two claims – that there has been no slavery in the Muslim world and that oil and finance explain inequality in the Middle East – taken together cast grave doubts on Piketty’s reliability as an economic historian and as a systematic thinker.
I walked away from the Town Hall bemused. The contemporary debate over economic inequality and what to do about it is an important one. Piketty’s books are a very stimulating contribution. But his confusion about the Middle East and his failure to factor globalization or rapid technological innovation into his analysis are serious shortcomings. The first is almost inexplicable. The second is where the most serious analytical attention needs to be focused. Now that Donald Trump is President of the United States and seems bent on radical protectionism, these issues are only going to become more acute and more important. We need to get our bearings and political correctness about the none Anglo-American world will not help us one little bit.
Paul Monk is the author of The West in a Nutshell: Foundations, Fragilities, Futures (www.echobooks.com.au) and a consultant on international security affairs and applied cognitive science.