Writing in today’s Otago Daily Times veteran political commentator and analyst Colin James claims, “The big news of the past 10 days has been Thomas Piketty, who has reworked western economic history to show that unchecked market capitalism rewards the already well-off in a self-reinforcing loop: income from capital outruns income from wages and salaries.(1)
“Hence rising inequality. . .
“The Treasury has drawn its staff’s attention to Picketty. Rightwing Financial Times columnist Martin Wolf showered superlatives on his new book, now No 1 on Amazon.”
Geoff Bertram of the Institute for Governance and Policy Studies at Victoria University (Wellington) describes Piketty’s book as “a bombshell, promising a Kuhnian scientific revolution” in his contribution to a book of responses by New Zealand economics academics, researchers and writers. Yes, almost unbelievably, we have an actual book on Piketty, his data, analysis and solutions and their relevance, if any, to this country: The Piketty Phenomenon: New Zealand Perspectives (Wellington, Bridget Williams Books, 2014).
But perhaps not so strange. . .
While much of the NZ left still labours under the misconception that neo-liberalism is running riot in New Zealand – it was actually exhausted in this country by the mid-1990s – the reality is that the ruling class here are not ardent neo-liberals. The neo-liberal policy prescriptions were taken up in the 1984-1993 period because they happened to coincide with the needs of the capitalist class to raise the rate of profit through raising the rate of exploitation, cutting chunks of public spending that didn’t help improve profitability, and commodifying parts of the state sector. These policies required a massive attack on the working class and breaking whatever power the unions still had.
But having largely succeeded, the ruling class faced a new dilemma. Removing all the things they thought were obstacles to establishing a dynamic new round of capital accumulation didn’t really regenerate the system. Overall economic growth remained sluggish and productivity growth fell behind Australia and many other OECD countries. Capitalists remained reluctant to make large new investments in PME (plant/machinery/equipment) and R&D (research and development).
Since as early as 1993, the New Zealand ruling class has been casting around for a new ‘big idea’. Jim Bolger toyed with ‘social capital’ as the big idea, Jenny Shipley with ‘social responsibility’ and the last Labour government with ‘the third way’. The current National-led government is keen on ‘private-public partnership’ (as, indeed, the last Labour government was). But this has all been insipid stuff. In the meantime, economic growth has remained problematic and social inequality has grown (if we take the 1984-2014 period), spawning a new set of problems.
The vast majority of capitalist politicians in New Zealand, and the overwhelming bulk of the capitalist class here, recognise that, while New Zealand could bounce along at current levels of growth and even further social inequality would be tolerable to the general population, including the working class, the situation is far from ideal. It would be better to have some new ideas to, if not close the gap a bit, at least lift up the worst-off sections of society, while boosting profits and growth.
Into this situation, comes French economist Thomas Piketty. He’s attractive overseas as many other advanced capitalist economies are in a worse situation than New Zealand and unbridled neo-liberal policies are seen to have contributed to the woes in the financial sector and elsewhere. Eventually, Treasury and other important management players in the operations of New Zealand capital were going to hear about the guy and start investigating his ideas. Since, despite the widespread paranoia on the left about Treasury and National, these folks are not theory-driven but operate as practical managers of the economic system – ie they’re interested in what appears to work rather than pushing some ideological position regardless of its impacts – they have no problem with considering Piketty’s views and seeing if there is stuff that can be applied to help improve the operations of New Zealand capitalism.
Moreover, while Piketty produces a formidable mass of material on rising inequality across the globe in recent decades, it’s not as if he is opposed to inequality per se, let alone the exploitation of the working class. Piketty is all in favour of what he sees as genuine capitalist entrepreneurs; it is the rentiers he is opposed to. The people who simply live off interest, rents, dividends, siphoning off surplus-value rather than initiating the production of new rounds of surplus-value.
Rentier capitalists are something of a problem in terms of New Zealand capital. For instance, a chunk of capitalists here would rather buy property – and/or luxury yachts for that matter – than invest in new technology to expand production and growth. The reality beneath the spin about New Zealand being a ‘rock star’ economy is that this country’s economy is dependent on dairy exports and tourism. A recession in China or a failure in the Australian banking system and we’d be pretty fucked. So Piketty’s views on this layer of rentier parasites could well be of interest to the managers of NZ Capital Ltd.
He is also concerned about the potentially politically destabilising effects of gross inequality. In the New Zealand case, this might not be so relevant as people here remain largely apathetic about the growth of poverty and inequality. They’ll say it’s a bad thing, but virtually none of them will take to the streets over the issue. However, there is always the potential for a tipping point to be reached. Moreover, smart capitalists prefer workers who are fed, clothed, sheltered and entertained enough to turn up and work hard each day.
Indeed, it seems that the smart money in this country has beaten Piketty to it – the sharp rise in inequality here was under the fourth Labour and fourth National governments. The fifth Labour government and the current Key government have slowed the growth of inequality since 1999 – as Bernard Hickey notes in his contribution to the book on Piketty, income and support benefits, interest-free student loans, Working for Families, the accommodation supplement and income-related rents have kept the Gini pretty flat (around 32) since the end of the 1990s. (Of course, these are also mainly forms of handouts to capital: for instance the accommodation supplement means hundreds of millions of dollars a year to capitalist landlords, WfF means employers can continue to pay low wages and interest-free student loans help turn out more skilled labour for employers down the track without them having to pay the full cost for the creation of that skilled labour. Moreover, the 2009 Ministry of Development Social Report showed this country’s Gini coefficient rose to 34 in 2008, three points worse than the OECD average; the percentage of the general population and of children in low-income houses rose; and the percentage of people who had to spend more than 30% of their income on housing costs rose from 21% in 2004 to 29% in 2008.)
While Hickey perhaps slightly underestimates the rise in inequality, he makes the interesting point that New Zealand proves the Piketty case that capitalist governments need to have some form of redistribution of wealth downwards in place because the market can’t do it and the economic, social and political costs of not doing it can be devastating.
From the standpoint of the interests of the working class, however, two initial problems can be identified in Piketty. One is that capitalist economic crises are not caused by inequality and the inability of poor people to buy stuff. As Marx noted, since workers are paid less than the value of goods they produce there is always an element of under-consumption in the system. All this means is that some firms go bust. And, of course, capitalists produce much more than means of consumption for workers. They also produce means of production for other capitalists, luxury goods for the rich, and a wide range of things which are purchased by governments (ranging from kidney dialysis machines to weapons of mass destruction). It’s not poverty and under-consumption which create capitalist crisis – it’s the normal operations of capitalism which create poverty and it’s capitalism’s inevitable crises which intensify poverty as the capitalists try to escape crisis by driving down wages, a policy which necessitates driving down workers’ consumption levels. See, for instance, the feature which critiques the idea that inequality causes economic crisis and also The Story of Inequality.(2)
Secondly, crisis is built into capitalism; the system simply can’t escape the law of the tendency of the rate of profit to fall. As we note elsewhere on this blog:
“. . . there is no big mystery about why the rate of profit falls once you understand the nature of capitalist economy and the way the surplus is created through exploitation. What happens is that as capitalism expands, more and more capital is invested in plant and machinery in proportion to the amount expended on labour-power. We can make an equation S/(C+V), where S represents the surplus-value and C and V represent the capitalists’ outlay: C is constant capital (spent on plant, machinery, technology, raw materials) and V is variable capital (spent on labour-power). C merely transfers its own value into the new product. V, however, creates additional value through surplus labour-time, as we have explained already.
“As C rises more and more in relation to V (the part which creates new, expanded value), the rate of profit therefore falls. The overall surplus-value may still be large and expanding, so at first there doesn’t appear to be a problem. However, after a period of years, capitalism is faced with re-equipping and modernising not only individual workplaces, but whole industrial sectors and even whole economies. It is at this point that the fall in the rate of profit becomes a problem, because they simply lack the necessary capital for the scale of modernisation required. Thus the first country in which the postwar boom ended and recession began was Britain, because it had the oldest industry.
“For instance, take a point in time in which capitalists invest a billion dollars and gain a 10 percent rate of profit. That means $100 million profit. But as the rate of profit falls to five percent, they would have to invest $2 billion to make the same amount of profit.
“When the rate of profit falls to a level where ordinary production cannot be sustained, let alone new investment to revitalise industries, economies go into major recessions.”
For a fuller discussion of how capitalism works and why, ultimately, it doesn’t, see the larger article here.
For how Key and co. try to adminster the system in New Zealand, see our article on Managing the malaise. For a current example of how a problem which is specific to capitalism is presented as some kind of ‘natural’ problem, check out our feature on pensions and the retirement age. And for a discussion about inequality in New Zealand and the reluctance of anti-poverty campaigners to talk about capitalism, see our article on Max Rashbrooke and the ‘c’ word.
1. Piketty does say this, but his bigger concern is that the growth of private wealth outstrips overall economic growth rates and this causes severe economic problems.
2. It’s interesting how individual capitalists experience the problem, however. For instance, US billionaire Nick Hanauer has, in an open letter, called on American bosses to raise wages and for there to be a $US15 per hour minimum wage (that’s about $NZ19) – the US minimum wage is currently a meagre $US7.25, although 29 states have laws which put local minimum wages higher. The US minimum wage, in real terms, is now significantly smaller than in 1968. Measured in 2014 dollars, it was then $10 per hour! Hanauer’s open letter, when advocating more than doubling the national minimum wage, declared “We’ve got to try something. These idiotic trickle-down policies are destroying my customer base. And yours too.”