Thomas-Piketty-011by Philip Ferguson

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.”

  1. Jim Brash says:

    Progressive taxation, new modes of production, the development of new goods & services, and more stringent regulation of the markets serve the same purpose as putting a bandaid on a gunshot wound. Structural improvements do not alleviate systemic crises. Crises are operative cogs in the machine. Irrational exuberance when it comes to securities speculation, deflation, inflation, income inequality, overproduction, underconsumption, hi-levels of unemployment, layers of rentier capitalist( ruling class or petty bourgeois) low wage job growth out performing growth in high wage jobs etcetera, are essential components of capitalism. They can’t be cut off to save the body; you cut them all off there is no body. The whole system is disease ridden. Its now time to work on a process of euthanization not further treatment. I hope that Marxist economists are able to take all the data Piketty compiled and do a real update or 4th volume to Das Kapital.

    • PhilF says:

      Yes, if all the energy that has gone into patching up capitalism had gone into overthrowing it we could be living in a world of freedom and plenty by now.


  2. PhilF says:

    A friend of mine in London just commented to me that Picketty’s book “seems just the sort of message that the worried middle class wants to hear – thank God for a scientific view of how equality (ie less of a gap between the plutocrats and us) is now proved to be a good thing!”


  3. […] Thomas Picketty’s ideas reach New Zealand […]

  4. “While much of the NZ left still labours under the misconception that neo-liberalism is running riot in New Zealand …”

    I think I agree with what you go on to say here, but for want of a better term I think ‘neo-liberalism’ is still a reasonable description of the general form of capitalist economic thinking we live under. Just like ‘Keynesian’ or ‘Fordist’ could be used to roughly describe an earlier period, even if those governments too did not follow Milton Keynes to the letter.

    Speaking of Keynes, the most interesting review of Picketty’s book I have read is by James Kenneth Galbraith here:

    This is a Keynesian critique of Picketty – he focuses on Picketty’s ‘physicalist’ concept of capital, and actually has quite a good summary of the Marxist concept which he starts out with. I think it is interesting that someone who comes from what used to be fairly mainstream liberal establishment thinking (ie Keynesian theory) sounds like an extreme radical, by critiquing a book by Picketty which is in its turn portrayed by the mainstream media as “Marxism for the 21st century”. Where does that leave the Marxist!!

    I haven’t read the actual book, doubt if I ever will, but must say I do like the graphs. I agree with the general thrust of Hegelian/Marxist critique of empiricism – facts are not enough to tell the whole story etc. But in a world dominated by statistics and surface thinking, I don’t think it does any harm to make use of these, especially if they actually back up Marxist claims. I try to do this, in a brief and simplistic way, in my hypothetical high school level statistics lesson I describe in my new blog. This probably won’t cause any sort of revolution just yet but you might like reading it.

  5. PhilF says:

    Hi Tim,

    I think it helps to be as precise as possible when using terms. Neo-liberalism is a term that gets bandied about a lot in NZ; it’s become a kind of term of abuse in the same way that chunks of the left used to bandy about the word ‘fascist’ to describe all kinds of reactionaries, most of whom were not fascists.

    The neo-liberal reforms in New Zealand only really occurred in the 1984-1993 period. If you go back and look at what actually happened then, it’s very different from what is happening now. Key favouring keeping the retirement age at 65, extending free doctors’ visits, favouring public-private partnerships over an unrestricted market, etc etc – these are not neo-liberal economics.

    Indeed, it’s hard to find an economic thinker of any serious weight/credibility in NZ today who is an out-and-out neo-liberal.

    The reason for this is that neo-liberalism was essentially the ideological justification for the ruling class stepping up the rate of exploitation and cutting back on social goods which were drains on surplus-value. This necessitated defeating the unions, driving down real wages and benefits, and commodifying chunks of the state sector.

    But after a decade of doing all that, NZ capitalism was not reinvigorated. The ruling class and its economic thinkers had to deal with this and move on to other ideas. They certainly never undid the neo-liberal reforms, although they did roll back some of them a bit. Both Labour and National today belong more to what was once dubbed ‘Third Way’ politics – an approach which is not overly weighted toward either the free operations of the market or state ownership/interventionism.

    In order to be ahead of the game, or even up with it, the serious/revolutionary left needs to be examining what the ruling class is doing now and why, not acting as if they are basically pursuing the same policies they did 20-30 years ago, The ruling class are fairly smart – not all of them individually (!), but collectively as class they are – so they don’t hang onto policies that no longer have the desired result. They aren’t ideologically driven; they’re profit-driven. They move pragmatically around a whole bunch of policies, as they attempt to manage a system that no-one, not even them, actually controls.


    PS: A small thing. Milton Keynes is a town in England. Keynes the economist is J.M. (John Maynard) Keynes. I’ll take a look at your links. Cheers.

    • Jim Brash says:

      Phil, would this explain why a segment of the ruling classes, maybe not in NZ but in Europe, are financially backing the far right? And if so, its kind of absurd that a segment of the same ruling classes that were gun ho for neoliberalism are now supporting the right wing portions of the anti-austerity movement.

    • daphna says:

      With the exception of Act all the parties in parliament could now be described as Third Way. Labour bemoaned the latest National Government budget was Labour-Lite policies; and this weekend the Greens announced they’ll extend National’s programme of free doctor visits for children to include teens. All the more reason to see “Getting rid of the National Government” as an election campaign call, is simply about rearranging the furniture.

  6. PhilF says:

    Hi Jim,

    I’m not sure that sections of the actual ruling class in Europe are backing the far-right. Maybe there is some of this in France, because the FN has been a large party for some time now. Isn’t it more that some individual capitalists in Europe, people who are not mainstream ruling class, are providing this type of support, rather than significant sections of the ruling class.

    But, yes, to the extent that some of the bourgeoisie may be backing these parties, they tend not to be ardent champions of full-on neo-liberalism. But nor are the ‘regular’ bourgeois parties. The hardcore free marketeers, the people who are ideological neo-liberals, are very much a small minority these days in *most* places around the world. Even in the US, when the financial crisis hit, Bush and co couldn’t explain it in neo-liberal terms and had to do some very non-neo-liberal (but still very capitalist) things.

    One of the big problems about the term neo-liberalism that I didn’t talk about above is that some people on the left use it as virtually a synonym for capitalism. This is quite politically confused and dangerous. Because loads of people, including loads of supporters of capitalism (in fact most these days) are against full-on neo-liberalism. So uniting people on the basis of being opposed to neo-liberalism is a kind of popular front / cross-class politics. it obscures, rather than clarifies, class divisions and the nature of exploitation, and it subordinates workers and the left to bourgeois politics.