Piketty's lessons for South Africa

[A shorter version of this piece was published in the Sunday Times.]

Thomas Piketty will be visiting South Africa at the end of this month. His visit lays down an awkward deadline for the thousands of you who have bought his 700 page magnum opus. And it poses an interesting question: what does this global history of wealth and inequality, focused on France, have to say to South Africans, citizens of the country that is routinely described as the most unequal in the world? The short answer : a great deal.

First there is much in Piketty's work about how to do economic research. He has little enthusiasm for the greek letters and experimentally derived numbers of contemporary mathematical economics. And his work draws – in deliberate contrast – on a very wide and deep body of reading. History is his particular guide, but he is also much more interested in wider cultural understandings of the rewards of private income and private capital. His book circles back repeatedly to the insights that Austen and Balzac offered of the importance of inherited wealth, of rentier capitalism, in the 19th century. And this is really his main point: studied over the longest possible period, from many different national sites and using the best possible sources of data, growth under capitalism is much lower than most people expect, sitting at around 1 per cent per annum. Under these (normal) conditions the returns on invested capital tend to be significantly higher than the rate of growth so that the historically accumulated portion of national income from capital grows more rapidly than the economy as a whole. In the absence of significant external shocks or state intervention, those with capital tend to earn an increasing portion of the income available. Much of the book is in fact an explanation of why the exceptions – especially the period from 1914 to 1970 in Europe and the US – prove his general rule: that, in the absence of these shocks, inequality will increase remorselessly.

Demography is key to this story. In a country like the United States, economic growth over the last two hundred years has been nourished by an enormous expansion of population, rising 100-fold from about 3 million in 1800 to 300 million today. France, on the other hand, merely doubled in this same period, going from 30 to 60 million, with more sedate effects on the overall economy, which, in turned, raised the importance of inherited wealth. Here is the first question for South Africans – for our demographic growth is in fact behind us, with our population rising ten-fold over the course of the last century and 200% over the last 50 years. While economic growth was famously rapid in this period, the economic benefits were fettered by the limits that segregation and Apartheid imposed on African wages, consumption and property accumulation. Growth significantly above 2%, which we have been repeatedly promised since 1996, seems very unlikely under these circumstances. Populations are now stagnant or in decline in most of the wealthiest countries and the prospects for long-term growth above 1% are grim, which, Piketty insists, means that the portion of income derived from capital will continue to grow.

What then of the vision of prosperity and growth in Europe and America (and even South Africa) in the period between 1945 and 1973, the sunny skies and Chevrolet era? Here Piketty has bad news. It was the world wars, the global bankruptcies of the 1930s, the confiscatory taxation and hyper-inflation of the 1940s, that emptied the reservoir of inherited wealth in Europe and the United States, leaving those with earned incomes – for the first time – at a great relative advantage. Here, again, South Africa is an exception, for, while the world wars greatly increased the state's spending, the Depression (and the crisis in 1932 that prompted the country to leave the gold standard) had the opposite effects here that they had in the north, strengthening the value of share-holdings in the gold-mines and undermining (not for the last time) the value of earned incomes denominated in local currency. Events since the early 1970s have made many of these forms in income inequality worse.

Events since the early 1970s have made many of these forms of income inequality worse. Stupendous increases in the costs of elite education have been important. And the general decline in the tax rates applied to the highest earners, as Piketty shows, have encouraged companies to reward their best-paid workers in ways that would have made little sense when the state gobbled up the bulk of the largest incomes. He also tracks the rise of a new patrimonial middle class – those between the bottom 50% and the top 1% who now – like the very rich – also have a good chance of benefiting from inherited wealth, usually in the form of their parents' pensions or property.  These transfers of inherited wealth, it is important to notice, affect about 1 in 6 people, but they now take place late in life because one of the most important changes in the years after 1970 has been the enormous growth in the capital holdings of the baby-boomers. In a very important sense the global capital stock, and the increasing incomes derived from it, now lie in the hands of those who are over 70. This is something those who have in mind a South African manufacturing boom may want to ponder – selling old-aged services is likely to be much more remunerative.

What does this all mean for us? Much of Piketty's work is concerned to show that the old instruments of the welfare state – of subsidized education, health care, unemployment insurance and trade unions  – were effective measures between 1930 and 1970 for slowing the relative accumulation of incomes at the very top. These may be important arguments to keep in mind in our context, where something like welfare-fatigue seems to be coming the norm. More importantly however – here and around the world – what Piketty shows is that, in contrast with the very detailed information that credit agencies, banks and revenue services gather about salary-earners, those who derive their incomes from capital live in an informational void. Their assets are frequently held off-shore and their incomes are largely un-taxed and, importantly, unknown. In many countries – like India and Russia – this informational fog is actually growing larger and darker around a new patrimonial class. And it is here that his most important recommendations lie. Piketty suggests that states everywhere should enforce a small and shared registration tax on all capital assets as a means of dissolving this fog, providing detailed and accurate information about the size and distribution of capital assets, wherever they are held. South Africans, like Africans in general, have special reason to endorse this proposal.