Thomas Piketty's new book uses data to trace how inequality changes ideology

French economist Thomas Piketty changed the world in 2014 with his magisterial Capital in the Twenty-First Century, a book that reported out an incredibly ambitious project to map out three centuries' worth of capital flows, and from that, to derive an empirical answer about whether markets are a machine for finding smart people and allocating capital to them so that they can invent things that make us all better off ("meritocracy"), or whether they simply make the people who happened to get rich (possibly by inventing something, more often by inheriting wealth or by being a sociopathic looter) even richer (spoiler: r>g, which means that markets' long-run function is to increase inequality by allocating ever-larger pools of capital to rich people who don't do much that's socially beneficial with it).

Here's an example of how markets -- even ones with lots of growth -- are much better at enriching the rich than making us all richer, from the 2014 edition:

All large fortunes, whether inherited or entrepreneurial in origin, grow at extremely high rates, regardless of whether the owner of the fortune works or not. To be sure, one should be careful not to overestimate the precision of the conclusions one can draw from these data, which are based on a small number of observations and collected in a somewhat careless and piecemeal fashion. The fact is nevertheless interesting.

Take a particularly clear example at the very top of the global wealth hierarchy. Between 1990 and 2010, the fortune of Bill Gates -- the founder of Microsoft, the world leader in operating systems, and the very incarnation of entrepreneurial wealth and number one in the Forbes rankings for more than ten years -- increased from $4 billion to $50 billion. At the same time, the fortune of Liliane Bettencourt -- the heiress of L'Oréal, the world leader in cosmetics, founded by her father Eugène Schueller, who in 1907 invented a range of hair dyes that were destined to do well in a way reminiscent of César Birotteau's success with perfume a century earlier -- increased from $2 billion to $25 billion, again according to Forbes.

In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working. Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size. Note, in particular, that once a fortune passes a certain threshold, size effects due to economies of scale in the management of the portfolio and opportunities for risk are reinforced by the fact that nearly all the income on this capital can be plowed back into investment. An individual with this level of wealth can easily live magnificently on an amount equivalent to only a few tenths of percent of his capital each year, and he can therefore reinvest nearly all of his income. This is a basic but important economic mechanism, with dramatic consequences for the long-term dynamics of accumulation and distribution of wealth. Money tends to reproduce itself.

One of the corollaries of this rich-get-richer phenomenon is that it breeds a belief in "hereditary meritocracy," whose argument goes like this: "I deserve my riches because I did something special. My kids inherited my riches (because rich people have dismantled any mechanisms for preventing intergenerational wealth transfers by the super-wealthy), and they're rich too, even though, objectively, they have not done anything great. But we live in a meritocracy! Otherwise my wealth might be illegitimate. If we live in a meritocracy and my kids are rich despite not having done anything great, it must be because they are great. That is, in addition to inheriting the money I got from doing something great, they also inherited my capacity for greatness. My money doesn't just prove that I did something amazing, it proves that I have amazing blood, which I have passed on, and which the market has recognized by allocating all that capital to my kids."

In other words, inequality needs ideology to stabilize it. When you're starving and someone's useless kids are flaunting their third solid gold Bentley by driving through town, terrorizing you and your starving neighbors, the temptation to build guillotines begins to mount.

Rich people can offset the guillotine risk by buying guard labor, and they are, but this has diminishing returns (including the problem of hiring guards to protect you from your guards), and so the market finds more efficient ways to stabilize inequality.

The most important of these is ideology: inculcating a belief that the system is just. This is hard, and it's a long-term project, but if you can convince people that they're not poor, merely "temporarily embarrassed millionaires", you can get them to do their own guard-labor, in their heads, before they even go looking for lumber to build those guillotines.

The rich people of the world have spent lavishly, over decades, to promote the idea of markets as meritocratic, and, in so doing, have (at least partly inadvertently) kept alive the eugenic idea of "good blood" -- which explains a lot about the rise of neo-aristocratic rich racists who find in Donald Trump (and his cohort around the world) a welcome fusion of racism and plutocratic policies.

Now, Piketty has penned a new book (currently available in France as "Capital et idéologie," forthcoming in English as Capital and Ideology") in which he uses the same data-driven econometric methods combined with history and sociology to build up an account of the relationship between inequality and ideas.

Over at Promarket, Branko Milanovic (previously) reviews Capital and Ideology, making it sound really exciting. In particular, Piketty focuses on the transformation of labor parties into liberal parties whose core constituency is the middle class -- a really pressing issue as left wing parties around the world are riven by internal struggles between leftists and liberals.

I'm interested in the ways that inequality has given rise to conspiratorial thinking. It's not like antivax arguments got better over 70 years: but they somehow got more convincing. There are people who worry about machine learning who attribute this to Big Tech's ability to use targeted advertising and algorithms to change peoples' minds, but I think it's much more productive to look to the material circumstances of people who believe unconvincing ideas than it is to reinvent junk science like "neurolinguistic programming" (dressed up in machine learning hype) to explain how people ended up so distrustful of our states and institutions and their truth-seeking capacity that they're willing to believe that the Earth is flat.

This part of the book looks empirically at the reasons that left-wing, or social democratic parties have gradually transformed themselves from being the parties of the less-educated and poorer classes to become the parties of the educated and affluent middle and upper-middle classes. To a large extent, traditionally left parties have changed because their original social-democratic agenda was so successful in opening up education and high-income possibilities to the people who in the 1950s and 1960s came from modest backgrounds. These people, the “winners” of social democracy, continued voting for left-wing parties but their interests and worldview were no longer the same as that of their (less-educated) parents. The parties’ internal social structure thus changed—the product of their own political and social success. In Piketty’s terms, they became the parties of the “Brahmin left” (La gauche Brahmane), as opposed to the conservative right-wing parties, which remained the parties of the “merchant right” (La droite marchande).

To simplify, the elite became divided between the educated “Brahmins” and the more commercially-minded “investors,” or capitalists. This development, however, left the people who failed to experience upward educational and income mobility unrepresented, and those people are the ones that feed the current “populist” wave. Quite extraordinarily, Piketty shows the education and income shifts of left-wing parties’ voters using very similar long-term data from all major developed democracies (and India). The fact that the story is so consistent across countries lends an almost uncanny plausibility to his hypothesis.

It is also striking, at least to me, that such multi-year, multi-country data were apparently never used by political scientists to study this phenomenon. This part of Piketty’s book will likely transform, or at least affect, how political scientists look at new political realignments and class politics in advanced democracies in the years to come. In the same way that Capital in the Twenty-First Century has transformed how economists look at inequality, Capital and Ideology will transform the way political scientists look at their own field.

Thomas Piketty’s New Book Brings Political Economy Back to Its Sources [Branko Milanovic/Promarket]

(via Naked Capitalis)