Mervyn King*, the former Governor of the Bank of England, has added his take to the ever growing pile of reviews of Thomas Piketty's Capital in the 21 st Century. And I think it's fair to summarise the review as being that the book contains a great deal of excellent research but the conclusions drawn from it could do with a little more work.
The historical story is fascinating and well told, with particular reference to the share of the top incomes. The picture is familiar – a widening gap between high and low earners over the past quarter of a century. Technological change and global competition have raised the demand for special talent and lowered it for unskilled labour. The rewards for success have risen and wages towards the bottom of the income distribution have been squeezed.
In a few weeks, Wimbledon will return to our television screens. The top tennis players in the world will compete for prize money that, boosted by broadcast income from more than 200 countries, will this year total £25 million.
Forty years ago, the total prize money was £91,000. Taking into account the rise in the cost of living, the players will receive 33 times as much this year compared with in 1974. Over the same period, average real hourly earnings in manufacturing have merely doubled.
This is akin to my own reading of the inequality story. We have greater within country inequality as an almost inevitable consequence of globalisation. That same globalisation leading to ever reducing global inequality. So to call increased incountry inequality some inevitable part of capitalism as Piketty does seems a little strange. For it might well be an inevitable property of globalisation but not of capitalism. And, as ever, if we blame something on the wrong cause then we'll take action to solve the wrong thing. For example, whether we used capitalism or socialism to extend globalisation we might still see that rise in inequality. So blaming capitalism, trying to fix capitalism so the inequality doesn't occur, would be useless if our still increasing globalisation kept increasing that inequality.
The other point about it possibly being globalisation causing the rising inequality is that it's a self-limiting process. Once those billions of global poor are the global middle class (as, for example, the IPCC models predict happening sometime later this century) then the driver of that increased inequality will have gone away.
King also makes one other very good point:
Also absent from the heart of the analysis is any recognition that the main reason for the average rate of return exceeding the growth rate by a good margin is that savers require a risk premium to compensate for the uncertain nature of the returns on investment. Adjusting for risk, average rates of return have historically been much closer to growth rates.
And the present concern in capital markets is not that the rate of return is above the growth rate, but that the (risk-adjusted) rate of interest is below the growth rate.
Five-year real interest rates in the US and UK, adjusted for risk, are at present slightly negative whereas current growth rates of the economy, and even more so expected rates over the next five years, are significantly positive.
Meaning that even if we accept Piketty's theoretical construct we have the empirical evidence that this model doesn't actually apply to us at this time.
A reasonable final summation of King's views on Piketty would be "interesting but flawed".
*One of the little oddities of the British system of titles is that while he used to be Sir Mervyn King, now that he's actually Lord King, we don't call him Sir Mervyn even though he's still a Knight.
