Book review: Time for Socialism

Hi all – below is the text version of our book review of Thomas Piketty’s “Time for Socialism“. The video can be found here. Would be keen for thoughts, and if there are other books people want reviewed.

This is a book review for Thomas Piketty’s “Time for Socialism”.  Gulnara got me this for Christmas. I have earlier reviewed Piketty’s magnum opus – Capital in the 21st Century – and will provide a link for that here (review, additional discussion).

Gulnara got me this book because she knew I’d find it interesting – and she also knew that my students are likely to ask me about it.  Each year I will have students ask me if we should be communist, whether the profit motivate is immoral, and why we don’t teach the “obvious solutions” to the “clear problems in society”.  Every year I appreciate these questions, and the opportunity to think through what these questions mean with the students.  As a result, this video is in part my opportunity to prepare.

In the same way as when I chat with my students, the goal here is not to define what is right or wrong in a moral sense – just to look at the arguments at hand and push on them a little, to see where they may be delicate to different evidence or different value judgements.  It is only by doing this that we can cut through a group’s rhetoric to have a conversation about what people truly care about.  Furthermore, a lot of ground is covered in the book and here – so the discussion should be seen as cursory at best. More detailed discussion of specific issues is something we could do another time.

Gulnara’s section

As with Capital, Time for Socialism is a book that makes arguments that should be aired providing data to establish and support claims.  Unlike Capital it is not a long comprehensive book – instead making Piketty’s arguments through five years of newspaper articles that he has written.  Sadly this means the arguments are less comprehensively made, and so to make sure we are being fair we’ll have to be quite clear about what we think the argument is before throwing around any criticism.

Both Piketty and the Nolan’s over here are individuals that strongly believe in reducing the inequities in opportunities faced by individuals – and who see economics and justice as inextricably linked. Furthermore, we both believe in the importance of a democratic voice and entrenched rights to allow for this. But even with that framing I feel that we have taken the same goals and come to very different understandings of how this “should” be applied.

Back to Matt

Piketty notes that since his youth in the 1990s he has moved from a strong belief in mainstream economics to what he defines as a more socialist perspective – where socialism is defined as a form of centralised action. This is interesting, as my personal journey has been the complete opposite. In my youth I believed that centralisation and decisions by experts were the elements missing from society, preventing justice and progress – while now I see as many cases, if not more, where it is a lack of belief in individuals to make choices when given the opportunity that holds us all back.  Contrary to Piketty’s introductory comments – property rights do play a role in a just society.

While Piketty talks of “the ideal economic system one wishes to set up”, I can’t help but repeat to myself that I do not know what an ideal is – just that I want people to feel secure and capable to make choices and live a good life. Ultimately, my ideal is likely to differ from the ideal of many others – and so I wouldn’t really want to impose that.

No single narrative is right – and these things differ policy by policy – even for Piketty.  As a result, the clearest way to understand the book is to describe the arguments given and the facts that support it. Then to discuss what we see as missing from these arguments, and where there are potentially misleading facts. Over to Gulnara to summarise the book.

Gulnara section

Summary:

This book is a series of newspaper articles linked together by common themes. There is no need to evaluate each article or even theme here in order to discuss what needs to be discussed – instead we want to pull together the threads of the worldview noted at the start of the book.

Piketty notes from the start that he wishes to use the term socialism, but that is a term that can have many meanings – for example in New Zealand the term is fairly innocuous for most of us, while in the United States it is loaded with severe negative connotations in much of the public consciousness.  He then defines the key characteristics of what he views as socialism to his mind when he uses the term – there are five of these characteristics, listed as:

  1. Equality of outcomes – with a strong focus on reducing wealth inequality.
  2. Equality of outcomes and the right to a minimum standard/bundle – this is the provision of goods on an equal basis through government (universal provision).
  3. Participation through circulation of power and ownership.
  4. Globalisation – but not as its done now
  5. Universality and equality

These five characteristics of Piketty’s socialism are the overarching “policy goals” that Piketty is supporting in this text – indicating that they can be widely applied as appropriate rules of thumb in opposition to whatever current policy settings exist.  The case and context for this argument is then given throughout the book through multiple newspaper articles – where these tangible specific examples are intended to make a case for these more general points.  

Given this, let’s look at each of these a bit more closely and think about a bit of friendly critical evaluation.

Over to Matt

Equality of outcomes and wealth inequality:  

To some wealth inequality sounds like the very definition of injustice, while to others even mentioning inequality in wealth is compared to green-eye envy – and I say this as someone with clearly green eyes. 

Many years ago I wrote an article in the Dominion Post on how land was socially owned, and we should be willing to pay a rent to government as the representative of society for the use of that land. In this way I feel that I have clearly signalled my own concern that the fruits of land and knowledge may fall in the hands of too few people – and yet I don’t find the discussion in this book of wealth inequality and wealth inequality trends particularly enlightening.

One of the starkest issues with Piketty’s description of wealth inequality is what is missed in the discussion – wealth inequality without considering the change in the age distribution and average age, without describing its relation to the level and allocation of capital resources in an economy, without indicating how the “claim” on that underlying lands production has changed, without considering changes in the risk-free rate and the ability to interpret wealth ratios, and the narrow consideration of financial wealth while excluding the significant build up and use of human capital.

For simplicity let’s come up with a toy example that can help us think through these issues.  Take an economy with three people, a capital owner who works and lives in their own factory and two employees who also live and work in the factory.  This gives us one capitalist and two workers – even though all three people “feel” the same apart from a property right over the factory.

Furthermore, the gross value added in the production process is then split between capitalists and workers evenly – so 50% of the GVA goes to one person and 50% goes to the two workers.  We may look at national accounts figures and say this appears unjust, as there is income inequality – the capitalist receives 50% of the GVA, while the workers receive 25% each.  This is inequality in income from the national accounts.

But wait, this is not household income – it does not tell us the amount the individual can consume given their share of the surplus from a production process.  Part of the return to our capitalist friend will be used to maintain the usefulness of the capital equipment that is used in production.  If we assume that this requires 20% of the total GVA, then their household income is net of this cost of 20% of GVA.  So the capitalist receives 30% of the GVA and there is still a little income inequality.

How about wealth inequality?  The measure is financial wealth, so it is the associated value of the capital item.  This will depend on the present value of the stream of cash flows from the capital item.  The additional return (beyond simply selling labour) is 5% of GVA for the capitalist, so the wealth they are holding is the capitalised value of that 5% per year discounted by their discount rate (which is related to the risk-free rate of return).

And the wealth of our workers, well that depends on their saving.  But if we assume that people simply spend what they earn there will be no saving – and it makes our example easier.  Namely, wealth inequality would be INFINITE.

Which one of these measures refers to our key concern when we discuss inequality of outcomes?  I would argue that only the household income inequality measure truly matters – and we would want to understand why inequality in that measure occurs.  Is the capitalist taking on more risk?  Are they actually providing intangible capital or working longer hours?  Or is it purely luck or a matter of initial endowment?  Each of these explanations then may give us a different lens on what an appropriate form of redistribution would be.

Piketty’s views differ from this specifically because of his view that wealth itself generates power – and an ability to force redistribution towards yourself.  In this world it is not the broad structure of inequality that is the issue – but the density at the very top.  It is not truly “wealth inequality” that is the concern – but the ability for the “elites” to claim the resources of society as a whole.  The term wealth inequality here is really just a rhetorical device for noting that concern with excessive power – an issue that turns up in a later argument.

Even if we accepted the view on power, we should not forget the coercive nature of the state – governments have to have power to redistribute resources, and that power is in the hands of those who work for the state and elected officials. My article on land ownership that I mentioned before was unpopular with my work, with the newspaper, and with readers – and I realised that my personal views may differ strongly from the views that people hold about the state. I have significant trust in government – probably well above the average.

But taking a step back, I can understand where people are coming from. The government is an institution that can be captured by vested interests, and it isn’t guaranteed that they will always act in the common good. 

Furthermore, even with public ownership and the provision of income from that to people in society it is more tangible to point to the provision of a house – the provision of food – or the provision of clean air – than it is to describe the provision of an income that allows individuals to trade-off between things based on their own subjective value. 

Trust and security both suggest that individuals themselves value, and are more willing to contribute within, a society with clear property rights that they can share in.

Such an argument does suggest a floor – an ability for someone to live and provide for themselves without reliance on others. It also points to a reservation option if society demands too much from them.  But wealth inequality statistics don’t tell us much about that, and if not considered critically can be used to paint a picture of injustice where none exists.

The discussion of wealth inequality is in part a red herring – the true issue is that of a sufficient minimum standard and concerns that institution arrangements and structures lead to regulatory capture and market failure.

Equality of outcomes and rights to a minimum standard – the provision of equal products

Now we can focus explicitly on the discussion of a minimum standard – what does this mean.

Here there are three types of public provision to consider with varying arguments – and which are intrinsically intertwined:

  1. Underlying absolute needs of the individual.
  2. Products and services required for equalising the “relative” position of the individual.
  3. Public goods, products with significant market failures due to asymmetric information, and goods with positive externalities/spillovers.

It is hard not to mix all three, as a single item of government expenditure can embody all of them – i.e. education expenditure.  

However, it is important to be clear regarding which of these is the motivation – if you use a market failure argument to state it would clearly be more efficient to spend on this item, but you motivate it using relative position, and fall back on absolute need when pushed, your argument becomes incoherent.  At that stage people will start using the “idea” of your argument to push for things in the same way, and given each of these will lead to different observed outcomes your critics will simply pick the argument that appeared to fail in the data to undermine what is being said. 

However, I have no experience of these things – I have grown up in New Zealand, born at the start of the fourth Labour government when New Zealand opened up. It is Gulnara that can speak with more authority and experience on the issue of growing up in the Soviet Union where many items were provided by the state.

[Gulnara to talk about her experience here]

Thanks Matt. To my mind there are actually two separate issues here that deserve attention. The first is how pre-distribution was used to achieve “equality of outcomes” and its costs.  The second is the post-distribution that occurred in terms of the public provision of products, touching on the issues you have just discussed Matt.

I don’t think we can talk sensibly about one without the other – as the two are linked in terms of how they influence incentives.

Communist Russia progressed from the status of a backward nation to the world’s second-ranking industrial power. Most of this advance was made under a system of tight economic controls which enabled the government to direct investment and labor into development of a heavy industrial base at the expense of other sectors of the economy.

As the Soviet economy became stronger and more complex, the system of central controls became more cumbersome and less able to meet the nation’s needs – output growth started to fall. 

Why? Due to the lack of incentives and price signals.

In a number of enterprises the wage rates were fixed in such a way that the difference between the qualified and unqualified, heavy and light work, disappeared almost completely. Equalisation of pay leads to a situation where the unqualified worker does not strive after gaining qualifications, as they do not see any improvement in their personal position.

The fact that wage rates even existed, which was not Lenin’s first desire, indicated that the Soviet Union recognised, it had to work within constraints. But if they could not use markets what other incentive mechanisms could be used.  The first solution that was tried were appeals to individual pride. Hunger for prestige was introduced: red labour banners, distinguished scientific, technical and arts worker medals – paired with small material awards added to those honours. This led to increasing status competition to achieve these awards – driving increasing corruption.  

During Stalin’s time the need for explicit pay differences was recognised with the difference in pay between the lower and the higher grades of workers increased. From then on those who did not work were seen as parasites and the view of “from everybody according to his ability, to everybody according to his work” was introduced. 

However, pay differences never reflected the same difference as was observed in the Western world.  Why? Because of underlying public provision associated with roles. The Soviet Union used direct ownership and provision of goods and services as a way of remunerating staff – and the big difference between this and other forms of remuneration was that it was non-transparent.  Such non-transparency drove corruption, with a culture of corruption leaching into everything that occured.

The Soviet system did provide you with your minimum needs such as housing and effortless access to the job market, and hence a minimum income as long as you were able to do the job you were told. 

However, if you had talents and skills and wanted to use them to progress, this was not possible. Nation-wide corruption was prominent. In education for example, you had a chance to study hard and get into university, but say you had 5 places allocated to engineering in a given year, 3-4 of them would be already taken by some (e.g. a prosecutor or mayor’s child), leaving hundreds of students to compete for 1 single place. Similar things would be observed in allocations of prestigious jobs such as medical doctors, university lecturers, and more higher up in the hierarchy jobs (mayors, lawyers, head of any departments). The blockage of access to any of this sort of incentives, led to a lost opportunities of talents. It was almost impossible to get into positions you were striving for if you didn’t have any relative, friend who could pretty much sort it out for you. 

This happened with everything – better housing would go to people based on who they know, better jobs would go to people who were better at socialising, and better schools would be available to those who got on well with the university. 

I have personal examples, but I feel uncomfortable mentioning them. Ultimately, for all its imperfections, outcomes in the West bear some relation to effort – and that link is essential for any sort of trust in society. Public provision can be just as corrosive as entrenched private sector inequality – and this is a trade-off that Piketty often misses.

[Back to Matt]

This does lead to a question though – why is Piketty focused on government provision of these goods and services, and not government provision of the income necessary to buy these goods and services with private provision?

There can be good reasons for public provision – market failures stemming from asymmetric information, competition issues, institutional issues, and spillovers or externalities. Relatedly, the broader inability for individuals to pool risk and the belief in a given minimum living standard for all individuals may motivate public provision – although it is more likely to motivate direct income support. Behavioural economics may come in and state that individuals will not purchase things that are in their own interest. 

Finally, but differently to above, there may be a social reason for believing that everyone should receive the same product – in order to enshrine some conception of equality of opportunity, or to engender a sense of shared experience between individuals.

However, this does lead to three concerns we may have about such provision:

  1. Inefficiency: The traditional “inefficiency of public provision” – the idea that civil servants, unencumbered by the discipline of competition, would extract surplus for themselves by working less. More broadly, we have the incentive issues Gulnara noted earlier.
  2. Consistency with other measures: The interpretation of income and wealth inequality statistics may change – if we take our toy example from before, if we know that a government was providing education, food, housing, toilet paper, and roads would we feel differently about the inequality of income and wealth than if it was not?  Final income studies try to account for this, but they are fairly rare and often allocate expenditure in an ad hoc or subjective manner (i.e. Harding. Lloyd & Warren 2006: The Distributional Effects of Government Spending and Taxation | Levy Economics Institute (levyinstitute.org), Auten Splinter 2019 AutenSplinter-Tax_Data_and_Inequality.pdf (davidsplinter.com), and Saez Zucman 2020 w27922.auto.pdf (berkeley.edu))
  3. Preference heterogeneity and choice: It sounds nice to provide things to people, but there are two issues that come up.  
    1. The obvious one is that people may value things differently, and so providing something without choice may simply mean the people don’t get what they most desire – they no longer have a choice about the type of health care or education.  Here we would have inefficiency in terms of how inputs create social welfare.  
    2. But there is a second issue – how do you operationalise provision?  Everyone has different educational opportunities because their parents will spend a different amount of time studying with them. Focusing only on equality of the provision of education led Piketty to bemoan school choice in “Inequality in France” and “Parcoursup: Could Do Better”, but what happens if the same argument then led us to say that all children should go to a boarding school to remove unequal opportunities. Is such a dictate from above truly just?  What about a dictate that the same school materials should be used? What about if the children were banned from going home for the holiday to promote equality? What about if the children were taken at birth to prevent any parental based advantage – where do views of individual rights become sufficient for us to say no, and how could they be included in the argument?

All I can really say for this section is that measures of expenditure are essential for understanding outcomes – and we should be careful trying to be too dogmatic one way or the other.  To go any deeper would require an additional hour for this video.

Sharing of power

Piketty’s focus on power sharing is two-fold:

  1. Sharing power within a firm through increased employee ownership and voting rights.
  2. Sharing power within society through greater taxation on wealth and inheritance and the provision of a minimum “capital payment” to all individuals.

Let’s start with the first point. Why is tying an employee to an organisation the way we want to address any imbalance between the employer and employee power? In the articles “Basic Income or Fair Wage” and “Rethinking the Capital Code” Piketty makes clear that it is unfair bargaining positions that he is interested in addressing with employee ownership schemes – although there are a number of OECD papers now linking these schemes to productivity and wage gains from such firms, his focus is rightly on the issue at hand given the likely selection bias issues in a number of these studies.

Maybe it is the New Zealander in me talking, but the ability to cleanly move between jobs, contribute to different projects, and move to whatever task appears to need me most is something that is positive – and rules that assume and enforce a situation where people have to stay tied to one job seems wrong on both a social and an individual level.

As our toy example earlier noted, it was the combination of employees and an employer that generated the GVA, which was then split between the individuals. The ability for the employee to force a move away helps to give them the position to bargain a higher share of that surplus, the employer and employees incentive to maintain and build capital (physical and human) similarly creates the surplus that is shared. If joint ownership helped them to do both, and they are both in a position of power, it does not seem necessary to dictate joint ownership – and such dictates appear to be blunt tools.  

Furthermore, such dictates may have unintended consequences – they link an employee with a firm potentially reducing their outside options, they make the employee more exposed to shocks facing the firm, and they make the retirement savings of the individual less diversified. Ignoring any costs to capitalists even from a pure workers perspective there are significant shortcomings to work through.

This is not to say there is no room for equalising bargaining positions, and for improving employee rights in the face of monopsony and asymmetric information. And mobility itself is not costless – the loss of firm specific capital and the insecurity associated with job movement and job fragility are all real.  But labour laws and fundamental income support appear to be a way to address this without the individual being tied to the business.

The minimum capital payment is something that fits strongly within the narrative we’ve been supportive about above. The incomes we all earn, and the returns on our assets, are in part due to the fact we are in a high productivity world – rather than just a product of the sweat of our brow.  In such a case, ensuring that everyone starts off with something feels consistent.

Similarly, recent research by Balboni etal 2021 indicates the importance of available capital for helping individuals get out of poverty traps. https://twitter.com/ChaseReid5/status/1474894957190295559

But let’s be clear on how things are being financed. A decision to finance this with a wealth tax is increasing the cost of capital, and will in turn reduce investment. We may see that as appropriate, we may see this as preferable to alternative forms of financing, but there will be a change in behaviour.

Why is it that people who accumulate should be liable to pay more tax than those who have the same income, but just love spending more? What is the actual “social dividend” that is captured in transactions between individuals, and why is it not that figure that we are reallocating? Given that, government revenues and expenditures are then how this claim is actioned.

It is here that Piketty’s argument is weak – to raise the funds for the type of capital redistribution required we would require everyone to contribute on the basis of their share of this boon of productivity, the mechanism of a wealth tax (which I’d take as a de facto more progressive tax scale) is not sufficient.  Whether you take the revenue estimates of Sarin and Summer or Saez and Zucman saez-zucman-responseto-summers-sarin.pdf (gabriel-zucman.eu) – the higher of which Piketty cites in “Wealth Tax in America” – such a tax at rates that create a tax liability greater than the income flow would not be sufficient to fund the redistribution discussed – and would be well below the Sarin Summers estimates of improved broad tax enforcement Understanding the Revenue Potential of Tax Compliance Investment | NBER.

The comparison to history here is a red herring, again.  Government expenditures to GDP are now higher in most countries than they were at any time in the past, and are financed through broad funding measures. Piketty believes in greater expenditures than in the past and that will require greater funding than in the past, with the consequences that creates – there is nothing wrong with believing in that, but we need to be clear on the trade-offs.  

If the implied tax on income earned from an asset rose towards 100%, people would switch from considering how to avoid tax more than how to effectively utilise the asset – and marginal discussions of how UCC changes would influence the capital stock, as Gulnara and myself had undertaken earlier in the year Taxation, user cost of capital and investment behaviour of New Zealand firms (vuw.ac.nz), would not give us an accurate picture of this.

And this is the crux of the debate – government expenditures and transfers, along with taxation, is how the “minimum capital payment” is operationalised now. The fact I can use a public road, go to the hospital for a nominal fee, and sit in a park all indicate that there is a type of “minimum capital payment” already.  The questions that separate people are “how large should it be” “who should contribute to it” and “who gets to choose how the capital is allocated”.

Globalisation and universality

The last two options we’ll put together into one and only discuss briefly.  Although there is the odd bit of rhetoric in there that globe twitter may disagree with – the basis for both these sections is for global equality and anonymity for the treatment of people, which are essentially globes goals. The guiding principle of any governance institution, or any supra-national organisation, should be to ensure equal treatment of individuals and support for minimum standards – where these standards of equality correct for differences in opportunity based on gender and ethnicity.  

Just like the majority of economists including us, his view may read as naive for those from both the left and right – who believe in the moral imperative of some cultural or social arrangement, that some differences are “natural” or “necessary”, or that it is practically impossible for such coordination to occur.

Personally I find it refreshing. When we look back to now in 100 years it would be our willingness to accept poverty in low income nations that would lead our great grandchildren to view us as immoral – not the fact that someone once said something inappropriate on twitter.  The fact that the left and the right can only see injustice insofar as it relates to them or their peer group – and not through our global refusal to support those most in need – is such a clear failure in public discourse that on these points I have no real area for disagreement with Piketty. 

Articles such as “Europe, Migrants, and Trade” and “Manifesto for the Democratization of Europe” also indicate that Piketty also sees the inclusion and integration of migrants as part of this overall program – showing a consistency that an increasing number of economists are losing in recent years.

Where this view of equality does create disagreement is with how others will interpret Piketty – and sometimes how he interprets himself in the newspaper articles. In a tweet from Noah Smith he notes:

Noah Smith 🐇 on Twitter: “In which @BrankoMilan argues (correctly) that the people complaining about capitalism are almost exclusively people in rich Western countries where capitalist globalization has caused the disappointment of the middle classes. 🔥🔥🔥🔥🔥 https://t.co/0rLF8eZE2t https://t.co/mgMwI4wFRR” / Twitter

Is the injustice here that some middle class Americans have seen income growth stall – as it is Americans, not other high income countries.  Or is it the level of poverty in low income countries?  The idea that if the wealthy simply had less wealth then both the global poor and middle class would have been better off is simply not true – those with wealth are those who built and allocated capital in such a way that it helped to lift the truly poor out of poverty, to their own interest.  Reallocating from the most wealth alone would not generate the revenues necessary for the global expenditures Piketty suggests, and yet this is what he appears to indicate from the very first of his newspaper articles.

Why do I raise this – Piketty cites an earlier version of this very graphic in “After Climate Denial, Inequality Denial”, but all he states in the article is that this graph makes the case for the inequalities he bemoans and that others that view it differently (such as the Economist magazine) are being dishonest.  This is not right. To argue from data we need a counterfactual, and acting as if this is a fixed sum of income to be reallocated is a likely poor counterfactual – asking “why” is important, as fits the idea that debate is kept open which is what he asks for in the first chapter of this book.

Questioning this also opens other doors that he may have inadvertently shut – market power and concentration of firms, regulatory capture, unequal international treaties. All these issues can offer explanations for the distribution of income and wealth that suggest policy conclusions that differ from expenditure and revenue raising.  Understanding “why” is important for knowing what intervention is truly just. 

In this way, the rhetoric is inconsistent – picking and choosing the cause in isolation based on the subject of the article.  The honest interpretation that everyone who has benefited from technological growth over a long period of time would need to contribute to support his redistributive grand-design is missing. And that where income change is not the product of technological growth, but instead power, we need to understand the power dynamic prior to considering the intervention. If someone has power due to concentration or regulatory capture, they will have the means to avoid indirect instruments such as a tax.

Conclusion remark

Also, I will say one more thing about the arguments overall – after all the road to hell is paved with good intentions. Within any structure, institution, and society it is always the way that the “needs of the many” can swamp the “needs of the few”.  Or even the wants of the many can swamp the absolute needs of the few.

We all have varying conceptions of justice due to different perspectives, different preferences, and different beliefs. And the tyranny of the majority is a real thing, that becomes strongest when change is driven in the name of justice and victory over some other. 

The principles of universality and equality work only when the rights of the individual are enshrined and protected – and every single time we think of a neat scheme to improve some metrics of outcomes we need to keep that in mind.  This isn’t some way to slow down progress – it is a way to stop our generation from becoming the monsters we read about in history books.

A desire to do good needs to be balanced alongside humility and a recognition that we don’t always know what good is – if we lose sight of that we might lose the argument, but even worse we might win it.

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