Thomas Piketty's real challenge was to the FT's Rolex types

If the FT's attack on the radical economist's 'rising inequality' thesis is right, then all the gross designer bling in its How To Spend It section can be morally justified

• 
• • Paul Mason
  • The Guardian, Monday 26 May 2014 20.00 BST

The adverts in the FT and other reputable papers – mainly for large watches, first-class air travel, portable fine art etc – should be collectively retitled How To Hide It

Thomas Piketty's Capital was still No 3 on the Amazon bestseller list when the Financial Times dropped its front-page bombshell. By picking through the spreadsheets the "rock-star French economist" had placed online, the FT concluded that his key data appeared to be "constructed out of thin air".

Piketty's claim that inequality in the west has risen since the 1970s is wrong, says the FT's Chris Giles. And on this basis, Piketty's view that rising inequality is the central contradiction of capitalism, and will get worse, is also wrong.

It is always right to trawl through data. There is so much grossing and smoothing in economics, and so little of the realtime peer review that happens in science, that data should always be challengable. But the gleeful response to Piketty's "errors" on the rightwing Twittersphere did not happen because some FT pointy-heads discovered a few fat-finger inputs. It happened because, if Giles is right, then all the gross designer bling advertised in the FT's How To Spend It can be morally justified: it is evidence of rising social wealth in general, not the excess of a few Rolex types.

But the attack does not quite come off. For Sweden and France, the FT's conclusions barely diverge from Piketty's. For Britain and the US they do: the official figures capture the general curve of inequality downwards in the mid-20th century, but shatter into incoherence after 1970, failing to match Piketty's claim that wealth inequalities have increased.

There is an obvious reason for this: since time immemorial the rich have been averse to declaring their wealth. But after 1979 capitalism was restructured to promote wealth accumulation, ending the "euthanasia of the rentier" Keynes had designed into the postwar system.

Unlike income, which has been vigorously taxed since the mid-19th century and therefore recorded, personal wealth was, after 1979, the subject of a half-hearted cat-and-mouse game in which the cat and the mouse were wont to share yachting trips to the Aegean on a regular basis. That's why the work of Piketty and his collaborators had to be based on a mixture of inheritance tax data and surveys, plus a large amount of calculation.

Piketty's figures show a clear upward trend to inequality in the UK since the 70s; the FT's preferred official data dissolves into a series of squiggles that show nothing conclusive. And let's be clear why: the HMRC currently estimates that the top 10% of the population own 70% of the wealth, while the Office for National Statistics thinks they own just 44%. The discrepancy occurs because, of course, there is neither requirement nor desire to record actual market wealth at all. There are only inheritance tax returns on estates big enough to pay it.

The old Inland Revenue figures for UK wealth were so wonky that they abandoned efforts to calculate them: but in their last attempt (2005) they said that on top of £3.4tn "identified" wealth in the UK, a further £1.7tn had to be assumed that was either not declared or belonged to people who slipped through the net.

For this reason one of Piketty's key demands is the automatic sharing of bank information between states and banks. The principle is simple, he writes: "National tax authorities should receive all the information they need to calculate the net wealth of every citizen." Why that might be needed is understood if you flick through the wealth management magazines produced by the FT and other reputable papers. The adverts – mainly for large watches, first-class air travel, portable fine art, tax haven accountants and capacious luggage – deliver a clear subliminal message. They should be collectively retitled "How To Hide It".

In the end, Piketty did not claim there had been a vast increase in wealth disparities since the 1970s. Piketty's prediction is that the moderate rise in inequality under neoliberalism is set to gather pace in the 21st century, taking us back to Victorian levels by 2050. His prediction is based on simple maths: if growth is low, and the bargaining power of labour low, and the returns on capital high, then it is more logical to sit on assets and speculate rather than accumulate wealth by work, invention or entrepreneurial risk.

Piketty asks the question that mainstream economics doesn't want to answer: do we want a society based on work and ingenuity or on rent?

It's not an academic question. Figures from Lloyds Private Bank show UK asset wealth grew from £4.7tn to £7.8tn in the decade to 2013, with most of that generated by the rising value of financial portfolios, and all wealth growing faster than incomes and inflation. If Piketty's figures are wrong, the probable cause – beyond the odd transcription error – is a mild overestimation of a clear trend, generated in an attempt to uncover modern capitalism's guilty secret. If the FT's figures are wrong, it is because they rely on those of governments that have become – as Peter Mandelson once put it – "intensely relaxed about people becoming filthy rich".

But the most important question is the future: if Piketty is right then we have to "euthanase" the rentier class all over again. Only taxes on current wealth – and an end to opaque "wealth management" trails that end up in Switzerland or Cyprus – will prevent capitalism generating levels of social inequality that destroy it.

Paul Mason is economics editor at Channel 4 News and the author of Why It's Kicking Off Everywhere.

Thomas Piketty's bestselling post-crisis manifesto is horrendously flawed

Allister Heath in The Telegraph

Given that today’s fashionable economic ideas tend to become tomorrow’s government policies, it’s not looking good for the future of free-market capitalism. Consider the current bestselling book in America, Capital in the Twenty-First Century, a hugely important work that has already become the defining post-crisis manifesto. Its ground-breaking research on historic patterns of wealth ownership is second to none, but its conclusions are horrendously flawed.

Its author, the French economist Thomas Piketty, advocates an 80pc income tax rate for those earning more than £300,000 a year. For good measure, he also floats a range of other even worse ideas, including an internationally coordinated progressive wealth tax, hitting anybody with at least £165,000 in assets and peaking at a crippling 10pc a year on billionaires, a windfall tax on private capital, a dose of inflation and a war on inherited wealth. It’s the kind of hardcore message to warm the hearts of your average British socialist, circa 1976 – and yet it is being embraced as the latest, cutting-edge thinking.

Even more fantastically, this assault on private property and wages would supposedly have no meaningful negative side-effects. Piketty writes that “the evidence suggests that a rate [of tax] of the order of 80pc on incomes over $500,000 or $1m a year would not reduce the growth of the US economy but would, in fact, distribute the fruits of growth more widely while imposing reasonable limits on economically useless behaviour”. Instead of being laughed out of town, Piketty is being treated with the sort of adulation usually reserved for a rock star.

At this point, I could cite some of the many peer-reviewed studies that show — unlike the author’s own research — how high marginal tax rates reduce work and effort, remind readers that eating capital is the best way to impoverish a nation, reduce productivity growth and keep wages down, or point out that societies where the most successful entrepreneurs are rewarded by the state seizing their assets don’t prosper.

Instead, let me consider Piketty’s big idea, which he believes justifies his policies of “confiscatory” taxation – to him, a positive term. He believes that in a peacetime free-market economy, the returns on capital — dividends, interest, rents and capital gains — inevitably grow faster than the overall economy. The owners of capital will therefore end up grabbing an ever-greater slice of the pie, leaving workers with less and less.

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I buy neither the prediction nor the proposed solution. For a start, João Paulo Pessoa and John Van Reenen from the LSE have shown that the share of UK income going to labour is largely the same now as it was 40 years ago, unlike in America. And if the returns to capital do go up, more money will eventually be invested to reap the rewards — and that, in turn, will increase productivity and hence wages, and keep down capital’s share of GDP.

There are other problems. Try telling pensioners that “rentiers” always end up ahead. The rate of interest on many bank accounts is close to zero, and therefore negative after inflation, and returns on gilts have been awful over the past couple of years. Of course, share prices have shot up — but risky assets come with a premium, and total returns on UK equity markets haven’t exactly been stellar over the past 15 years.

Capital is an amorphous concept; it keeps changing, as does its ownership. Entire industries are being decimated by technological progress; the whole point of capitalism is creative destruction, which means that old capital becomes obsolete, wiping out its owners, and is replaced by new capital, enriching its creators. It is also easy to destroy assets by consuming them — and that is what happens, in most cases, when money is passed down generations.

The fact that Piketty’s book is selling so well busts several myths.

The first is about American intellectual exceptionalism: the idea that US Left and Right differ only marginally in their support of capitalism, unlike in Europe. That certainly isn’t the case today. Parts of the US intelligentsia now advocate the same ideas that are to be found on Europe’s Left-wing fringes; Piketty and his adoring fans would go much further even than Ed Miliband.

The second incorrect idea is that the recent episode of banker-bashing from Occupy Wall Street et al was merely a reaction to the bail-outs, or to the financial sector’s role in the crisis. It was perfectly possible, we were told, to slam bankers but to embrace entrepreneurs. It was a case of Wall Street bad, Silicon Valley good; money accrued through finance was supposedly “undeserved” and that accrued by building a business wasn’t.

The truth, as I long suspected and as the almost delirious reception that this book has received confirms, is altogether different. Envy is back, disguised as a concern about “inequality”, and the bail-outs and QE were merely a convenient excuse to bash the rich. It is shocking how many intelligent people now support seizing most of the wealth created by entrepreneurs, including the founders of the great software companies (which is what a 10pc annual tax on the assets of billionaires would soon achieve).

The third myth is that there is such a thing as the “1pc”. This was always nonsense: someone earning £150,000 a year (the threshold at which a UK income taxpayer joins the club) has nothing in common with a billionaire. The Left now has another enemy, the top 0.1pc or even 0.01pc, which is just as well given that plenty of those waxing lyrical about Piketty are in the lower reaches of the top 1pc themselves. It is a case of the rich waging war on the extremely rich.

One reason why many believe Piketty’s claim that returns to capital will continue to outpace GDP is the experience of the past three to four years. Share prices have bounced back, and house prices have outperformed; meanwhile, wages are down in real terms. Yet that doesn’t mean this will continue indefinitely.

Regardless of whether Piketty’s key prediction is true — and I’m sure it isn’t — a much better solution is to encourage an ownership society so all can enjoy returns from capital. In the UK, auto-enrolment means that nearly everybody will begin to accumulate financial assets in pension pots.

Housing policy needs to change. In London, New York and San Francisco, house prices have rocketed because of planning rules that limit supply growth, pricing many out of the market. The best way to refute Piketty’s law in this area is to make it much easier to build new homes.

We also need a normalised monetary policy, not one designed to keep the price of capital assets as high as possible, thus artificially (but temporarily) boosting the wealthy.

Last but not least, supporters of capitalism need to get their act together. They are being slaughtered on the intellectual battlefield by opponents who are finding sexy new justifications for their old arguments. We need more and better defences of the free enterprise system, and we need them now.

Capitalism simply isn't working and here are the reasons why

Economist Thomas Piketty's message is bleak: the gap between rich and poor threatens to destroy us

• 
• • Will Hutton
  • The Observer, Saturday 12 April 2014 20.30 BST

Thomas Piketty has mined 200 years of data to support his theory that capitalism does not work. Photograph: Ed Alcock for the Observer

Suddenly, there is a new economist making waves – and he is not on the right. At the conference of the Institute of New Economic Thinking in Toronto last week, Thomas Piketty's book Capital in the Twenty-First Century got at least one mention at every session I attended. You have to go back to the 1970s and Milton Friedman for a single economist to have had such an impact.

Like Friedman, Piketty is a man for the times. For 1970s anxieties about inflation substitute today's concerns about the emergence of the plutocratic rich and their impact on economy and society. Piketty is in no doubt, as he indicates in an interview in today's Observer New Review, that the current level of rising wealth inequality, set to grow still further, now imperils the very future of capitalism. He has proved it.

It is a startling thesis and one extraordinarily unwelcome to those who think capitalism and inequality need each other. Capitalism requires inequality of wealth, runs this right-of-centre argument, to stimulate risk-taking and effort; governments trying to stem it with taxes on wealth, capital, inheritance and property kill the goose that lays the golden egg. Thus Messrs Cameron and Osborne faithfully champion lower inheritance taxes, refuse to reshape the council tax and boast about the business-friendly low capital gains and corporation tax regime.

Piketty deploys 200 years of data to prove them wrong. Capital, he argues, is blind. Once its returns – investing in anything from buy-to-let property to a new car factory – exceed the real growth of wages and output, as historically they always have done (excepting a few periods such as 1910 to 1950), then inevitably the stock of capital will rise disproportionately faster within the overall pattern of output. Wealth inequality rises exponentially.

The process is made worse by inheritance and, in the US and UK, by the rise of extravagantly paid "super managers". High executive pay has nothing to do with real merit, writes Piketty – it is much lower, for example, in mainland Europe and Japan. Rather, it has become an Anglo-Saxon social norm permitted by the ideology of "meritocratic extremism", in essence, self-serving greed to keep up with the other rich. This is an important element in Piketty's thinking: rising inequality of wealth is not immutable. Societies can indulge it or they can challenge it.

Inequality of wealth in Europe and US is broadly twice the inequality of income – the top 10% have between 60% and 70% of all wealth but merely 25% to 35% of all income. But this concentration of wealth is already at pre-First World War levels, and heading back to those of the late 19th century, when the luck of who might expect to inherit what was the dominant element in economic and social life. There is an iterative interaction between wealth and income: ultimately, great wealth adds unearned rentier income to earned income, further ratcheting up the inequality process.

The extravagances and incredible social tensions of Edwardian England, belle epoque France and robber baron America seemed for ever left behind, but Piketty shows how the period between 1910 and 1950, when that inequality was reduced, was aberrant. It took war and depression to arrest the inequality dynamic, along with the need to introduce high taxes on high incomes, especially unearned incomes, to sustain social peace. Now the ineluctable process of blind capital multiplying faster in fewer hands is under way again and on a global scale. The consequences, writes Piketty, are "potentially terrifying".

For a start, almost no new entrepreneurs, except one or two spectacular Silicon Valley start-ups, can ever make sufficient new money to challenge the incredibly powerful concentrations of existing wealth. In this sense, the "past devours the future". It is telling that the Duke of Westminster and the Earl of Cadogan are two of the richest men in Britain. This is entirely by virtue of the fields in Mayfair and Chelsea their families owned centuries ago and the unwillingness to clamp down on the loopholes that allow the family estates to grow.

Anyone with the capacity to own in an era when the returns exceed those of wages and output will quickly become disproportionately and progressively richer. The incentive is to be a rentier rather than a risk-taker: witness the explosion of buy-to-let. Our companies and our rich don't need to back frontier innovation or even invest to produce: they just need to harvest their returns and tax breaks, tax shelters and compound interest will do the rest.

Capitalist dynamism is undermined, but other forces join to wreck the system. Piketty notes that the rich are effective at protecting their wealth from taxation and that progressively the proportion of the total tax burden shouldered by those on middle incomes has risen. In Britain, it may be true that the top 1% pays a third of all income tax, but income tax constitutes only 25% of all tax revenue: 45% comes from VAT, excise duties and national insurance paid by the mass of the population.

As a result, the burden of paying for public goods such as education, health and housingis increasingly shouldered by average taxpayers, who don't have the wherewithal to sustain them. Wealth inequality thus becomes a recipe for slowing, innovation-averse, rentier economies, tougher working conditions and degraded public services. Meanwhile, the rich get ever richer and more detached from the societies of which they are part: not by merit or hard work, but simply because they are lucky enough to be in command of capital receiving higher returns than wages over time. Our collective sense of justice is outraged.

The lesson of the past is that societies try to protect themselves: they close their borders or have revolutions – or end up going to war. Piketty fears a repeat. His critics argue that with higher living standards resentment of the ultra-rich may no longer be as great – and his data is under intense scrutiny for mistakes. So far it has all held up.

Nor does it seem likely that human beings' inherent sense of justice has been suspended. Of course the reaction plays out differently in different eras: I suspect some of the energy behind Scottish nationalism is the desire to build a country where toxic wealth inequalities are less indulged than in England.

The solutions – a top income tax rate of up to 80%, effective inheritance tax, proper property taxes and, because the issue is global, a global wealth tax – are currently inconceivable.

But as Piketty says, the task of economists is to make them more conceivable. Capital certainly does that.