Piketty on the global crisis

One thing that I learned in my decade as a training manager is that some books are destined to be bought rather than read. In the corporate training arena a guru would produce a tome that would have enormous influence on the debate. It would shape the agenda for conferences and spawn imitators who would write ‘how to implement’ publications, thus generating consultancy income. The case I best remember was the US academic Peter Senge’s The Fifth Discipline. This book introduced the seductive concept of ‘the learning organisation’. It was originally published in 2006 and it is claimed that over one million copies have now been sold. The best I ever did was 3000.

I can claim a personal acquaintance with quite a number of those million Senge purchasers; if you were to be taken seriously as a training manager you needed to be able to talk about the learning organisation.   Unfortunately Peter Senge’s book was a difficult read: it was long and it was dense. I never saw it open on anyone’s desk and I suspect most of the volumes that I observed on their bookshelves gathered dust.

Does the same fate await Thomas Piketty’s Capital in the Twenty-First Century? This proved to be the publishing sensation of 2014. It is a serious and thoughtful volume, written by an unassuming Professor at the Paris School of Economics. After the French language version sold 50000 copies; the English translation reached number one on The New York Times bestselling hardcover nonfiction list in May 2014. It is 577 pages long and very complex in its arguments; you need to read every sentence.

Let me say with some pride that I have now read Piketty. Over the course of a week’s holiday I spent three hours each morning diligently reading, digesting reflected and noting. It was worth it. The favourable reviews are correct: this is the book that we of the left have been waiting for. I can only hope that Ed Balls and Rachel Reeves of Labour’s front bench have opened their copies and digested, reflected and noted.

It is generally accepted that the Conservative Party has an unassailable lead over Labour on the handling of the economy. Indeed the Conservative Leadership, with the shameful collusion of the Liberal-Democrats, have somehow or other established the myth that the global financial crisis of 2008 was a result of Chancellor Gordon Brown’s over-spending. Labour’s current response, in a desperate attempt to demonstrate financial competency, appears to be a commitment also to cut public spending but to do so more fairly and precisely. Try putting that across on the doorstep to an unemployed 18 year-old in North Walsham, Norfolk.

Now let’s turn to Piketty. His central thesis, as has been well-exposed, is that the market economy, if left to itself, contains powerful forces – some of which will threaten social justice. Without effective intervention, including progressive income tax and the introduction of some sort of wealth tax, greater inequality is inevitable. This rising inequality will occur when the private return on capital is significantly higher for long periods of time than the rate of growth of income and output. Wealth, particularly, inherited wealth, becomes more commanding: as Piketty eloquently puts it: ‘ the past devours the future’.

Now consider his perspective on the global financial crisis: In my view there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms’. It is widely accepted that the collapse of the reckless and unsustainable US mortgage lending triggered the 2008 crash. Thomas Piketty gives us an explanation of the deeper causes.

One does not have to agree with every section of the book to thank him for reintroducing inequality as the central issue in economics. He has pointed to endemic flaws in our global financial system, which ultimately can only be rectified through international collaboration. Such measures may prove more popular than the current Labour leadership recognises. On my study wall is a cutting from an advertisement from the charity Oxfam. This states simply that ‘The World’s 85 richest people own the same wealth as the 8.5 billion poorest’. It is to combat obscenities like this that I first became active in politics.

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