Capital in the Twenty-First Century–Malthus, Ricardo, and Marx on Inequality

I just started reading the introduction to Thomas Piketty’s masterwork on the topic of economic inequality Capital in the Twenty-First Century, and I wanted to jot down some notes from the introduction on how earlier economic theorists dealt with the subject of economic inequality.   In particular, I wanted to capture Thomas Piketty’s insights on how Malthus, Ricardo, and Marx thought about the subject.   In it, Mr. Piketty shows in essence what they got they wrong in the hindsight of later economic research, but also what they got right.

1.  Malthus

Thomas Malthus published his Essay on the Principle of Population in 1798, and in it he posited that the primary threat on economic and political stability was overpopulation.   What did he get right?   Well, it is true that France was the most populous country in Europe and had achieved a steady increase in population throughout the eighteenth century, with a population in 1700 of 20 million (four times the population of England) and 30 million by 1780.   This contributed to a stagnation of agricultural wages and an increase in land rents in the decades before the French Revolution of 1789.   It was not the sole cause of the revolution, but it was definitely a contributing factor.

To combat this problem of overpopulation, he proposed the draconian measure of an immediate halt to all welfare assistance to the poor, and an institution of severe scrutiny of reproduction by the poor.

What did he get wrong?   Well, like others in England, like Arthur Young, who wrote of the poverty of the French countryside based on his travels there in 1787-1788 on the eve of the revolution, much of the extremity of his solution to inequality was based on the fear gripping those in England, and indeed much of the European elite, in 1790s of a similar revolution taking place at home, rather than on a sober economic analysis of the factors involved.

2.  Ricardo

David Ricardo published his Principles of Political Economy and Taxation in 1817. Like Malthus, he was interested in the issue of overpopulation and its effects on social equilibrium, but in particular through the mechanism of its effect on land prices and land rents.   His argument was that, as population increased, since the supply of land is limited relative to other goods, it will become increasing scarce as more and more people are competing for roughly the same amount of land.  So the price of land will rise continuously, as will the rents paid to landlords.   This means that the landlords will claim a growing share of national income, as the share available to the rest of the population decreases.   This growing economic power of the rentier vs. the renting segments of society could only be counterbalanced by a steadily increasing tax on land rents.

What did Ricardo get right?   Although his example was based on the price of land, his “scarcity principle” meant that certain prices might rise to very high levels, which might be enough to destabilize entire societies.   His insight of the scarcity principle could well be applied to the price of urban real estate in major world capitals or the price of oil.

What did he get wrong?   Ricardo did not anticipate the importance of technological progress or industrial growth, which changed the level of output achievable from any given piece of land.    In other words, although land is a fixed input, the productivity achieved by that land is not a fixed output.

In addition, the high prices for a certain scarce commodity, through the law of supply and demand, will create a countervailing force that will reduce the prices of that commodity through the lowering of demand, often through the development of alternatives.  In the case of oil, for example, the high prices of oil have created a pressure to develop alternative fuels, which are thereby becoming more competitive with oil and may someday replace it.

3.  Marx

I have to start the notes to this section by mentioning a Monty Python skit where there is a new faculty member of the Philosophy Department who is arriving at the University of Wallamalloo in Australia and who is told he can mention Karl Marx in his lectures as long he states clearly that he was wrong.

Mr. Piketty is here to tell us both what he got right and what he got wrong.

For Marx, who wrote the first volume of Das Kapital in 1867, he differed from Malthus and Ricardo in that he was writing during the full swing of the Industrial Revolution.   The Industrial Revolution ushered in a period from 1870-1914 where inequality stabilized at extremely high levels due to a long phase of wage stagnation and an increase the share of national income devoted to capital (industrial profits, land and building rents) which occurred during a period of rapidly accelerating economic growth.  It was only the shocks to the system rendered by World War I which were powerful enough to reduce inequality.

Marx set himself the task of explaining why capital prospered while labor incomes stagnated.  What he did was to take the Ricardian model of the principle of scarcity and apply it to a world where capital was primarily industrial (machinery, plants, etc.) rather than landed property.    However, as opposed to land, which was a fixed quantity, he saw that there was no limit to the amount of capital that could be accumulated.    His principal conclusion was the “principle of infinite accumulation”, which said that capital would accumulate in fewer and fewer hands with no natural limit to the process.    It’s like the “scarcity principle” on steroids.   This economic “singularity event” would led to a political singularity event, namely, the communist revolution.

What did Marx get wrong?   He neglected the possibility of durable technological progress and steadily increasing productivity which can serve to some extent as a counterweight to the process of accumulation and concentration of private capital.   I use the word “can” advisedly, because the productivity gains due to technological innovation in the U.S. after the 1970s have been going almost totally to the capital side and not to the labor side of the economy, so increasing productivity does not necessarily lead to it being a counterweight to the process of accumulation.

Of course, the other major flaw in Marx’ argument was what would happen after the “political singularity event” of the Revolution.   He did not put a lot of thought in to the question of how a society in which private capital had been totally abolished would be organized politically and economically.

What did Marx get right?   If population and productivity growth are relatively low, then cannot counterbalance the destabilizing effects of accumulated wealth.   Although accumulation ends in the real world at a finite level, not an infinite one as Marx had posited, it still ends at a level high enough to be destabilizing.   That insight is just as relevant to the levels of private wealth in the 1980s and 1990s in the Western world and Japan as it was in the late nineteenth century in Europe.

One factor that Malthus, Ricardo, and Marx had was that their analysis was based on analysis of a relatively limited set of facts about recent economic conditions, combined with theoretical speculations.   It would take the 20th century for economists to begin to apply the principles of social science research and the use of historical data to the economic problems like the problem of economic inequality.


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