Accumulation and All That

Friedrich over BishopsgateThese days, Thomas Piketty is everywhere. Capital in the Twenty-First Century came out in April and exploded into the world of economic policy debate, current affairs commentary and the blogosphere. It is difficult to talk about inequality and capitalism without feeling under some pressure to at least mention the French economist’s name and indicate familiarity with his arguments. Some have complained about the bubble-like quality of Piketty enthusiasm, and quite a few people are understandably getting quite tired of having to talk about him all the time.

The tidal wave of Piketty commentary has produced several reviews that are impossible to surpass, including ones written by Branko Milanovic, James Galbraith, Doug Henwood and Tim Shenk, which are all well worth reading in themselves. It has also prompted critical cross-checking of his empirical findings. On Friday Financial Times economics editor Chris Giles announced that he had discovered several errors in Piketty’s dataset. Whether these errors are really particularly problematic for the conclusions arrived at in Capital in the Twenty-First Century remains to be seen. There are some reasons to believe that they are less damaging to Piketty’s general findings than the errors discovered one year ago in a famous paper by economists Carmen Reinhart and Kenneth Rogoff. But discussion about the quality of datasets and the implications of empirical findings is good, and should be encouraged.

What I would like to do is to bring out a number of themes in Capital in the Twenty-First Century that have received less attention than they deserve. First, Piketty provides a very interesting perspective on the problem of global inequality. Second, his work points to the importance of economic history for economics. Finally, these two themes come together in the core policy instrument that the book proposes to reduce inequality: taxation. In all these areas, his position is more interesting than has been supposed. Some critics have focused on the alleged utopianism of Piketty’s policy proposals. Others have been quick to classify him as a critic of capitalist accumulation tout court. Both these lines of response are misguided. Piketty’s policy agenda is very realistic about the centrality of the nation-state. Furthermore, although his subject matter is clearly indebted to Marx, in its political force the argument advanced by Piketty is much closer to the fiscal managerialism of Schumpeter. Exploring these subtleties will, I hope, show why Capital in the Twenty-First Century is such a game-changing book.

Global inequality

Kenneth Rogoff has recently formulated an important reply to Piketty’s project. Rogoff argues that although inequality is indeed increasing in advanced economies, the world as a whole is still becoming a more equal place. It is undeniably true that hundreds of millions in Asia have been lifted out of poverty in the last three decades. Accompanying the immiseration of the Western lower and middle class since the 1970s, then, are the rapidly increasing incomes of the masses in emerging market economies. In light of this, Rogoff rightly asks where the inequality problem is located. How do we square the negative trend in the industrialised world with the positive trend in the world as a whole? Are the two related, and what are their effects on each other? This is surely a hugely important issue, and it can only be hoped that debates in the wake of Capital in the Twenty-First Century will focus more on this globally significant issue.

There do seem to be some differences that account for the coincidence of these two trends. Rogoff is right when he posits that the world is in many ways more equal. But this is above all true in terms of income, i.e. wages or salaries earned through individual labour. In terms of wealth (what Piketty capaciously calls capital), it is not all that clear that the world has in fact become more equal. If the figures about rising internal disparities in many emerging markets are to be believed, the number of super-wealthy Chinese, Indians and Russians will soon be large enough to join the Western 1 to 0.1% in the upper strata of the global wealth distribution. The problem here is that when it comes to the wealth distribution among individuals at the global level, we simply do not have precise enough figures to make any solid claim about the trend of the last thirty to forty years. If the global labour force has been earning steadily more equal incomes, and yet this majority has simultaneously been left behind by a minority of cosmopolitan individuals who hold most of the world’s wealth, then what is the net result for the world as a whole? It is not unlikely that we would describe this situation as being, on balance, more unequal.

It is exactly to counter the prospect of a world of relatively equal wages but profoundly unequal wealth that Piketty introduces his notional global tax on capital. This tax should be understood as a ‘useful utopia’ in the Rawlsian sense: it is an ideal that tracks certain features of reality and thereby provides a useful metric for progress. The purpose of this tax would be as much to gain knowledge about the global wealth distribution as to actually rebalance it. The informational challenges involved are surely huge, and politically this proposal is clearly dead in the water. But the challenge of preventing capital flight into tax havens remains pressing regardless of whether cross-border taxation regimes are feasible or not. Piketty’s proposal does not stem from any desire to establish a world government. Instead, it is a response to the clear difficulties encountered by states when trying to tackle inequality on an individual basis.

If inequality is a pressing issue because it undermines democratic values, social cohesion and dynamism (as was explored in these pages last year), a solution must focus on its manifestation within particular countries. This is, after all, the reality of inequality that people experience on a day-to-day basis. The global tax on capital is not a blueprint for global redistribution. It is chiefly a tool to coordinate attempts by individual countries to re-balance wealth more effectively among their own population. In the current world economic system of tax havens this is made very difficult, because owners of wealth can relocate assets abroad and evade the attention of national authorities. In this setting, a global tax on wealth would bring much-needed epistemological and fiscal advantages. Yet it would serve to strengthen a series of national redistributive efforts rather than aim for the full readjustment of global incomes.

Rogoff asks what the case might be for using the proposed global tax on wealth to promote worldwide economic egalitarianism:

‘Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?’

Clearly, Piketty’s followers would be less enthusiastic if their tax would be used for this purpose. But that is chiefly because this is not really the intention behind the global wealth tax in the first place. In a redistributive scheme aimed at cosmopolitan justice, citizens of rich countries would probably pay transfers to poorer countries, and this includes the lower and middle classes of wealthy countries whose incomes have come under increasing pressure in recent decades (although even this point is questionable: many lower and middle class citizens in rich countries have been able to use their assets as collateral for massive borrowing, and therefore may have net negative wealth).

But this is fundamentally different from the nature of Piketty’s proposal, which is founded on the political reality of the national state as the basic building block of economic management and income redistribution. This is why he emphasises repeatedly that the global tax on capital is only a benchmark against which progress towards improved national taxation can be measured. Its primary goal is to curb global wealth inequality by limiting the accumulation of super-high stocks of wealth. Its secondary goal is to provide informational advantages to states by bringing into view the concentration of wealth–the the ‘cadastral’ function of taxation. The proposal is not designed to create a global commonwealth; if it serves a political purpose, it is as a standard against which to measure the fiscal reform of large and associated economies such as the United States and the EU.

Making wealth redistribution the objective of the nation-state seems the most politically realistic and justifiable course of action. The nation-state embodies democratic legitimacy and is, for better or for worse, the most efficient vehicle for taxation that we possess. But this is exactly why it would be logical to see rising inequality of wealth within countries in the past 30 years as the problem and disregard, for the time being, increasing equality of income between countries. Rogoff’s suggestion that the convergence of world incomes shows that the status quo is not as bad as Piketty thinks is therefore misplaced. Growing global equality of incomes would be a reassuring fact if the world population shared a single polity. But this is not the case. The point that the impressive convergence of worldwide incomes makes redistribution less urgent thus misses both why wealth inequality is problematic for fiscally autonomous democracies, and why it has recently become a hotly debated issue in democracies at all.

In the conclusion of his reply, Rogoff does raise another interesting point:

‘In accepting Piketty’s premise that inequality matters more than growth, one needs to remember that many developing-country citizens rely on rich-country growth to help them escape poverty.’

This is certainly true. Large economies indeed exercise a major demand function in the world economy. The way in which this generally happens is by the accumulation of trade surpluses and deficits in different economies. As the world’s largest economy the United States functions as a global ‘borrower of last resort’. The second, third and fourth largest economies—China, Japan and Germany—are all net exporters. American demand fuels the exports of this trio of surplus countries. They thereby accumulate large claims on the rest of the world. To get an idea of the extent of this phenomenon: last month’s IMF World Economic Outlook estimated the total size of the American current account deficit for 2014 at $391 billion dollars. Against this, the surplus trio is expected to accumulate claims on the rest of the world amounting to $565 billion this year. The IMF’s current forecast is that these imbalances will grow stronger over the next five years, to around $627 and $808 billion dollars, respectively.

Global macro-economic imbalances are related to income and wealth inequality in two ways. First, claims accrued on foreign countries are one of the drivers of global inequality in capital ownership. The export earnings of the surplus trio and of the world’s oil producing countries are reinvested abroad in stocks, securities, real estate and other assets. This is often done through sovereign wealth funds, but in many cases private individuals also accumulate large asset holdings abroad—as anyone who has recently visited Knightsbridge or Belgravia can confirm. Second, the rigidity of global imbalances contributes to the strength of the return on capital. Piketty’s baseline economic scenario is a return to a world economy of low growth (1.0-1.5% per year) by 2100. The longer imbalances continue in these conditions, the larger the potential for surplus countries to acquire ever-larger claims on deficit countries, as their income from foreign asset ownership grows substantially faster than the ability of surplus countries to escape dependency through economic growth.

Piketty openly recognises the negative impact of such a trend. The splendid twelfth chapter of his book deals with ‘global inequality of wealth in the twenty-first century’. If oil prices continue to steadily rise on their current trajectory, then an even more unequal global distribution of wealth is not inconceivable. As Piketty writes:

‘…the key difference between the sovereign wealth funds and the billionaires is that the funds, or at any rate those of the petroleum exporting countries, grow not only by reinvesting their returns but also by investing part of the proceeds of oil sales…If a sufficiently large fraction of the corresponding rent is invested in sovereign wealth funds every year (a fraction that should be considerably larger than it is today), one can imagine a scenario in which the sovereign wealth funds would own 10-20 percent or more of global capital by 2030-2040. No law of economics rules this out. Everything depends on supply and demand, on whether or not new oil deposits and/or sources of energy are discovered, and on how rapidly people learn to live without petroleum. In any event, it is almost inevitable that the sovereign wealth funds of the petroleum exporting countries will continue to grow and that their share of global assets in 2030-2040 will be at least two to three times greater than it is today [$3.2 trillion or 1.5 percent of global wealth]—a significant increase.’ (p. 459)

To be sure, Piketty remains sanguine about the real issue, which is rising inequality within countries, or as he calls it ‘oligarchic divergence’. By contrast, ‘international divergence’, in which some countries come to possess large parts of others, is a secondary and less likely scenario. Piketty points out that in spite of the rapid increase in foreign asset ownership in Asian economies, for example, the rich countries of the West still have vastly larger total capital stocks. The fear of ‘growing Chinese ownership’ of the West is a ‘pure fantasy’. But of course there is nothing that prevents fast-growing emerging economies from acquiring larger and larger chunks of lesser developed countries—as is already happening in the case of China’s growing ownership of assets in Africa.

Moreover, the current sluggishness of the world economy is partially reinforced by the rigidity of trading surpluses and deficits. Recently, economic historian Peter Temin from MIT has provocatively argued that the world today is stuck in a ‘global paradox of thrift’. The paradox of thrift is an old nugget of Keynesian economics. Its basic insight is that what is good for an individual entity, such as a household, may not be good for a collective entity, such as the national economy. Keynes famously pointed out that being thrifty as an individual is a good thing. By keeping one’s income higher than one’s expenditures, it is possible to accumulate reserves and save up money. However, if all households in an economy try to save at the same time, they are confronted by a paradox. Because one household’s expenditures directly contribute to another household’s income, it is impossible for the economy as a whole to earn more is being spent. In fact, everyone’s attempt to save will be thwarted by falling incomes.

The only way out of the paradox of thrift is to find foreigners willing to spend money on goods and services produced within the country. In this case the country will accumulate an export surplus as it exports more than it imports. This is where the question of global imbalances becomes relevant. Temin’s originality lies in applying the paradox of thrift to the world economy as a whole. In the wake of the Great Recession, many of the world’s economies today are looking to grow by developing export surpluses. But if all countries try to export more than they import simultaneously, they run into the problem of thrift once more. Until the day when we can trade with the inhabitants of Mars, the world economy as a whole can never export more than it imports. We thus find ourselves in a stalemate as the surplus trio of China, Germany and Japan are unwilling to reduce their export surpluses, preventing the United States from rebalancing its own trade deficit.

With the world economy stuck in a trap of insufficient demand for exports, growth will probably remain low in the immediate future. The result of this is twofold. In the first place, the global paradox of thrift further depresses global growth rates (g) below the return on different forms of capital (r). This sustains higher inequality according to the r > g mechanism described by Piketty. Secondly, it allows both wealthy individuals and sovereign wealth funds to amass large stocks of foreign assets. The relation between global trade imbalances and inequality of wealth is not straightforward, and in many ways incredibly convoluted. But without any coordinated response to the question of imbalances, it will be more difficult to stem rising global inequality of wealth.

Capital in History

One of the most hard-hitting points of Piketty’s book is how susceptible economic theory is to drawing the wrong conclusions by extrapolating temporary trends and then deriving general laws from them. Simon Kuznets, the American economist whose 1953 study Shares of Upper Income Groups in Income and Savings is in many ways the immediate methodological inspiration for Piketty’s project, is the perfect example of this. Writing right after the widespread capital destruction and devaluation of the world wars and the interwar period, Kuznets concluded that economic development would eventually lead to more equal incomes. With the wisdom of hindsight, we can now see the shortcomings of his findings, which were based on the American experience of a unique period in the history of capitalism. The mid-twentieth century egalitarian moment of New Deal progressivism in the United States and of Les Trente Glorieuses and the Wirtschaftswunder in Europe was an aberration that is not likely to repeat itself without serious institutional reform.

From the left, one of the responses to Piketty has been one of feeling underwhelmed: what is so new about any of this? Is all this not exactly what Marx said already in Das Kapital the 1860s? Of course, there is a deep similarity between the subject matter of both authors’ work. Both Marx and Piketty are concerned about rising inequality, and drew up theories of capital accumulation to support their analyses. But one very basic difference that should concern the left relates to political action. Marx’s view of capital’s long-term effects was constituted by the so-called tendency of the rate of profit to fall. He supported this claim with an elaborate argument about the ‘organic composition of capital’. The basic upshot of this was that over time, capital accumulation was bound to lead over time to falling returns for capitalists who owned the means of production.

By contrast, Piketty identifies exactly the opposite tendency in capital accumulation: there is no inbuilt mechanism that necessitates the eventual decline of r. In his view, the rate of return on capital may well be structurally above the rate of growth. Against Marx, then, Piketty emphasises the tendency of the rate of profit to stay high. Consequently, the political force of their arguments is very different. Rather than rejoicing over the prospect of an inevitable final crisis of capitalism that will inaugurate a better world, Capital in the Twenty-First Century is a call to action to stave off a future that is probably going to be less equal than the present.

Marx’s mix of optimism and economic determinism had a place in the nineteenth century. But at the beginning of the twenty-first century, these attitudes are now more commonplace among figures on the free market right. Technological optimists like Peter Diamandis and Matt Ridley today provide an upbeat view of the economic future: technological advances promise to bring abundance and the ability to deal with the most pressing challenges facing humanity. Whatever one thinks of these predictions, Piketty’s prognosis of capitalism’s future differs from them both in degree (it is not as resolutely optimistic) and in kind (it is not driven by any immutable laws). Notwithstanding all the talk about long-term tendencies in his book, Piketty is not a determinist about inequality or economic development.

There are some problems with Piketty’s own historical analysis, however. The main problem is one of detail: the analytical categories he deploys, such as capital, return, growth and income, do not permit more than an extremely broad-brush picture. This is not in itself a problem, because Piketty’s stated goal is to look for exactly these long-terms trends. However, the book is really only the start of a much larger series of investigations into the factors that drive changing wealth and income distributions at particular points in history. For example, we can see that the general trend of the period 1913-1950 is a strong fall in the capital stock in many economies. This is what accounts, in Piketty’s view, for the strong reduction in inequality of wealth during that period. But the short-term fortunes of capital are more volatile than such depictions suggest.

In order to understand these, we need more detailed economic-historical accounts. For a country like Germany, for example, the 37-year period between 1913 and 1950 saw many reversals and fluctuations. How exactly did the rate of return and thereby capital accumulation change during the wartime productive boom between 1914 and 1918? How was it affected by the infamous hyper-inflation period that started around the end of the war and lasted until 1924? How did the American-fuelled investment boom in Weimar Germany affect wealth and income distributions during the brief period of ‘stabilisation’ between 1924 and 1929? What was the role of the Great Depression, and importantly, the Nazi response to this dislocation? There are many twists and turns in this narrative. For example, in the space of just five years between 1933 and 1938 the income share of the German top 1% rose from 11% to 17% of national income, whereas that of the top 0.1% rose from 3% to 7% of national income. Piketty briefly notes that the top shares of German national income ‘increased rapidly’ and attributes this to ‘the general reestablishment of income hierarchies in the Nazi era’, but does not explain how ‘demand for armaments’ was able to counter the general egalitarian trend of the interwar period. These sorts of interesting episodes deserve more attention, not least because they run against the broader trend of a reduced return on capital in the mid-twentieth century. By bringing in the rich literature on specific but important cases such as the German one, it would be possible to distinguish long-term from short-term variations.

The need to study capital accumulation in the short and medium run as well as in the long run can be illustrated by the simplest of facts. Almost all of the countries surveyed by Piketty have stocks of national wealth that range from three to seven years of national income. In other words, even in the countries with the most wealth, if economic activity could only be financed by selling existing assets it would take just seven years to expend the entire national capital supply. The point here is not that this is economically possible (it would be inconceivable) let alone desirable (talk about a waste of resources!). It is that the total amount of capital and the returns it earns can change rapidly in just a few years.

More fundamentally, we experience capital accumulation as a short-run, booming and often temporary development, not as a mystical force of nature working its magic. To his credit, Piketty repeatedly acknowledges the flesh-and-blood nature of the monumental shifts that are documented in his book. Still, his vast but blurry grand-historical canvas needs to be brought into sharper focus by a series of more fine-grained local portraits. In this sense Piketty stands in the shadow of his countryman Fernand Braudel. It was that great economic historian who excelled at bringing out the real force of the longue durée while at the same time producing works of extremely detailed ‘pointillism’. Piketty’s book therefore unwittingly provides a case for the reinvigoration of Braudelian grand history.

The core argument of the book rests on the strength of the equation r > g. By using a broad definition of capital (every asset that yields an income stream), Piketty is able to extend his analysis of inequality to the very long run, all the way back to antiquity. The letter r then denotes not just land ownership but all kinds of legally supported dominion over bodies and matter. In the United States, the effects of slave ownership on national wealth were profound. Slaves were one of the main pillars of the wealth, which in years of national income was more than twice as large as that of the north. A large body of very interesting recent historical work has started to explore the complex but profound interrelations between slavery and capitalism. Far from the relic of feudalism that liberal and Marxist analyses of slavery had always posited, it is now more widely believed that slavery was a crucial catalyst for the capitalist transformation of the American economy in the early nineteenth century. In the words of one historian, slaves were ‘the capital that made capitalism’.

It is clear that the range of assets encapsulated by Piketty’s definition of capital is extremely wide. As we move further back into history, the picture becomes murkier, for obvious reasons. Piketty frankly acknowledges the limitations of the data before 1750. He writes that:

‘The primary reason for the hyperconcentration of wealth in traditional agrarian societies and to a large extent in all societies prior to World War I (with the exception of the pioneer societies of the New World, which are for obvious reasons very special and not representative of the rest of the world or the long run) is that these were low-growth societies in which the rate of return on capital was markedly and durably higher than the rate of growth.’ (p. 351)

It is safe to say that the return on capital, broadly construed, was ‘durably’ higher than the growth rate. But to what extent was it ‘markedly’ higher? Inequality in national wealth is not merely a modern phenomenon. Ancient and medieval states experienced quite different rates of return depending on the strength of land-owning elites, the productivity of the land and agriculture, and the political and social structures that developed in different areas.

And in positing a historical equilibrium of the rate of return around 4-5 percent, Piketty also glosses over the lasting effects of external shocks. The infamous Black Death—the plague epidemic that ravaged Europe and Asia in the mid-fourteenth century—caused long-term reductions in the return to capital compared to labour, quite simply because healthy workers become more valuable as their brethren died by the millions. Likewise, the ‘Little Ice Age’ that lowered global temperatures in the seventeenth century had immense political, economic and social ramifications. This was especially true for the ‘low-growth’ ‘agrarian’ societies that are compressed into an abstract singularity when Piketty states that r was equal to about 4-5 percent for millennia. None of this detracts from the strength of the main argument, which deals with inequality since the late eighteenth century. But given the important role of sudden and unintended crises in reducing inequality during the interwar period through destruction, inflation and taxation, we need to take the influence of external shocks very seriously. They have occurred throughout history, and will doubtless reappear in unforeseen forms in the future. Standing ready to ensure that their effects are positive rather than negative is thus a crucial task.

The New Crisis of the Tax State

The upshot of Piketty’s plea for improved fiscal information gathering and control is that we should equip ourselves with the tools to manage the uncertain developments of the future. In this respect, his views draw support from what is perhaps an unlikely angle. As the thinker who coined the term ‘creative destruction’, Joseph Schumpeter is widely seen as one of the most eloquent advocates of capitalist entrepreneurship. In the words of one of his biographers, he is the modern ‘prophet of innovation’.

Why, then, are Schumpeter’s ideas relevant to Piketty’s project? For one thing, Schumpeter wrote his most enduring works about capitalism exactly during the period that is so central to Piketty’s work: the years from 1913 to 1950. For another, the Austrian thinker cared more about the legitimacy of capitalism than is commonly assumed. Schumpeter is often seen as a skeptic about the substance of democracy and its lofty ideals. Elections, he thought, were simply the least violent and burdensome way of changing governments. Between elections, the political class would take charge of things, and voters had little to say. But we should not mistake this minimalism for indifference. Exactly because voters were so impulsive, it was important to make sure that they continued to experience capitalism as a system in which benefits and burdens were widely shared.

Schumpeter believed that the political support for capitalism would soon erode if corporations earned huge profits while workers’ wages declined. In Capitalism, Socialism, and Democracy (1942), he foresaw that the likely result of such de-legitimisation would be to accelerate the advent of socialism. Although social cohesion would be preserved under an organised socialist economy, the engine of economic dynamism would grind to a halt. A future of decay and decline then lay ahead. There was no shining golden path of capitalist development. There was only a least bad solution that guided societies between the Scylla of unbearable inequalities and the Charybdis of socialist stagnation. Schumpeter’s somewhat cynical worldview therefore led him to make a case for the palliative functions of state involvement.

In 1918, Schumpeter delivered a lecture in Vienna on the problems facing the Austro-Hungarian Empire after the end of World War I. Titled ‘The Crisis of the Tax State’ (Die Krise des Steuerstaates), this address remains one of the most penetrating analyses of the power of the state in capitalist development written in the twentieth century. The state, Schumpeter argued, was essentially a tax-levying entity. By studying the development of the state’s fiscal powers, it was possible to discern the ‘laws of social being’ and ‘the fate of nations’ driving forces’. The economic dislocation of the war had saddled Austria with a large debt and shortages of vital products. Only new and innovative taxation could address these issues.

Schumpeter proposed a one-time progressive wealth tax at rates of 10 to 65 percent to be implemented during 1919. By then Schumpeter had become Austria’s minister of finance, and declared that the first goal of the tax was to bring in new revenue for the state. But its immediate objective was to reduce war-induced inequalities and stabilise the country’s fragile democracy. Social unrest in post-war Austria was unprecedented, and the fear of a Bolshevik revolution was widespread in Vienna. Regaining mass support for the fledgling republican government was absolutely vital to economic reconstruction. The value of reforming taxation was more than merely economic; it was above all an important political gesture.

Laissez-faire enthusiasts who invoke Schumpeter as their intellectual godfather are rarely aware of the ground-breaking progressive role that he envisioned for the tax state in the early twentieth century. In the end, interwar Austria would not be the place where these hopes were realised. After just seven months in office an intransigent parliament forced Schumpeter to resign as finance minister (he subsequently went to head a private bank, which he managed to bankrupt by 1924, resigning himself to a life of academic economic and political theory thereafter). His proposed wealth tax never came to pass, and with weak government finances, Austria sank away into hyperinflation. In 1922 the League of Nations provided a stabilisation loan, but at the price of surrendering all control over finances to a foreign commissioner whose primary responsibility was to the international bankers who had provided the funds. The rise of fascism and the demise of the first Austrian republic in the 1930s ended the first attempt to establish democratic control over the modern tax state.

The similarity between the challenges of Schumpeter’s world and those of today is striking. In many ways we are currently facing a second Schumpeterian crisis of the tax state. As Piketty writes:

‘the rich world is rich, but the governments of the rich world are poor. Europe is the most extreme case: it has both the highest level of private wealth in the world and the greatest difficulty in resolving its public debt crisis—a strange paradox’. (p. 540)

On the one hand the industrialised world is wealthier than ever. On the other hand, national welfare systems are eroding, and massive public debts have accrued in many advanced countries. The troubles of economic adjustment in southern Europe are only the most vivid manifestation of this widespread phenomenon. The inability of modern states to assert their fiscal sovereignty is feeding political dissatisfaction and dangerous extremism.

At the same time, tax havens have thrived, allowing corporations and individuals to hold vast stocks of wealth outside the reach of national fiscal authorities. It has recently been estimated that around 8 per cent of global household financial wealth, some $5.9 trillion, is held in offshore bank accounts located countries with strong banking secrecy laws. The importance of tax havens in weakening political control over capitalism has been emphasised in these pages before. As Piketty’s provisional dataset shows, fiscal authorities lack adequate information to even measure the size of this problem. One of the main rationales for better taxation is that it will increase our knowledge of inequality. This can in turn guide better and more focused policy action to address social questions. Schumpeter was acutely aware of this advantage when he wrote that ‘kind and level of taxes are determined by the social structure; but once they exist they become a handle,…which social powers can grip to change this structure’. The global tax on wealth is a self-consciously idealistic proposal, but it is merely the marching banner for a more fundamental project. Reinventing the tax state, both at a national and transnational level, will be vital to managing capitalism in the century ahead.

Nicholas Mulder is a graduate student in the history of economic thought and political economy at King's College, Cambridge.