Capital in the Twenty-First Century

  The truth is that to pose the question in this way is to approach it too abstractly. The answer given by the golden rule is not very useful in practice. It is unlikely that any human society will ever accumulate that much capital. Nevertheless, the logic that underlies the golden rule is not without interest. Let me summarize the argument briefly.40 If the golden rule is satisfied, so r = g, then by definition capital’s long-run share of national income is exactly equal to the savings rate: α = s. Conversely, as long as r > g, capital’s long-run share is greater than the savings rate: α > s.41 In other words, in order for the golden rule to be satisfied, one has to have accumulated so much capital that capital no longer yields anything. Or, more precisely, one has to have accumulated so much capital that merely maintaining the capital stock at the same level (in proportion to national income) requires reinvesting all of the return to capital every year. That is what α = s means: all of the return to capital must be saved and added back to the capital stock. Conversely, if r > g, than capital returns something in the long run, in the sense that it is no longer necessary to reinvest all of the return on capital to maintain the same capital/income ratio.

  Clearly, then, the golden rule is related to a “capital saturation” strategy. So much capital is accumulated that rentiers have nothing left to consume, since they must reinvest all of their return if they want their capital to grow at the same rate as the economy, thereby preserving their social status relative to the average for the society. Conversely, if r > g, it suffices to reinvest a fraction of the return on capital equal to the growth rate (g) and to consume the rest (r − g). The inequality r > g is the basis of a society of rentiers. Accumulating enough capital to reduce the return to the growth rate can therefore end the reign of the rentier.

  But is it the best way to achieve that end? Why would the owners of capital, or society as a whole, choose to accumulate that much capital? Bear in mind that the argument that leads to the golden rule simply sets an upper limit but in no way justifies reaching it.42 In practice, there are much simpler and more effective ways to deal with rentiers, namely, by taxing them: no need to accumulate capital worth dozens of years of national income, which might require several generations to forgo consumption.43 At a purely theoretical level, everything depends in principle on the origins of growth. If there is no productivity growth, so that the only source of growth is demographic, then accumulating capital to the level required by the golden rule might make sense. For example, if one assumes that the population will grow forever at 1 percent a year and that people are infinitely patient and altruistic toward future generations, then the right way to maximize per capita consumption in the long run is to accumulate so much capital that the rate of return falls to 1 percent. But the limits of this argument are obvious. In the first place, it is rather odd to assume that demographic growth is eternal, since it depends on the reproductive choices of future generations, for which the present generation is not responsible (unless we imagine a world with a particularly underdeveloped contraceptive technology). Furthermore, if demographic growth is also zero, one would have to accumulate an infinite quantity of capital: as long as the return on capital is even slightly positive, it will be in the interest of future generations for the present generation to consume nothing and accumulate as much as possible. According to Marx, who implicitly assumes zero demographic and productivity growth, this is the ultimate consequence of the capitalist’s unlimited desire to accumulate more and more capital, and in the end it leads to the downfall of capitalism and the collective appropriation of the means of production. Indeed, in the Soviet Union, the state claimed to serve the common good by accumulating unlimited industrial capital and ever-increasing numbers of machines: no one really knew where the planners thought accumulation should end.44

  If productivity growth is even slightly positive, the process of capital accumulation is described by the law β = s / g. The question of the social optimum then becomes more difficult to resolve. If one knows in advance that productivity will increase forever by 1 percent a year, it follows that future generations will be more productive and prosperous than present ones. That being the case, is it reasonable to sacrifice present consumption to the accumulation of vast amounts of capital? Depending on how one chooses to compare and weigh the well-being of different generations, one can reach any desired conclusion: that it is wiser to leave nothing at all for future generations (except perhaps our pollution), or to abide by the golden rule, or any other split between present and future consumption between those two extremes. Clearly, the golden rule is of limited practical utility.45

  In truth, simple common sense should have been enough to conclude that no mathematical formula will enable us to resolve the complex issue of deciding how much to leave for future generations. Why, then, did I feel it necessary to present these conceptual debates around the golden rule? Because they have had a certain impact on public debate in recent years in regard first to European deficits and second to controversies around the issue of climate change.

  Law and Politics

  First, a rather different idea of “the golden rule” has figured in the European debate about public deficits.46 In 1992, when the Treaty of Maastricht created the euro, it was stipulated that member states should ensure that their budget deficits would be less than 3 percent of GDP and that total public debt would remain below 60 percent of GDP.47 The precise economic logic behind these choices has never been completely explained.48 Indeed, if one does not include public assets and total national capital, it is difficult to justify any particular level of public debt on rational grounds. I have already mentioned the real reason for these strict budgetary constraints, which are historically unprecedented. (The United States, Britain, and Japan have never imposed such rules on themselves.) It is an almost inevitable consequence of the decision to create a common currency without a state, and in particular without pooling the debt of member states or coordinating deficits. Presumably, the Maastricht criteria would become unnecessary if the Eurozone were to equip itself with a budgetary parliament empowered to decide and coordinate deficit levels for the various member states. The decision would then be a sovereign and democratic one. There is no convincing reason to impose a priori constraints, much less to enshrine limits on debts and deficits in state constitutions. Since the construction of a budgetary union has only just begun, of course, special rules may be necessary to build confidence: for example, one can imagine requiring a parliamentary supermajority in order to exceed a certain level of debt. But there is no justification for engraving untouchable debt and deficit limits in stone in order to thwart future political majorities.

  Make no mistake: I have no particular liking for public debt. As I noted earlier, debt often becomes a backhanded form of redistribution of wealth from the poor to the rich, from people with modest savings to those with the means to lend to the government (who as a general rule ought to be paying taxes rather than lending). Since the middle of the twentieth century and the large-scale public debt repudiations (and debt shrinkage through inflation) after World War II, many dangerous illusions have arisen in regard to government debt and its relation to social redistribution. These illusions urgently need to be dispelled.

  There are nevertheless a number of reasons why it is not very judicious to enshrine budgetary restrictions in statutory or constitutional stone. For one thing, historical experience suggests that in a serious crisis it is often necessary to make emergency budget decisions on a scale that would have been unimaginable before the crisis. To leave it to a constitutional judge (or committee of experts) to judge such decisions case by case is to take a step back from democracy. In any case, turning the power to decide over to the courts is not without risk. Indeed, history shows that constitutional judges have an unfortunate tendency to interpret fiscal and budgetary laws in very conservative ways.49 Such judicial conservatism is particularly dangerous in Europe, where there has been a tendency to see the free circulation of people, goods,
and capital as fundamental rights with priority over the right of member states to promote the general interest of their people, if need be by levying taxes.

  Finally, it is impossible to judge the appropriate level of debts and deficits without taking into account numerous other factors affecting national wealth. When we look at all the available data today, what is most striking is that national wealth in Europe has never been so high. To be sure, net public wealth is virtually zero, given the size of the public debt, but net private wealth is so high that the sum of the two is as great as it has been in a century. Hence the idea that we are about to bequeath a shameful burden of debt to our children and grandchildren and that we ought to wear sackcloth and ashes and beg for forgiveness simply makes no sense. The nations of Europe have never been so rich. What is true and shameful, on the other hand, is that this vast national wealth is very unequally distributed. Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education. This has been true, moreover, for a very long time: because growth has been fairly slow since 1970, we are in a period of history in which debt weighs very heavily on our public finances.50 This is the main reason why the debt must be reduced as quickly as possible, ideally by means of a progressive one-time tax on private capital or, failing that, by inflation. In any event, the decision should be made by a sovereign parliament after democratic debate.51

  Climate Change and Public Capital

  The second important issue on which these golden rule–related questions have a major impact is climate change and, more generally, the possibility of deterioration of humanity’s natural capital in the century ahead. If we take a global view, then this is clearly the world’s principal long-term worry. The Stern Report, published in 2006, calculated that the potential damage to the environment by the end of the century could amount, in some scenarios, to dozens of points of global GDP per year. Among economists, the controversy surrounding the report hinged mainly on the question of the rate at which future damage to the environment should be discounted. Nicholas Stern, who is British, argued for a relatively low discount rate, approximately the same as the growth rate (1–1.5 percent a year). With that assumption, present generations weigh future damage very heavily in their own calculations. William Nordhaus, an American, argued that one ought to choose a discount rate closer to the average return on capital (4–4.5 percent a year), a choice that makes future disasters seem much less worrisome. In other words, even if everyone agrees about the cost of future disasters (despite the obvious uncertainties), they can reach different conclusions. For Stern, the loss of global well-being is so great that it justifies spending at least 5 points of global GDP a year right now to attempt to mitigate climate change in the future. For Nordhaus, such a large expenditure would be entirely unreasonable, because future generations will be richer and more productive than we are. They will find a way to cope, even if it means consuming less, which will in any case be less costly from the standpoint of universal well-being than making the kind of effort Stern envisions. So in the end, all of these expert calculations come down to a stark difference of opinion.

  Stern’s opinion seems more reasonable to me than Nordhaus’s, whose optimism is attractive, to be sure, as well as opportunely consistent with the US strategy of unrestricted carbon emissions, but ultimately not very convincing.52 In any case, this relatively abstract debate about discount rates largely sidesteps what seems to me the central issue. Public debate, especially in Europe but also in China and the United States, has taken an increasingly pragmatic turn, with discussion of the need for major investment in the search for new nonpolluting technologies and forms of renewable energy sufficiently abundant to enable the world to do without hydrocarbons. Discussion of “ecological stimulus” is especially prevalent in Europe, where many people see it as a possible way out of today’s dismal economic climate. This strategy is particularly tempting because many governments are currently able to borrow at very low interest rates. If private investors are unwilling to spend and invest, then why shouldn’t governments invest in the future to avoid a likely degradation of natural capital?53

  This is a very important debate for the decades ahead. The public debt (which is much smaller than total private wealth and perhaps not really that difficult to eliminate) is not our major worry. The more urgent need is to increase our educational capital and prevent the degradation of our natural capital. This is a far more serious and difficult challenge, because climate change cannot be eliminated at the stroke of a pen (or with a tax on capital, which comes to the same thing). The key practical issue is the following. Suppose that Stern is approximately correct that there is good reason to spend the equivalent of 5 percent of global GDP annually to ward off an environmental catastrophe. Do we really know what we ought to invest in and how we should organize our effort? If we are talking about public investments of this magnitude, it is important to realize that this would represent public spending on a vast scale, far vaster than any previous public spending by the rich countries.54 If we are talking about private investment, we need to be clear about the manner of public financing and who will own the resulting technologies and patents. Should we count on advanced research to make rapid progress in developing renewable energy sources, or should we immediately subject ourselves to strict limits on hydrocarbon consumption? It would probably be wise to choose a balanced strategy that would make use of all available tools.55 So much for common sense. But the fact remains that no one knows for now how these challenges will be met or what role governments will play in preventing the degradation of our natural capital in the years ahead.

  Economic Transparency and Democratic Control of Capital

  More generally, it is important, I think, to insist that one of the most important issues in coming years will be the development of new forms of property and democratic control of capital. The dividing line between public capital and private capital is by no means as clear as some have believed since the fall of the Berlin Wall. As noted, there are already many areas, such as education, health, culture, and the media, in which the dominant forms of organization and ownership have little to do with the polar paradigms of purely private capital (modeled on the joint-stock company entirely owned by its shareholders) and purely public capital (based on a similar top-down logic in which the sovereign government decides on all investments). There are obviously many intermediate forms of organization capable of mobilizing the talent of different individuals and the information at their disposal. When it comes to organizing collective decisions, the market and the ballot box are merely two polar extremes. New forms of participation and governance remain to be invented.56

  The essential point is that these various forms of democratic control of capital depend in large part on the availability of economic information to each of the involved parties. Economic and financial transparency are important for tax purposes, to be sure, but also for much more general reasons. They are essential for democratic governance and participation. In this respect, what matters is not transparency regarding individual income and wealth, which is of no intrinsic interest (except perhaps in the case of political officials or in situations where there is no other way to establish trust).57 For collective action, what would matter most would be the publication of detailed accounts of private corporations (as well as government agencies). The accounting data that companies are currently required to publish are entirely inadequate for allowing workers or ordinary citizens to form an opinion about corporate decisions, much less to intervene in them. For example, to take a concrete case mentioned at the very beginning of this book, the published accounts of Lonmin, Inc., the owner of the Marikana platinum mine where thirty-four strikers were shot dead in August 2012, do not tell us precisely how the wealth produced by the mine is divided between profits and wages. This is generally true of published corporate accounts around the world: the data are grouped in ve
ry broad statistical categories that reveal as little as possible about what is actually at stake, while more detailed information is reserved for investors.58 It is then easy to say that workers and their representatives are insufficiently informed about the economic realities facing the firm to participate in investment decisions. Without real accounting and financial transparency and sharing of information, there can be no economic democracy. Conversely, without a real right to intervene in corporate decision-making (including seats for workers on the company’s board of directors), transparency is of little use. Information must support democratic institutions; it is not an end in itself. If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again.59