Capital and ideology: interview with Thomas Piketty

Thomas Piketty tells Robin Wilson how wealth and power can be transferred from capital to workers and citizens.

Robin Wilson: If Capital in the Twenty-First Century made you famous for one thing, it was the equation ‘r>g’: the rise of inequality in recent decades has been linked to the excess of profit accumulation over economic growth and so to huge rents for shareholders and chief executives. Redressing such inequality then implies taxing heavily capital assets as well as high incomes. But in Capital and Ideology you raise a problem: a feature of globalisation has been the transnationalisation of wealth and the failure of nation-states to keep up—even in terms of the data they collect. So what is to be done?

Thomas Piketty: We have to rethink the way we organise globalisation. Free capital flow is not something that came from the sky—it was created by us. It was organised via particular international treaties and we have to rewrite these treaties. The circulation of investment is, of course, not bad in itself but it has to come with an automatic transmission of information about who owns what and where. It has to come with some common tax system, so that the most mobile and most powerful economic actors have to contribute to the common good—at least as much a proportion of their wealth and of their income as the middle class and the lower socio-economic groups.

Otherwise, we have created a very dangerous system, where a very large part of the population feel that they are not gaining from globalisation—they are not gaining in particular from European integration—and that people at the top, large corporations or people with high wealth and high income, get a better deal because the system in a way was organised so that they can just click on a button and transfer their wealth to another jurisdiction and nobody can follow them. It doesn’t have to be this way.

This is a very sophisticated international legal system, in particular in Europe, which has made it possible that you accumulate wealth by, in effect, using the public infrastructure of a country—the public education system and everything—and then you can go somewhere else and nothing has been planned so that we can follow you. This has to be changed.

I voted yes in the Maastricht treaty referendum in 1992. I was very young but still I am part of the many people who maybe did not realise at the time that this would lead us to a very unfair system. Some other people realised very well what they were pushing for: we should have more competition between countries so that countries will make an effort to be more ‘efficient’ and not tax too much.

To some extent, I can understand this argument. Except that, at the end of the day, this is a mistrust of democracy—this attempt to go around democratic choices by forcing the rules of the game to deliver certain types of distributional outcomes, mainly by making it possible for the most mobile and most powerful economic actors to avoid taxation in effect. This is a very dangerous choice for globalisation and for democracy and it is putting our basic social contract under a very dangerous threat.

Let’s focus on the European Union. We are up against a race to the bottom in corporate taxation in Europe as individual states have pursued beggar-my-neighbour approaches, rather than collaborating to match collectively the power of capital. One of the features of the current EU architecture, to which you have alluded, is the constraint of unanimity operating hitherto against action at EU level to reverse this race to the bottom. So how can it be reversed?

We cannot wait for unanimity to change the rule of unanimity. So at some point we need to have a subset of countries, ideally including the largest countries—Germany, France, Italy, Spain, as many countries as possible—which decide to sign a new treaty between them whereby they will take a majority-rule decision on a certain number of tax decisions: to create a common tax on the profits of large corporations, on large carbon emissions and on high-income, high-wealth taxpayers.

This will be done through majority rule among these countries. Ideally, I would like this to be done through a new European assembly made up of national parliament members—a little bit like the German-French parliamentary assembly created last year as part of the new bilateral treaty between France and Germany. Which, by the way, illustrates that it’s perfectly possible for two countries or more to stay in the European Union—France and Germany are still in the EU, of course—and to have a bilateral or trilateral or whatever treaty, in order to create some special co-operation for countries that want to move ahead into more political and fiscal integration.

I very much hope that a subset of countries will put this proposal on the table—and not only make this proposal but say ‘Okay, six months from now, 12 months from now, this will come into force and we will have majority-rule decision-making to have this recovery plan with this new common tax system’ and so on. I very much hope that most of the 27 countries that are currently members of the EU will join, but probably what will happen is that at least for a certain number of years some countries will choose to remain aside from this mechanism.

This is what happened with the creation of the euro, of course. I’m not saying this is perfect—I would prefer all 27 countries to be part of the full process of integration. I would also like Britain to come back and I think at some point this will happen. But if we wait for all countries to agree before moving in this direction we are going to wait forever. So it’s very important that a subset of countries moves in this direction—if we are always waiting for unanimity to make progress, at some point the cost of unanimity is enormous.

We’ve seen that recently with the new recovery plan, which has finally been adopted. But as we all know it has been adopted under the threat that if some countries put in their veto then there would be a separate agreement between 25 countries instead of 27. You cannot rule a large federation forever in this manner. It is not working because, in effect, it takes too much time.

If we decide in three months, in six months, that the recovery plan was too small—which is very likely to be the case—what are we going to do? Are we going to play this game another time, forcing unanimity to happen behind-closed-doors without public parliamentary deliberation, without majority-rule decision-making? We have to move to something else.

In Capital and Ideology, you paint a fairly unforgiving picture of the evolution of the EU, as effectively the only quasi-federal entity in the world to define itself so narrowly in terms of market-clearing measures rather than social policy or a political community. This has, you claim, fuelled alienation from the European project among les classes populaires, as their socio-political aspirations have not been addressed—as evidenced by the Brexit referendum, the earlier referendum defeats on the proposed EU constitution, or indeed the controversy over Maastricht which you mentioned. How can citizen trust in Europe be rebuilt?

Let me first say that I am a European federalist—I believe in Europe. Before describing everything that should be improved, it’s important to remember that European nation-states have been able to build, especially in the decades after World War II, the best social-security system in the world, the least unequal, social-market economic system in the world. This is a great achievement. I am not here to say that everything is bad in Europe—that would be ridiculous. We have built a social system which, by and large, is the least unequal in history, and this is a huge achievement, but this achievement is fragile.

For a long time we thought that it was possible to have the welfare state within each nation-state and then the EU would just be in charge of enforcing the common market and the free flow of goods, services and capital. We realise today that this is not sufficient and if we don’t harmonise tax legislation—and, more generally, if we don’t have some common public policy to regulate capitalism and to reduce inequality—then indeed there is a risk that the divorce between the European project and les classes populaires at some point will just destroy the project itself.

I am very shocked by the fact that, as I show in Capital and Ideology, if you look, referendum after referendum—whether it is in Britain, France or Denmark—wherever you have a referendum over Europe, it’s always the bottom 50 or 60 per cent of income, wealth or education groups which vote against Europe and only the top 10, 20 or 30 per cent which vote for Europe. This cannot be a coincidence.

The explanation according to which the bottom 50 or 60 per cent group are so nationalist, or they don’t like internationalist ideas, is just wrong. There are many examples in history where, in fact, the more disadvantaged socio-economic groups are more internationalist than the elite.

It entirely depends on the political project—the political mobilisation around internationalist ideas—that you present. The problem is that over time the European project has been viewed more and more as being built in the interest of the most mobile and most powerful economic actors. This is indeed very dangerous.

With the Covid crisis, we have an opportunity to try to show to the public opinion of Europe that Europe can be here to reduce inequality. But this will require some deep change in the way we conduct economic and tax policy.

Who is going to repay the large public debt? For now we put everything on the balance sheet of the European Central Bank but at some point we will have to discuss who is going to pay for that. There are solutions which, in fact, come also from the history of Europe itself. Let me remind you that after World War II, in the 1950s, many countries—including in particular Germany—invented some very innovative ways to reduce large public debt, including very progressive tax on very high-wealth individuals.

Germany in 1952 put in place a very ambitious, exceptional, progressive wealth tax, which applied between 1952 and the 1960s: very high-wealth taxpayers had to pay a very large amount of money to the German treasury. This was very successful in the sense that this policy not only helped reduce public debt—it paid for public investment, public infrastructure, and it was part of the very successful postwar growth model.

We are going to have to find something similar in the future, except that now we cannot do it alone. It cannot be just Germany or France or Italy. We will have to have some common tax policy.

Europe has to show its citizens that Europe can mean solidarity—Europe can mean asking more of those who have more and, in particular, of very high-wealth individuals who have more than €1 million or €2 million in assets. They should make an exceptional contribution in the coming years, to repay some of the Covid debt. Some proposals have been put on the table in various countries, including in Germany—very similar in fact to what was actually done in Germany in 1952, when it was a big success.

At some point, we will have to add this up at a transnational level. Through the kind of European assembly I was describing earlier—it could be Germany and France but it would be better if it was Germany, France, Italy, Spain, Belgium, as many countries as possible—we will have to change the course of Europe, so as to convince the middle class and lower socio-economic groups of Europe that Europe can work for them and Europe can be here to reduce inequality, and not only be in the interest of the wealthiest citizens.

Continuing that point about les classes populaires, you have some very striking sociological graphs in Capital and Ideology where you show how the support base for the parties of the left in Europe, which was historically among les classes populaires, has shifted dramatically in recent decades, so that they have come to represent the better-educated and even to some extent the better-off in Europe. And, in the process, you say what you call the ‘classist’ politics of the past risks being substituted by the identitarian politics of nativist movements in the Europe of today. How has such a dramatic transformation come about and can it be corrected?

The biggest part of the explanation has to do with the fact that we have stopped discussing the transformation of the economic system. We have stopped discussing reducing inequality between social classes. For many decades now, we have been telling the public that there is only one possible economic system and one possible economic policy, that governments cannot really do anything to change the distribution of income and wealth between social classes—and that the only thing that governments can do is control their borders, control identity.      

We should not be surprised that 20 or 30 years later the entire political conversation is about border control and identity. This is largely the consequence of the fact that we have stopped discussing the transformation of the economic system.

That’s partly due, of course, to the gigantic historical failure of communism, which has contributed to a general disillusion towards the idea of changing the economic system. I was 18 at the time of the fall of the Berlin wall in 1989 and I can remember, in the 1990s, I was much more a pro-market believer than I am today, and so I can very well understand the feeling that came after the fall of communism.

But not only has this gone too far. We have forgotten that on the other hand you have all the many achievements of social democracy, including progressive taxation of income and wealth, including co-determination in companies, including social-security systems. This big success of the 20th century can be taken further in the future. New thinking about a new form of economic system—more equitable, more sustainable—is the discussion we now need to have.

In the book, you conclude with your version of an alternative, which you describe as ‘participatory socialism’. It involves a progressive tax on all wealth—the proceeds of which, you say, should go to a capital endowment for every 25-year-old, as well as the extension of existing co-determination arrangements in Germany and elsewhere to change the balance of corporate power. You’re saying this would be a way to transcend capitalism without repeating the Soviet nightmare, so can you finally elaborate on that?

The system of participatory socialism I describe at the end of Capital and Ideology some people would prefer to call social democracy for the 21st century. I have no problem with this but I prefer to talk about participatory socialism. In effect, this is the continuation of what has been done in the 20th century and what was successful. This includes equal access to education, to health, to a system of basic income, which to some extent is already in place but needs to be made more automatic; educational justice needs to be more real and less theoretical, as it is too often the case.

Regarding the system of property, which has always been the core discussion about socialism and capitalism, the proposal I am making relies on two main pillars: one is co-determination, through change in the legal system and the system of governance of companies, and the other part is progressive taxation and the permanent circulation of property.

Regarding co-determination, let me remind you that in a number of European countries—including Germany and Sweden, starting around the 1950s—we’ve had a system where 50 per cent of seats on the governing boards of large companies will go to elected representatives of employees, of workers, even if they don’t have a share in the capital of the company, and the other 50 per cent of voting rights will go to shareholders.

Which means that if, in addition, the workers and employees of the company have a capital share of, say, 10 or 20 per cent, or if some local or regional government, as sometimes happens in Germany, has a share of 10 or 20 per cent in the capital stock of the company, then in effect this will shift the majority, even if you have a private shareholder who has 70, 80 or 90 per cent of the capital. So this is quite a big change, as compared to the usual rule of one share, one vote, which is supposed to be the basic definition of shareholder capitalism. In France, Britain or the United States, or in other countries where this system was not extended, shareholders don’t like this idea at all.

But, in the end, it was pretty successful in Germany and Sweden. I don’t want to idealise the system but it has to some extent made it possible to involve workers in the long-run strategy of companies, in a way that is not perfect in Germany or Sweden but is a bit better at least than in France, Britain and the US.

We can go further in this direction, so the first pillar of participatory socialism I propose is to say ‘Okay, let’s extend this co-determination system to all countries’—all countries in Europe to begin with but all countries in the world, ideally. Let’s also extend it to small companies and not only the large companies where it applies in Germany. In Sweden it applies to a bit smaller companies but the very small companies are excluded. Let’s apply it to all companies, no matter the size, and let’s go further by assuming, for instance, that with the 50 per cent of the vote going to shareholders, a single shareholder cannot have more than 10 per cent of the vote in large companies—say of over 100 workers.

The general idea is that we need to share power. We need more participation by everybody. We live in very educated societies, where lots of people—lots of wage-earners, engineers, managers, technicians—have something to contribute to decision-making in the company.

When you are in a very small company where there’s only one individual who put in the small capital to create the company and hires one or two people, you can see where you want the majority of the vote with the one individual, the founder of the company. But, as the company gets bigger and bigger, you need more deliberation, and you cannot be in a system where one individual, because he or she had a good idea or was very lucky at the age of 30, is going to concentrate all the decision-making power at the age of 50, 70, 90—including in a huge company with thousands or tens of thousands of workers.

So that’s the first pillar of participatory socialism. We start from the co-determination system, as it has been applied, and we try to extend it.

The second pillar is progressive taxation. Again, we start from what has been experimented with during the 20th century. Some countries, like the US, for instance, went pretty far in the direction of progressive taxation: the top income tax rate at the time of Roosevelt was 91 per cent and on average between 1930 and 1980 it was over 80 per cent.

And in fact it was very successful, in the sense that productivity growth at this time was much higher than it has been since the 1980s. So the view that was put at the time of Reagan—that in order to get more innovation, more growth, you need more and more inequality at the top—is simply wrong if you look at the historical evidence.

The big lesson from history that I push in my book is that economic prosperity historically comes from equality and, in particular, equality in education. The US was the most educated country in the world in the middle of the 20th century, with 80-90 per cent of the generation going to high school, at a time when it was maybe 20-30 per cent in Germany, France or Japan. You had this huge educational advance and the US was also the most productive economy.

The top income-tax and top inheritance-tax rates were divided by two by Reagan, but in fact the per capita national-income growth rate was also divided by two in the three decades after the Reagan reform. So I propose large-scale progressive taxation—not only of income and inherited wealth but also of wealth itself and on an annual basis, so as to avoid excessive concentration of wealth at the top.

And indeed so as to pay for a minimum inheritance for all: I propose €120,000 at the age of 25. This is still quite far from complete equality. In the system I propose, the people who today receive zero euro, which are basically the bottom 50 or even 60 per cent of societies, would receive €120,000, and the people who today receive €1 million, after the tax and everything, would still receive €600,000—which is less than €1 million but a lot more than €120,000.

So we are still very far from equal opportunity, which is a theoretical principle that people pretend they like but in practice—when it comes to concrete proposals—many people have a problem with. We need however to go in this direction. This proposal is actually very moderate—we could go further.

I am not saying this platform should be applied next week in every country. This is a general view of how the economic system should be transformed in the long run. The system I am describing, which I call participatory socialism, of course is different from the welfare or social-democratic capitalism we have today. But it’s very much a continuation of the transformation that already took place over the past century.

The welfare or social-democratic capitalism we have today is very, very different from the colonial capitalism that we had in 1900 or 1910, where the rights of property owners—at the world level, the colonial level, but also the domestic level—were much, much stronger. You could fire a worker when you wanted, oust a tenant when you wanted. This has nothing to do with the system we have today. So there is a long-run process towards more equality, towards justice. And this comes with a more balanced distribution of economic and social rights between owners and non-owners, with the regulation of property and the transformation of property relations.

This evolution will continue. It has already been very strong in the past century and it will continue in the future. This is a discussion we need to reopen—to shift the political conversation away from identity politics and border control towards economic and social progress and transformation.

This is part of a series on Corporate Taxation in a Globalised Era supported by the Hans Böckler Stiftung