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Chapter 1. The concept of wealth


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1Interest in the discussion of why some nations are richer than others peaked in the eighteenth and nineteenth centuries, and has been sustained to the present, well into the second decade of the twenty-first century. Two recent books, one by James A. Robinson and Daron Acemoğlu (2012), and the other by Thomas Pikkety (2013), deal with the question of the cause of the wealth of nations – a very unusual point of interest some decades ago unless it was in relation to development theories. These books mean to take up the intellectual and political discussion of the topic from very different perspectives. Why some nations are richer than others or why some individuals are richer than others has indeed been the core issue of economics, and is still topical.

2Yet there is still another important question: to what extent wealth can grow in the long term and what consequences this may have. This requires an analysis of a variety of factors and it calls for a brief consideration of the meaning of “wealth”.

3As pointed out by Joseph Alois Schumpeter1 (1954) the “terminological squabbles about wealth and income”, though probably futile, reveal, to some extent, the authors’ analytic thinking. In classical economics, the answer to the question of what it is that is being consumed and produced is “wealth”. “Authors waver between wealth considered as a fund or stock and wealth considered as a flow of goods”, says Schumpeter, and he adds that “the latter meaning prevailed as the popularity of the phrase, distribution of wealth, suffices to show” (p. 595, note 32). This concept is today used as “distribution of income”, which is generally measured yearly or every three-month periods.

4This issue is central in Piketty’s work. The author suggests that the differences in such distribution in the twenty-first century might go in the direction of the periods prior to 1914-1945, that is, towards greater inequality, as opposed to the expectations of a whole generation that convergence across nations and across social groups within them would come hand in hand with growth. Though the methodological critique of his work may be valuable, so is his warning about a phenomenon that, anyway, cannot necessarily be explained the way he does.

5Economists generally wonder what a person’s level of income depends on. To answer such a question, they suggest imagining a series of mental exercises, such as randomly picking any one of the seven thousand and something million people in the world and trying to guess their level of income. Then they ask: what data on that person could provide the right number? Some of the characteristics that come to mind are: age (children and old people in general earn less than adults), gender, level of education (the higher that level, the more the person usually earns), social class (a high position within the social structure probably implies the possession of more material and finantial properties and therefore, higher incomes) and what the person does for a living. However, the economists say, there is an attribute that might help more than any other to guess the person’s income: the country he lives in. For indeed income differences across countries may be really huge. Just to mention an extreme example, a person living in Luxembourg earned 51,000 dollars in 2003, whereas someone living in Ethiopia barely earned 650. From this point of view, then, it is a nations’s level of development what determines the average life styles of their people. Evident though this might seem, such statement will lead on to the old discussion about development, its causes, its processes, its drivers, its obstacles.

6Few further comments seem necessary, for wealth could come from different sources. For instance, it could be the consequence of differences in the nature of institutions, more specifically, of the dualism between extractive societies and others promoting individual initiative, as Robinson and Acemoğlu (2012) suggest. Or of prior backgrounds of capital accumulation and inclusion in the world system, according to Andre Gunder Frank (1992), and Immanuel Wallerstein (2000), among others. Or even of a variety of factors such as technological innovation considered within the political environment in which it crops up. Other causes could also be differences in the availability of natural resources or capital. Since this will precisely be the core issue in this book, we will have the chance to evaluate these different and very topical views of what is under study. Yet it seems relevant to quote a paragraph I consider particularly exemplary to show how analytic levels have recently plummeted. According to Robinson and Acemoğlu (2012):

Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people […] We’ll show that this interpretation of Egyptian poverty […] turns out to provide a general explanation for why poor countries are poor. Whether it is North Korea, Sierra Leone, or Zimbabwe, we’ll show that poor countries are poor for the same reason that Egypt is poor. Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities. (p. 18)

7No doubt it is a provocative point of view, for if interpreted literally, then it does not matter much what Egypt, Sierra Leone, North Korea or Zimbabwe could do or produce; it would simply be necessary for them to replicate American or British democratic institutions. That is, a political transformation of this kind would render a poor society rich. Yet, there is no mentioning of the historical link between these countries and the “successful” ones. No historical analysis could seriously disregard British behavior towards Egypt between 1882 and 1945, or ignore Gamal Abdel-Nasser’s independence efforts till his defeat, or the unconditional support of the United States to Anwar Sadat and Hosni Mubarak’s political systems as one of the main aspects of Middle Eastern security in the Arab-Israeli conflict (Porter, 2014).

8These authors consider creative destruction – understood as related to technological innovation, in Schumpeter’s terms –, a characteristic of successful nations, and they disregard the setback that a society might undergo as a consequence of civil turmoil. This is, however, a gross contradiction to the authors’ statements regarding, for example, the case of Iraq and their critique of the modernization theory (p. 517).

9If not a tautology, the belief that, in the long term, the emergence of institutions such as those of the developed countries will render a society rich is a simple act of geopolitical positioning consistent with the profusion of “Arab spring”3 incidents. It may even be a new way of considering the role of that region now in relation to the economic and energy future of China, and to the potential social vulnerability of this country as well as the threat posed by a multipolar world in which Europe might play a central role. Yet, this is not meant to be a political discussion but a critique of the theoretical weakness of that belief. Its main argument has to do with the assumption that what can be done or produced by a nation will only depend on the extractive or inclusive nature of its society. Such a narrow point of view disregards many aspects: the pre-existing human, financial and technological capital in each nation, the interdependences between developed and developing countries, and even more so the fact that the number of things to do is not endless or independent of the prior evolutionary state of the economic system as a whole. This question, which can only and necessarily be answered in terms of both historical processes and resources, cannot be explained by means of such reductionist concepts, as would be the case when considering, for example, that Egypt never managed to diversify its production because it could not create open non-extractive societies.

10Piketty (2013) admits that comparisons of wealth across societies and historical stages may become abstract. He pertinently states: “it is much easier to count people than to count goods and services”. And he is referring here to a fact which, though obvious, is usually disregarded:

Economic development begins with the diversification of ways of life and types of goods and services produced and consumed. It is thus a multidimensional process whose very nature makes it impossible to sum up properly with a single monetary index. (Chapter 2, pp. 89-126)

11Yet he goes on to say:

In Western Europe, North America, and Japan, average per capita income increased from barely 100 Euros per month in 1700 to more than 2,500 Euros per month in 2012, a more than twentyfold increase. The increase in productivity, or output per hour worked, was even greater, because each person’s average working time decreased dramatically: as the developed countries grew wealthier, they decided to work less in order to allow for more free time (the work day grew shorter, vacations grew longer, and so on).

12It is clear that such long-term measuring reflects the author’s attempt and that of others such as Angus Maddison4, to establish the level of progress in material well-being in the last centuries by means of an estimate of the world and regional output. Piketty, however, warns that the change in the composition of GDP is a key element, even when he does not go deep enough in his discussion, which remains at an abstract level. In trying to clarify the question so as to show that, despite the difficulties to measure wealth, there has undoubtedly been huge material progress since the industrial revolution to the present, he wonders about the end of growth: “[In the twenty-first century,] are we headed toward the end of growth for technological or ecological reasons, or perhaps both at once?”

13To illustrate his point, he again uses measuring of this kind and states that only countries in the so called “catch-up stage” revealed output (wealth) growth rates of 3 to 4%. Now since this process ends when the less advanced countries catch up with the more advanced, these rates are only transitional and of limited duration:

At the global level, the average rate of growth of per capita output was 0.8 percent per year from 1700 to 2012, or 0.1 percent in the period 1700–1820, 0.9 percent in 1820–1913, and 1.6 percent in 1913–2012.

14The author wants to point out that there is no historical example of growth in wealth per capita exceeding 1.5 % annual rates over lengthy periods of time, not even so in technologically advanced societies. Yet “many people think that growth ought to be at least 3 or 4 percent per year. As noted, both history and logic show this to be illusory”.

15But another relevant aspect in Piketty’s work is his attempt to show how, after more than two hundred years of history, the ratio between accumulated capital (wealth as stock) and annual output (wealth as flow) becomes even. This happened after the destruction of capital between 1920 and 1950 in France, Germany and Great Britain (cf. his Figure 4.55), and also as shown by prior trends of the same ratio, for example between 1870 and 19106. This would illustrate that, eventually, the Thirty Glorious Years in France (1945-1975) or, in Marglin’s (1992) terms, “the golden age of capitalism”, was an exceptional, somehow one-off, growth stage.

16Regarding this point, I suggested a similar approach in previous work (Kozulj, 2001, 2005), though from a very different perspective. It had to do with two aspects: urbanization as part of the driver of development, as was and still is the case; and the epistemological weaknesses of the system of beliefs prevailing on a global scale.

17It will be shown later that at this level of abstraction, these statements may be imprecise. But if this type of approach is combined with the one focusing on political institutions – as is the case with Robinson and Acemoğlu’s – the question becomes even more confusing. For these authors, Egypt (or North Korea, Sierra Leone or Zimbabwe, but also Argentina, China and many other countries) should do what people dissatisfied with the governments say, because poverty in those nations would not be related to the size of their markets, or their prior historical conditions. Nor to what economists have always regarded as the key factors of growth and well-being. On the contrary, poverty would stem from the existence of political sectors concentrating power, concerned only about their own wealth, that is, “extractive”. Following this approach, then, all policy recommendations for development should be withdrawn and replaced with the support of social movements asking for more markets and more democracy, even when at some point they might overthrow a government others might consider democratic because it has been voted by the majority of people.

18Besides, what Robinson and Acemoğlu could certainly not account for is the case of those governments that cannot “do what people ask” precisely because there are international financial institutions opposing to it, as was recently the case with Greece. Then, would those financial institutions eventually concentrating wealth in few hands at the global level be considered “extractive”? This attribution of responsibility to individual societies, to national elites, or to the lack of creativity of those nations, together with the denial of the existence of an asymmetric and unequal world order, disregards history and conceals the deep-rooted extractive nature associated to present-day asymmetries and inequalities.

19Defining as identity an instance of free market with democracy shows a level of arrogance and is not an economic theory or a sociological analysis: it is a political definition and, as such, a non-scientific one. The problem is not that science should be considered superior to politics, but that in this way, both are degraded in a world demanding better policies based on more solid knowledge. If not, little could be asserted about moral and social human progress, which should then be considered only a temporary illusion of a small portion of the twentieth century. In turn, economics as a science would be merely equivalent to the phlogiston theory in chemistry, which prevailed in part of eighteenth century thought.

20The notion of wealth is generally identified with the abundance or scarcity of some particular attribute, whether spiritual, cultural or material. Economics obviously approaches the main issue of material wealth as possession or control over different goods and assets, but also, and even more emphatically so, the question of the creation of those goods and assets. But then we go back to the initial question: is it important to deal with the issue from the perspective of wealth as stock or from that of the growing creation of goods and services, that is, as a flow of those goods or services? Is it important to consider the interrelation between both forms of defining and perceiving it? It will be seen that this issue is still important in the twenty-first century, though it is perhaps one of the longest-standing regarding the nature of wealth. Karl Marx, as is well known, used to see this problem through his theoretical framework called “the organic composition of capital”, or the dynamic ratio between constant and variable capital as a cause of capitalist crises7.

21Piketty, in turn, analyzes the logic behind the growth of capital stock (regarded as savings from capital gains, or unconsumed capitalist income, as opposed to what this capital produces - (r>g)8). This shows how a decrease in output from capital is the logical cause of the growing importance of inherited wealth and income with respect to income coming from labor, which, in turn, will deepen the inequalities in wealth in the long term. It seems that he cannot even consider that a higher capital-output ratio may precisely derive from a stock of capital that, in itself, is not – or is scarcely – productive, as is the case with house building or urban infrastructure, for instance. Indeed in modern societies, the annual creation of wealth may determine present and future wealth accumulation, or it may destroy previously accumulated wealth, or wealth coming from the annual flow of available and consumable goods.

22No doubt there is a link between output growth and employment creation, and a close interrelation in economic theory and practice between employment, productivity, income, consumption and aggregate demand. Otherwise, the practical and theoretical concern for business cycles, their causes and impacts, or for the different barriers preventing growth both in the short and the long term, could not be understood. There is a perception that many environmentalists do not consider these concerns licit, for under this logic, the planet would not be sustainable. This criticism has long been present in the literature on the vagueness of the concept of “sustainable development”, in as much as economic growth has always been dominant in the scene (Meadows, 1995).

23Yet for the developers of classical economics, the central issue was the link between wealth and value, or between national social and private wealth. Wealth could come from human industry, from the accumulation of precious metals, or from an abundance of natural resources. For Adam Smith it was very simple: wealth was the possession of useful and transferable material objects whose acquisition or production implies labor. His example of specialization and division of labor as the cause of wealth is no doubt well known, though people in general may be less familiar with the case of the pin factory than with the concept of the “invisible hand”, which would channel all abilities, needs and their fulfillment in the market.

24In turn, Nassau William Senior9, “in making Wealth the fundamental concept of economic theory, emphatically disclaimed any idea of implying that Wealth was more important than Happiness, Welfare, Virtue, and the like” (Schumpeter, 1954). And he later improved and condensed Smith’s definition by stating that wealth resides in “all things that have exchange value”. Senior would certainly be amazed to see – whether at ground level of from somewhere above us – the interrelations existing nowadays between wealth, well-being, happiness and virtue, but this would be a completely different discussion. Suffice it to say here that in the world we have known for the last seventy years, not being able to acquire some level of wealth due to lack of employment or of a remunerated job implies a very different human condition from that existing towards the end of the eighteenth and the first half of the nineteenth centuries. At the time, a slave had an owner, and for us now, selling a number of hours on the labor market to earn a living has been an important human improvement. We should then wonder what it means that nowadays there are unemployed people who need to sell their bodies, or a part of them, to make a living, or who survive out of the remnants that other human beings discard if they cannot create use and exchange value.

25To be more precise, it is not as important to know how richer a rich is today than in the fifteenth or sixteenth century, as it is to answer whether today’s poorest people live better than the poor at that time. That is, if the child of an unqualified worker, him/herself barely qualified – or even less so than his/her parent – lives under conditions of urban poverty which are worse than the conditions imposed by traditional or rural poverty at the time. It is also important to know if today’s forms of wealth creation will or will not be able to prevent despairing levels of marginality or poverty. For Thomas Piketty, it looks like this question has already been answered by history:

The average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 or 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5–10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today. (2013, p. 456)

26Anyway, I do not think the question can be reduced to a comparison of average wages and their relation to absolute wealth in the eighteenth and the beginnings of the nineteenth century. For example, building a rural dwelling and having access to food could have been better guaranteed sometime in the past than in today’s conditions of structural unemployment and urban marginality. Also the subjective perception of poverty and inequality in an affluent society is very different from that in a relatively poor one. The attempts by the United Nations Development Program (UNDP) to include multidimensional poverty indicators have to do with this question. Yet, considering indicators related to health care, education or other instances of unfulfilled basic needs is only the beginning of this attempt to understand what being poor entails today, well into the twenty-first century, one of ostensible opulence and seemingly endless technical progress.

27Another central issue regarding the topic of this chapter has to do with measuring wealth. This has already been dealt with briefly when introducing long-term comparisons such as those commented by Piketty. For instance, when using series meant to show – though only in an approximate manner – the level of world wealth, or as was the case with the series developed by Maddison.

28In pre-capitalist societies it was not necessary to use aggregate indicators homogenized by a currency unit, as is now the case with our Gross National or Domestic Product (GDP), or Gross Domestic Product per Capita (GDP/capita). Wealth could perfectly be measured according to the amount of land or cattle, the number of castles, works of art, minstrels, courtiers, gold pieces, precious stones and even armies that people possessed.

29Obvious though that might seem, the relevance of the question becomes clear when the following aspects are considered. In the first place, far back in the history of mankind, the levels of wealth were immeasurable as compared to the subjective perception of the value of its counterpart, poverty and its conditions at different moments. Secondly, the actual composition of wealth is important for the sustainability of its reproduction in time. Thirdly, indicators such as GDP are intrinsically more changeable in their internal composition the faster technological innovation and creative destruction are, and this is a fact that has not been sufficiently analyzed. In the fourth place, indicators such as GDP, urbanization, the Human Development Index (HDI) and modern notions of well-being are interrelated. Next, GDP changes as a consequence of differentiated phases of human development on a global scale. Finally, part of the wealth regarded as stock was, sometime in the past, wealth created as annual flow, and that portion of wealth cannot be entirely appropriated or increasingly reproduced.

30This last point is related to the growth of cities, on which many other activities and businesses depend. This will be dealt with below in greater detail. It is only necessary to emphasize here that an important part of what is measured by GDP has to do directly with the construction of urban systems, and that the more mature urbanization is, the less it can be expected that basic activities related to the building of houses and infrastructure – and incremental productive capacities – contribute to future growth. This is a peculiar reason why wealth regarded as stock or fund will be greater than wealth regarded as annual flow, which – in the absence of active and focused policies – affects both employment and distribution of wealth. It should be noted that the present analytic approach to the link between wealth as stock and as annual flow is radically different from the Marxist approach related to the labor theory of value, prior accumulated labor, organic composition of capital. The focus here is actually on specific activities, processes related to physical as well as human capital, and some other theoretical questions that might have to do with these.

31This aspect, which is related to the problem of considering capital a fund of homogeneous value, is certainly not new. On the contrary, it is linked, according to some authors, to the breakup between classical micro and macroeconomics (Dvoskin & Libman, 2009). Also to the contributions of the Austrian School (Lachmann, 1947, 1956), which has always emphasized that capital goods are heterogeneous and partially non-convertible. And it is basically linked to all the possible ways in which authors have tried to solve this problem, as is the case with Hicks’ theory (1939)10, later perfected by Arrow-Debreu (1954)11.

32The concepts of heterogeneity, specificity, complementarity and limited divisibility and convertibility of the physical goods making up capital have been generally accepted. Yet, I consider that the main theoretical concern has been an attempt to maintain coherence between aggregate macroeconomic and purported microeconomic analyses. The purpose of this has been to rescue the static and dynamic equilibrium approaches of post-Keynesian and neoclassical theoretical discussions regarding issues such as wages, full employment, cost-effectiveness, neutrality of money, among others.

33I am not aware of any effort having been made to understand the question of the heterogeneity of capital taking into account the dynamic links between these aspects: the evolution of urbanization processes, technological changes and the problem of the progressive transformation of activities that, at a specific time and place in the past, used to be essential for the creation of flows of annual wealth but then declined. Nor has it been considered that those capital goods can create an intrinsic difference in value once they are completed with respect to the value they had as annual flow.

34Wealth is said to have been measured already by the ancient Egyptians, whose goddess Seshat was seen as a keeper of records and books, or perhaps even earlier by the Nuragic peoples of Sardinia, generally reported as the most remote keepers of statistical records. Yet the first attempts to measure wealth in the history of economics have to be traced back to the work of Spanish politicians, or of the English econometric theorists and their French, German and Italian colleagues of the sixteenth and seventeenth centuries.

35The important thing is, however, that it is impossible to understand statistical data without understanding where they come from. Or that it is necessary to know the methods by which the results have been obtained and their epistemological background in order to retrieve information from those data.

36However, the System of National Accounts, the basis to measure GDP, was standardized only in the post-war period (as of 1945, and particularly after 1953). Therefore, data about periods prior to that – compiled over the last sixty or seventy years –, though meant to be universally valid, are too general to permit any significant comparisons. In fact, updated recommendations were published in 1993, which may add new inconsistencies regarding measurements carried out over the last seventy years.

37It is particularly important to remark here that, even when Piketty rightly emphasizes the fact that the wealth indicator varies widely and attaches great importance to its changes across fields such as agriculture, industry and services, he does not relate these aspects to modern urbanization processes, so peculiar of the second half of the twentieth century and the first decades of the twenty-first12. It is curious, for cities in the past were the product of agricultural surplus and their levels of wealth depended on that as well as on their trade and military abilities. Jan de Vries (1984) analyzed European urbanization between 1500 and 1800 and was very critical of the fact that those cities be considered pre-modern. In fact, together with authors such as Henry Pirene, Max Weber, Ferdinand Braudel and others, he emphatically considered the unique role of those medieval cities and their links to the birth of capitalism. But no doubt the population density and size of those cities are nowhere close to those of the cities formed along the second half of the twentieth century. As Kingsley Davis (1965) has properly pointed out, “before 1950 no society could be described as predominantly urbanized, and by 1900 only one – Great Britain – could be so regarded”.

38An analysis carried out by Tertius Chandler (1987) could provide evidence that Davis’s statement is correct. Indeed, between the years 100 and 1800, the ten largest cities were within a maximum magnitude order below a million inhabitants – more specifically, between a hundred thousand and five or six hundred thousand people.

39There is no doubt that the development process as we now know it, which took place between 1945 and the first decade in the twenty-first century, implies a unique technological style in history that could hardly have been imagined by the classical economists13.

40Though building those cities was certainly an economic activity, it was not really measured for it did not affect industries such as today’s cement, steel, aluminum, chemistry and others, which are typical of the urban style that developed mainly after 1945. By way of example, the production of cement increased by a factor of 60 between 1926 and 2012, that of steel by a factor of 10 between 1943 and 2012, copper by a factor of 34 between 1900 and 2012. There are no production statistics for any of these products before the dates mentioned in each case, but these data show that average consumption per capita of these basic products sharply increased as a consequence of the type of urbanization that took place following the technological style of the last seventy years.

41The important thing, however, is that each of these products – with which many others are manufactured – are part of the annual flow of wealth creation. Part of this wealth remains as stock in time. But a proportion of it cannot be privately appropriated, strictly speaking, nor does it have a reproductive nature. On the contrary, it is a condition for the subsequent creation of flows of wealth and new stock based on other activities of non-equivalent value in their absolute magnitude or in their composition between capital and labor.

42Thus, after the First and Second Industrial Revolutions, but even more so after the Second World War, these and other activities linked to urbanization can be seen as variables embodied within GDP measurement, a fact whose relevance I tried to emphasize in several previous works (Kozulj, 1997, 2001, 2003, 2005, 2011). These attempts, however, have not in the least influenced the treatment of the serious issues that might result from such an approach in relation to the sustainability of the flows of wealth creation in modern societies.

43This is what I would like to emphasize in particular, for the present styles of urbanization are in themselves an important part of GDP growth, and employment and distribution of income depend, at least partially, on its future growth. Then, exploring this link in greater depth might cast some light on the debate on the future dynamics of the creation of wealth and well-being. Also, new insights could be gained into the dynamics of world economy since 1950, particularly regarding the impact that the modernization and urbanization process undergone by China and other Asian countries has had since 1995, or even better, between 2004 and 2014.

44The core issue here is that the activities involved in the construction of large cities and their infrastructure, that is, the portion of GDP normally called Gross Fixed Capital Formation (GFCF)14, tends to decrease as the urbanization process consolidates. This means that part of the industrial activity becomes less dynamic and could even enter a long overcapacity stage with respect to future demands.

45It is true that, while that is taking place, new products and services may appear. But they will surely not be enough to employ the amount of labor force that those activities required in the past and to create equivalent amounts of wealth. Occupational labor mobility implies that human capital may be homogenized, but this is not necessarily so, and in any case, it certainly cannot be a spontaneous process. Because of the heterogeneity of capital, an important amount of equipment and machinery is also involved in those activities. Finally, urbanization processes are essentially inter-generational.

46The activities substituting for those that disappear may be insufficient for many reasons. This is important because, though it has continued to create new goods and services, the technological style that has permitted growth over the last sixty or seventy years might be in serious trouble in the next five or six decades to sustain a type of growth enabling a large number of people to live on a job. Chapter 4 presents some evidence on this as it deals with several aspects of technological change.

47In turn, this question is related to that of how much public employment and spending devoted to unemployment benefits the systems can sustain if the causes of unemployment are structural. This is particularly relevant when decision-makers keep suggesting that the problem can be solved with short-term measures or by individual creativity – when it is known that the vulnerable youth sector is involved. Also that the inconsistencies of the labor market may be solved by implementing wage flexibility, or that if there is no interest rate, there will always be cost-efficient investment projects which will in turn optimally cater for the wishes of the citizens according to their contribution to productive effort. All in all, this is the dominant creed today, represented by, for instance, Vilfredo Pareto, successful survivor in the world of economic thought.

48Allyn Young (1928) holds that “even with a stationary population and in the absence of new discoveries […] there are no limits to the process of expansion except the limits beyond which demand is not elastic and returns do not increase”. Such simple reasoning must assume that the resources used in production may be easily transferred from one activity to another. Though this view is generally held in economics, it has never been analyzed with respect to the intrinsic rigidity of physical and human capital typical of certain activities and industries. It should be admitted, however, that this author rightly considers market size a key factor for growth.

49Then, while Piketty does not explicitly refer to this question – and might be considering the modernization of China, India and other countries a simple catch-up process15 –, Robinson deals with it from a somehow more ideological than scientific or historical perspective. That is, almost as a tautology, or as a rather imprecise and informal axiomatic approach, concealed under a discourse full of gaps. Yet, it is these gaps that contribute some useful tips:

In China, the current influence of the Communist Party and its extractive institutions remind us of the Soviet development of the nineteen fifties and sixties, though there are significant differences between both processes. The Soviet Union managed to grow under extractive economic and political institutions because it forcibly assigned resources to its industry under a centralized government, particularly for arms and heavy industry. This growth was partly possible because there was much to be done. Growth under extractive institutions is easier when creative destruction is not a need. Chinese economic institutions are, no doubt, more inclusive than those in the Soviet Union at the time, but Chinese political institutions are still extractive. The Chinese Communist Party is almighty and controls="true" state bureaucracy, the armed forces, the mass media and large sectors of the economy […] Because of the control of the Party over economic institutions, the scope of creative destruction is strongly reduced, and will continue to be so until there is a radical reform of political institutions. (pp. 513-514)16

50If the generic concept “much to be done” is replaced with a more specific one, such as the dynamics of certain industries in turn influencing the creation of new wealth as a natural consequence of urbanization, creative destruction as a need is understood from a different theoretical perspective. This could question, however, in the first place, the positive (Schumpeterian) sense of the creative destruction process given its potential inability to create wealth (and employment). The concept could also be questioned for its contribution to squandering and destruction of resources and the environment (not necessarily inevitable if there is a strategic long-term perspective, convincing enough to create a different outlook). Finally, a type of destruction pure and simple (typical of large-scale wars or of permanent, though restricted, states of war) could also be objected to, for its repetitive and non-creative nature.

51In the last case mentioned, wealth is destroyed in a most literal sense, and therefore, assets per capita and the flow of goods and services are reduced and global poverty increases, whether sharply or gradually. But physical destruction leading to reconstruction – by means of small-scale Marshall Plans – implies a more sophisticated rationale, as has been seen over the last decades.

52We will put aside for a while other forms of creation of wealth (things to do) such as building fallout shelters, silos or other facilities, which could also require important amounts of steel and cement, among other inputs, and other construction equipment such as cranes, concrete-mixing trucks, power shovels and labor force. Or the manufacturing of weapons as a form of creation of wealth as annual flow, but also as stock that will, in some cases, grant absolute military supremacy or, in others, the hope of freeing the country from some form of oppression (or of getting ready for self-defense).

53There has been some amount of literature debating to what extent Marx and Schumpeter’s perspectives regarding the progressive as well as destructive nature of capitalism are or not based on a certain coincidence of their theoretical approaches. John E. Elliott (1980) explored this issue and described the differences between both authors: whereas Marx strived to show that capitalism would destroy itself as a consequence of its own economic failures, Schumpeter rather believed that capitalism would not be able to survive because of its economic achievements (based on creative destruction as the ability to produce technological innovation, where businesspeople are crucial), and because it undermined its institutions leading them towards socialism. In turn, Nathan Rosenberg (2011) also explored this issue, and wondered whether Schumpeter was a Marxist. Such a doubt stemmed from the Austrian economist’s emphasis on the progressive transformation of capitalism into socialism, particularly focusing on the backwardness of its institutions with respect to the economic situation in which they emerged. These two reviews of Marx and Schumpeter’s theories have in turn received criticism, either because it is misleading to overemphasize the aspects at which their theories ovelap in order to establish a coincidence between them (Foster, 1983) or because Schumpeter – unlike Rosenberg – did not regard profits as resulting from the exploitation of the labor force (Kurz, 2013).

54Summing up, then, though this could be a very interesting debate, the literature under analysis is too much to the point, and is relevant here only as regards Piketty’s most recent approach, the evolutionary nature of the system and the long term as the core of the issue. Besides, creative destruction seems not to be much criticized, unless when the author assumes that growth will slow down in the long term he does so under implicit hypotheses which are irrelevant in the context of his text. In any case, his emphasis on the mechanisms of distribution of wealth by means of institutional and fiscal instruments shows him in favor of not taking much into account the physical and structural side of the supply. This is a very dangerous perspective, since it implicitly separates the distribution of wealth from the actual ways in which it is created and its capacity to generate income. And this in turn renders him intellectually mediocre, as he is seen as a leftist spokesman in favor of supporting the indignants. And his contribution to the economic theory is very poor. Finally, he does not suggest any real policies for a world in which the debate is between those implying adjustment and those implying expansion of the demand and the subsequent reaction of the markets.

55In order to clarify these questions, I will now go back to urbanization as a variable embodied in wealth measurement. This is an important aspect because discussions on whether development explains urbanization (Tolley, 1997) or whether urbanization explains growth (Henderson, 2004) respond to different perspectives and comprise a series of complex arguments. And they also reveal the danger of using theoretical concepts whose extrapolation to the empirical field disregards Schumpeter’s advice as to the need to understand how statistics are calculated. We are referring here to the extrapolation of concepts such as “productivity”, measured by aggregate indicators with values frequently interpreted in a general, usually mistaken, way, which may in turn lead to inadequate policies with serious consequences.

56And apart from that, discussions on creative destruction, the progressive nature of capitalism, its transformation into socialism and the serious questions about the sustainability of economic growth imply regarding the socio-economic system not only as dynamic but also as mainly evolutionary, understanding that evolution always includes destruction and creation. Hand in hand with this there are biological, social, cultural and many other types of transformations, all of them also evolutionary. The constant change of the concept of wealth, its composition and distribution is in no way strange to the changes undergone by the urbanization process typical of both capitalist societies and communist and socialist ones in the twentieth and so far the twenty-first centuries. Yet this appears somehow blurred as a consequence of dealing with the question in abstract pairs such as free market-democracy; planning-socialism; interventionism-state control. Wrongly trying to find the causes of economic success and convergence across nations in notions that suppose technological and life styles not completely divisible also casts some shadow on the analysis, as does using aggregate variables with fixed meanings in time despite the necessary changes involved in economic development.

57Physiology has taught us that growth may be represented by means of a sigmoid curve (similar to a logistic curve) where there is first slow growth followed by a high level of development, sustained by the effect of sexual hormones. Then this growth level is reduced till body maturity is reached and growth stops. When this logic is applied to the different tissues in the body, it can be seen that there are some, like the bone tissue, which behave differently from the rest. In tissues where cells are renewed, those cells have a very short lifespan, and are quickly substituted with new cells coming from undifferentiated germ layers. Neurons and the bone and heart muscles do not extend over certain stages of development.

58It is curious that, though this is a proven fact in biology, it has not inspired the evolutionary trend in economics to perceive the creation of wealth as a dynamic concept whose internal composition varies beyond the well-known agriculture-industry-services triad. If the metaphor makes any sense, what I mean is precisely that the bone tissue may have more analogies with urban infrastructure, whereas the logic of quick cell renewal may be better compared with fast innovation and creative destruction. There is yet a substantial difference: the drivers of growth in biological bodies are their genetic load (DNA) and feeding. What could those drivers be in a socio-economic system? It is not a question I dare to answer, but I wish to present some evidence regarding the important consequences of leaving aside in this discussion on growth the fact that urbanization is embodied in this growth and in its measurement.

Notes de bas de page

1 Joseph Alois Schumpeter (1883-1950) was an Austrian economist and sociologist. His work is among the most significant in the field of economics in the twentieth century. He introduced the concept of “innovation”, which has been greatly influential. Among other works, he wrote The theory of economic development (1912), Business cycles (1939), Capitalism, socialism and democracy (1942), History of Economic Analysis (1954) and the essay Ten great economists: from Marx to Keynes (1951).

2 Unless otherwise stated, all the quotations here have been taken from the English versions of the corresponding bibliography. (Translator’s note)

3 By way of example, one of the projects of the “Minerva Initiative” titled “Tracking Critical-Mass Outbreaks in Social Contagions” and led by the Cornell University, means to model the behavior of civil unrest processes and to understand the critical mass phenomena involved in them. The Johns Hopkins University (Applied Physics Laboratory) and the American Air Force Office of Scientific Research also take part in the project. The Minerva Initiative, a defense project launched in 2008, means to study different socio-cultural aspects in over 50 countries considered strategic to American interests. Other projects, such as “Understanding the Origin, Characteristics and Implications of Mass Political Movements”, have similar objectives.

4 Angus Maddison (1926-2010) was a British economist specializing in quantitative macroeconomic history. He devoted to constructing long-term series of GDP and of other variables linked to growth and development. He was Emeritus Professor at the University of Groningen and founder of the group that constructed vast databases which are now of public use.

5 The ratio he uses is national capital in Europe expressed as a percentage of the annual national income.

6 In Figures 3.5 and 3.6, Piketty estimates the French ratio between the years 1700 and 2012 (2013, p. 144).

7 According to the Marxist theory of crisis, as competition across capitals grows, so does investment in constant capital (part of the initial capital devoted to the purchasing of means of production) and this reduces investment in variable capital (part of the initial capital devoted to the reproduction of labor force). In this way, the organic composition of capital grows, constant capital also grows and variable capital decreases – that is, there is no investment in the reproduction of labor force, which is what really produces value. This brings about the tendency of the rate of profit to fall, where rate of profit is defined as the proportion between surplus value and the sum of constant capital and variable capital. There is, then, a fall in the rate of profit as a consequence of overproduction of capital. When profit falls, investments decrease, together with labor, purchase of equipment, raw materials, means of subsistence, thus spreading the effects of depression to other branches of industry. The reduction in the rate of profit is countered by the destruction of capital, whether physical – due to the war –, or simply economic – as a consequence of competition.

8 In Piketty’s book, r stands for the rate of growth of return on capital, and g for the rate of growth of the economy, that is, the annual product. The author’s reasoning starts by considering that, if, by way of example, r = 5% and g = 1% (both annual), and if the savings of those deriving their income from r was only a fifth part, then that would mean that inherited wealth grows faster than the annual wealth produced by society as a whole in a year. Were these differences to persist, inherited capital would keep growing along the generations, and income coming from created wealth would obviously be higher than wealth yet to be produced. However, he does not go deep into the requirements for r to be paid by the rest of the society. Indeed though his reasoning is impeccable, if g completely stagnated or became negative, inequality would grow by definition. Piketty states that this is what happened in France between 1820 and 1913 and is, therefore, a historical fact. However, the drivers of growth in that period were based on a technological style very different from that of the period 1950-2013. And though it is true that since 1970 or 1980 g has tended to decrease and r to increase, this, which is “another historical fact”, is still in progress. That is, the author does not explain what happens with the fifth part of r that is “saved” and what output g has. Piketty may not be interested in this reasoning because what he means to show is the real possibility of growing inequality in the twenty-first century and the importance of the institutions that might be able to limit excessive return on capital so as to prevent that inequality. But he is far from formulating it by means of a model comprising the economic behavior of a system as a whole, which both Marx and the neoclassical authors, and to some extent, also the Keynesians, actually did.

9 Nassau William Senior (1790-1864) was the first professor of Political Economy at Oxford. He was also one of the most influential economists and reformers of the nineteenth century, and for many years an adviser to the British government.

10 Cf. Puttaswamaiah, 2001.

11 These authors state that, under certain economic assumptions (such as convex preferences, perfect competition and independent demand), there should be a set of prices such that aggregate supplies equal aggregate demands for each good in the economy.

12 Piketty is very clear about this part of the problem, that is, that the internal composition of GDP changes because it has comprised different goods along history. However, he never relates this question to the one he wants to emphasize, which is the transformation of wealth as flow into wealth as stock, linked to technological inflexibility, human capital and the consequences on the distribution of income and wealth. See the title “Growth: A diversification of lifestyles”, in Chapter II.

13 “Technological style” refers here to the set of industrial tools and procedures related to the production of the goods and services that have shaped the modern urban lifestyle, and which have developed since the post-war period.

14 That is, gross fixed investment.

15 The “catch-up” process is one of capture (or addition through buying or developing) of technology by the less developed countries from the most developed ones. This permits the formation of more modern productive structures and, according to the circumstances, more competitiveness on the world market.

16 The translation is ours.

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