Capital in the Twenty-First Century

In a 1963 speech US president John F. Kennedy coined the phrase, “Growth is a rising tide that lifts all boats” (14). This captured a spirit of optimism regarding economic progress. It suggested that inequalities, whether of status, income, or wealth, are not important since economic growth will ultimately make everyone better off. There is a powerful logic to this. Does it matter if my neighbour owns a Mercedes, if I am now able to buy my Toyota? Who cares if she travels first class to Paris, staying in five-star hotels, if I can afford a vacation? Economic growth can improve the living standards of most people in tangible ways. This is true, moreover, even if inequalities persist, or if the fruits of growth are unevenly distributed.

Consider, for example, the difference between the 1980s and the present. As Piketty points out, “there was no Internet or cell phone network, most people did not travel by air, most of the advanced medical technologies in common use today did not yet exist, and only a minority attended college” (122). Economic growth then has multiple benefits. It is not merely that it allows us to have a greater quantity and quality of goods and services that already exist. For instance, it may allow us to have more and better clothes and a greater choice of food. It also creates new technologies that can improve our lives and make them easier. Taken from a longer-term perspective, growth since the 18th century has improved things in even more fundamental ways. As Piketty notes, “instead of living in societies where the life expectancy was barely forty years and nearly everyone was illiterate, we now live in societies where it is common to reach the age of eighty and everyone has at least minimal access to culture” (117). We have better medical care. We are better educated. And we have more leisure time to travel, read, and to enjoy ourselves.

Considering this, growth may seem like the ultimate panacea to social ills. Indeed, it can even improve social mobility. Since growth promotes new products, such as computers, and therefore new skills, like programming, it can create opportunities for those “whose parents did not belong to the elite of the previous generation” (107). That is, it can disrupt static and entrenched hierarchies, and offer high incomes to individuals willing to take risks or embrace change. However, growth also has core limitations. Most obviously, it only enhances welfare overall if some of that growth is utilised to improve public goods. Growth only improves our lives if it also allows more resources for education, health, public housing, and a clean and safe environment, in addition to private goods. And this is not something Western governments have been sufficiently doing since the 1980s.

Just as important, growth only limits the impact of inequality when growth is high. It is certainly true that, “a low annual growth rate over a very long period of time gives rise to considerable progress” (95). Even 1% of growth per year results in profound improvements over a century. Unfortunately, though, people do not live with such a long-term viewpoint. What we seem to observe, when growth is 1% or less, is personal stagnation. We live from year to year, and with such growth find it hard to identify any tangible effect on our lives. This makes the greater wealth and income of others even more conspicuous and problematic. This is especially the case if that inequality is significant and if the rich seem (in contrast to us) to be seeing a rapid rise in their living standards.

The benefits of growth then are as much psychological and relative as material. It is about the sense that things are improving, that we are part of Kennedy’s “rising tide,” as much as it is about objective economic fact. It is also why, as Piketty observes, the elimination of inequality as an issue is something which “economic growth is quite simply incapable of satisfying” (122). This is because high growth rates, of more than 2%, which start to affect the structure and perception of inequality, are historically exceptional. They existed in Europe, and to a lesser extent the United States, between the 1950s and 70s, because of the significant post-war rebuilding required. The same is true of contemporary emerging economies. China’s growth rates of over 5% are possible because there is still a great deal of economic and technological “catching up” to be done with the West. Once China has reached the “technological frontier,” having adequate quantities and qualities of the latest industrial machinery, their progress will slow as did that of France, Germany, and Japan in the 1970s. In other words, growth is not a sufficient solution to the problem of inequality.