The final part of chapter 2 itself breaks into two parts. First is an appreciation for what even a seemingly modest amount of economic growth can do.
“In my view, the most important point…is that a per-capita output growth rate on the order of 1% is in fact extremely rapid, much more rapid then people think.” (page 95)
Following this is a bit of math, which invoves putting 1.01 or 1.015 to some power like 30 or 50 and get something really large. 1.0130 = around 1.35, or a 35% increase. 1.01550 = around 2.1, or a more-than-doubling.
Concretely, per-capita output growth in Europe, North America, and Japan over the past thirty years has ranged between 1 and 1.5 percent, and people’s lives have been subjected to major changes. In 1980 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 exist, and only a minority attended college. (page 95)
Thomas Piketty points out that the relatively rapid change we see today stands in contrast with most of history. “A society in which growth is 0.1% to 0.2% replicates itself with little or no change from one generation to the next.” (page 96) That said, the relation between growth and inequality is a very complicated one. Thomas Piketty points out that growth can create new inequality as new sectors can make certain people very wealthy very quickly. (Bill Gates and other tech billionaires are great examples of this.) Meanwhile, growth also can make inherited fortunes less important, thereby reducing inequality.
In France, people speak of the “Trente Glorieuses” (glorious thirty), meaning the economy during the three decades after World War Two. Europe had particularly high growth rates at this time, but note that this was a “catch up phase” (discussed in my previous post). The low growth in the previous period reflected the destruction of the two world wars.
Things were much smoother in the United States, as we did not suffer the sort of destruction faced by Western Europe during the world wars. Great Britain was included with Western Europe, but actually resembles the United States more than Continental Europe, “The Blitz” causing far less overall destruction than most other European countries suffered. “If we looked only at continental Europe, we would find an average per capita growth rate of 5% between 1950 and 1970–a level well beyond that achieved in other advanced countries in the past two centuries.
These very different collective experiences of growth in the twentieth century large explain why public opinion in different countries varies so widely in regard to commercial and financial globalization and ineed to capitalism in general. In continental Europe and especially France, people quite naturally continue to look on the Trente Glorieuses…as a period blessed with rapid growth, and many regard the liberalization of the economy that began around 1980 as the cause of a slowdown. (page 98)
[ Note to the reader: “liberal” in American politics means something extremely different—sometimes opposite—of what “liberal” means in France and in economics. In the economic definition, “liberal” means free trade, privatization, competition, and minimal to no regulation. Typically in the United States this is called “neoliberalism” and was the target of many protests in the last couple of decades, most famously the Battle of Seattle anti-World Trade Organization protest of 1999 and the Occupy movement of 2011.]
In Great Britain and the United States, postwar history is interpreted quite differently . between 1950 and 1980, the cap between the English-speaking countries and the countries that had lost the war closed rapidly…It may even be the case that the sense of being rivaled (or even overtaken in the case of Britain) played an important part in the “conservative revolution” (of the early 1980s). Even today, many people believe that the conservative revolution was remarkably successful, because their growth rates once again matched continental and Japanese ones.
Again, implicit here was that this all was about a natural “catch up phase” and growth rate patterns likely would’ve been about the same regardless of political policies.
The last bit in Chapter 2 is about inflation. Inflation is, of course, people needing more dollars to buy the same amount of “stuff” as the years go by. As noted earlier in the chapter, “stuff” that people buy changes over the years, so that inflation becomes increasingly hard to measure the larger the gap in time.
Inflation was unknown in most of the 19th Century, even going slightly negative in Britain and the United States. He makes an interesting historical note that the French Franc (Their currency starting in 1975, and used until the adoption of the Euro in 1999) had the exact same metal content (4.5 grams of silver) as the live used during the ancien regime (the monarchy)
The lack of inflation was a direct function of the gold standard. If the value of goods and services grew faster than the amount of gold you could dig up, then you’d have less money per unit of production, and thus inflation would be negative. During the time of the gold rush, inflation was positive, as then a lot more gold was chasing the same goods. It’s also worth noting that the gold standard was a real political issue in the United States during the late 19th Century, with progressives and populists wanting to get off it. Witness the famous “Cross of Gold” speech given in 1896 by progressive William Jennings Bryan, the Democartic nominee for president. According to Sam Pizzigati, author of The Rich Don’t Always Win, in his chapter titled “Plutocracy Triumphant,” spending on the 1896 presidential election, measured in terms of % of GDP, was six times as high as it was in 2008. The election was won by conservative Republican William McKinley.
Thomas Piketty adds an interesting cultural dimension to this super-low-inflation world:
In eighteenth and nineteenth-century novels, writers frequently described the income and wealth of their characters in francs or pounds, not to overwhelm us with numbers but because these quantities established a character’s social status in the mind of the reader. Everyone knew what standard of living these numbers represented….In Great Britain, the average income was on the order of 30 pounds a year in the early 1800s, when Jane Austen wrote her novels. The same average income could have been observed in 1720 or 1770…She knew that to live comfortable and elegantely, secure poroper transportation and clothing, eat well, and find amusement and a necessary minimum of domestic servants, one needed—by her lights—at least twenty to thirty times that much. The characters in her novels consider themselves free from need only if they dispose of incomes of 500 to 1000 pounds a year. (page 105-106)
(Mister Darcy of Pride and Prejudice, by contrast, had an annual income of 10,000 pounds, or over 300 times the average or 10 times what was needed to be “free from want.”)
World War One shattered this financial world.
To pay for this war…governments went deeply into debt. As early as August 1914, the principal belligerents ended the convertability of their currency into gold. [In other words, they went off the gold standard. ] After the war, all countries resorted to the printing press to deal with their enormous public debts. Between 1913 and 1950, inflation in France exceeded 13% per year, so that prices rose by a factor of 100 during this time. In Britain and the United States, the rate of inflation was barely 3 percent during this period. Yet this still means that prices were multiplied by 3, following two centuries in which prices had barely moved at all. (page 107)
While Thomas Piketty promises more analysis on the effects of inflation on wealth distribution (A teaser: it can reduce inequality, but in a very crude way that crushes some people’s wealth while leaving others’ untouched.), he ends the chapter with more culture:
It is surely no accident that money–at least in the form of specific amount—virtually disappeared from literature after the shocks of 1914-1945. This is true not only of European and Amerian novels but also of the literature of other continents. The novels of naguib Mahfouz, or at any rate those that unfold in Cairo between the two world wars, lavish attention on income and wealth as a way of situating characters and explaining their anxieties. We are not far from the world of Balzac and Austen. The novels of Orhan Pamuk, set in Istanbul in the 1970s…omit mention of any specific sums. In Snow, Pamuk even has his hero, a novelist like himself, say that there is nothing more tiresome for a novelist than to speak about money or discuss last year’s prices and incomes. The world has clearly changed a great deal since the nineteenth century. (Page 108-109)
The end of Chapter 2 signifies the end of the first part of the book. This first part deals with preliminary concepts and gave a sort of “you are here” view of the world economy. Chapter 3 begins the next part, an analysis of economic inequality, which is the hearts of the story. Stay tuned!