In 1919 several great industrialists in the United States, among them David Rockefeller, Henry Ford and Andrew Carnegie, signed an agreement that launched an initiative that shortly afterward would be called welfare capitalism. On the strength of the restitution principle, the basic assumption of this agreement envisaged that companies should take responsibility for the well-being of their dependents and their families. In this way the company gives back a part of the profits that resulted from those who competed to create them. This is a typical principle of American cultural origin: to give back post factum (after the fact) a part of what was obtained thanks to the contribution of the community that contributed to the successful implementation of a productive activity. Welfare capitalism immediately had some success in the United States, but it did not take long for its Achilles heel to become evident: it did not satisfy the requirement of universalism. The compact did not have value erga omnes (for everyone), since it was a private action on a voluntary basis. This is why, exactly twenty years later in Britain, the liberal John Maynard Keynes wrote that if welfare is desired as the model of social order, it can only be universal (Keynes 1939). Indeed, a particularistic welfare would not guarantee social peace, neither would it serve to reduce inequality. Thanks to this insight, Lord Beveridge, a member of the British Parliament, succeeded in having the famous “Beveridge Report” approved during wartime in 1942. From this were launched the National Health Service, free assistance to the handicapped and elderly who were not self-sufficient, and free education for all until a certain age. This was the beginning in Britain of the famous model of the welfare state: the state, not the company, must take care of the well-being of its citizens by putting the principle of redistribution into practice. Beveridge’s phrase has become famous: the state must take responsibility for citizens “from cradle to grave”. This model represented an authentic triumph of civilization, which then spread from Britain to the rest of Europe, in different versions and with different outcomes.

The ideas of English social critic and reformer, John Ruskin (1819–1900) show elements of modernity and remarkable originality which, in contrast with many other critics of early capitalism, make reading his works both current and highly stimulating. This is particularly true of Unto This Last, his economic and social commentary magnum opus. We will consider two aspects of his thought from this book – the motives for work and wealth – which we consider particularly significant and prophetic for our present-day economy and society.

Ruskin was both a critic of capitalism – because of workers’ conditions in factories – and a critic of the economic theory of his time, that of David Ricardo, Thomas Robert Malthus and particularly that of John Stuart Mill. Today he would have been even more critical of our capitalism and economic theory, which have exacerbated those vices he identified and stigmatized in his own generation. From this perspective Ruskin was on the side of the utopian socialists (like Robert Owen, he tried to constitute an ideal community of workers), Karl Marx, US President Andrew Johnson and, in Italy, Arturo Labriola, Achille Loria, Ugo Rabbeno and the many theorists of cooperation, as well as social Christians like Giuseppe Toniolo (the Gospels and the biblical tradition are essential background for understanding Ruskin’s criticism of capitalism).

As we know from much historical evidence, economic science does not always move forward with better responses to the same questions; it also changes some questions and forgets others. Questions central to the classical era of economics (whether political or civil) regarding income distribution, the nature of profit, the role of rent were progressively abandoned by the neoclassical revolution at the end of the nineteenth century. For example, what we today call “income distribution” is quite different from its meaning in the classical era, and we simply no longer talk about the origin of value and profit.

The Italian political economist, Achille Loria (1857–1943), the brother of the well-known mathematician Gino Loria, was a witness to the great methodological revolution in economic science at the end of the nineteenth century, and bitterly opposed its tendency to abandon themes that he considered central even in the new economics. Loria’s scientific and human programme in particular originated in response to this conflict, and in an era such as ours, of environmental and financial crisis, his criticisms of economic science are relevant and worth reconsidering today.

The centrality in Loria’s work of the problem of rents – his central criticism of capitalism – make him an author that, to be understood correctly, should be considered within the civil economy tradition. Loria’s scientific misfortune, in relation to his talent, was a consequence of his anachronism: he was born too late with respect to the classical paradigm and too early for today’s. The first few decades of the twentieth century marked the eclipse of his themes by mainstream economics, not just on rents and income distribution, but also on land and his analysis of politics and institutions, themes which are now once again on the agenda in these crisis times. We find in Loria’s work a theoretical and methodological apparatus that anticipated many of the topics at the centre of current economics, such as the economic analysis of law, institutions, political choices, as well as hints of theories of public goods, the commons, energy and land.

Piketty’s Capital is a stupendous achievement. It lays out a majestic panorama of the rise and fall and rise again of the wealthy over two centuries in several countries. It has a bearing on some unexpected questions. For example, I have a scholarly interest in nineteenth-century French landscape painting. During that period, more than 2,000 paintings on average were exhibited every year in the Paris salon, and similar numbers were rejected. The best of these have become part of humanity’s heritage; millions look at them in museums and reproductions abound. But how did they come into being? Who paid for them? Piketty shows that the French elite were immensely wealthy. The rich were numerous enough to sustain the hopes and expectations of thousands of artisan painters, and the pinnacle achievements of a few of them. Like other enduring assets of humanity, this art was created in response to the tastes and the buying power of the rich.

Piketty’s prime achievement is a rich statistical description of the inequality of income and wealth in France, the US and Britain over two centuries. But something is lost as well. His focus is on the top 10 per cent, 1 per cent and 0.1 per cent, and in his story these are the only ones that count. The rest are written out and denied historical agency. During the past few decades, social invisibility has been lifted by the academic study of history from below. Inadvertently, in pursuit of a quantitative handle on the rich, Piketty has restored a history from above. This exclusive focus on the wealthy also imparts an explanatory bias: the waxing and waning of elite wealth cannot be explained entirely by observing the rich. That, however, is what Piketty attempts to do.

THE MODEL

The core concept is a purported historical regularity, namely that over the long run, r > g, where r is the prevailing business interest rate and g is the rate of economic growth. That in itself, if it were true, would be a simple mechanism for concentrating income and wealth. It does not require anything else. Borrowers would be paying more to service their debt every year than the growth of output as a whole.

Increasing income inequality is one of the most serious problems in the contemporary world, and Japan is no exception. In this context, it is only natural that Thomas Piketty’s Capital in the Twenty-First Century has attracted great interest from general audiences as well as from academia. His book is impressive because it is based on extensive research and a rich long-term data set for the major developed countries. This data set includes the research by Moriguchi and Saez, who studied long-term change in the top income share in Japan. As these authors pointed out, there is a great deal of literature on the long-term development of income distribution patterns in Japan. In this chapter, I begin by surveying this literature, focusing on research into the pre-war period; this is unique, in that studies based on individual-level data exist for this period and, moreover, there is scope to extend these studies. Then, using the new data set, I explore the relationship between income and assets at the individual level in Japan during the pre-war period.

This chapter is organized as follows. The first two sections survey the literature, with the former looking at the functional income distribution and the latter focusing on the individual income distribution. The third section relates the individual distribution of income to the distribution of assets. The final section gives my concluding remarks.

THE FUNCTIONAL DISTRIBUTION OF INCOME

The functional distribution of income in Japan has been studied since the pre-war period, but the systematic estimation of long-term economic statistics in the 1970s substantially improved income distribution estimates. The most important work on this issue is that by Minami and Ono, who estimated the functional distribution of income in the private non-agricultural sector by industry, focusing on the manufacturing and mining industries (“M industry”) and the service sector (“S industry”).

Figure 12.1 shows the change in the capital share (capital income/total income) from 1906 to 1940, using data from Minami and Ono (1978a). While there was a procyclical fluctuation, a clear upward trend can be observed in the capital share, which rose from 0.39 in 1906 to 0.54 in 1940.

In Capital in the Twenty-First Century, Thomas Piketty spends relatively little time discussing the politics and policies affecting inequality. However, in a subsequent reflection on the debate his book has produced, he stresses the complexity of these issues and suggests that, in the book, “[he] may have devoted too much attention to progressive capital taxation and too little attention to a number of institutional evolutions that could prove equally important, such as the development of alternative forms of property arrangements and participatory governance”. In the spirit of Piketty, this chapter starts from the need to see the complex politics and policy relating to inequality as something that can only be understood historically. The focus is on the attempts to reduce economic and social inequality that have been a key characteristic of social democratic politics in Britain since the First World War. This pursuit has had to take place in circumstances very much not of social democrats’ choosing: conditions of war, depressions and enormous changes in economic structure. As Piketty stresses, “there have been many twists and turns and certainly no irrepressible, regular tendency towards a ‘natural equilibrium’ ”. The pursuit of this goal rests on complicated ideological foundations, and there is a substantial literature that examines the relevant doctrinal history. Inequality is complex and multidimensional, but this essay is restricted to “vertical” disparities in income and wealth, which have been an important, sometimes pre-eminent, component of that broader concern.

The focus here is on the shifting policy agendas that have accompanied this concern, seeing these shifts as based on interplay between doctrinal views and changing understandings of the forces affecting income and wealth distribution. Like all understandings of modern economic life, these have been grounded in a developing field of statistics: statistics that have both helped to shape and, in turn, been shaped by contemporary political and policy concerns.

This chapter is divided into four sections. First, we discuss “classic social democracy”; this is grounded in the concept of equality articulated by R. H. Tawney, which has dominated our understanding of the period from the First World War down to the 1950s, including the construction of the “classic welfare state” in the 1940s.

What kind of a free market liberal society was Germany on the eve of the First World War? Robert Martin, a retired civil servant who had worked in the Ministry of the Interior, earned his keep by assembling detailed information from German tax statistics in his twenty-volume series Yearbook of German Millionaires. The collection included named individuals possessing a fortune worth more than a million marks, also giving their addresses. Since the annual publication was “bought as well as studied with the greatest care by the well-to-do, not only in Germany but in the whole world”, Martin claimed that it was also “the most effective advertisement for the millionaires”. Martin also stated that the 10,000 individuals included in the new edition on the Rhineland (the western centre of heavy industry in Prussia) had been very helpful in improving the quality of the data by voluntarily submitting additional material, making it very likely that its coverage was complete. Even the emperor could be included, although he paid no tax in Prussia: his annual income exceeded the next wealthiest individual by 3 million marks, but he was not the wealthiest millionaire. That spot went to Bertha Krupp, recorded with a fortune of 283 million marks. Luxury and private wealth were apparently popular topics in those days, and nobody seems to have worried that thieves and conmen might also make use of the publication.

Thanks to Thomas Piketty and his team – among whom Fabien Dell assumed responsibility for the German component – we are all now aware that industrialized societies suffered from serious, and in many cases increasing, economic inequality at the end of the nineteenth century. Private wealth reached a level six times the national income around 1910. A fortune of a million marks was 800 times the average income of employees, making the 10,000 millionaires of Martin’s yearbook a much more exclusive group than the 892,000 euro-millionaires in Germany today. Private wealth of a million euros today equals only thirty times the average annual income. However, Bertha Krupp’s wealth in 1913 was 0.56 per cent of national income, while the fortune of the richest Germans today, the BMW-owning family the Quandts, is 0.87 per cent of current German GDP.

The themes of well-being, approval, public happiness and a good social life have been and are at the centre of the civil economy tradition, alongside the relationship between the well-being of nations, of citizens and indicators such as GDP. In recent years, informed by significant segments of civil society, debate has grown significantly on the necessity of surpassing GDP or of adding other indicators that report other dimensions of well-being. Some scholars (such as Amartya Sen, Jean-Paul Fitoussi and Joseph Stiglitz) and politicians are considering new measuring techniques of subjective happiness as well-being indicators that can work alongside, or replace, GDP and other objective indicators. France, followed by the United Kingdom, and now Italy as well, have initiated projects aiming to directly measure their citizen’s subjective well-being. This is based on the hypothesis, supported by ample empirical evidence, that in a postmodern world objective indicators are no longer sufficient to express how well people live, which increasingly depends on non-monetary factors such as the quality of the natural environment, the availability of relational goods, and so forth.

However, the scenario that is taking shape is similar to what we might see with a football match. At the end of the game the different statistics appear on the screen: the percentage of possession by each team, fouls committed and suffered, the number of corner kicks, and so forth. However, at the top of the statistics, the number of goals dominates the rest; it is the only statistic that really counts, and which no other statistic listed can remotely modify. Indicators like the Human Development Index (HDI), the ecological impact, in Italy the Benessere Equo e Sostenibile (BES) – “Fair and Sustainable Well-being” – and others all resemble ball possession and corner kicks, which are ancillary to the number of goals scored (or GDP).

Another analogy, one closer to what we will soon need to implement in modern economies, comes from the great multi-stage cycling tours.

The central issue addressed in Thomas Piketty’s Capital in the Twenty-First Century is the historical relationship between capital accumulation and inequality. It has gained widespread recognition, even notoriety, for its claim that capitalism systematically breeds inequality. Piketty’s authority in making that controversial claim derives from the extensive historical analysis that he offers of long-term trends in the accumulation of capital and the returns that it generates. Yet, even though these trends are of central importance in determining the plausibility of Piketty’s central thesis, his measurement and interpretation of capital’s role and rewards have received only limited attention.

In this chapter I present a critical analysis of the image that Piketty constructs of the history of capital in the US. The US economy, to its champions and its critics, is often seen as exemplifying all that is characteristic of capitalism. Therefore, if one is interested in learning about capital in capitalism, the history of the US is a promising source of insight. In my first section below I sketch the image that Piketty presents of historical trends in capital’s role in US history and explain how he constructs it. He does so by departing from an approach to defining and measuring capital that has become standard in economics today, and that is why the image of capital that he presents for the US is a distinctive one.

The novelty of Piketty’s treatment of capital raises the important question, which I address in my second section, of whether it makes conceptual sense. Specifically, is it consistent with the way he understands the economic role of capital and the rewards that accrue to it? In fact, Capital offers surprisingly little insofar as conceptualizing the economic role of capital is concerned, and, when it comes to understanding capital’s rewards, the book largely piggybacks on the standard model from mainstream economics. Doing so creates an important incoherence in Piketty’s work since the neoclassical theory of distribution is based on an entirely different concept of capital than the one he favours. However, moving forward on the history of capital in the US will not be achieved by moving backward to a mainstream analysis of capital, even if it offers internal coherence, given that it has significant problems of its own.

We need to begin anew to criticize the capitalism we have created in the past three decades, a period that coincides with the era of globalization and common goods. The beginning of the 1980s marked the close of an energetic time of reflection on economic and political systems. The late 1970s ended (primarily in Europe) an era of just under three centuries characterized by the Industrial Revolution, and an era characterized by schools of thought critical of this new form of production and life, which has been called “capitalism” since Karl Marx’s time. With globalization and the collapse of state socialism, the economy as it manifests itself in present history became a fact of nature, the deep structure of which was no longer discussed. That is not to say that there are no contemporary economists, politicians, or philosophers who criticize our form of capitalism – one need only consider Amartya Sen, Muhammad Yunus or Serge Latouche – but these criticisms as a whole have not yet produced a different narrative of our time. Important innovations have been proposed in both theory and practice, but without either individually or collectively having the strength of thought to narrate a non-capitalist market economy. Sen’s capabilities, Yunus’s social business, Joseph Stiglitz’s and Thomas Piketty’s criticisms of inequality, Vandava Shiva’s “earth-centred economy” and Latouche’s degrowth all differ among themselves, but even if we were able to systematically arrange them in such a way as to make them coherently coexist (not an easy task), we still would not have created an alternative market economy to the current form of capitalism. In truth, we would have to say that we are far from it. We are like the baby in its mother’s womb, so immersed in the liquid that nourishes it that it cannot think that a world beyond might exist; to become aware of the existence of another larger, more marvellous world it must first leave the world that nurtures and sustains it.

Thomas Piketty’s Le Capital au XXIe siècle was first published in Paris during the summer of 2013. On the appearance of an English edition in March 2014 it became an international blockbuster, being quickly translated into German, Spanish and Chinese. Sales of all copies by January 2015 were 1.5 million and rising, fuelled by popular concern about growing income inequality and the links between inequality and global economic instability. Thanks to Piketty, and to his large transnational team of colleagues, together with a spate of recent books on global wealth and income disparities, distribution is back at the centre of our concerns.

PIKETTY’S PROMISE

In light of the mass of new comparative data contained in Capital in the Twenty-First Century, and in associated publications and appendices, it is clear that some common long-run trends in inequality across the developed world had not been sufficiently recognized. In particular, Piketty emphasizes the notable increase in income-generating wealth of top income earners in recent decades, together with rising pay. His study of top incomes, and their genesis, has unsettled the widely held assumption that capital’s share in national income (via interest, dividends and capital gains) would always necessarily revert to a long-run constant. The social concentration of wealth through inheritance and its role in cumulatively ratcheting up incomes, and thus further increasing wealth in the top 10 per cent or so of the population, is now in the spotlight. It is this that underpins Piketty’s dire prediction that, in the absence of fiscal and other measures to arrest the trend, things can only get worse. The new patrimonial class will increasingly engineer the political and legal process to further their economic interests, the rewards to merit and education in society will break down, and crises will ensue across the social democracies within a few decades.

Following the work of Simon Kuznets in the early 1950s, economists had generally assumed that modern economic growth would in the long run reduce the gap between rich and poor. In the early post-war years it was relatively easy to accept the inverted U-shaped curve of income distribution that Kuznets had identified for developed economies.

The question of common goods, or the commons, is one against which to test the robustness of the conceptual framework of the civil economy. Interest in this question has grown dramatically over the last few decades, even though the first systematic reflection in economics goes back to 1911, when Katherine Coman published “Some Unsettled Problems of Irrigation” in the American Economic Review. However, in discussing alternate forms of property in the Politics Aristotle had already made specific reference to common goods: “It is clearly better that property should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition” (II.5.37).

Goods such as air, water, climate, soil fertility, biodiversity, seeds and knowledge are posing hitherto unforeseen challenges for the future of humanity, in that they are essential goods for which it is practically impossible to find substitutes. Common goods have always existed, but only in recent times has it been acknowledged that there is a problem of determining the limit beyond which we begin consuming “tragedy”. The term is taken from Garrett Hardin, an American biologist, who in 1968 published “The Tragedy of the Commons”, an article that made him famous. Clearly, Hardin could not have imagined the heated debates that his essay unleashed. First, because not all types of common goods lead to the tragedy of depletion. That happens when one considers – as did Hardin – only rivalry in consumption and non-excludability of use as characteristic aspects of the common good. For example, in his 2012 book Infrastructure, Brett M. Frischmann talks about the comedy of commons to emphasize that open access generates positive externalities that are never counted in economic calculations.

Second, because the word “tragedy” creates misconceptions. In common use it indicates “ruin”, or “inauspicious outcome”, while Hardin used the term to denote a situation similar to the prisoner’s dilemma, in which the optimal solution cannot obtain as long as the agents act according to the standard of homo economicus.

Starting out from Thomas Piketty’s Capital in the Twenty-First Century, this chapter will look at the problem of increasing inequality in wealth and income in Sweden from a historical perspective. We have two theses, which can be stated as follows. First, the period 1950–c. 1995 in Sweden can be characterized as a period in which individual wealth formation was challenged by collective wealth formation, in the form of public pension reserve funds and also in the form of so-called wage-earner funds. Occupational pension funds also increased considerably. An aspect of this development that is relevant for Piketty’s general thesis is that collective wealth formation can be construed as an alternative to wealth taxation and progressive income taxation when it comes to altering the balance between labour and capital. However, this possibility is not open to Piketty since he defines pension payments as income and refrains from tackling the issue of how the source of this income in accumulated wealth pension payments might be dealt with. Suppose that the labour share of value-added decreases. Our claim is that the higher the share of collective wealth in total wealth, the lower will be the increase in inequality from the decreased labour share. This is simply because collective wealth is more equally distributed than individual wealth.

Our second claim is that the process of collective wealth formation in Sweden has in essence rested on a political process, and that ideological conflict between labour and capital in Sweden has manifested itself in these issues. Collective wealth has been fundamentally controversial, and this is so because the distribution of wealth is closely linked to the distribution of power. Power as a central aspect of wealth, i.e. the question of control as an aspect of ownership, is not very explicit in Piketty’s great work. We will discuss the political issues related to collective wealth formation later.