Jesus Fernandez-Villaverde,
Professor of Economics at the
University of Pennsylvania
After the score of reviews already written about Thomas Piketty’s Capital in the Twenty-First Century over the last few months, it is futile to rehearse the same arguments about the economics of the book yet one more time. Suffice it to refer the reader to the reviews of Debraj Ray, Larry Summers, or Per Krusell and Tony Smith. However, the readers of this newsletter may find of some interest to reflect not on the book itself, but on the reasons of its success and why those reasons point out to the challenges that Catholic economists need to address to help building a fair society in the twenty-first century.
We must start from a fundamental observation: The world economy has changed dramatically over the last several decades, and it is bound to change even more. These changes are reshaping our societies in profound ways.
First, the rise of China and other emerging nations has thoroughly reorganized how we produce, trade, and consume. The consequences of this rearrangement are just starting to be felt. If, for example, Africa has really turned a corner since 2000—as some perceptive observers claim—our cars in 2030 might be manufactured in Tanzania or Kenya.
Second, the fall in the price of computers is spawning a new technological age. The $2,000 MacBook Pro on which I am writing this review is more powerful than the multimillion-dollar supercomputer I used for my Ph.D. dissertation in the late 1990s. Indeed, chances are you will not be driving your 2030 African car: A sophisticated computer will do it. As Google has shown, the engineering problem of driverless cars has been solved. All that remains is for society to adapt to it. But while driverless cars will bring more comfortable morning commutes, they also mean that our grandchildren will add truck drivers to stagecoach drivers in the same group of professions that appear only in old black-and-white films.
But technological innovation is not only about replacing workers with capital (truck drivers with computers). And globalization isn’t just about companies searching for low-cost labor. It is also about raising the rewards of those whose skills complement technology and whose products appeal to larger populations of consumers.
Soccer players, the ultimate international workers, illustrate this point. In 1897, Aston Villa was the most successful professional soccer team in the world. Its star, Charlie Athersmith, was earning around $55,000 in today’s money, making him either the best or among the best-paid soccer players of his time. Athersmith played at Villa Park, which had opened that same year and could hold up to 40,000 spectators (although a normal crowd was closer to 20,000). Without radio or TV, only those at Villa Park or the stadiums Aston Villa visited could pay to see Athersmith.
Real Madrid is the Aston Villa of our time: the most valuable soccer team in the world. Its star, Cristiano Ronaldo, earns around $44 million annually. Often, Ronaldo’s games draw global audiences of more than 100 million people. While Ronaldo makes less money per spectator than Athersmith did (making him “cheaper” entertainment), technology has made him fabulously wealthier.
Global economic integration and the technological revolution are positive on the whole. But these powerful forces create winners and losers. Top lawyers, famous professors, successful entrepreneurs, and insightful consultants win. Adjunct professors, paralegals, truck drivers, manufacturing workers, and low-level administrative staff lose. Winners accumulate income and wealth. Losers do not.
Even if we tried to arrest them, these changes are probably unstoppable for any open society. Instead, the real questions are, first, how to think about them and, second, what sorts of policies are most likely to serve the common good. Market economies rely on the participants’ beliefs that the outcomes they produce are fair. Without a belief in fairness, economic agents will not engage in productive exchanges. More important, as voters, they will overregulate and stifle markets.
The success of Piketty’s book shows that confidence in the fairness of the market economy has weakened, and if we ignore Piketty’s allure because we find his arguments wrong and his policy recommendations misguided, we run the risk of being blind to the concerns of a large, increasingly disaffected sector of our society. Many Americans feel that the fortunes made in finance over the last two decades are nothing but rents extracted by a few entrenched firms that enjoy a special relationship with Washington. Workers in many corporations instinctively understand that the compensation of their CEOs has more to do with inadequate governance rules than with the value added by top management. Voters react with horror to the constant spectacle of interest groups determining public policy.
We need to be careful not to deny the obvious. Globalization and technological change are disruptive and rewrite the rules of economic success and failure so rapidly that many people are disoriented—and frustrated. Although there are many factors, by my reckoning these fundamental forces, which have gathered momentum in recent decades, explain the stagnation of the incomes of most Americans. This economic reality will surely influence politics. Voters will sooner or later gravitate toward those who offer an alternative, no matter how unwise.
A society’s institutions must be judged by their ability to help humans flourish. Excessive income and wealth inequality strongly suggest that too many Americans cannot lead productive, fulfilling working lives. This in turn indicates that many of our institutions are failing to adapt to new economic realities. In these circumstances we must undertake a vigorous program of reform. What, then, should we do?
The first order of business is to transform our educational system to provide as many children as possible with the abilities required by the new economy. Too often when we discuss our inadequate schools, we talk about inner-city schools. Yes, the status of inner-city schools should cause moral outrage. But we forget the extent to which our educational system also fails the middle and the upper-middle class. A recent international study demonstrates that the son of an American with a professional degree does worse in math, on average, than the son of a janitor in Shanghai.
The second priority must be to slow the rise in health care spending. We spend around 18 percent of national output on health care. Much of the income stagnation of the middle and working class in the U.S. can be accounted for by the growth in health costs.
Third, we need to ensure that the rules of the economic game are the same for all. The government should not help well-connected industries, in particular financial services firms. Market economies and many of the inequalities they create are felt to be legitimate when the outcomes they produce are thought to be fair. That’s hard to sustain when the rules are crafted or bent to favor the well-connected.
Fourth, we must decide, in an honest way, how much of the current entitlement state we want to keep and how we are going to pay for it.
As Nobel laureate James Heckman and his coauthors have reminded us, the seeds of productive lives are the non-cognitive abilities (self-discipline, patience, curiosity, creativity, fidelity) instilled by families during early childhood. More than ever, we must foster an environment where families can play their role as the fundamental cells of our society. Our national policy over the last several decades has forgotten this lesson, often neglecting the need to provide economic support for families. Today we need to revise the tax treatment of married couples, mandate more generous maternity leave and child care facilities, and otherwise think about how to structure government and employer-mandated benefits to better serve the interests of families.
Americans are increasingly anxious about the fairness of our society. Many are losing faith in our institutions. Piketty has tapped into such discontent. The buyers of his book are expressing, in a slightly more intellectual fashion, the same anxieties as the voters who support populist candidates on the right and on the left. The liberal Piketty reader in Seattle and the libertarian, “abolish the Fed” agitator in North Carolina seem very different. But at the deepest level, they share the same instinctive sense that the old social contract in America is under a great deal of stress. They both are looking for an alternative to a system that doesn’t seem to work well for most people. The problem is that both are misled by the wrong solutions. It’s up to us to work to find the right ones.
This review is an excerpt from the review “Anxieties of Fairness” by the same author, published in First Things, August/September 2014.
Jesús Fernández-Villaverde is the Vice-President of CREDO, Senior Fellow at the Collegium Institute for Catholic Thought and Culture, and Professor of Economics at the University of Pennsylvania. His research is in macroeconomics and econometrics. Most of his papers deal with the solution and estimation of non-linear dynamic equilibrium models and with business cycles. He received his Ph.D. in Economics from the University of Minnesota and, before that, he graduated from E-3, a joint program between the Law School and the Business School of ICADE, a Jesuit institution in Madrid, Spain. On Sunday evenings, he attends Holy Mass at Saint Thomas of Villanova Church, but on weekdays he tries to find time away from lunch seminars to go the Penn Newman Center.
