1Rising economic inequality has attracted a good deal of attention in recent years, among academic specialists, the general public, and politicians. However, evidence of increasing inequality has been emerging for some time. Starting in the 1980s, the mass media advertised the growing number of billionaires. After a long period when the rich had kept a low profile, an open display of great wealth usually associated with earlier periods in history returned in the U.S. and some other countries. In the 1990s, new and highly publicized fortunes arose in hi-tech, finance, and other sectors. For some time, U.S. government data on income distribution have shown rising inequality of income among households, although the official data have not adequately charted the rise of the share of income of the very rich, due to under-sampling and omission of capital gains income.

2Then a few years ago, two interacting developments catapulted inequality to its current high degree of public attention. The first was the careful empirical work of Thomas Piketty and Emmanuel Saez, who used a variety of sources to compile data series on trends in the concentration of income among the very rich – the top 1% and above – which had not been available before (Piketty & Saez, 2003). They made their data series easily available starting around 2007. In the wake of this work, a protest movement directed at inequality, the Occupy Movement, sprang up in 2011 in response to the economic and financial crisis of 2008, drawing widespread support for a critique of the wealth and power of “the 1%.” Without the work of Piketty and Saez, the now well-known slogans about “the 1%” might not have appeared. And without the protest movement, the new data might not have penetrated beyond the world of academic specialists. Piketty’s Capital in the Twenty-First Century, published in 2014, and which quickly became a best-seller, offered a sweeping account of trends in inequality of wealth and income in various part of the world going back to the nineteenth century, analysis of the roots of its rise and fall, and policy proposals to forestall a new period of economic and political dominance by the possessors of inherited wealth.

4Commentary from the heterodox side of the house has also not been lacking. Much of this commentary from the left can be justly summarized in the following way: “Piketty has done great service in assembling a massive amount of useful international data on wealth and inequality. His book has also been immensely useful in calling more attention to the relationship between capitalism and growing inequality in the current period. Perhaps especially in light of these contributions, it is regrettable that Piketty has chosen to locate his analysis on conventional neoclassical theoretical foundations. His definition of capital diverges strongly from Marx’s treatment, but, more seriously, his deployment of marginal productivity theory to explain the return to capital is indefensible. In attempting to understand the extraordinary sales and impact of the volume, this orthodoxy in theory is one of the crucial conditions of its impact. While the identification of a long-run, inherent tendency to largely unjustifiable income and wealth inequality within capitalism is disturbing, it is reassuring that this can be understood and addressed without abandoning the comfortable neoclassical worldview. Finally, even in the absence of these theoretical problems, the return to capital is a complex distributional question subject to multiple historical and social determinations.”

5The purpose of this article is to unpack the implications of this theoretical critique for evaluating Piketty’s contribution. We will argue that there are good grounds for this critique, but that, in addition, there are other elements in Piketty’s volume which can support at least a sneaking sympathy with a political economy perspective. Finally, we argue that a political economy perspective – most particularly, the social structure of accumulation (SSA) theory – is essential to a more realistic understanding of Piketty’s empirical results.

1. Mainstream Piketty and the theory of distribution

6Piketty compiles an impressive and invaluable historical time series regarding wealth and income distribution across a number of developed economies; yet he also chooses, as other have argued (Boyer, 2013; Varoufakis, 2014; Kapeller, 2014; Patnaik, 2014; Foster & Yates, 2014; Syll, 2014; Aspromourgos, 2015; Morgan, 2015; López-Bernardo et al., 2016; Shaikh, 2017), to analyse these empirical trends within a discredited, neoclassical theoretical framework. Piketty’s most explicit discussion of theoretical foundations comes in his treatment of the return to capital. This discussion is rooted in the marginal productivity theory of orthodox, neoclassical economics (2014, p. 212-217, p. 220-222). The neoclassical framework assumes a full employment economy where the “inputs” or “factors” of production – capital and labour – are remunerated according to their respective “marginal products”; where the marginal product reflects the additional output brought about by an extra unit of capital or labour, all else being equal – a hypothetical proposition that can’t be tested empirically (Moseley, 2012, p. 131-133; Patnaik, 2014, p. 3; Syll, 2014, p. 37-38). Hence, the implication of marginal productivity theory is that “each social class gets the value created by the factors it happens to own” (Hunt, 2011, p. 434). Piketty partially deviates from the neoclassical theory of distribution, however, if only to discuss bottom- and, in particular, top-end labour incomes (Piketty, 2014, Chap. 9). Here it appears that the role of labour market institutions takes precedence:

The main problem with the theory of marginal productivity is quite simply that it fails to explain the diversity of the wage distributions we observe in different countries at different times. In order to understand the dynamics of wage inequality, we must introduce other factors, such as the institutions and rules that govern the operation of the labour market in each society. To an even greater extent than other markets, the labour market is not a mathematical abstraction whose workings are entirely determined by natural and immutable mechanisms and implacable technological forces: it is a social construct based on specific rules and compromises. (Piketty, 2014, p. 308)

At the same time, he can’t quite bring himself to break with marginal productivity theory more generally:

To be clear, I am not claiming that all wage inequality is determined by social norms of fair remuneration. As noted, the theory of marginal productivity and of the race between technology and education offers a plausible explanation of the long-run evolution of the wage distribution, at least up to a certain level of pay and within a certain degree of precision. Technology and skills set limits within which most wages must be fixed. (Piketty, 2014, p. 333)

7Piketty wants to abandon marginal productivity theory for certain segments of labour income; but “when it comes to factor shares and the return to capital, technology and marginal products rule again” (López-Bernardo et al., 2016, p. 199). His reasoning is inconsistent however: once it is accepted that bargaining power is the primary determinant for particular segments of the income distribution, it must be so for the entirety – that is, at any one time, income distribution is a zero-sum game (Patnaik, 2014, p. 5-6; Syll, 2014, p. 41-42).

8And if this wasn’t issue enough, Piketty chooses to downplay the distributional implications of the Cambridge Capital Controversies (Cohen & Harcourt, 2003). Piketty (2014, p. 230-232) diverts attention from the central focus of the debates: “the question of treating ‘capital’ as a ‘factor of production’ for a theory of distribution in a capitalist economy” (Bhaduri, 1969, p. 532). The problem for neoclassical theory is one of identifying a physical unit, independent of price, with which to aggregate “capital” goods (Robinson, 1970, p. 311-313). The price or “reward” that capital receives depends on its marginal product; but this can’t be calculated until capital is first aggregated (Hunt, 2011, p. 436). As a result, the neoclassical aggregate production function and, by extension, theory of distribution are empty of content. What’s more, leading orthodox economists of the day – most notably, Paul Samuelson – openly conceded the debate (Keen, 2011, p. 142; Syll, 2014, p. 41), contrary to the impression conveyed by Piketty (2014, p. 231).

9In reality, the various kinds of labour income and income-earning wealth – regardless of how the latter is acquired – are primarily remunerated in accordance with institutional norms and practices, which, to a large degree, reflect the relative power of contending social classes. Only a political economy framework, rooted in the classical tradition, is capable of capturing the complexities of distribution in a capitalist economy (Aspromourgos, 2015, p. 11-12). A theoretical framework that makes the capital-labour class relation explicit would be more in keeping with the empirical evidence: technology and skills are, at best, of secondary importance in the determination of functional income distribution – the role of bargaining power is paramount (Stockhammer, 2017).

10This brings us to Piketty’s theory of class. At a theoretical level, capital and labour are conceptualised as harmonious factors of production earning a return on their marginal products, rather than antagonistic social classes engaged in the capitalist production process (Wright, 2015, p. 60-61). Where class is discussed in any broader sense, Piketty follows the conventions of contemporary mainstream sociology: classes are categorised according to their proportional shares in the national income distribution (Piketty, 2014, Chap. 7). He does however concede that such an analysis is “quite obviously arbitrary and open to challenge” (Piketty, 2014, p. 250).

2. Anti-mainstream Piketty

11As we have argued, neoclassical economics has reason to feel at home with Piketty. However, Piketty may not be completely at home with neoclassical economics. In the section of the Introduction entitled “The Theoretical and Conceptual Framework”, Piketty literally spends the bulk of it explaining that he feels much more at home in Paris than in the United States, the epicentre of modern neoclassical economics. Piketty’s judgments on the economics profession have been uniformly harsh, no more so than in the pages of Capital. He argues that it would be good if economists “set aside their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything” (2014, p. 32).

12In the introduction and conclusions to his magnum opus, Piketty issues a welcome and timely call for a revival of the classical political economy approach of, amongst others, Smith, Ricardo, and Marx (Piketty, 2014, p. 15-16, p. 30-33, p. 573-575). Indeed, the fragmentation of the social sciences has signaled a retreat from questions of distribution and class – Piketty’s main preoccupation. He is especially scathing of the economics profession in this regard:

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in. (Piketty, 2014, p. 32)

Political economy, on the other hand, seeks to integrate the social sciences – in particular, history, economics, sociology, anthropology, and political science (Piketty, 2014, p. 573-574):

If we are to progress in our understanding of the historical dynamics of the wealth distribution and the structure of social classes, we must obviously take a pragmatic approach and avail ourselves of the methods of historians, sociologists, and political scientists as well as economists. (Piketty, 2014, p. 33)

13It has been disappointing to his heterodox colleagues that Piketty did not carry out this programme more consistently in the intervening pages of Capital. It may be possible that the surplus tradition within economics could open the possibility of a conditional welcome for Piketty in an alternative home. Setting aside the Austrian tradition (see Martins, 2014, p. 233-235; Lavoie, 2014, p. 29-30), the major existing trends in economics today consist in the binary opposition between orthodox and heterodox economics, vulgar and classical economics (pace Martins, 2014), the scarcity and the surplus tradition. Is it possible that reading Capital in the Twenty-First Century against the grain (or at least against the grain of Chapter 6 which discusses marginal productivity theory) may open up the possibility of reinterpreting Piketty’s findings in the context of the surplus tradition?

14We will argue here that an alternative understanding of income distribution can be gleaned from Piketty’s framing of the relationship between the return to capital and income distribution. In this argument, we will be considering primarily Piketty’s “First Fundamental Law of Capitalism: α = r x β” rather than his subsequent excursions into growth theory. The discussion of the return to capital in this context will have some implications for Piketty’s now famous conclusion that over time in capitalism r > g.

It will be initially convenient to rearrange the First Fundamental Law as β x r = α, as Piketty in fact takes up the discussion of each of these variables in that order, starting with β. β is the ratio of capital to national income. Piketty defines capital in the following way:

I define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market. It consists of the sum total of nonfinancial assets (land, dwellings, commercial inventory, other buildings, machinery, infrastructure, patents, and other directly owned professional assets) and financial assets (bank accounts, mutual funds, bonds, stocks, financial investments of all kinds, insurance policies, pension funds, etc.), less the total amount of financial liabilities (debt). (Piketty, 2014, p. 48)

15Piketty’s inclusion of land and financial assets as well as productive assets is particularly controversial among heterodox economists. Nevertheless, this inclusion, in an odd sort of way, contributes to opening the possibility of considering Piketty’s results within the surplus tradition. In the surplus tradition, profit has its origin in the production of surplus, but, as Marx (1993) [1894] emphasized at some length in Volume 3 of the original Capital, rent and the returns to financial assets also find their origins in the produced surplus. Thus, while Marx would certainly not see these assets as capital proper (financial assets are “fictitious capital” and much land ownership is the artificial monopolization of a natural resource in the Marxian framework), he would see the returns to these assets as forms of the social surplus.

16The inclusion of these assets also serves to render Piketty’s discussion of r as the rate of return to capital as particularly non-tenable. Much has been made of Piketty’s non-discussion of the Cambridge Controversy’s conclusion that the marginal productivity of capital is conceptually incoherent because the marginal unit of capital cannot be defined. It is certainly true that no production function can be described which smoothly substitutes capital for labour because of this. But it is even more implausible that a financier could substitute labour for money in producing a financial return. Substituting labour for land is imaginable in the case of agriculture, but a landlord’s ability to substitute labour for his apartment in the provision of housing services would appear to be very strictly limited.

17Perhaps most damaging to the internal consistency of Piketty’s argument, this definition of capital is too expansive even in neoclassical terms and is therefore inconsistent with Piketty’s own discussion of profit as the return to the marginal productivity of capital. Neoclassical theory only appears in the discussion of the marginal return to capital on page 212 of Piketty’s book. This discussion then only continues for another 12 pages. The suspicion arises that Piketty is not particularly concerned with this argument. As observed earlier, Piketty actually denies that marginal productivity explains the return to labour at the bottom end of the distribution (this is ruled by legal minimums) and the top end of the distribution (this is governed by the ability of top managers to set their own compensation as a group and by changing tax incentives). If Piketty cared, this would be a fatal concession, as, in marginal productivity theory, output is exhausted in the distribution to the factors of production. If it does not explain the returns to one factor it cannot explain the levels of return to the others except by unlikely chance.

18The inclusion of land and financial assets in the definition of capital also raises another problem for the First Law. Standard financial theory identifies the value of capital assets as the capitalized returns which these assets generate. In the case of land and financial assets, many heterodox theorists would agree. Thus, in these cases, the quantity of capital does not determine the rate of return, r. Rather, the rate of return, r, determines the quantity of capital, at least if it is measured in monetary terms. The possibility of the direction of the determination flowing in the opposite direction emphasizes the tautological character of the First Fundamental Law. The tautology is emphasized by Varoufakis (2014), for instance, but is also admitted by Piketty (2014, p. 52).

19This prompts us to re-rewrite the First Fundamental Law as originally ordered: α = r x β. α is the share of national income which goes to capital. Piketty sums up the forms this income takes in the following way: “[T]he rents produced by an asset are nothing other than the income on capital, whether in the form of rent, interest, dividends, profits, royalties, or any other legal category of revenue” (2014, p. 422). In Piketty’s neoclassical version, the quantity of capital determines the rate of return and then the quantity of capital in conjunction with the rate of return determines the income of capital which when divided by national income determines the capital share. In the surplus approach by contrast, it is this division of the surplus which then determines the return to capital, r, which then determines the value of certain capital assets, while the value of concrete capital goods is determined by their costs. Can this surplus approach interpretation be found in Piketty?

20In Piketty’s volume, the return on capital, r, is actually calculated by directly relating the value of the capital (as Piketty defines it) and the income derived from capital. These numbers are empirically found in an analysis of the historical data. Piketty describes this process:

[T]he capital shares and average rates of return indicated in Figures 6.1-4 were calculated by adding the various amounts of income from capital included in national accounts, regardless of legal classification (rents, profits, dividends, interest, royalties, etc. [...]) [...] and then dividing this total by national income (which gives the share of capital income in national income, denoted α) or by the national capital stock (which gives the average rate of return on capital, denoted r). (Piketty, 2014, p. 201, p. 203)

21Thus, the analysis of the return to capital is, in the actual analysis, concretely subordinated to the empirical work. Piketty regards this process, however, as more than the assembling of a series of numbers: “National accounts represent the only consistent, systematic attempt to analyze a country’s economic activity” (2014, p. 58). It is a form of analysis which is “completed with additional historical and distributional data” (2014, p. 59). This is not a simple empiricism. For Piketty, “national accounts are a social construct in perpetual evolution” (2014, p. 58). The dependence of capital values on rates of return is also recognized by Piketty in the case of rental returns where rent controls lower real estate values (2014, p. 144, 187).

In this way, Piketty’s approach resembles that of Wesley Clair Mitchell in analyzing business cycles, described by Mitchell himself in the following passage:

To observe, analyse, and systematise the phenomena of prosperity, crisis, and depression is the chief task. And there is better prospect of rendering service if we attack this task directly, than if we take the round-about way of considering the phenomena with reference to the theory. (Mitchell, 1970 [1913], p. 20)

22This was not, however, a renunciation of theory by Mitchell, but a commitment to the inductive method (Sherman, 2001). This resemblance on the part of Piketty may not be entirely accidental. Piketty identifies Simon Kuznets as his most admired non-Francophone theorist. Kuznets himself was heavily indebted to Wesley Clair Mitchell with whom he worked closely at the National Bureau of Economic Research. As a student of Veblen’s, Mitchell is securely located in the very heterodox American institutionalist tradition. Piketty lends an institutionalist flavour to his analysis of the price of capital:

[I]t is important to stress that the price of capital [...] is always in part a social and political construct: it reflects each society’s notion of property and depends on the many policies and institutions that regulate relations among different social groups, and especially between those who own capital and those who do not. (Piketty, 2014, p. 188)

But an institutionalism is perhaps not the only connection between Piketty’s analysis and the heterodox surplus approach. Within his discussion of marginal productivity, Piketty himself poses the major alternative explanation of his empirical observations:

The available data indicate that capital’s share of income increased in most rich countries between 1970 and 2010 to the extent that the capital/income ratio increased. [...] Note, however, that this upward trend is consistent not only with an elasticity of substitution greater than one but also with an increase in capital’s bargaining power vis-à-vis labor over the past few decades, which have seen increased mobility of capital and heightened competition between states eager to attract investments. (Piketty, 2014, p. 221)

This bargaining power theory of the return to capital has echoes of a more Marxist approach to the division of the social surplus between capital and labour. Indeed, in discussing the political consequences of this division, a kind of Marxism emerges almost explicitly:

For those who own nothing but their labor power and who often live in humble conditions (not to say wretched conditions in the case of eighteenth-century peasants or the Marikana miners), it is difficult to accept that the owners of capital – some of whom have inherited at least part of their wealth – are able to appropriate so much of the wealth produced by their labor. (Piketty, 2014, p. 40)

23In this way, a different and somewhat contradictory reading of Capital in the Twenty-First Century emerges. The point here is not that the reading of Piketty in Capital as an orthodox theorist is incorrect. It is certainly more than defensible and this case was repeated by ourselves in the opening section of this paper. Piketty’s heterodox critics have recognized the value of his empirical work. Appropriating this empirical work and placing it in a heterodox context does not necessarily involve a wholesale repudiation of the rest of the book. That said, it is certainly true that a more consistent class-based approach would alter the accumulation of the empirical quantities at the centre of Piketty’s argument. As Erik Olin Wright (2015) points out, the inclusion of working class housing in capital is questionable. Even more consequential in the current period is the failure to understand the high levels of executive remuneration as a transfer of surplus. Indeed, it is this particular failure at an empirical level, more so than the inadequacies of marginal productivity theory, which demonstrates the necessity of a proper theorization.

3. Heterodox economics, classical political economy and SSA theory

24The major alternative to the neoclassical scarcity approach today is a modern version of political economy which comes down from classical political economy through Marx and finds its institutional expression within the diverse community that has become known as “heterodox” economics. Indeed, as Lawson (2006) and Martins (2014) have argued:

[T]he distinction between heterodox economics and mainstream economics can be seen as a modern form of Marx’s distinction between classical political economy and vulgar economy. Heterodox economics, like Marx’s development of classical political economy, provides a conception where human agency and social structure presuppose each other. (Martins, 2014, p. xix)

25The complex nature of the contemporary crisis of global neoliberal capitalism (Kotz & McDonough, 2010) has driven home the need for such an approach – both in terms of understanding and responding to the crisis (Goldstein & Hillard, 2009; Lavoie, 2014, Chap. 1; Martins, 2014; Stilwell, 2016):

The world economy is in the grips of a financial crisis that has the potential to rival the Great Depression. Yet, the readily visible aspects of the crisis are merely the superficial expression of a deeper crisis that revolves around the nexus of under-consumption, over-investment and financial crises. An integrated heterodox approach is uniquely suited to understand these interconnected crisis components due to its focus on the interrelations between social classes, the distribution of income, effective demand, Marxian competition, crisis theory, Keynesian uncertainty, financial innovation and fragility, endogenous expectations, and structural and institutional change. (Goldstein, 2009, p. 263)

26Despite appeals for a revival of the classical political economy approach in the opening and closing chapters of his book, Piketty largely reverts to a mainstream analysis in the intervening pages. It may be, however, that Piketty’s results are best understood within a broad Marxian political economy framework. In this respect, SSA theory has successfully integrated the various traditions and strands of heterodox economics, each having already built upon a specific aspect of Marx’s classical political economy approach. Social structure of accumulation (SSA) theory provides us with a more unified heterodox framework within which to analyse long waves of capital accumulation (Kotz et al., 1994; McDonough et al., 2010; McDonough et al., 2014; McDonough, 2017). Each “stage” of capitalism is characterised by a particular institutional form – a new SSA – comprising a self-reinforcing set of economic, political, and cultural institutions. Initially, the SSA stabilises long run expectations of profitability and, in turn, promotes stable accumulation. Over time, the very process of expansion undermines itself and leads to a crisis in the SSA, as the underlying contradictions of capitalist accumulation – notably, the capital-labour class relation – reassert themselves in the form of an institutional blockage. The economy enters into a long period of stagnation and/or economic instability; until, that is, arising out of the indeterminate process of class struggle, a new capitalist SSA emerges or the capitalist mode of production is superseded outright (McDonough et al., 2010, p. 1-4).

27The SSA theory is firmly rooted in a Marxist understanding of the longer-term, transhistorical dynamics of capitalist development, which emphasises the system’s tendency towards periodic structural crises arising out of class conflict (Mandel, 1995 [1980]; Gouverneur, 1983; Vidal et al., 2015; Kotz, 2017). Such structural crises have occurred in the USA and Western Europe in the 1870s-90s, 1930s, 1970s, and again since 2008. An institutionalist influence allows for the possibility of capitalist recovery as the system moves through intermediate stages – that is, intermediate in length between particular historical conjunctures and overall capitalist history (McDonough, 2007). While these Marxian and institutionalist insights provide strategic direction to working people, in line with structural and conjunctural conditions, the post-Keynesian influence incorporates a complimentary consideration of the roles of money, credit and aggregate demand in reproducing a monetary production economy (Kotz, 1991; Trigg, 2006; McDonough et al., 2010, p. 2). In addition, SSA theory is compatible with the wider ecological and feminist concerns of the heterodox social surplus approach (Lee & Jo, 2011; Klitgaard & Krall, 2012; Martins, 2014).

4. Piketty’s results and SSA theory

29Many analysts have noted the relatively low and stable degree of inequality in the income distribution in the U.S. from the late 1940s through the 1970s, followed by rising income inequality after around 1980. Piketty documented that pattern for the U.S. (Figure 1) and a similar pattern in other, although not all, countries. We argue that the social structure of accumulation (SSA) theory of the evolution of capitalist systems can contribute to uncovering the reasons for that pattern. We will argue that the observed pattern cannot be adequately understood based on principles that are derived from capitalism in general, or based on analysis of capitalism in general supplemented with accidental events such as major wars. An analysis of the institutional form of capitalism, which changed significantly around 1980, can make a significant contribution to explaining the major shift in the trend in income inequality after 1980.

31Piketty claims that, if r > g for a significant period of time, then two consequences follow. First, the ratio of wealth to income (W/Y) in the society increases, an inference that depends on assumptions that r does not fall and that all profit is accumulated as additional wealth. That is, as long as r is sufficiently greater than g so that the accumulation rate exceeds g, allowing for some consumption out of profit income, W/Y will grow. Since the relevant comparison is between the after-tax rate of profit and g, taxation of profit can affect the result.

33Piketty argues that r tends to be significantly greater than g throughout history, except when dramatic events cause a reversal of the relationship. While no theoretical reason for this relationship is provided, Piketty gives substantial empirical evidence for it. He suggests that r tends to be in the 4-5% range (Piketty, 2014, p. 358-359) while output growth is close to that range for significant periods of time only when a country is catching up to the world technological frontier, a condition that does not last.

34In a capitalist system, if all forms of income other than labour and property income are excluded, then the trend of distribution of income among individuals is affected by three factors: 1) the trend in the class distribution of income, between labour and property income; 2) the trend in the distribution of labour income; 3) the trend in distribution of property income. As Piketty’s data show, the trend in income inequality among individuals has varied over time and place. For the U.S., his Figure I.1 for the share of the top 10% in national income shows the following trends: 1) 1910-1928: rising to almost 50%; 2) 1930s: falling rapidly to about 45% where it stabilizes; 3) 1940s: precipitous drop to about 35% where it stabilizes; 4) 1950s-1970s: period of stability at just under 35%; 5) 1980-2010: rise back to 50% in 2007, after which it falls slightly in the economic crisis.

35We will concentrate on how to analyze the two distinct periods in the trend in income inequality in the U.S. following World War II. First, the late 1940s to the about 1980 was a period of a relatively low and stable degree of inequality, followed by a second period from about 1980 to 2007 of rapidly rising inequality. The relation between r and g over those two periods might tell us something about those two trends, but at most it would involve the trend in inequality between profit and wages. As Piketty’s own data show, rising inequality in the distribution of labour income played a major role in the shift in trend from the first to the second period.

36The view that the trend in income inequality in a capitalist system cannot be fully explained by characteristics of capitalism in general is supported by the evidence that the trend has been quite different in different periods in the capitalist era. Characteristics of capitalism in general might be involved in the explanation if combined with one or a few accidental developments, such as major wars, as Piketty argues, or innovations. However, neither capitalism in general by itself, nor combined with accidental developments, can offer a fully adequate explanation, which requires taking account of the particular form of capitalism in a given time and place.

40Figure 4 indicates the large difference in the trend in income inequality between the two periods, showing the total increase in average real family income for the five quintiles of the population and for the top 5%. The first period was a somewhat equalizing one by this measure. The real income of all five quintiles approximately doubled or more, but that of the lowest quintile grew the fastest, while the top quintile’s income grew the slowest. The average real income of the top 5% grew even more slowly. The difference after 1979 is striking. From 1979 to 2007 income growth increases consistently from the bottom to the top quintile, with the top 5% growing the fastest. The real income of the bottom fifth grew barely at all, despite the rapidly rising female labour force participation of the second period, which added a second wage earner in many families.

41How can this stark difference between the two periods be explained? A central claim of SSA theory is that: “Capitalists cannot and will not invest in production unless they are able to make reasonably determinate calculations about their expected rate of return” (Gordon et al., 1982, p. 23). An SSA promotes capital accumulation by fostering stability and predictability that enable capitalists to form such expectations. To that early expression of SSA theory has been added, by later works of that school, the argument that an SSA also promotes a high rate of profit, which is necessary to promote accumulation.

43These two SSAs also differed in the degree of regulation of markets. In the first SSA the state exercised a significant degree of regulation of business and of market exchange, far beyond the state role prior to the 1930s. However, the state was not the only agency that regulated the market. Trade unions also did so through collective bargaining, as did corporate bureaucracies which established a restrained, co-respective form of competition between large firms and typically chose the CEO by promotion from within rather than from an outside market for CEO. These features of the first SSA explain why it is reasonable to identify it as a “regulated” SSA, or “regulated” capitalism.

45Kotz (2015, Chap. 2) explores the relation between these two ways of characterizing and contrasting the two SSAs. That is, they differ in the mode of regulating the capital-labour class relation and in the extent of regulation of market activity by non-market institutions. It is the latter dichotomy that gives rise to the concepts of “regulated capitalism” and “neoliberal capitalism.” Briefly stated, the relation between the two ways of characterizing the two forms of capitalism is found in the role played by the institutions and dominant ideas of regulated capitalism in promoting capital-labour compromise, while the institutions and dominant ideas of neoliberal capitalism promote relatively full domination of capital over labour. When a decisive part of big business shifted from acceptance of capital-labour compromise to a drive to crush organized labour around 1980, the promotion of neoliberal restructuring was the means to achieve that end (Kotz, 2015, Chap. 3).

Table 1. The ideas and institutions of regulated and of neoliberal capitalism in the U.S.

	Regulated Capitalism in the U.S. after 1945	Neoliberal Capitalism in the U.S. after 1980
1. Dominant ideas and theories	Keynesian ideas and theories	Economic ideas and theories that view an unregulated market system as optimal and view state intervention as a threat to economic efficiency and individual liberty.
2. The Global Economy	The Bretton Woods System, with fixed exchange rates, a gold-backed U.S. dollar as the world currency, and a moderately open world economy although with tariffs and some obstacles to free capital movement	Removal of barriers to the movement of goods, services, capital, and money across national boundaries.
3. Role of Government in the Economy	a) Keynesian fiscal and monetary policies aimed at a low unemployment rate and an acceptable inflation rate b) Government regulation of basic industries c) Government regulation of the financial sector d) Social regulation: environmental, occupational safety and health, and consumer product safety e) Strong anti-trust enforcement f) A high level of provision of public goods and services including infrastructure and education g) Welfare state h) Progressive income tax	a) Renunciation of aggregate demand management b) Deregulation of basic industries c) Deregulation of the financial sector d) Weakening of regulation of consumer product safety, job safety, and the environment e) Weakening of anti-trust enforcement f) Privatization and contracting out of public goods and services g) Cutbacks in or elimination of social welfare programs h) Tax cuts for business and the rich
4. The Labor Market	a) A major role for collective bargaining between companies and unions b) Large proportion of stable, long-term jobs	a) Marginalization of collective bargaining b) Casualization of jobs
5. The Corporate Sector	a) Co-respective competition b) Corporate CEOs promoted from within the corporation c) Bureaucratic principles govern relations within corporations d) Financial institutions mainly provide financing for non-financial business and households	a) Unrestrained competition b) Corporate CEOs hired from outside the corporation c) Market principles penetrate inside corporations d) Financial institutions shift toward new types of activities and become relatively independent of the non-financial sector

47Source: authors

49Neoliberal capitalism has been based on a more or less opposite relation between labour and capital -- relatively full domination rather than compromise -- and its institutions are more or less the opposite of the institutions of regulated capitalism. Neoliberal capitalism greatly weakened the bargaining power of labour. The more fully open global economy put US workers in competition with low-wage workers elsewhere, and a substantial literature has found evidence that this played a role in wage stagnation or decline while profits continued to rise. The abandonment of macro policy aimed at a low unemployment rate resulted in a higher average unemployment rate in the 1980-2007, of 6.1%, which reduced labour’s bargaining power. The deregulation of infrastructure sectors led to very large cuts in wages in those sectors. Cutbacks in the welfare state lowered labour’s fallback position. The cuts in corporate tax rates along with the declining progressivity of the personal income tax and rising regressive payroll taxes contributed to widening capital-labour after-tax income inequality. The labour market institutions of neoliberal capitalism have played a major role in the widening class income gap, as previously strong trade unions in basic industry have been largely unable to fend off huge pay cuts, especially for newly hired employees. The intense competition of neoliberal capitalism presses capital to use any means to drive down labour costs.

50The radical change in labour’s bargaining power in the neoliberal era is indicated by the changed effects of a low unemployment rate on wages. In the regulated capitalist era in the U.S., the low unemployment rate prior to the peak of each business cycle led to real wages rising faster than labour productivity, a resultant squeeze on profits, and a tendency for inflation to accelerate. However, in the 1990s, when a decade-long expansion eventually pushed the unemployment rate down well below 5%, while real wage growth picked up somewhat as labour’s bargaining power increased, it did not rise faster than labour productivity and inflation remained quiescent (Kotz, 2009). Marx’s reserve army effect was not observed in the neoliberal era due to the structurally weak bargaining position of labour.

51Regulated and neoliberal capitalism may also have opposite effects on the distribution of labour income. While there was significant wage inequality in the regulated capitalist era, in the neoliberal era a small part of the wage-earning class did well while the vast majority did not, giving rise to the observed phenomenon of the disappearing middle, where “middle” must be defined to reach high up. Regulated capitalism facilitated and encouraged solidarity within the working class which tends to reduce wage inequality, while neoliberal capitalism promotes individual pursuit of self-interest at the expense of others which tends to increase wage inequality.

52A few high-wage groups have been able to stand against the wind coming from neoliberal restructuring. Some groups of workers who were not exposed to international competition and whose unions remained strong have done well, such as longshore workers and some skilled construction workers. However, the great majority have not been able to stand up against the powerful forces driving disequalization. Industrial union strength depends on solidarity, and when solidarity is strong, the lowest-paid workers benefit disproportionally. When the unemployment rate is low, all workers have greater bargaining power, but the least powerful, low-wage segment of the working class benefits the most. A particularly important institutional change in the neoliberal era, under the heading of cutbacks in the welfare state, has been the big decline over time in the real minimum wage, which increases wage inequality as the real wage of the bottom part of the distribution falls.

53Neoliberal capitalism might also tend to increase inequality in the distribution of property income, although the case is not as straightforward as it is for income inequality between capital and labour and among labour income earners. Regulated capitalism, with its regime of restrained competition, virtually banished the threat of bankruptcy for large corporations. The whole set of regulations of market activity made outcomes less variable for capital as well as for labour. Neoliberal capitalism, by freeing capitalists to seize any opportunity, productive or unproductive, generates a few big successes and many failures. Neoliberal restructuring brought a “winner take all” economy, whose disequalizing impact affects the top labour income earners (athletes, actors) as well as the distribution of property income. The widely recognized rocketing upward of CEO pay in the neoliberal era resulted from the unleashing of the market. Bureaucratic job ladders in large institutions in the regulated capitalist era had produced limited pay differentials for executives, while the shift to hiring CEO’s from a market outside the firm led to escalating CEO pay. As was noted earlier, CEO pay here is viewed as largely a form of property income, and this development enabled those who landed positions in the biggest and most profitable institutions to move near or even into the billionaire range.

Concluding comment

54An effort to quantify the size of the effect on inequality from individual institutional or policy changes in the neoliberal era is difficult, and perhaps impossible, to carry out successfully. A whole new regime replaced an earlier one around 1980. The capital-labour compromise at the heart of regulated capitalism was relatively equalizing, and all of the institutions of regulated capitalism worked together to promote a relatively low and stable degree of income inequality. The dominant ideas of regulated capitalism reinforced its effect on income inequality. When neoliberal capitalism rapidly replaced it around 1980, the process went into reverse. A thoroughly dominated working class could not defend itself, and the institutions of the regime worked together to drive rising income inequality. Neoliberal ideas supported the new regime and defended the effects on income distribution either by denying them or by claiming that any change in income distribution must be desirable, based on the neoliberal theory that in a competitive market system income distribution reflects both contribution and sacrifice and so is justified. Contrary to this belief, freeing markets tends to produce rising income inequality without regard to merit or sacrifice, as the quickest and the most unscrupulous grab whatever is available. In this way a political economy approach is essential to explain the origin of Piketty’s observed changes in income inequality over time in capitalist economies.

55We have also argued, along with others, that Piketty’s utilization of marginal productivity theory is difficult to defend. Unlike others, we have contended that there is potentially, not so much an alternate, but a parallel political economy reading of Piketty’s volume. The success of an SSA perspective in analysing Piketty’s central results in US economic history perhaps makes this political economy reading, rather than Piketty’s neoclassical passages, more salient. It is regrettable that Piketty did not choose to emphasize this perspective in drawing conclusions from his meticulously assembled numbers. An SSA style analysis would have provided a broader context within which his wealth tax proposals could be considered. To reverse the socially harmful rise in income inequality requires, not just changing one or a few institutions or policies, but replacing neoliberal capitalism with a system that will bring an equitable distribution of income and guarantee a decent living standard for all. The 2008 financial and economic crisis significantly delegitimized neoliberal capitalism, creating conditions that may in the years ahead stimulate the growth of popular movements for economic justice that represent the only means for achieving such a transformation.

56The heterodox critique of Capital is perhaps having an impact. Perhaps we can even leave Piketty with the last word. In a recent interview he was asked the following question:

Are you saying that notwithstanding your rhetorical strategy to communicate with neoclassical economists on a ground where they feel comfortable, in your view it is not just that you reject marginal productivity explanations of income for those at the very top but more generally as well?

Piketty’s response was:

Yes, I think bargaining power is very important for the determination of the relative shares of capital and labor in national income. It is perfectly clear to me that the decline of labor unions, globalization, and the possibility of international investors to put different countries in competition with one another–not only different groups of workers, but even different countries–have contributed to the rise in the capital share. (Dolcerocca & Terzioglu, 2014)