“Capital” – Thomas Piketty’s economic revival
September 10, 2014
“So many books, so little time” (quoting Lonnie Shalton) – a statement so sad and yet so true. Some of us who used to frequent public libraries and book stores (when they were still popular, before the advent of digital downloads) can remember the feeling of euphoria, even goose bumps, when we walked in amongst those thousands of books written over thousands of years, of which we only have time to read a small fraction in a lifetime. We avid and voracious readers seem to bask in a sea of fiction, non-fiction, non-fiction disguised as fiction, fiction disguised as non-fiction – all entertaining to some degree, some enlightening, some a waste of time – but we continue to read on, in search of meaning, resolve, order, confirmation of our personal beliefs – answers to life’s persistent questions – you know, like Guy Noir, the famous private eye from Lake Woe-Be-Gone, a la Prairie Home Companion.
Thomas Piketty, in his recently published tome, “Capital in the Twentieth Century”, has been acclaimed as having produced an important historical and analytical review of economic maladies of the economies of the UK, France, Germany, and the US, and mathematically and factually supported economic prognostications and recommendations for the current century.
Piketty, a French economist who lived, studied, and taught in the US for years, produced, with his collaborators, 570 pages of economic history supported with facts, figures, graphs, illustrations, and references to support his findings – a meaningful, thought provoking, product which could be a textbook for advanced economics courses (if they continue to use books in higher education). He provides empirical evidence refuting some economic theories and supporting others by comparing economic trends over centuries and illustrating the values of egalitarian economic policies and the devastation of in-egalitarian principles of oligarchic and aristocratic societies.
Some people wouldn’t find the book engaging enough to stay with to the end simply because much of the content is specific to economic theory and is primarily written in the jargon of economists.
So, although the book is highly recommended, for those who would prefer not to toil through 570 pages, allow me to summarize a bit:
Piketty believes that inequality occurs when the rate of return on capital is greater than the rate of economic growth over an extended period of time. In other words, if capital commands a rate of return of 5% and the growth rate is 1%, wealth accumulation is highly concentrated with typically 90% of capital owned by the top 10% and 50% owned by the top 1%. This proved to be true throughout history right up to WWI. When this occurs, inheritance dominates over saving, wealth from the past grows more rapidly than savings from work, “the past tends to devour the future.”
The two world wars, and the public policies that they necessitated, played a large role in reducing inequalities in the 20th century until the 1970s and 1980s and then they started rising quickly thereafter.
The US is now at a record level of inequality of income from labor, probably an all-time high. The increase reflects an unprecedented explosion of elevated incomes from labor for top managers of large firms which creates a separation from the rest of the population.
The inequality in the distribution of income peaked in 1929 with 50% going to the top 10%, dropped to 45% by 1940, dropped to 30-35% by the mid 1940s, remained there until 1980, then started up, peaking at 50% in 2007-2008. The bulk of the growth was realized by the top 1%, who went from 9% of national income in 1970 to 20% in 2000-2010.
(Well, we know what happened from 1980 until 2008 – Reagan, Bush, Clinton, and Bush – all corporatists and trickle-down theorists, all sleeping with the bankers of Wall Street. (My words, not Piketty’s).
Piketty states that, if the trend continues, the top 10% will be raking in 60% of national income by 2030. (That is not a misprint, 60% of income to 10% of the people)
Piketty states that “there is no ineluctable force standing in the way of a return to extreme concentration of wealth and no guarantee that the distribution of inherited capital will not ultimately become as inegalitarian in the 21st century as it was in the 19th. The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion.”
“No one denies that it is important for society to have entrepreneurs, inventions, and innovations. The problem is that the entrepreneurial argument cannot justify all inequalities of wealth, no matter how extreme, no matter how justified inequalities of wealth may be initially, fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond all possible rational justification in terms of social utility. This is the main justification for a progressive tax on the largest fortunes worldwide.”
Piketty suggests a tax rate in the US of 80% on incomes over $500,000 to $1 million and perhaps 50% to 60% for incomes over $200,000 in order to invest more in health and education and reduce the federal deficit.
He suggests a tax on capital, a flat tax of 15% on private wealth would yield enough to reimburse all of the public debt.
The purpose of the tax is not to finance the social state but to regulate capitalism and to stop the indefinite increase in inequality of wealth and to regulate the banking system to avoid crisis.
Piketty has no particular liking for public debt and states that it is a backhanded redistribution of wealth from the poor to the rich. Private wealth rests on public poverty.
This superficial summary in no way gives justice to the enormity of knowledge provided by this work, it is just a smattering, a teaser, for those who have interest in the subject and the patience to focus on his message. His message is loud and clear and one that we should pay attention to now rather later.
He thinks inequality of income and wealth is unhealthy to say the least and an obstacle to maintaining a viable economy, free from oligarchy and aristocracy, two structures of society which have never prevailed for any appreciable period of time. This isn’t the exact way that he stated it, but the way it appeared to this reader.
It is impossible to begin to explain the value of Piketty’s message in a few paragraphs. It would be presumptuous and misleading to even attempt. This is just a taste of the message, a small taste. He has received much acclaim from those in his profession, all of whom are qualified to speak on the subject. He doesn’t even claim to be right in his assumptions, expressing the fact that all of the evidence of the past isn’t available and none of the future is available or predictable.
Think about it!
Convince someone today to help us elect better leaders, please!