Friday, May 2, 2014

Piketty: Inequality is the Problem, Government is the Cure

You get the point pretty early on in Thomas Piketty's Capital in the Twenty-First Century. On the first page of the Introduction he writes:
When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.(p.1)
It does?  But, writes Piketty, there "are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests"(p.1).

Thank goodness for that!  Notice the assumption: capitalists work for private interests; government works for the general interest.  You mean like Sen. Harry Reid (D-NV)?

Piketty develops his larger argument in the introduction.  First, he cites David Ricardo, who argued in 1817 that the natural scarcity of land would result in the almost unlimited  rise in the value of land and therefore rents.  The landlords would inherit the earth, "upsetting the social equilibrium."  So Ricardo proposed a "steadily increasing tax on land rents."(p.6)

Then  came Marx.  He extended Ricardo's principle of accumulation of land rents to capitalism as a whole, the "inexorable tendency for capital to accumulate and become concentrated in ever fewer hands, with no natural limit to the process."(p.9)  He proposed an "apocalyptic end" to capitalism.

In other words, both Ricardo and Marx proposed that wealth would concentrate without limit and that something should be done about it.  Remember this was before Stein's Law that if something cannot go on forever, it will stop.

But then after World War II along came Simon Kuznets, who showed that, since World War I, inequality had been declining, so there was nothing to worry about.  Let capitalism do its thing.

Unfortunately, writes Piketty, the reduction in inequality stopped right after World War II.  On page 24 he shows a chart of the top 10% share of US income from 1910 to 2010.  It's 40 percent from 1910 to 1920, rises in the 1920s to 45 percent and stays there right through the Great Depression.

Then suddenly, the top 10% share drops off a cliff from 45 percent to 35 percent in two years between 1941 and 1943 at the start of World War II.  It stays there for the next 40 years until the 1980s.  Since 1980 the top 10% share has gone steadily up, hitting 40 percent of income around 1990, 45 percent in the late 1990s and briefly hitting 50% right before the Great Recession.

Then Piketty shows a chart of capital/income ratio in Europe for 1870 to 2010 on page 26.  It shows that the "market value of private capital" in the late 19th century was 6 to 7 times national income.  Then after the two world wars it crashed to two to three times national income.  Ever since 1950 the ratio has been climbing.  In France and Britain the ratio is back to 5 times national income.  In Germany it's back to 4 times national income.

In other words, "the process by which wealth is accumulated and distributed contains powerful forces pushing towards... an extremely high level of inequality."(p.27) and these "forces of divergence" may be getting the upper hand unless we do something about it.

Discussion Points
  1. What does it mean when the "rate of return on capital" exceeds the growth in "output and income"?  Does it mean that the capitalists are grabbing the goodies, or is capital income the price we pay for growth?
  2. It's pretty obvious why the top 10% share of income in the US dropped in 1941-43. Income taxes, with the top rate going to 90 percent, where it stayed until the tax rate cuts started in the late 1970s.  Over the next 20 years taxes on income and capital were reduced again and again. But what does the spurt in top 10% income share mean?  Does it mean that the most able grabbed more income?  Did they hide their income in the high tax years?  Or does it mean that capitalism automatically rewards achievers?
  3. Piketty takes it for granted that inequality is a scandal.  But is it?  Put it this way.  In the agricultural era the landed warriors collected rent because they had seized the land and forced the peasants to pay them for the privilege of farming the land.  OK, bad, bad, bad, as in barons of the crags.  But capitalism is different.  Today people with savings put money into commercial and industrial ventures.  If the venture succeeds (i.e., provides products and services that people want) the investors reap huge benefits.  If it fails they lose their money unless government comes in and bails them out.
  4. What about the notion in economics that interest on a loan is an example of "time preference?"  Money in the here and now is worth more than money in a year, so you have to compensate someone to forego spending money now.  We pay workers to forego their leisure; we pay capitalists to forego immediate spending.  What's the scandal? (In a later chapter Piketty writes that time preference is "simplistic."
But I still have my question.  What does it really mean when capitalists are making tons of money?

Introduction

Part One: Income and Capital

Income and Output

End of Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

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