Suddenly, a new economist has been making waves — and he is not on the right. At the Institute of New Economic Thinking’s conference in Toronto last week, Thomas Piketty’s book Capital in the Twenty-First Century got at least one mention at every session I attended. You have to go back to the 1970s and Milton Friedman for a single economist to have had such an impact.
Like Friedman, Piketty is a man for the times: For 1970s anxieties about inflation, substitute today’s concerns about the emergence of the plutocratic rich and their impact on economy and society. Piketty is in no doubt that the current level of rising wealth inequality — which is set to grow still further — now imperils the very future of capitalism and he has proved it.
It is a startling thesis and one extraordinarily unwelcome to those who think capitalism and inequality need each other.
“Capitalism requires inequality of wealth,” runs this right-of-center argument, to stimulate risk-taking and effort, and governments trying to stem inequality with taxes on wealth, capital, inheritance and property is like killing the goose that lays the golden egg.
Therefore, British Prime Minister David Cameron and Chancellor of the Exchequer George Osborne faithfully tout lower inheritance taxes, refuse to reshape the UK’s council tax and boast about its business-friendly low capital gains and corporation tax regime.
Piketty deploys 200 years of data to prove them wrong, saying that capital is blind. Once its returns — investing in anything from buy-to-let property to a new car factory — exceed the real growth of wages and output, as historically has always happened (excepting a few periods such as from 1910 to 1950), then inevitably, the stock of capital will rise disproportionately faster within the overall pattern of output, so wealth inequality rises exponentially.
The process is made worse by inheritance and, in the US and UK, by the rise of extravagantly paid “super managers.”
High executive pay has nothing to do with real merit, Piketty writes — for example, it is much lower in mainland Europe and Japan. Rather, such high pay has become a Western social norm permitted by the ideology of “meritocratic extremism,” which is, in essence, self-serving greed to keep up with other rich individuals. This is an important element in Piketty’s thinking: Rising inequality of wealth is not immutable. Societies can indulge it or they can challenge it.
Inequality of wealth in Europe and US is broadly twice the inequality of income — the top 10 percent have between 60 and 70 percent of all wealth, but merely 25 to 35 percent of all income. However, this concentration of wealth is already at pre-World War I levels and heading back to those of the late 19th century, when the luck of who might expect to inherit what was the dominant element in economic and social life. There is an iterative interaction between wealth and income: Ultimately, great wealth adds unearned rentier income to earned income, further ratcheting up the inequality process.
The extravagances and incredible social tensions of Edwardian England, belle epoque France and the robber-baron US seemed forever left behind, but Piketty shows how the period between 1910 and 1950 — when that inequality was reduced — was aberrant. It took war and depression to arrest the inequality dynamic, along with the need to introduce high taxes on high incomes, especially unearned ones, to sustain social peace. Now the ineluctable process of blind capital multiplying faster in fewer hands is underway again — and on a global scale. The consequences are “potentially terrifying,” Piketty writes.