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It seems that since thepublication of Thomas Piketty’s Capital, thebook has garnered widespread attention among the general public and economistsaround the world. This attention has come in the form of much discussion andargumentation both in publication as well as online. Again, another economist’stheory has come under detailed scrutiny, and once again, one economist’s theorynever simply holds up to the barrage of questions aimed at toppling his empire.The multifaceted nature of economics, of human behavior, and those two thingscoming together then, is perhaps ultimately the most convoluted science.However, among all the economic theories and predictions that often notoriouslywrong, Piketty has made a call for economists to go back to the scientificbasics of studying historical and empirical data. Such data, derived fromFrance and Britain, which stretches back to the 17th century, is thegreatest backbone of Capital, withoutwhich none of his ideas, predictions, and propositions would have anycredibility.
However, despite the sheer amount of data that is compiled andthen presented to us, the validity of that data nonetheless still poses a largeproblem, from which Piketty concludes that a global progressive tax isnecessary in order to prevent an apocalyptic wealth inequality. Just from afirst glance, any one would say that is highly problematic that best. In orderto attack this problematic conclusion, we shall take a look at some of his dataand then inherited wealth, which to Piketty is a highly important factor thatplays a large role in wealth inequality. We will first take a look at the problemPiketty is seeing with the direction capitalism is headed towards beforeconsidering his problematic conclusion in light of his inheritance argument. Thestudy of economics, like every science, will always be on some level “imperfectand incomplete” (1).
However, having sifted through a large amount of datawhich “only since the end of the twentieth century” has the world had “statisticaldata and… the indispensable historical distance to correctly analyze thelong-run dynamics of the capital/income ratio and the capital-labor split,”Piketty has concluded that capitalism tends to brew economic inequality due tothe inevitable accumulation of the wealth of capital, which grows faster thanthat of labor’s: r > g or r – g > 0, where r is understood as the averageannual rate of return on capital and g is annual economic growth (292). Thisequation is historically true for well-established societies in which growth isslowing down, or is already quite slow. In such societies, accumulated wealthbecomes more important than income from labor, which means inherited wealth ismore valuable than any large salary.
If the already rich are sitting on a largeamount of capital, and this is compounded with high returns on capital, thenthe results will be devastating over a long period of time. The wealth willinevitably be in the hands of the very few, while the rest of society suffers.These claims are valid insofar as they are predictions and conclusions drawnfrom the data Piketty compiled.
However, are these predictions accurate, and ifthey are, for what reasons are they accurate? Here I will begin to outline someof his thinking that is supported by his graphs of the data he compiled. Lookingat beta (capital/income ratio) from the 1700s up to 2000s, we see two largeshocks that occurs right along one another. These shocks were the two worldwars, and in Britain and France, before the wars, beta was at 700%, but rightafter, beta dropped to around 300 percent and remained there until mid 20thcentury when it began climbing, and finally this century he projects that betawill once again reach that 700% of the belle époque/Jane Austen days.What were some of the reasonsthat the world wars caused such a large shock in the capital/income ratio? Waralways forces countries to mobilize human labor, as they all scramble toassemble weapons, manufacture heavy machinery, and so on. War also destroyslarge amount of capital, and in post war years there must be human labor torebuild and to reconstruct cities and infrastructure. Even more significanthowever is after the first world war, the plunge was attributed to spendingforeign capital in order to pay for the war.
Figure 3.1 and 3.2 show largeshrinkage of all these assets of Britain and France respectively. The followingincrease in capital after the two world wars is mostly just in housing, under400% in Britain and over 400% in France. Comparing these two countries tothe United States, the states has had a more consistent increase, butnonetheless experienced the shocks, though not as drastic. Beta increased fromover 300% 1770 to almost 500% in 1910, falling only almost 100% due to WorldWar I, and bounced back just as quick due to speculation in the stock market,though the second world war caused beta to plunge 120% to around 380%. For thedecades later, the United States has seen a slow but consistent growth to about450%, the slow rise mostly having to do with an increase of immigrants, whichincreases the amount of people to divide capital between. Taking these data together then,Piketty tries to create a world beta from 1870 to 2010, and keeps projectingthat ratio until 2100, which is highly questionable.
Y Whether the threecountries together is able to reflect the general direction of the economy ofthe world, no one will be able to conclusively say, and whether theseprojections are accurate, only time will tell. The world ratio was 500% in 1910according to him, and was 260% post world wars, and is around 440% today. Continuingthis trend, he projects 600% by 2010. This global view is also highly dubious giventhe nature of information systems and technologies and artificial intelligence,though markets are becoming more open everywhere and will lend themselves toglobalization. Hence, study of the way capitalworks and the way capital is directed in society is crucial in understandinginequality. Within capital and within labor, both have their own inequalities. Laborincome is an example, where the distribution is astoundingly unequal, as shownthrough the recent boom of supermanagers, who are considered to be financialsuperstars earning multimillion salaries by virtue of shareholders.
Now manyget educated just to be able to have a position at a prestigious financial firmin order to earn those astronomical sums of money as salaries. Piketty concludesthat the return on capital has been a historical 5%, and will not change verymuch, though recently 5% in the pre-Trump election days was a highly optimisticprojection if based on a relatively risk-averse investment portfolio. If it is true that the averagereturn on capital is steady, while growth of economic growth is slowing, ashuman labor will be replaced and the population increase will slow, then it ishighly conceivable that beta will continue to increase. Savings rates on paperaccording to Piketty are also quite steady regardless of economic conditions.All of these important factors of the economy playing together lead toPiketty’s conclusion that capital will play an increasing role in the stabilityof society, which will take power away from the hands of the many. This is the barebones version ofthe conclusions he arrived at from his data, and we are left asking somequestions.
Behind all of this, are the conclusions and questions he is makingand asking about in the graphs and numbers really form an accurate picture ofthe direction capitalism is headed towards today? Let’s then look at his solution:a global and progressive tax on capital itself, and along with it a high levelof international transparency with financial information in order to collecttaxes. This transparency can expand the limited information we currently haveand improve regulations across the globe especially in times of crisis where itis most needed. Such high level of transparency will also force governments tocollaborate with one another and share financial data. Ultimately, the systemwill be capable of estimating with a very small margin of error every singleperson’s net worth. The revenue generated by the global tax would be somehow divided between all thecountries in the world.
How that could be done without breaching current lawssurrounding safety and privacy is unclear.Piketty is motivated by manyfactors stated above, but also he wants to shut down illegal tax shelters therich use to hide their wealth from governments and avoid paying taxes. Thisalso will eliminate the harmful tax competition so prevalent in Europe, whichincentivizes people to move to countries with lower taxes.
However, the very slimpossibility that this could be a feasible policy to implement across the globemakes the proposal seem pointless. Logistics aside, would this really helpreduce inequality or simply incentivize the hiding of wealth in other ways?Would it cause more harm than good? How do we get everyone to be on board andtrust not only their own governments but also a much bigger conglomerate?Piketty is indeed aware of all these problems, and hence his statement thatsuch a proposal is utopian. The more important point here seems to be thatthere must be a drastic effort of the wealthy countries to begin wonderingabout the effects of increasing wealth inequality. Having understood Piketty’sproposal, then let us take a look at his theory of wealth inheritance, and whathe believes to be a large driving force behind wealth inequality, and willcontinue be.
Granted, “in stagnant societies, wealth accumulated in the pastnaturally takes on considerable importance,” the rentiers ultimately do notseem to be able to maintain an endless stream of income for their future generationsespecially in America with a high inheritance tax of 40% for estates greaterthan 345,000 dollars, and is staggered for values below. In order for thewealthy to keep such an inheritance as well as their children to pass on suchan inheritance, they face multiple obstacles today that tend to diminish anddilute inherited family wealth. First and the most obvious is the inevitableconsumption of a certain amount of wealth. This could be very minimal for individualslike Bill Gates and Liliane Bettencourt.Even after the super wealthycovers food, shelter, clothing and luxury items (political, philanthropiccontributions) and the maintenance of their lifestyle and items, they are stillleft with a substantial amount of wealth to pass on to their children. But oncethey pass away, the inheritance tax in America is absolutely capable ofdistributing that wealth among more and more people. This is assuming wealthypeople will not give any money away towards philanthropic deeds written ontheir will. That inheritance is then further divided among children, andmarriage is not often between two people of equal wealth.
Only in a very fewextreme cases inheritance money will promote the sort of apocalyptic inequalityPiketty sees. If the child marries someone just as wealthy, and bequeaths allof the money to one child, is very conservative with money and has a high riskportfolio that performs well throughout his life and on top of that spendsalmost next to nothing and has a tax haven to hide some if not most of it, thenwe will definitely see a troubling spike in wealth inequality in the comingyears.Today is very much different from19th century France where the top decile were landowners who had80-90% of the wealth. Though limited and even flawed empirical data thatPiketty uses suggest is moving towards inequality once again, this inequalitywill be different due to the proliferation of information technology and comingsoon, the replacement of human labor by robots. We all agree that populationgrowth is will continue to decrease, and for the middle class in developedcountries like Japan and the United States, a lot of it is due to people makingconsiderations and compromises when it comes to the quality of life they cangive to their children, and whether their own life will improve if they do havechildren. The work-obsessed Japanese tend not have children in Japan becausethey understand that the job-market is extremely tough, along with unsteadywork employment. These people’s inheritance will either be given to those closeto them, to charity, or largely spent. It is likely that these economicpressures will soon face many wealthy and developed countries in light ofrobotics as well which will inevitably replace human labor.
For others, they will not have achild unless they can provide them with a private education and unless they canafford to buy them a house. For these people, it is a matter of a standard ofliving, not about the mere birth of a child who can carry on some geneticlegacy of two human beings. Inequality here, then, is reflected by the lifechoices people make, and a mid-life crises many of these men and women mustface. This however, is hard to quantify, as it is a qualitative judgmentwhether they consider their own lives as fulfilling or not. However, we also must recognizethat based on projected statistics that validate the theory that inheritedmoney will play a larger and larger role even in middle-class families whereboth husband and wife work. Even if it were true, it is softened by the factthat people are having fewer and fewer children who are receiving bettereducations who have access to better and better healthcare. Hence the increaseof wealth inequality from 15% in 1910 in WWI back to 24% in 2030 like back in1790 (Figure 11.9) is not as dark as Piketty predicts.
This focus oninheritance does not simply favor the 1% who simply sit on their capital andput it in investments. This is rather would be more indicative of thelife-choices of people who do not live paycheck to paycheck. Those who do, whoare stuck in the bottom 50% are still left to scramble to find some job that issustainable, but there will always be a 50%, and if the lower 50% have anincrease of living standards, then there is no real issue to debate here.People who capitalize on opportunity will have higher chances of climbing thesocioeconomic ladder.
Wealth inequality is not aproblem in itself, but it is a matter of how much. There should be nothingobjectionable to a hard working person who earns a high salary who deserves toearn that salary. No reasonable person living in a capitalistic society shoulddisagree with that. That said, it is also important to keep in mind the bottom50% who do not have equal opportunities to climb the socioeconomic ladder, andit is rightly said by Piketty that “modern growth, which is based on the growthof productivity and the diffusion of knowledge, has made it possible to avoidthe apocalypse predicted by Marx and to balance the process of capitalaccumulation” (294).
Education has its own problems, and it might be necessaryin the future to incorporate money-managing skills within school curriculums.This way, a low-income earner can have the tools and the knowledge to become acapitalist if he chases good opportunities. These seem to be reasonablesolutions, not a global progressive tax that is too difficult to implement inthis day and age.At this point it is clear thatthere are many areas that could use reforming in the current economy, but theoverarching theme that Piketty should have emphasized more on is labor and theinequality of labor, which is where new ideas are formed. Currently, teachers,research scientists, are poorly paid and those areas are usually poorly funded.Profits generated from new ground-breaking ideas that benefit society are oftenearned by financial and logistical sectors, not the creative ones.
Futurereform for the economy should focus on these ideas that allow a constant andgreater growth and diminishes the ever-increasing influence of capital. In conclusion, Piketty’s accountof wealth inequality has a lot of useful information, but ultimately his advicefalls short of anything practically implementable. He seems to have given toomuch weight to the harmful reasons why wealth inequality is increasing, but notenough on current bad policy that does not encourage the young to pursue areasof the world that are worth expanding on. Instead, they attend prestigiousschools and study economics and finance in order to land that dream job of asuper manager at a top firm.
Of course, that is also an exaggeration, but thepoint is to garner interest in new sectors where the economy can help ideastake off, give large growth, and make a positive impact on the world. Incentivizinginnovation seems to be the practical solution here.