Piketty’s Capital

With the success of the free market system in China and the collapse of the Soviet Union, the world has reached consensus over the best economic system. Capitalism is now the standard way of organizing most economies around the world. Along with its wide adoption, came the creed that capitalism creates prosperity and raises people out of poverty. This seems true more than ever in the 21st century developing nations. In China, for example, more people have risen from poverty and a middle class has been created. Prosperity has always been the promise of capitalism in western nations. In America, in particular, the Baby Boom generation grew up in a world where one’s labor allowed her to access a middle-class standard of living providing for herself and her children. However, in the 21st century Western World and while China was rising under the eyes of everyone, a new reality started to set in. This fact has been brewing since the end of the miracle 1990s decade but has been primarily accentuated by the financial crisis of 2007-2008. That was the reality of high unemployment and low wages. The promise that through hard work everyone will get to middle-class status seems to have evaporated. At the same time, those people who were at the top of the economic food chain have seen their wealth increase at a breakneck pace. That resulted in considerable inequalities in every capitalist nation on the globe. With that in mind, a book in 2013 came to shatter the global consensus on capitalism. This book was “Capital in the 21st century” (or “Le Capital dans le XXI siècle”) by French economist Thomas Piketty. Spanning over a thousand pages and through historical research going back 300 years, Piketty analyzed capitalism as an inequality generating machine. He concluded that Capitalism creates inequality as a direct consequence of its proper application, and not because of its failure as a lot of people claimed. Indeed, this all goes down to the fact that the rate of return on capital “r” is greater than the growth rate of the economy “g”. Which means that capital grows faster than wages do in an economy. The result is that a wealthy heir will see his fortune grow faster than workers and will be able to live off it, not work and still have more money than what he inherited to give to his heirs. Piketty analyzed mainly the economies of his native France going back to the 18th century as well as the economies of Great Britain and the United States. He found that throughout most of this history, the economic growth rate was low. While the rate of return of capital was high. One explanation was the relative scarcity of Capital which demanded a premium when invested. He found that the periods of high economic growth in western nations over the 20th century were a result of wars and rebuilding. In wars, fortunes get destroyed, so the wealthy stop earning their high rates. While more money is invested in postwar reconstructions resulting in high growth rate. But this is rather the anomaly. In peacetime, money starts accumulating and demanding a higher rate of return. “You should be working in politics, we need people like you”. So says Lea Salame the Franco-Lebanese journalist to Professor Piketty on the late night french show “On s’est pas couché” (we didn’t go to sleep). Indeed, Piketty has become a huge celebrity the world over and especially in his native France where he is held up with pride as the leading French economist. The socialist government of Francois Hollande consulted him on economic matters, however, there was a falling out. Piketty is especially popular among the western left wing and American liberals. Paul Krugman in one interview expressed great admiration for Piketty’s work. He said that inequality has been long neglected by modern-day economist as well as the issue of accumulated wealth. In that respect, Piketty was doing an excellent service to the discipline of Economics. What might have made Piketty part of the global zeitgeist is the disappointment of the Millennial generation? Today a significant portion of them are unemployed or underemployed. In some developed countries, this figure is a double-digit percentage. This part still lives with their parents or moved back after college. These were the foot soldiers of the “Occupy Wall Street” and associated “Occupy” movements. These young workers face a future that is dimmer than their baby boom parents. And they see the rich getting richer. Piketty is an avowed socialist. He devotes a small part of his book to Marx only to state that his analysis lacked mathematical and statistical rigor. And this despite the fact that several statistical sources were available during his time. He differentiates himself from Marx and the communist tradition in that he embraces the Free Market. He also believes that a minimum level of inequality is necessary to get people to work longer and better and to foster innovation. However where he does a service to the socialist ideals is with his solution to global inequality: A Global Wealth Tax. Piketty proposes a wealth tax on the rich, which he defines as someone with wealth over 1 million Euros. He suggests a yearly tax of 1 to 2 percent on all the assets of this class of people. This tax would then get redistributed to those at the lower echelons of society as well as for social services like education and healthcare. (He also proposes a higher tax on billionaires, in the order of 10 percent). He answers his challengers who claim that these levels of inequality are necessary to foster innovation by deconstructing some of the American entrepreneurial myths. For instance, the computer innovations of Steve Jobs and Bill Gates would have only been possible thanks to the public investments in the computer research and development. For Piketty, all innovators rest on the shoulders of giants. No one creates something on his own out of nothing. And therefore, all those innovators and entrepreneurs owe a debt to society and that tax is a way to pay it back. Some critics have challenged Piketty’s assumption of wealth accumulation, holding that real estate accounts for 50% of the wealth and is mostly owned by the middle class in wealthy nations. Others have challenged Piketty’s assumption that inequality matters at all. For them, if everyone in society is getting his wants and needs satisfied, they shouldn’t care about the fact there is a class of ultra-rich. These were the same people who advocated the failed trickle-down economics theory. And indeed what is true today is that very little is trickling down to those on the lower echelons of society. At least Piketty gives a possible solution to this problem. Sources: Capital in the 21st century book capital in the 21st century wiki on s’est pas couché https://youtu.be/rN73nWGC2zI Paul krugman Moyer’s and co https://youtu.be/QzQYA9Qjsi0 Heritage Foundation criticism of Piketty: http://www.heritage.org/research/reports/2014/09/understanding-thomas-piketty-and-his-critics