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Thomas Piketty and the Growing Inequality in Capitalism

by Hagen Kraemer Wednesday, Dec. 31, 2014 at 6:04 AM

"When capital profit is permanently higher than the growth rate for production and income which was the case up to the 19th century, capitalism automatically produces unacceptable and arbitrary inequalities that radically put in question the achievement principle..."


By Hagen Kraemer

[This article published in December 2014 is translated from the German on the Internet, The French economist Thomas Piketty has presented a remarkable book titled “Capital in the 21st Century.” He offers the results of his research over years on the long-term empirical development of income- and wealth-distribution. His statement that an unregulated capitalism would lead quasi-automatically to an increasing disparity in incomes and assets attracts great attention. From that, Piketty derives the necessity of countering the consequences of these development tendencies with strengthened redistribution measures.]

With “Capital in the 21st Century,” Thomas Piketty achieved a great international surprise success. Within a few weeks after its appearance in the US, his important book catapulted to the top of bestseller lists and was in first or second place for several weeks in the spring of 2014 in book sales for The acknowledgment that Piketty received from acclaimed US economists and Nobel Prize winners Paul Krugman, Robert Solow and Joseph Stiglitz contributed to that popularity. They spoke effusively about his work. In Germany, the 800-page technical book written for the broad public has been intensely discussed since the spring thanks to the publication of the German language edition.


After distribution questions were only treated at the margin for many years in the public (and in economics), a new debate about inequality and social justice started in the recent past even before Piketty’s book was published. Piketty’s work has given new energy to this urgently necessary discussion since it offers much useful information and countless new stimulation. First of all, there is an abundance of historical and current empirical material that Piketty (partly with co-authors) compiled and evaluated in the last 15 years. Much of that was already published previously in renowned economic journals and is not set in a larger context in his book. This part of his scholarly work represents a unique pioneering project that is also recognized in international expert circles despite many methodological challenges that are inevitable and insoluble given the scope of the endeavor. (Piketty successfully deactivated the reproaches of data manipulation in the Financial Times.) The other absolutely positive aspect is that Piketty countered the narrow theoretical approach of mainstream economics in treating distribution questions with an expanded perspective. He regards discussing distribution questions in a social, political and historical context as indispensable. (“The distribution question is too important to be left to economists, sociologists, historians and philosophers; it interests everyone and that is good,” Piketty 2014, p.14f).

The enormous interest in Piketty’s book is explained by the political and social explosiveness of his central statements and his prognoses. That incomes and assets are distributed only according to performance and not according to need in a perfectly functioning market economy can be read in every introductory textbook on economics. However Piketty questions that a market economy can fulfill its promise in the long term of distributing income and assets according to the achievement principle. Gaining an income comparable to inherited assets through efforts in the course of their lives is no longer possible for members of society. Piketty warns of the threatening march into a “patrimonial society” where the height of the “paternal inheritance” essentially defines who is poor and who is rich in a society. A growing group without doing anything can inherit more than a hardworking employed person can earn in his/her whole working life. A game of chance called birth decides who has money, not hard work and efficiency. This prospect must also alarm advocates of the neoliberal credo since the central incentive and spur ensuring increased prosperity in a capitalist society would disappear with the elimination of the achievement principle.


How does Piketty substantiate his diagnosis of a general inequality tendency in capitalism? For Piketty, there are no power elites who illegitimately appropriate oversized incomes. Rather there are economic laws of the free market economy that provoke economic inequalities quasi independent of human actions in the course of time. The accidentalness of the initial conditions and a cumulative process determine who are poor and who are rich in a society. For Piketty, the growing significance of capital or wealth relative to income in an economy has central importance. Capital and wealth are synonymous terms on the global plane for Piketty. By “capital,” he does not understand only produced means of production (material capital). For him, capital is the market value of all marketable assets (private and state). Both the non-financial assets (land, real estate, machines, commodity inventories, infrastructure, patents etc) and financial assets (bank accounts, investment funds, stocks, capital investments of every kind, insurance policies etc) minus all the obligations are included.

Under certain presuppositions (essentially the predicted decline of economic growth), Piketty forecasts a constantly growing share of capital income in the total income (the profit rate rises). If property owners save a large part of their income, this causes an ever greater income- and wealth inequality.

Figure 1 shows the empirical development of the capital-income relation for the European countries Germany, Great Britain and France had a U-form in the long term. Between 1870 and 1910, the capital inventory was equal to seven years of the net national income. Through the disastrous political and economic catastrophes occurring between the 1920s and the 1940s, massive devaluations or destructions of parts of the capital stock occurred so only a value of two to three years net national income was posted. However the capital-income relation has increased since then and is now between 400 percent and 600 percent. “Capital is back” is the title of an article recently published by Piketty and Gabriel Zucman (in: Quarterly Journal of Economics, 2014, p.1155-1210). Piketty titled his book “Capital in the 21st Century” because he expects the capital-income relation will grow more and more in the next decades and have a decisive influence on our society (Marketing considerations may also have played a role in the choice of the book title. No great similarities can be found between Piketty’s and Marx’ analyses. While Mark wanted to overcome capitalism, Piketty wants to save it from itself. In this point, there are more similarities with the liberal Keynes.).


Something else is essential for Piketty’s argumentation as he writes at the beginning of his book:

“When capital profit is permanently higher than the growth rate for production and income which was the case up to the 19th century and threatens to become the rule again in the 21st century, capitalism automatically produces unacceptable and arbitrary inequalities that radically put in question the achievement principle on which our democratic societies are based” (Piketty 2014, p.13f).

Three central messages are advanced here that are discussed in detail in the course of the book: (1) in the past, capital returns (r) was regularly higher than the growth rate of production and income (g). This phenomenon did not occur temporarily in the 20th century – because of special developments – but will return in the future. (2) If r is greater than g, economic forces give rise to an increasing inequality. (3) Our modern democratic societies are based on the achievement principle (meritocracy) that will be undermined by coming developments endangering the social cohesion. Therefore Piketty regards state interventions preventing increasing concentrations of wealth and the growing power of the wealthy by taxing high incomes and wealth as necessary.


In his many public appearances and interviews, Piketty emphasizes again and again the first three parts of his book where he presents his analyses are the central part of his study. In the fourth part of his book, he speaks in detail about the political-economic implications but is rather reserved in his diction. Piketty discusses measures in the framework of tax policy. He understands his ideas more as intellectual stimulations and describes his proposal of a global wealth tax as a “useful utopia.” He supports top tax rates of around 80 percent for the top 1 percent or the top 0.5 percent of income recipients (income from a million euros). Firstly, Piketty considers top tax rates on this scale as not endangering growth from his theoretical model. Secondly, he refers to the mainly positive experiences made by the US and countries with similar high tax rates after the Second World War. He proposes the introduction of a progressive wealth tax that should be raised from net assets of a million euros and amounts to one percent per year for assets of five million (two percent above that). Ideally such a tax would be introduced globally. Piketty is aware this would be very difficult to realize in practice.


In a (neo-) classical way, Piketty relies on redistribution to moderate the inequalities created by the market process. This arises out of the traditional economic notion that interventions in functioning markets have to be prevented to not impair the markets’ capacity for allocation. Piketty only mentions at the margin that the genesis of primary incomes can also be influenced to reduce inequalities. For him, this seems an inferior alternative. Many things suggest that the end of the full employment phase that began in many industrial countries in the 1970s has influenced the relative strengths and primary distribution to the disadvantage of employees. The decline of the wage rate that started around this time in these countries is an indicator that the distribution of market incomes is affected by historical and political factors (cf. Kramer, Hagen: Capital and Labor in Piketty’s “Capital in the 21st Century,” Herdentrieb, ZEIT-Online, 7/14/14). In addition, labor-saving technical progress, globalization and liberalizations made realizing wage increases in harmony with higher productivity increasingly hard for employees.

In many passages in his book, Piketty is clearly conscious of the significance of social power in distribution questions. However Piketty decided to derive his “distribution laws” on the basis of the neoclassical standard model in which the influence of power, social and political forces is faded out in the analysis of income and wealth distribution. Full employment is assumed here. There is no place for such far-reaching reflections for him. On first view, nothing indicates that the distribution trend shown by Piketty could also be presented in another model framework. Many questions are still open in the debates over economic and social inequality in modern market economies ignited anew by Piketty. His valuable work will stimulate further research.


Thomas Piketty’s 1-hour 2014 presentation on inequality of incomes and assets

Video: Capital in the 21st Century, 1hr 30min

Thomas Piketty, May 30, 2014

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