Suddenly, there is a
new economist making waves – and he is not on the right. At the conference of
the Institute of New Economic Thinking in Toronto last week, Thomas Piketty’s
bookCapital in the Twenty-First Centurygot
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, as he indicates in an interview
in today’s Observer New Review, that the current level of rising
wealth inequality, set to grow still further, now imperils the very future of
capitalism. He has proved 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-centre argument, to stimulate risk-taking and
effort; governments trying to stem it with taxes on wealth, capital,
inheritance and property kill the goose that lays the golden egg. Thus Messrs
Cameron and Osborne faithfully champion lower inheritance taxes, refuse to
reshape the council tax and boast about the business-friendly low capital gains
and corporation tax regime.
deploys 200 years of data to prove them wrong. Capital, he argues, 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 they
always have done (excepting a few periods such as 1910 to 1950), then
inevitably the stock of capital will rise disproportionately faster within the
overall pattern of output. Wealth inequality rises exponentially.
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, writes Piketty – it is much lower, for example, in mainland
Europe and Japan. Rather, it has become an Anglo-Saxon social norm permitted by
the ideology of “meritocratic extremism”, in essence, self-serving
greed to keep up with the other rich. 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.
of wealth in Europe and US is broadly twice the inequality of income – the top
10% have between 60% and 70% of all wealth but merely 25% to 35% of all income.
But this concentration of wealth is already at pre-First World War 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
extravagances and incredible social tensions of Edwardian England, belle epoque
France and robber baron America seemed for ever 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
incomes, to sustain social peace. Now the ineluctable process of blind capital
multiplying faster in fewer hands is under way again and on a global scale. The
consequences, writes Piketty, are “potentially terrifying”.
a start, almost no new entrepreneurs, except one or two spectacular Silicon
Valley start-ups, can ever make sufficient new money to challenge the
incredibly powerful concentrations of existing wealth. In this sense, the
“past devours the future”. It is telling that the Duke of Westminster
and the Earl of Cadogan are two of the richest men in Britain. This is entirely
by virtue of the fields in Mayfair and Chelsea their families owned centuries
ago and the unwillingness to clamp down on the loopholes that allow the family
estates to grow.
with the capacity to own in an era when the returns exceed those of wages and
output will quickly become disproportionately and progressively richer. The
incentive is to be a rentier rather than a risk-taker: witness the explosion of
buy-to-let. Our companies and our rich don’t need to back frontier innovation
or even invest to produce: they just need to harvest their returns and tax
breaks, tax shelters and compound interest will do the rest.
dynamism is undermined, but other forces join to wreck the system. Piketty
notes that the rich are effective at protecting their wealth from taxation and
that progressively the proportion of the total tax burden shouldered by those
on middle incomes has risen. In Britain, it may be true that the top 1% pays a
third of all income tax, but income tax constitutes only 25% of all tax
revenue: 45% comes from VAT, excise duties and national insurance paid by the
mass of the population.
a result, the burden of paying for public goods such as education, health and housing is
increasingly shouldered by average taxpayers, who don’t have the wherewithal to
sustain them. Wealth inequality thus becomes a recipe for slowing,
innovation-averse, rentier economies, tougher working conditions and degraded
public services. Meanwhile, the rich get ever richer and more detached from the
societies of which they are part: not by merit or hard work, but simply because
they are lucky enough to be in command of capital receiving higher returns than
wages over time. Our collective sense of justice is outraged.
lesson of the past is that societies try to protect themselves: they close
their borders or have revolutions – or end up going to war. Piketty fears a
repeat. His critics argue that with higher living standards resentment of the
ultra-rich may no longer be as great – and his data is under intense scrutiny
for mistakes. So far it has all held up.
does it seem likely that human beings’ inherent sense of justice has been
suspended. Of course the reaction plays out differently in different eras: I
suspect some of the energy behind Scottish nationalism is the desire to build a
country where toxic wealth inequalities are less indulged than in England.
solutions – a top income tax rate of up to 80%, effective inheritance tax,
proper property taxes and, because the issue is global, a global wealth tax –
are currently inconceivable.
as Piketty says, the task of economists is to make them more conceivable.Capital certainly does that.
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