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It’s a rich man’s world: Capital in the 21st century
Neo-liberal economic policies will lead to more and more inequality and social unrest, argues the author of Capital in the Twenty-First Century. Policy makers should take heed of this important book.
Sorry to be bossy, but you simply must read Capital in the Twenty-First Century. It’s a big ask. Thomas Piketty, the French economist, who is now a global intellectual superstar, has produced a work of some 700 pages, crammed with statistics and not a little theory. Moreover, his radical thesis has been widely publicised in innumerable admiring reviews.
That thesis – in case you have been living in a cave for the past month – is as follows. It is the natural state of affairs in the free market system for returns on capital to be higher than the rate of growth of the economy (and thus the rate of growth of incomes).
As a consequence, the owners of capital and particularly the owners of substantial capital pull further and further ahead. The consequence is not merely rising inequality but – in time – a growing role for inherited wealth in determining the distribution of rewards and privilege. As Piketty says in the book’s most quoted line, “the past devours the future”.
Many questions flow from this argument and the compelling case Piketty builds behind it. First, why has this tendency so far escaped our attention? One reason lies in the Panglossian determination of most of the economic academy to argue, against the facts, that capitalism is in essence a self-correcting system that may distribute rewards unequally but does so fairly on the basis of market value.
There is also a specific historical reason. In the 19th century, having capital was seen as a better route to economic security and social status than earning an income. Thus, by the early 20th century, the total value of capital in the UK and France was six to seven times national income.
However, that changed dramatically between the First World War and the 1960s. Factors including the cost of military mobilisation, the threat of revolution, inflation, and population growth led to what Keynes called “the euthanasia of capital”. After the war, the ratio of national capital to income fell by about half and, along with it, the contribution of capital ownership and inherited wealth to inequality.
In policy analysis, it’s vital to be able to distinguish a trend from a cycle. It was not a skill possessed by those who interpreted the post-war trend towards equality as irreversible. But reversible it certainly was, and, thanks to the policies promoted by a resurgent neo-liberal movement, we are back to the position of capital domination of a century ago.
As wealth begets wealth (the more capital you possess, the better your rates of return) and a variety of factors leads to slower growth in the developed world, inequality and the importance of inherited privilege are set to become more entrenched. As Piketty notes, today’s fabulously rewarded corporate super-managers will refresh the rentier class by bequeathing great wealth to their descendants.
For those who think economic outcomes should relate to merit (surely a constituency that stretches beyond the left, if only because the legitimacy of capitalism is in question), there is a second big question: What can be done?
It is possible events could reverse the cycle. What is being called the ‘second machine age’ of intelligent robotics, along with migration and higher birth rates, could raise the long-term growth rate, something that both reduces the advantage of capital and makes inequality more tolerable to the less well-off. But, many think new technologies will actually further polarise winners and losers.
Whatever the future brings, new ideas and new policy will surely be needed. Piketty’s main proposal – a global wealth tax – has been widely decried as unrealistic. This is a book about the flaws of our economic system but it also highlights the frailty of democracy. The mid-20th-century governments that reduced the power of capital not only felt they had no choice but also had greater confidence and public legitimacy than today’s enfeebled and despised political class.
Ultimately, the egalitarianism of democracy is bound to confront the polarising effects of unfettered capital accumulation. On what terrain that battle will be fought and the scale of casualties that result are issues that will decisively shape the coming era. The more people who read Piketty, the more likely it is that policy makers will see the need to act before social upheaval and unrest force their hand.
And if you’re still not convinced, Capital in the Twenty-First Century is also entertaining, well written, and crammed full of the kind of information and analysis that makes you want to throw down the book and find someone to share it with.