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Piketty: inequality & capitalism’s flaw

Written By: - Date published: 8:56 am, April 30th, 2014 - 50 comments
Categories: capitalism, class war, economy - Tags:

There is a major new economics tome out this year that’s sending waves through the economics community like none since Friedman in the 70s.

It’s Thomas Piketty‘s Capital in the Twenty-First Century.

Such is the impact that in a recent seminar at New York’s CUNY he was the headliner over Nobel-winning Krugman and Stiglitz.

Krugman’s review of his impact on conservatives in the New York Times is telling – they are warning that Mr. Piketty’s work must be refuted, because otherwise it “will spread among the clerisy and reshape the political economic landscape on which all future policy battles will be waged.”

And yet they cannot refute his superbly researched thesis, which spans hundreds of years of history and 700 pages.

So the conservatives – who have been focussing on denying the obvious and growing income and wealth disparity, and when that fails, insisting on the rich as job creators (except they’re not) – have resorted to name calling. Piketty, like any who acknowledge unequal wealth, must be ‘Marxist’.

That’s the sum of their refutation.

But Piketty’s argument is stronger than a bit of name-calling.  The essence is that:

economic growth will always be smaller than the profits from any money that is invested. Economic growth is what we all benefit from, but profits from invested money accrue only to the rich. The consequences of this are clear: those who have family fortunes are the winners, and everyone else doesn’t have much of a shot of being wealthy unless they marry into or inherit money.

So Piketty is doing more than acknowledging that inequality exists or is growing – he says that capitalism dooms us to it.  To combine it with a recent Nasa study shows us heading reasonably rapidly to societal collapse.  We’re at pre-WWI levels of wealth disparity and quickly heading to nineteenth century levels (and aristocracy).  That’s levels that hit beyond massive disparities in income, onto worryingly large disparities in equality of opportunity.  The rest of us have very little to no chance of ever catching up, without inheriting from or marrying into the 1%.

Wealth is no function of a fictional meritocracy as the right would have us believe, but of inheritance.

And wealth is where it is at more than income – the top 10% in Europe & the US earn 25-35% of income; but have 60-70% of the wealth.

So a wealth tax is where we need our answer, along with inheritance taxes and high taxes for high incomes.

Those things are beyond our current orthodoxy, but maybe economics may yet lead us there.


Another treatise on the economic (not political) impacts of inequality.

And join Closing the Gap for a NZ focus on reducing inequality.

50 comments on “Piketty: inequality & capitalism’s flaw”

  1. karol 1

    This looks to be a very important development in countering the myths of “neoliberalism” and moving towards an alternative approach to society and governance.

    I see there’s already a big queue for Piketty’s book, as on my public libraries’ website.

  2. Sanctuary 2

    Of course, our forebears – who had direct experience of the aristocracy and income distribution of the gilded age barons – didn’t need Thomas Piketty to tell them these things. They instinctively understood what he has empirically now proved, which is why they introduced heavy death duties and progressive tax systems to force the break up of great wealth.

    BTW – Piketty’s book is only $22 for a kindle edition.

    • Draco T Bastard 2.1

      Thing is, these things have been known since ancient times when interest was first banned and the writing off of debts was a regular occurrence. Actions that prevent such massive accumulation of societies wealth by the few.

  3. “..So a wealth tax is where we need our answer – along with inheritance taxes –

    and high taxes for high incomes..”

    amen to all that…

  4. just saying 4

    I think inheritance tax is a no-brainer, except for the fact that those with trusts (the middle class and up) would again be able to circumvent paying their fair share.

    Already we have the offensive situation in which the aged of more modest means (and no trust) are asset stripped if they need care, but gazillionaires get a free ride (this situation was somewhat improved by a raise in the value of assets that the elderly are able to keep, under Labour).

    Undoing the inequity caused by trusts would be a natural policy for a Labour Party worth it’s salt but the Labour Party only represents its own nowadays – the minority middle-class who are comfier than they have ever been. It really should change it’s name to reflect the reality. I suggest ‘The Puku Party’.

    • Draco T Bastard 4.1

      I think inheritance tax is a no-brainer, except for the fact that those with trusts (the middle class and up) would again be able to circumvent paying their fair share.

      The entire tax system, which has effectively been written by the wealthy for the last 500 years, needs to be re-written so that people can’t circumvent paying their fair share. The correct result of such would be that there would be no more wealthy.

      but the Labour Party only represents its own nowadays – the minority middle-class who are comfier than they have ever been. It really should change it’s name to reflect the reality. I suggest ‘The Puku Party’.

      QFT

  5. Colonial Viper 5

    This is what I wrote in Open Mike last night about Piketty. In essence, we are now in a world where the Red Queen rules. Because of energy depletion, resource constraints and climate change, we will have to work harder and harder just to stay in place, let alone “grow.”

    All the while, the power elite are taking over all the levers of power and are concentrating more and more paper and physical wealth around themselves. Piketty’s criticism of capitalism is excellent,but we are leaving that age behind. What we have now is an age of usury, extortion, neo-feudalism and imperial decline. Not capitalism.

    Piketty’s ideas are decent, but they are 25 years too late. We’ve actually moved far past the time the assumptions he uses will actually hold. Care of one of favourite websites Zerohedge:

    By Charles Hugh-Smith:

    The real problem with Piketty’s taxation/social welfare solution to wealth inequality is that it does nothing to change the source of systemic inequality, debt-based neofeudalism and neocolonialism. Simply raising more taxes to fund more social welfare programs leaves the unjust, rapacious, and ultimately destabilizing Status Quo entirely intact.

    I have laid out another path in my books: refuse serfdom, abandon participation in neofeudalism and neocolonialism, and build parallel systems of cooperation and wealth-building that are not debt-dependent.

    http://www.zerohedge.com/news/2014-04-28/critique-pikettys-solution-widening-wealth-inequality

    And by James Kunstler:

    I doubt that the Warren Buffets and Jamie Dimons of the world will see their wealth confiscated via some new policy of the Internal Revenue Service — e.g. the proposed “tax on wealth.” Rather, its more likely that they’ll be strung up on lampposts or dragged over three miles of pavement behind their own limousines. After all, the second leading delusion in our culture these days, after the wish for a something-for-nothing magic energy rescue remedy, is the idea that we can politically organize our way out of the epochal predicament of civilization that we face. Piketty just feeds that secondary delusion.

    http://www.zerohedge.com/news/2014-04-28/second-biggest-delusion-us-culture

    In relation to today’s conversations, my view is that Reserve Bank goals and interest rate settings are akin to trying to cleverly keep steam pressure up on the Titanic’s engines while the compartments are filling up with water. At this point nothing apart from getting ready for fossil fuel energy depletion, climate change, GFC II and permanent global economic contraction matters one whit.

  6. Draco T Bastard 6

    So a wealth tax is where we need our answer, along with inheritance taxes and high taxes for high incomes.

    That’s only part of the answer. A hell of a lot of that 60 to 70 per cent of owned wealth needs to be returned to the state as well. In NZ that would mean renationalisation of telecommunications, power and the farms. A maximum income of around $100k would help as well.

    • Not Petey 6.1

      Cuckoo

      • Colonial Viper 6.1.1

        Cuckoo You

        • Tracey 6.1.1.1

          but if petey cant be paid much more how will he know his self value or if he is succeeding.

          • Not Petey 6.1.1.1.1

            The $100k maximum income was the least cuckoo comment of DTB although still nutty one must say.

            The nationalisation of telecommunications, power and farms is the kind of cuckoo that could power all the clocks in Switzerland.

            • Draco T Bastard 6.1.1.1.1.1

              It’s privatisation, otherwise known as feudalism, that’s totally insane. This is what the research that’s coming out shows.

      • aerobubble 6.1.2

        See that’s the point, we should actually just give all our wealth to the richest 1% of 1% because ‘Not Petey’ would say it was the smart thing to do. All hail the King.

    • greywarbler 6.2

      CV and DTB
      Good thinking stuff. DTB you are undoubtedly right and CV you give paths to self-help until the larger DTB suggested action can be brought about.

      • Colonial Viper 6.2.1

        Yep, need stuff for immediate effect while working on massive medium and long term changes.

        • Tracey 6.2.1.1

          yesbut also need something to break the mindset. when you see the resistence to this thesis youcan see why your solutions are such a long way off.

          • Colonial Viper 6.2.1.1.1

            the truth is that political parties and the Wellington elite will be unlikely to deliver for us as real physical constraints close in and start grinding the economy down. We will have to rely on ourselves, on local communities and our close networks to keep going and to find new ways of getting things done.

            A simple example is raising the retirement age. Whose interests exactly is this austerity measure in? A whole bunch of Labour MPs with super schemes and Kiwi Saver schemes worth a quarter million dollars or more are going to have the nerve to vote through an increased retirement age for all other NZers. That’s courage for you.

    • Colonial Viper 6.3

      I would broaden out your comment “needs to be returned to the state” to”needs to be returned to public ownership.”

    • srylands 6.4

      How stupid. A maximum income of $100,000? We would end up looking like a temperate version of Niue. Why would anyone bother getting out of bed?

      • Colonial Viper 6.4.1

        To do work which is personally and professionally fulfilling, to positively contribute to society, to find a unique role and sense of identity in ones local community.

        (I personally think that a maximum income of 10x the median income is more reasonable = $290,000 pa or so. Set the income tax rate above that at say 91%, like it used to be in the US in the early 60’s).

      • Draco T Bastard 6.4.2

        $100k is more than enough to live comfortably on. Any more than that is pure greed and it is greed that destroys society.

        • Tracey 6.4.2.1

          slylands doesnt realise that most people in nz earn less than 100k pa and get out of bed everyday. some even serve others ahead of large paypackets.

          he doesnt know how to measure his self worth unless he can strive for a further payrise, like the donkey and the carrot.

  7. Ennui 7

    The problem we will have with regulating top wage levels by means of tax is that the money will find its way elsewhere. With the public sector I believe wages could be easily regulated (by way of a State Services pay structure) to get rid of fat cat managers pretending to be the same as private sector managers.

    The basic difference between private sector CEOs and public sector CEOs is that the private sector has income risk. State services CEOs get their income via tax, no risk, no need to have to sell etc. In my book they have so little income risk that they are worth fekk all.

    Control of private sector salaries gets problematic in that corporates in particular are often monopolies, duopolies etc, in effect rentiers. Rentiers need to be thoroughly regulated, and taxing their companies at a high rate is a great idea. In my experience these companies (power, telcos etc) if allowed are a dead weight on productive enterprise, their CEOs a parasitic elite.

    Companies in competitive markets have pressure to sell, and price pressure, which means they have to be lean and mean. These companies generate the money that gets sucked into “rentiers” books and tax that pays for public services. It would in my mind be counter productive to try to hard to restrict what could be earned. Top tax would be OK but I suspect that the accountants would find a way of using profits elsewhere, so it becomes a matter of Treasury and the IRD etc of coming up with ways of channeling that cash into places where it benefits the whole economy.

    • Colonial Viper 7.1

      The basic difference between private sector CEOs and public sector CEOs is that the private sector has income risk.

      Uh, no.

      From what I’ve seen big private sector CEOs who screw up get shown the door with a big golden parachute. In the US, bank CEOs almost destroyed the economy. Did you see the likes of a Jamie Dimon or a Lloyd Blankfein get sent to the poorhouse? So where is the income risk exactly?

      Do you mean getting a base salary of $1M pa with a potential bonus of $1M “at risk”? Oooooh that’s so risky!!! You might miss out on the $1M bonus and only make $1M total for the whole year!!!

      State services CEOs get their income via tax, no risk, no need to have to sell etc. In my book they have so little income risk that they are worth fekk all.

      Nah. NZ was built on a tradition and culture of public service; public servants who were paid very moderately but who believed in the professionalism of their calling of ‘serving the public’. These kinds of people have either been pushed out over the last 20 years, have left for overseas, or have simply retired.

      Calling state services heads “CEOs” is a total neoliberalism, and one that both Labour and National have perpetrated.

      • Draco T Bastard 7.1.1

        +1

      • Ennui 7.1.2

        CV, we dont disagree….you will note that I describe two reward systems that have very little risk attached.

        One is the leadership of state sector departments etc. The job is not to be strategic and to generate income. That’s the hardest bit in any job, it falls into that category of entrepreneurship, marketing and sales. In government the politicians should deliver the strategy, the IRD delivers the cash….wheres the risk. Its a bureaucratic delivery job. Your best monkey can lead the other monkeys, but monkeys are only worth bananas.

        So to corporate CEOs…..thats where I talked “rentier”. When you “own” a market or part of it your risk factor plummets. This is where the highest pay is given, look at what Telecom has paid its’ CEOs. What for, generally they are useless.

        Which leaves where the real money is made that all the corporate profits and tax take rely upon. That is in “productive” enterprise, and it requires strategic thinking, clear tactical direction, revenue risk, expenditure risk….and lots of people go broke, lose their shirts doing it. These to me are very valuable people and they should be encouraged.

        And in doing so these people should generate the wealth that is better spent rewarding aged care givers, dustmen etc rather than corporate of state sector CEOs.

  8. odysseus 8

    “And wealth is where it is at more than income – the top 10% in Europe & the US earn 25-35% of income; but have 60-70% of the wealth.”

    Does anyone know what the situation in NZ is?

  9. aerobubble 9

    I think the point is missing. That physic rules the universe. That the economic activity, called financialization brought about by neo-liberals like Thatcher and Douglas, has nothing to do with economics, or economists. It was due to the appearance and longevity, of the cheap high density liquid fuels flowing out of the middle east. Economics was what happen afterwards.

    Instead of using the money to go to Mars, end world poverty, we instead use the oil gusher to have wars and create financial empires. It was the biggest fraud in history, the worst kind of survival of the financial fittest. Dumb doesn’t do it justice, Thatcherism was always indecent and doggy, in its simplistic way that made the most boring of conservative feel like revolutionaries.

    Burn all the oil, as quickly as possible; how our animal brain took over our civilization.
    Our collective inner pyromaniac was unleashed.

    Piketty merely provides economists with a way to save their naff science credentials
    and provides a way back in for the neo-liberals to re-brand themselves.

    Monetary value depends solely on the people consenting to it having value, so it
    follows that we the people should benefit from its existence. Yet a media was born
    in the late 70s that use the propaganda machines to peddle that not only are economist
    market makers, rather than followers, but that we the people aren’t underwriting their
    whole neo-liberal experiment with the lives of our kids and grandkids.

    In order for growth, it was decided we had to have it all, now. Now the costs
    are appearing and the day of realization is upon us, least of course we accept
    the economist Piketty putting the heavens back into order even if dire.

    I suppose I’m trying to say, is I agree with Piketty its dire, I just think
    economists isn’t the intellectual sector that should have any say.

    • geoff 9.1

      Piketty’s argument for how 19th century economics snuck back in via Thatcher and Reagan is that the US and UK economies had flattened growth because their economies had finished post-war expansion. They compared themselves to other growing post-war western economies which were still undergoing enormous infrastructural rebuild and felt themselves falling behind. This somehow provided the political impetus to bring in neoliberalism.

    • Draco T Bastard 9.2

      +1

      Economists wouldn’t know what an economy was if they tripped over one

      Piketty is right that capitalism, quite literally, sucks but he fails to realise that and so just says that we to have more taxes on the very well off. It’s not enough. We have to get rid of capitalism.

  10. Picketty’s ideas in their 19th C form were demolished by Karl Marx.
    Capitalist inequality is inherent in the fact that the class that owns the means of production forces the other class that is dispossessed to produce surplus-value as the basis of profits. The distribution of income that results is a mere symptom of these unequal relations of production.
    Worse, Picketty thinks that a widening income gap is accompanied by increasing profitability. Those bosses are truly bloody minded bastards.
    Marx refers to a fixation on the symptoms rather than causes of inequality as “The Trinity Formula” as in the father, son and holy ghost. http://www.marxists.org/archive/marx/works/1894-c3/ch48.htm

    This fetishism has its materialist roots in the alienation or objectification of human labour as a intrinsic characteristic of the commodity which is explained in the first part of Capital Vol 1.
    https://www.marxists.org/archive/marx/works/1867-c1/ch01.htm#S4

    Ironically, it was the French translation of Capital that Marx thought the best since he had the chance to edit it and since it was serialised accessible to the ordinary worker. Even so, he had misgivings however that the French reader would be impatient to pass quickly from the difficult analysis to :immediate questions that aroused their passions”.
    http://www.marxists.org/archive/marx/works/1867-c1/p2.htm

    Most of the 600 page books written since on social inequality have only detracted from the truth.

    So what you say?

    Well even though Picketty’s passions leads him to condemn Capitalism his French impatience puts him alongside the German moral socialists that Marx excoriated in the Critique of the Gotha Program for forgetting that capitalism leads to falling profits and that any equalising of income requires a socialist revolution. [Google for the Cached version of the Critique]
    So Picketty’s empiricist method leads to rising profits and a falling share of wages where the political solution that presents itself is a moral condemnation of capitalism, combined with a practical push for the poor to rise up and demand their ‘fair share’ of income, even though their production of profits was never fair.
    So like all those who think that climate catastrophe can be managed by ‘adaptation’ of capitalism Picketty’s analysis stops short of overthrowing capitalism.

    • geoff 10.1

      The value of Picketty’s book is that it leaves those in power, who have used the economic theories of Friedman and Co to justify neoliberal economic reforms, without a leg to stand on.

      • Colonial Viper 10.1.1

        We still have to raise the retirement age to balance the budget long term and ensure the sustainability of the super system

        We have to be able to force workers to hand over more of their hard earned money to private sector financial institutions in order to control inflation.

        The economic answer is in export led growth.

  11. BEATINGTHEBOKS 11

    The basic problem with socialism and communism is that homo sapiens will always try harder if they can get a better life by working harder, it is human nature. If there is no incentivisation they won’t try harder but will languish in mediocrity. This is the problem with socialist theory. It is also why there has never been a car made in the European eastern block that anyone in New Zealand or Western Europe wanted to buy. Marxism in New Zealand will never take hold. The desperate conditions necessary for it to become attractive are unlikely to ever exist, I contest that the percentage of the population to VOTE for it ( the irony is not lost on me) will not happen under the current government, maybe the next labour government, but they will probably vote national at the next ELECTION in protest. Life in NZ is simply too good. I know unemployment exists, but most of them won’t vote, and if they do their percentage will be too low. It is a situation carefully managed by the government. Socialism fails because it is human nature to try and win the prize, once fed the winner can spread the spoils, but why would you risk your own neck if somebody else will feed you. Catch 22. Marxist theory belongs to a different time, and a different country ( a poorer country with fewer opportunities) and a different generation. Marxism will never exist in the era of twitter and facebook. Goodbye marxism its over.

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    2 weeks ago
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