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Capitalism and Inequality

Given the serious problems of migration into Europe, the economic, financial and political crises in most European nations, the US and most Latin American countries, it is fitting to refer to an interesting economic study undertaken by the young French economist Thomas Piketty just three years ago, in which he raises concerns about the West’s economic reality that had never been addressed before by experts in political economy.

 

In August 2013, Thomas Piketty published a book on economics entitled Capital in the Twenty-First Century specifically dedicated to the study of economic inequality in Europe and the United States since the nineteenth century. The cornerstone of his hypothesis is that when the rate of return on capital investment is higher than economic growth, the result is a concentration of wealth, which leads simultaneously to both social and economic instability. He therefore proposes a global system of progressive wealth taxes to try to reduce inequality and to prevent wealth from being controlled by a small elite of billionaires. 

 

Piketty’s book has elicited strong criticism from both the political right and the political left, because it says that when the state does not intervene to redistribute wealth – as has happened in Western countries – the rate of return on capital has always exceeded the rate of growth generated by income, which has been the ‘central contradiction’ of capitalism. In his book, Piketty expresses concern about the economic thinking of economists, who spend a great deal of time on so-called prescriptions to cure the most common dysfunctions of capitalism, such as unemployment, inflation, deflation, stagflation and recession. Piketty’s book serves as a stimulus to foster discussion of inequality, based on historical facts which provide a great opportunity for political debate.

 

Picketty does not present himself as opposed to the inherent inequality of the global economic system, and therefore he does not question it, but he arrives at the very obvious conclusion that capitalism thrives on inequality and often goes into crisis due to speculation. When the market economy is left on its own, a continuum from ‘inherent’ to ‘excessive’ inequality is created and Piketty focuses on the latter as a distortion caused by the excessive weight of the income accumulated in the process of wealth creation.

 

Piketty notes that except for the 30 glorious years following World War II, in times of moderate economic growth, the rate of return on capital grows faster than production and wages, and so the entrepreneur tends to become a rent-seeker. That is why, some economic experts like André Comte-Sponville, define capitalism as an economic system that makes money from money. Wages keep losing weight in the final structure of incomes, and inequality reigns freely. Capitalism is about the relationship between the rate of return on capital and the rate of economic growth, so that the past destroys the future.

 

The most efficient corrective measure – according Piketty – would be to increase competition in the market, but that is very much dependent on the will of the major political leaders. The fact is that the areas of competition in the market are getting smaller and smaller each day and are being replaced by areas of influence by large companies that set prices and conditions for their most important customers. So economic power constrains political power and establishes the conditions in the major markets.

 

Piketty also proposes a quick solution to curb inequality with a progressive tax on capital to be applied by all world economies. Although the idea is not new, Piketty is aware that this proposal requires high-capacity political management at the global level, and it would need fiscal coordination between all states, which is non-existent at the moment.

 

According to Piketty the forces tending towards equality, such as science and technology, operate at a slower pace compared to the speed of the opposing forces, similar to entropy in physical systems. Although it is possible to temporarily reduce it and organize the system with short-term political decisions, historical facts show that the conservative pressure of Reagan and Thatcher put an end to the 30 glorious years after the World War II, which proves that the forces of disorder are prevailing over those seeking to organize the economy.

 

Piketty’s work can also be interpreted as a fresh approach to economic research, because the reorganization is not necessarily new, but is derived from a major application of historical and statistical sources. Some other classical economists like Marx used statistical sources as elements to support their convictions. However, Piketty understands economics as a discipline that is part of the social sciences and which should be subject to politics. 

Ultimately in any complex system, the diagnosis is of little value to the final decision which, in the particular case of the economy, has always turned out to be wrong.

 

Addendum: Based on precise figures, Piketty’s book shows that capital income has been higher than production and that the economic approaches of capitalism and socialism have been wrong in the last two hundred and fifty years. It is therefore urgent to propose a new political economic model as soon as possible or implement speedy regulation of the one that now exists – preferably without using violence.