Few economists inspire popular movements, but Thomas Piketty has. “We are the 99 per cent”, the slogan of the Occupy Movement, was based on his in-depth analysis with Emmanuel Saez of income distribution and inequality in the US in 2003.
The Frenchman’s new book
Capital in the 21st Century
is already causing a stir. Some reviewers have called it the economic book of the year, others of the decade.
Piketty’s ground-breaking work on the
historical evolution of income distribution is impressive, but he covers
many other areas, including the erosion of meritocracy by inherited
wealth, public debt, education, health and taxation. He also proposes
challenging ideas for funding the social state in the 21st century.
Piketty’s central point is that when the rate
of return on capital exceeds the rate of economic growth, the economy
automatically generates arbitrary and unsustainable inequalities which
undermine the meritocratic values on which democracy is based.
Unless capital owners consume all of the return on their capital, more will remain for them and they get richer, effortlessly.
In the late 19th century, the amount of private wealth was a staggering six or seven years of national income.
Two world wars and the Depression wiped out
much of this wealth and, since the second World War, the emergence of
welfare states, nationalisation of monopolies, labour-friendly
governments and high income and inheritance taxes greatly reduced
accumulated capital.
In the public mind, that trend towards equality
seemed to be normal, but Piketty shows it was an exceptional period,
which will not be repeated on current trends.
It is already over in the US, where average
real incomes have hardly risen since the 1970s, despite high
productivity. The labour share of national income has been declining in
most countries for over 30 years.
This optimistic public misperception was shaped by the work of Nobel economist Simon Kuznets,
who argued that, as economies developed, inequality appeared to fall
and then stabilised. The labour share of national income seemed to
stabilise at about 75 per cent. The distributional issue seemed to be
settled and economists ignored it and most still do.
However, Kuznets only examined a short period
of time (1914-1948) and only the US. It was the wars, the Depression and
state “interference” that reduced the inequality, rather than any
self-correcting market mechanism, he argues.
In
Capital
’s 650 pages of tightly argued data-based economics, Piketty
and others have compiled their argument from data stretching back to the
1700s.
Note EU-Digest: Capital in the 21st Century is a must read book for every economist and Government Ministers of Finance and Economic affairs. Also people who have no educational economic background can read it because of its simple and very clear definitions as to the workings of economics.
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