The Inequality Debate: Thoughts on Piketty

OF PATRIMONIAL CAPITALISM, OLIGARCHY AND A BURGEONING PLUTOCRACY…

Fact is, there is rising inequality in a number of countries and something can and must be done. But the question that often lurks is, who does this? The government? And what range of tools is available to be utilized for such purposes? How does tax policy help address the growing inequality? Is income redistribution the only option? What of creating a bigger economic pie? Going by readings on the subject the last couple of weeks, I’m also disturbed by the r [the return on capital – profits, interest, and capital gains] > g [economic growth] rule in the way it is used as the basis to draw conclusions especially on the need for progressive taxation. Yes, it is granted based on the evidence, which is a central plank of Piketty’s scholarship, that in periods where the rate of growth of capital was more than the overall growth of the economy, income inequality increased or so to say patrimonial capitalism dominated by inherited wealth flourished to the detriment of the working classes [similar to Karl Marx’s arguments in Das Kapital]. That is, returns to capital are rising faster than economies are growing. What I find troubling is the causality being attributed to the extent that if r>g, then the overall economy suffers and inequality increases. I presume this theory will be validated or debunked later by empirical evidence. However, the progressive taxation scheme he admonishes is a mixed bag for me. A graduated wealth tax makes sense, but an 80% income tax for those on the highest salaries is quite hard to swallow. Are we punishing the creation of wealth?According to the Economist, “inequality is one of the most controversial attributes of capitalism. Early in the industrial revolution stagnant wages and concentrated wealth led David Ricardo and Karl Marx to question capitalism’s sustainability. Twentieth-century economists lost interest in distributional issues amid the “Great Compression” that followed the second world war. But a modern surge in inequality has new economists wondering, as Marx and Ricardo did, which forces may be stopping the fruits of capitalism from being more widely distributed…From the 1970s the ratio of wealth to income has grown along with income inequality, and levels of wealth concentration are approaching those of the pre-war era”.

There’s a lot of evidence to show that excessive taxation stifles growth and investments because it is these same people who are the entrepreneurs that keep economy going and not the government! As Piketty himself remarks, “I am a defender of the free market and private property, but there are limits to what markets can do.” Thus, the central question then remains: to what extent do government polices – a combo of monetary and fiscal – create an enabling environment that ensures a BIGGER pie for all to share regardless of social status without placing the burden of taxation on high wealth earners in a bid to use their monies to subsidize the poor. Has capitalism failed? Definitely NOT! Though not perfect, it is rather the sometimes populist government redistribution policies that have failed BIG TIME. One approach to stemming the economic divide lies in the way government labour market programs and education reforms address fundamental issues of creating a new class of entrepreneurs who have no recourse to any generational wealth pot by nurturing the can-do spirit to spin out new industries using the latest technological and scientific breakthroughs – The Instagram and WhatsApp founders and many other SMEs are an example of this new breed. As an aside, an Oxfam report found that the five richest families in the UK have more wealth than the poorest 12 million. Will “class warfare” give way to “generational warfare”, and will intragenerational mobility make rising income inequality less significant?

Links for further reading:

  1. http://www.social-europe.eu/2014/04/paul-krugman-thomas-pikettys-capital-21st-century/
  2. http://www.social-europe.eu/2014/04/joe-stiglitz-paul-krugman-capital-twenty-first-century/
  3. http://www.forbes.com/sites/kylesmith/2014/05/01/six-ways-thomas-pikettys-capital-isnt-holding-up-to-scrutiny/
  4. http://www.ft.com/cms/s/2/0c6e9302-c3e2-11e3-a8e0-00144feabdc0.html
  5. http://www.econlib.org/library/Enc/MarginalTaxRates.html
  6. http://www.economist.com/news/leaders/21601512-thomas-pikettys-blockbuster-book-great-piece-scholarship-poor-guide-policy
  7. http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/
  8. http://www.newstatesman.com/politics/2014/04/thomas-piketty-right-everything-you-need-know-about-capital-twenty-first-century
  9. http://www.nytimes.com/2014/04/20/business/international/taking-on-adam-smith-and-karl-marx.html?_r=1
  10. http://www.theglobeandmail.com/news/national/time-to-lead/how-globalization-has-left-the-1-per-cent-even-further-ahead/article15433419/?page=all
  11. https://www.facebook.com/theo.acheampong/posts/10203974059221167
  12. https://www.facebook.com/theo.acheampong/posts/10203887767143919
  13. http://opinionator.blogs.nytimes.com/2014/04/20/to-reduce-inequality-start-with-families/?smid=tw-share
  14. http://www.theguardian.com/business/2014/apr/22/rising-inequality-dont-blame-the-rich-poverty-jeffrey-frankel
  15. http://www.economist.com/news/finance-and-economics/21592635-revisiting-old-argument-about-impact-capitalism-all-men-are-created
  16. http://www.economist.com/news/leaders/21601512-thomas-pikettys-blockbuster-book-great-piece-scholarship-poor-guide-policy

About the Author

Theo Acheampong
Theo is an economist and social media enthusiast who provides regular commentary on socioeconomic and political developments in Ghana and Africa at large. Theo is passionate about leadership, entrepreneurship and the role of innovative technologies in solving Africa's developmental challenges.