Reports from the Economic Front

Capitalism And Inequality

12 March 2014 by Marty Hart-Landsberg

Thomas Piketty is an expert on income inequality. He and Emmanuel Saez have produced some of the best work measuring its explosive growth.

Piketty has just published a massive new book on the subject called “Capital in the Twenty-First Century.” A New York Times review of it by Eduardo Porter begins as follows:

What if inequality were to continue growing years or decades into the future? Say the richest 1 percent of the population amassed a quarter of the nation’s income, up from about a fifth today. What about half?

To believe Thomas Piketty of the Paris School of Economics, this future is not just possible. It is likely. . . .

His most startling news is that the belief that inequality will eventually stabilize and subside on its own, a long-held tenet of free market capitalism, is wrong. Rather, the economic forces concentrating more and more wealth into the hands of the fortunate few are almost sure to prevail for a very long time.

Piketty’s pessimistic view is based on his argument that income generated from capital normally grows faster than the economy or income from wages. This means that the private owners of capital benefit disproportionately from growth, which makes it easier for them to increase their asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). holdings and by extension future income. And, since wealth and income translate into political power, we face a self-reinforcing dynamic leading to ever growing inequality.

Porter provides some charts taken from Piketty’s work illustrating the rise in private wealth as a share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of national income and the growth in inequality in several countries.

Eric Toussaint, a Belgian political economist and president of the Committee for the Abolition of Third World Debt, has a longer more substantial review of the book, in which he shares the following table from Piketty.

One thing that jumps out of this work is that a serious wealth tax is capable of generating substantial funds that could be used to support public services.

Piketty’s work also suggests that embracing a system based on maximizing the returns to private owners of capital is a mistake for the great majority of working people.

A recent study by the investment bank Credit Suisse provides more evidence for this conclusion. As Michael Burke explains,

the study . . . shows that long-term growth rates of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
in selected industrialized economies are negatively correlated with financial returns to shareholders.

That is, the best returns for shareholders are from countries where GDP growth has been slowest, and vice versa. Where growth has been strongest, shareholder returns are weakest. . . .

The negative correlation does not prove negative causality. But it does support the theory which suggests that the interests of shareholders are contrary to the interests of economic growth and the well-being of the population.

Here is a chart taken from the study which highlights the negative correlation found by the Credit Suisse researchers.

All this information is worth keeping in mind the next time business and political leaders tell us that the key to our well-being is boosting business confidence, the market, or private returns on investment.

Marty Hart-Landsberg -



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