Thomas Piketty, the French economist who was one of those who
popularised the idea of a privileged 1 per cent, rings this alarm in his new
book: The US economy has started to decay according to the ways of aristocratic
Europe of the 19th century. Diligent work will be of less importance while
inherited wealth will become more desirable. The wealth of the few will
undermine the foundations of democracy.
Capital in the 21st Century has captured great interest as
US political leaders argue whether increasing income gap is an issue that needs
action.
The 700-page volume has been celebrated as one of the most
important economic opuses in recent years, citing data from the past three
hundred year to prove that the wealthy are hoarding more of an economy’s income
than before and that prevailing regulations will mean that it will only grow.
People who support this idea cite the book as evidence that the
wealth disparity must be reduced. Critics, however, reject the idea as being
that of a left-wing ideologue.
Last week, Piketty’s book climbed to the top of Amazon’s
bestsellers.
Unearthing information from 300 years of economic data, tax
records, 19th-century novels and modern TV programmes, Piketty questions the
assumption that free markets automatically produce extensive wealth.
On the contrary, he believes that the rich will become richer and
everyone else will have almost zero chance of catching up.
Investments in bonds, stocks, land and buildings — the “capital”
referred to in his title – invariably grow more rapidly than the incomes of the
masses. By its fundamental nature, capitalism generates inequality and can
undermine the stability of democracies, Piketty argues.
Economists used to view the thirty years after WW II as evidence
of capitalism’s capacity to create and distribute wealth. Piketty argues that
the era was a historical eccentricity produced by two world wars and the Great
Depression decimating the wealth of the old establishment. Piketty believes
higher taxes on wealth can control the spread of inequality. Moreover, he
thinks that college education for more people will sharpen their skills through
and could help reduce the effect of “inegalitarian spiral.”
During an interview with The Associated Press, Piketty, 42, talked
on the “dangerous illusion” of the meritocracy, and his suggested solutions for
controlling inequality.
Here is an edited summary of the interview:
What is the effect of a growing
wealth disparity?
The major concern for me is actually the efficient functioning of
our democratic institutions. It simply does not work well with an excessive
form of oligarchy where 90 per cent of the wealth is owned by an extremely
small class of people. The democratic model has always been seen to function
within a moderate level of inequality. I believe one main reason why electoral
democracy thrived in 19th-century America better than 19th-century Europe is
because you had greater distribution of wealth in America.
Your research reveals that
profits on investments – capital – increase more rapidly than wages and
economic growth. But many people are of the persuasion that greater inequality
can help generate more growth.
When inequality reaches an extreme, it completely stifles growth.
There was extreme inequality in the 19th-century and growth was markedly
minimal. Because the rate of growth of productivity was only 1 to 1.5 per cent
annually [in 19th-century Europe], and it was below the rate of return to
wealth, which averaged from 4 to 5 per cent, leading to huge inequality of
wealth. We need to realize that innovation and growth alone are not sufficient
to reduce the effects of the wealth gap.
Are we on the path back to the
Gilded Age?
No one can really be sure. The main point of the book is that we
are inside a pilotless plane. We must find a natural procedure or method that
can assure us that we will find ourselves landing on a safe, acceptable level.
Would the impact of wealth
inequality matter if wages for the middle class were still increasing?
There are two great forces that are pressing on the middle class
from both sides. One is the increase of the compensation for the highest
executives, which means that the share of wages going to the middle and lower class
is diminishing. That has been particularly true in the United States. The other
force prevailing is that the share of a nation’s income going to the workers
tends to decrease when the share going to capital is growing.
You consider meritocracy a “dangerous
illusion.” That runs opposite the view of many people who believe the US
economy works.
Our modern democratic model is founded on the assumption that
inequalities will be due to merit more than pure luck or inheritance. In some
cases, meritocratic arguments are utilized by the winners of the game to
justify the value of unhampered inequality. I do not believe we can find any
sound justification for giving people more than 100 times the regular wage in
order to produce highly-efficient managers.
People in Europe and the US have
a nostalgic view of the post-WWII era. We experienced expanding national
prosperity that benefited the majority of people. Can we still get back to
that?
It was in reality a transitory period because of the very
exceptional conditions. Growth was considerably high, partly because of
post-war reconstruction and population growth, as a rule, had been extremely
large in the 20th century. This is certainly not an option for policymakers.
The other main reason I think we should not be nostalgic is that one of the
reasons the inequalities were lower in the 1950s and 1960s is that the world
wars decimated some of the inherited capital that was the cause of the previous
inequality.
Why do you think a wealth tax
would dampen the destabilising effect of growing inequality?
Instead of imposing a flat tax on real estate assets, you would
impose a progressive tax on personal net worth. You would minimize the property
tax for those who are striving to begin creating wealth.
Every American politician
believes education is the solution to inequality and immobility. Can more
education provide the answer?
Ultimately, education is the most potent levelling force in terms
of wealth distribution. However, it is not sufficient. We need education as
well as taxation.
How did watching US television
programmes such as House, Bones, The West Wing and Damages assist you in
writing this book?
They contain stories that show us how you can get rich, get poor,
and so on. The heroes of the shows are mostly holders of PhDs. They comprise
the model of skill-based inequality … [The TV series are] like novels in the
19th-century. They can portray in an extreme manner a type of deep
justification or profound satire of the structure of inequality in our
societies.
Critics accuse you being
motivated by a political goal.
This book contains historical facts. It is up to people what they
want to do with it. It has four parts and the last part deals with policy
implications … For me, this is one of the least crucial parts. If you do not
agree with these 100 pages, that is perfectly fine with me. The main objective
of the first 500 pages is to assist readers and decision-makers to come up with
their own conclusions.
Prior to the production and publication of the research findings
done by Piketty and his fellow researchers, economists depended on less precise
parameters of inequality.
For instance, there is the Gini index, from Corrado Gini, an
Italian statistician who initiated the concept in 1912.
The index measures income distribution using a scale of 0 to 1.
Level zero signifies a condition where everyone has the same income. On the
other extreme, Level 1 means that all income goes to a single person.
The Census Bureau declares the United States possesses a Gini
index of 0.48, up from 0.40 in 1967. But without the tax data introduced by
Piketty and others, it would be more difficult to assess what that change
connotes.
At face-value, the minimal growth hides exactly how much money has
accrued at the top 0.01 per cent.