Tuesday, April 29, 2014

Piketty fence

By Carl 

So I’m back from vacation and I keep seeing this name on my Tweeter and FacePlace feeds: Thomas Piketty.

Sounds vaguely Dickensian.

From what I gathered, Piketty wrote a book proposing a new economic theory that would put paid to many of the basic notions that support capitalism. 

Let's take a look:

Piketty's argument is that, in an economy where the rate of return on capital outstrips the rate of growth, inherited wealth will always grow faster than earned wealth. So the fact that rich kids can swan aimlessly from gap year to internship to a job at father's bank/ministry/TV network – while the poor kids sweat into their barista uniforms – is not an accident: it is the system working normally.

If you get slow growth alongside better financial returns, then inherited wealth will, on average, "dominate wealth amassed from a lifetime's labour by a wide margin", says Piketty. Wealth will concentrate to levels incompatible with democracy, let alone social justice. Capitalism, in short, automatically creates levels of inequality that are unsustainable. The rising wealth of the 1% is neither a blip, nor rhetoric.

To understand why the mainstream finds this proposition so annoying, you have to understand that "distribution" – the polite name for inequality – was thought to be a closed subject. Simon Kuznets, the Belarussian émigré who became a major figure in American economics, used the available data to show that, while societies become more unequal in the first stages of industrialisation, inequality subsides as they achieve maturity. This "Kuznets Curve" had been accepted by most parts of the economics profession until Piketty and his collaborators produced the evidence that it is false.

In fact, the curve goes in exactly the opposite direction: capitalism started out unequal, flattened inequality for much of the 20th century, but is now headed back towards Dickensian levels of inequality worldwide.

Well, at least now I know why his name sounded Dickensian.

A cursory examination of the history of the American economy... indeed, any Western economy after the 1700s... would support Piketty's theory. There are numerous instances where income inequality expands, and then contracts after an economic bubble bursts. This is usually because the investor class – you know, the 1% – milks the excess cash and assets out of an economic entity, then walks away to leave it unbalanced and unstable.

The markets crash, and the paper wealth of that 1% drops precipitously since the investor class is outsizedly affected by investment classes (kind of obvious, but it needed to be said). But, and this is Piketty's point, income inequality never quite achieves the level it had after the last crash, but less an income parity at any point.

The long-term curve mimics the short-term curve: it points skyward. What does, in fact, bring it back down to more moderate levels is the introduction of what many would call "socialist programs": the notion that the poor and middle classes do all the work for the investor class, and as such need to be protected from the vagaries of the market swings.

So we have unemployment insurance, and Social Security, and welfare, and any number of jobs programs. All to keep the supply of economic fodder alive long enough, just long enough, to perform economically valuable work.

Of course, to afford these programs, government either need to borrow (and defer tax increases) or raise taxes. Either way, the investor class gives back some of that income inequality in the form of what conservatives would call "handouts," but in truth are lifelines for the working classes.

And we're supposed to be grateful.

In short, you and I spend our entire lives making other people rich so they can hand off their money to their dilettante heirs.

(Cross-posted to Simply Left Behind.)

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