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Home Publications Blogs Beat the Press Piketty's Relentless Wealth Gap Need Not Be So Relentless

Piketty's Relentless Wealth Gap Need Not Be So Relentless

Wednesday, 12 March 2014 12:08

Eduardo Porter picks up on the fashion book of the week, Thomas Piketty's Capital in the 21st Century. The punchline, which Porter accurately conveys, is that we are on a path of ever greater concentration of wealth and income. Piketty's isn't happy about this and recommends wealth and inheritance taxes as remedies, but since these taxes don't sound very likely, the picture looks pretty bleak.

While the book has much useful information and is well worth reading, folks can feel justified in taking its conclusion with more than a grain of salt. There is a lot about the determinism that doesn't seem quite so determined. For example, the greater concentration of income is most apparent in the U.S. and U.K.. There is nothing really to talk about in the case of France, not too much in the case in Germany, and pretty much zero in Sweden if we pull out the 70s when there was a sharp reduction in the concentration of income.

Much of the concentration of income hinges on policies that could easily be altered without overturning capitalism. For example, shorter and less stringent patent protection would go far towards reducing the concentration of income as would a return to the old fashioned view that monopolies like cable companies and Internet providers should be subject to regulation. (This is the topic of my book, The End of Loser Liberalism: Making Markets Progressive.)

I have a longer list of items in my review of the book. I won't repeat everything here, but I will just say that anyone who gives Bill Gates credit for inventing the mouse can reasonably be accused of paying insufficient attention to institutional detail. I will also add that the figure accompanying the Porter piece, which projects [mistakenly] the ratio of private capital to income through the year 3000 certainly looks a bit overly deterministic.


Note: corrections made, thanks TK421.

Comments (11)Add Comment
written by TK421, March 12, 2014 12:48
"but since these sound very likely"

Is that what you meant to write?
Piketty's not mired in the 19th century...
written by LSTB, March 12, 2014 1:08
...He just didn't read it.

Piketty has a grim picture of the future. The story is that slowing growth will lead to a rise in the ratio of capital to income, which we have already seen throughout the world with the rise in stock and house prices.

It's not the ratio of capital to labor that will rise, it's that ratio of land to capital and labor that will rise. The reasons this kind of stagnation didn't appear in the early 20th century were (a) progressives enacted property taxes (incl. the 1916 income tax), and (b) the internal combustion engine conserved land.

Unless we find a way to create clean energy on a heretofore unimagined scale that allows flying cars from suburbia or whatever, technological advancements will increase the returns to landowners and not capitalists and workers. Better to own the land the robots work on than the robots themselves.

Piketty should read Henry George and ditch Marx.
written by JSeydl, March 12, 2014 1:19
I'm about halfway through Piketty's book, and I don't think he presents rising inequality as a deterministic law of capitalism. In fact, he makes it very clear in the introduction that there are always forces pushing in different directions: higher educational attainment and skill development work to push against rising inequality, while high sustained rates of return on capital reinforce it, to name just two of the forces Piketty talks about. His point is that the forces reinforcing rising inequality have dominated and will likely continue to dominate. This is a prediction, not a law.

The points mentioned in the HuffPo article are fair criticisms of Piketty's work. Though I don't think he's knowledgable enough about US institutional frameworks to get too far into the specifics. (And nor should he be, in my opinion.) But one has to ask how all these institutional changes creating high inequality came about in the first place. They were in effect political changes, which we didn't democratically vote for.

Could rising inequality, perhaps due to high returns to capital owners, have produced these political changes, in turn reinforcing the inequality? What comes first, the chicken or the egg?

The tension between capitalism and democracy is well known and well researched. The tension manifests itself as follows: the political sphere wants to make the economic sphere more democratic, and the economic sphere wants to make the political sphere less democratic. That tension is the history of Western capitalism. When inequality rises, it means the economic sphere is winning the battle; and vice versa when inequality falls.

In other words, it's an incredibly unstable tension, which I feel as though Piketty makes clear - to combat the Solows and Kuznets of the world who think that everything is stable and under control.
written by urban legend, March 12, 2014 3:12
Full employment -- creating a demand for labor -- would be the best start towards a correction. Democrats could run successfully on "full employment" as the counter-punch to the Republicans "low taxes." Which do you want, lower taxes on income you don't have or might not have tomorrow, or an income to pay taxes with? Views will differ, but the majority will choose more jobs and higher incomes.

Democrats won't get far running on weaker patent protection or, these days, stronger antitrust enforcement.
adjusting to globalization will take some time....
written by pete, March 12, 2014 5:10
Bottom line is unskilled US workers make 10 to 20 times some workers in places like Bangladesh. Choices are either to halt the growth in global wages, which is phenomenal, by a mercantilist policy in the US, or payoff our unskilled like Europe does, with awesome SSI and unemployment, housing, health care, etc. Wishing for something else is silly, the global train has left the track.

Regarding inequality...after this tech revolution, there is the understandable inequality, as growth has been fantastic, driven by tech workers, who have reaped the rewards. Now settling into the new normal, this wealth will dissipate, much as it did from 1920 to 1968, peak equality, the beginning of the tech boom.

By the way Dean, related to your post on Mr. Daley, Coca Cola has like a beta of .5, it is a very stable stock, so quite unsurprising that it has underperformed during the market boom. It also has about $9B in earnings each year for its shareholders, so Mr Kent is getting $30M, a small chunk of that. And likely these are temporary bumps, cashing in stocks and stuff, not constant salaries. Mr Buffett apparently approves.
written by Loser Liberal, March 12, 2014 6:25
Dean is too quick to discount redistributive taxes and transfers as remedies. The Nordic countries of Denmark, Finland, Sweden, and Norway, which have much more equal post-tax-and-transfer incomes than we do in the US, all suffer from pre-tax-and-transfer income inequality Gini index levels that are about the same as ours. If the story is that the rich are rigging markets to make money flow up, such as through patents, then they aren't any better at it here than elsewhere.
written by Marko, March 12, 2014 6:40
"...anyone who gives Bill Gates credit for inventing the mouse can reasonably be accused of paying insufficient attention to institutional detail."

I wouldn't have expected Piketty to spend a lot of time worrying about fact-checking mouse inventors with such a book as "Capital". Maybe he only went as far as Wikipedia , which states :

"In 1982, Microsoft made the decision to make the MS-DOS program Microsoft Word mouse-compatible and developed the first PC-compatible mouse. Microsoft's mouse shipped in 1983, thus beginning Microsoft Hardware.[21] However, the mouse remained relatively obscure until the 1984 appearance of the Macintosh 128K, which included an updated version of the original Lisa Mouse..."


So , "developed" instead of "invented". A rather trivial difference , I'd say , and , who knows , maybe the French version of Wikipedia botched the translation.

Piketty et al. have done more to advance the discussion about inequality than just about anyone on the planet. You diminish yourself with your sniping , which appears to me more a manifestation of book royalty envy than anything substantive.
What about a pushback from the impoverished class?
written by John Wright, March 12, 2014 10:06
The increasing inequality Piketty sees suggests he believes the general population will always be well-behaved and not try to forceably extract some wealth in desperation.

I view the current distribution of USA wealth as determined by government policy and influenced by propaganda, and not some natural economic predestinaton.

The well-off still have to live somewhere and will have to pay heavily for personal safety if they are judged as extracting too much of the nation's wealth by their fellow citizens.

Now the USA does seem to be organized under the "Taking the Risk out of Democracy" premise advanced by Alex Carey, in which business propaganda influences the population's behavior leading to deference to the business class, but I don't see why this has to remain this way.

For example, I view the large USA military as a primary benefit for the ruling elite class in preserving the current global order, with negative value for the middle and lower classes, yet the USA military is pitched as "fighting for our Freedom" with the cost borne by all.

The article seems to suggest the typical USA citizen will passively and willingly descend into genteel poverty as they defer to the elite.

Perhaps the French aristocracy in 1781 believed the same.

Dean Baker's review (linked above) makes Piketty potentially much more useful.
written by jaaaaayceeeee, March 13, 2014 4:13

Here's Eduardo Porter's latest nyt overview of Piketty:

Eduardo Porter, like Dean Baker, appreciates how conclusively Piketty documents the damage that inequality, rising out of control, does to free markets.

Porter's economics reporting is easy to understand. He explains well how Picketty debunks the free market tenent that inequality will stabilize and subside on its own.

But Porter has Picketty saying reforming income taxes and wealth taxes would work, but that history doesn't offer much hope, that reform is politically feasible, as though we have no alternatives to relentless, increasing, inequality and damage.

So Dean Baker's review of 3/9/14 linked above, is looking better and better, because Baker shows how low wage havens like China are disappearing, meaning bargaining power can add to political feasibility.

Baker's review also points out that there is no law of capital preventing political action to reform drug and tech patents that lead to corruption and economic waste. Regulating monopolies, financial transaction taxes, TBTF banks, better corporate governance for pay, and other reforms have worked, and can again.

Dean Baker also covers the ongoing usefulness that the income distribution analysis of Saez, Picketty, Alvaredo and Atkinson will provide.

Having read at least 4 articles, I am starting to appreciate Picketty, Dean Baker's comments and review of Picketty's book. Without this blog post, I would have missed Dean Baker's review, and not had a chance, so thanks.
A little bit of beltway cynicism
written by Dave, March 13, 2014 8:40
There seems to be a natural human tendency to rely upon bits of first hand knowledge of existing political debates to determine what a person believes to be possible. For some reason, nobody wants to risk sounding out of touch with the current state of dysfunction by sounding hopeful or naive.

There needs to be clearer line of communication in which inside people don't taint their ideas by filtering out those that seem politically infeasible. Citizens need the raw picture so they can boot out the powers that put these filters in place.
written by skeptonomist, March 13, 2014 10:34
There is no reason to think that capitalism is self-regulating and tends toward a state of equilibrium in which wealth is evenly distributed, but a belief in something of this kind seems to underlie the thinking of most American economists to a greater or lesser degree. History shows that over time unregulated commerce leads to concentration of wealth. Also finance tends to expand and there is a tendency to develop ever wider swings of financial boom and bust. It is not a simple matter to counter these trends - economists and ordinary citizens do not have the power of plutocrats. It is easy to propose remedies for specific problems such as patents, but whether those remedies would work has often not been determined.

The economic regime in the US and other countries after WW II through the 60's was actually causing reduction of inequality. Were the patent laws really that much better then? What specific things were in fact different? One thing which certainly was different is that marginal tax rates were much higher - this may have had effects on incentives which are beyond the simple thinking of most economists on such matters. Financial regulations were stronger then as well. Restoring these things would be politically difficult - actually impossible under present conditions - but there is no reason to think that there are shortcuts to reducing inequality. Significant reform may not happen until the next major financial crash.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.