Economists Discover Capital or, Marx with g=0, β↑∞, r→0: revolution, war
It seems like economists are starting to realize that capitalism exists. This is an improvement from the past. We should welcome this discovery.
An economic historian named Thomas Piketty will release a book in English this year called Capital in the 21st century (slideshow version here). In it, he argues that the normal state of capitalism is inequality, growing inequality. He shows this with graphs and history. Such inequality was blocked for six decades of the 20th century only due to massive wars. In the 21st century, the inequality, which is now at pre-World War 1 levels, will cause “severe social disruption” unless a simultaneous, uniform global tax on capital occurs. Since Piketty thinks that this will not occur, the picture is bleak. For Marx, he thinks the solution was the following:
Marx: with g=0, β↑∞, r→0 : revolution, war
Piketty is not a communist, and so he thinks we should rather try to figure out something nicer to do than revolution. Like a tax. A big tax.
Such great premises, such weak conclusions.
Here are some choice quotes from the nytimes review:
There are a number of key arguments in Piketty’s book. One is that the six-decade period of growing equality in western nations – starting roughly with the onset of World War I and extending into the early 1970s – was unique and highly unlikely to be repeated. That period, Piketty suggests, represented an exception to the more deeply rooted pattern of growing inequality.
The six decades between 1914 and 1973 stand out from the past and future, according to Piketty, because the rate of economic growth exceeded the after-tax rate of return on capital. Since then, the rate of growth of the economy has declined, while the return on capital is rising to its pre-World War I levels.
If the rate of return on capital remains permanently above the rate of growth of the economy – this is Piketty’s key inequality relationship,” Milanovic writes in his review, it “generates a changing functional distribution of income in favor of capital and, if capital incomes are more concentrated than incomes from labor (a rather uncontroversial fact), personal income distribution will also get more unequal — which indeed is what we have witnessed in the past 30 years.
The only way to halt this process, he argues, is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme, would restrict the concentration of wealth and limit the income flowing to capital.
Piketty’s analysis also sheds light on the worldwide growth in the number of the unemployed. The International Labor Organization, an agency of the United Nations, reported recently that the number of unemployed grew by 5 million from 2012 to 2013, reaching nearly 202 million by the end of last year. It is projected to grow to 215 million by 2018.
Piketty’s wealth tax solution runs directly counter to the principles of contemporary American conservatives who advocate antithetical public policies: cutting top rates and eliminating the estate tax. It would also run counter to the interests of those countries that have purposefully legislated low tax rates in order to attract investment. The very infeasibility of establishing a global wealth tax serves to reinforce Piketty’s argument concerning the inevitability of increasing inequality.
His prognosis is extremely bleak. Without what he acknowledges is a politically unrealistic global wealth tax, he sees the United States and the developed world on a path toward a degree of inequality that will reach levels likely to cause severe social disruption.