Few economics books have caused quite the stir which accompanied the release of the English version of Thomas Piketty’s Capital in the Twenty First Century. And there can be few who are not familiar with the basic tenor of its argument. In short, it contends that capitalism has a tendency to concentrate wealth in the hands of fewer and fewer; that markets on their own will not correct this tendency; and therefore that governments ought to do something about this.
His conclusion is supported by an abundance of historical data which Piketty has made freely available. It is this data which has been reanalysed by Chris Giles and Ferdinando Giugliano and has led to some to-and-fro squabbles between Piketty and the Financial Times which have threatened to overshadow the broader debate.
That capitalism should lead, in a settled economy, to the concentration of wealth is relatively uncontentious. As Winston Churchill memorably pointed out, “The inherent vice of capitalism is the unequal sharing of blessings”. This tendency arises from the nature of the system. The rewards of capitalism flow disproportionally to those who have ventured capital, therefore those with greater access to capital, the affluent, can expect to benefit most in absolute terms. Further, those with economic power also have greater means to influence policy and markets in their favour. Thus, in a settled economy, with no government intervention, economic forces will tend to concentrate wealth.
There are some who suggest inequality and the envy which accompany it are spurs which promote economic growth. However, it is opportunity which motivates – inequality arises as a result of making the most of such opportunities. Inequality, from a social point of view, is an externality which arises from economic growth. It is not a cause of growth, it is a side-effect. Indeed, too much inequality can choke off growth.
Power and social justice
Although we may conclude that inequality is an inevitable consequence of economic growth in a capitalist economy, it does not follow that inequality is socially desirable.
Following John Rawls‘ A Theory of Justice, increasing economic inequality will be just only if it results in benefits for everyone; this will include, of course the least advantaged members of society. But as Friedrich Nietzsche pointed out:
Justice is … reprisal and exchange upon the basis of an approximate equality of power.
Where power – including, of course, economic power – is very unequal, we might expect little justice. The social problems associated with inequality – mental illness, drug addiction, obesity, loss of community life, increasing reliance on imprisonment, unequal opportunities and poorer wellbeing for children – are well enough documented that we need not go into them in great detail here.
In a free market economy, we may draw the distinction in theory, if not so easily in practice, between two separate phenomena. First, inequality which arises from an individual’s contributing to increasing national wealth, and their taking a disproportionate share of this increase in wealth as recompense. Second, we have an increasing inequality which arises from inequities which already exist.
Given the benefits of encouraging innovation and the costs of perpetually increasing inequality, society would do well to encourage the former and discourage the latter. This is the import of Piketty’s suggested wealth tax. He is not the first to suggest such a means to underpin sound economies, nor does he go so far as some. More than 100 years ago, the millionaire Andrew Carnegie argued:
It is difficult to set bounds to the share of a rich man’s estate which should go at his death to the public through the agency of the state.
In sum, however it may be that Piketty or his critics have under- or over-stated the level of inequality (and it should be borne in mind people interpret the validity of statistical analysis based on their own prior subjective beliefs). Inequality in the UK and the USA is on the rise.
There are good reasons to suppose this will undermine the long-term viability of our society if the trend continues. The solution to inequality is not, of course, to do away with the blessings of capitalism, it is to find a means of sharing for the benefit of all. However we might quibble about the details, the broad thrust of Piketty’s argument remains valid.