The past few days, OpEdge has been printing excerpts from the article I wrote on Thomas Piketty’ Capitalism in the 21st Century, which appeared in the most recent Jewish Currents.
This final excerpt from the article discusses my criticism of Piketty’s postulation of r>g as a natural law that over time tends to create ever greater inequality in capitalist economies.
While Capitalism in the 21st Century is a delight to read and has many important insights, it is not without its faults. For one thing, Piketty says that r>g is a natural law, meaning it is not a theoretical construct but a law that describes an inevitable economic process.
There are two problems with this assertion. For one thing, Piketty’s history begins only in 1800; the obvious question is whether his rule applies before the Industrial Revolution. Is it possible that social breakdowns such as the French Revolution, the fall of the Tang and Song dynasties, and the decline of the Roman Empire came about because the rich had finally taken too much from the economy, i.e., r>g produced such a great disparity of wealth that the economy fell apart or people rebelled? Did catastrophic events such as the Black Plague or the Little Ice Age of the 17th century create instant resets that ameliorated wealth inequality? Barbara Tuchman reports in A Distant Mirror that after the Black Plague, the price of labor in Europe soared to a record high (still not surpassed in world history) because of a shortage of workers. All of this predates Piketty’s history and goes undiscussed.
A more significant flaw in Piketty’s postulation of a natural law is that it attributes growing inequality to blind forces inherent in capitalism and market economies. But the increase in inequality between 1970 and the present day ensued as a direct result of specific actions by groups of human beings. These actions included: shifting the tax burden away from the wealthy and placing it on the poor and middle class; union-busting policies by governments; allowing the minimum wage to lag behind inflation; privatization of government services and wealth throughout most of the world; lowering taxes while cutting government spending on education, retirement and social-welfare programs; and funding wars not through taxation, but through debt held primarily by the wealthy.
Real people — most of them in the pay of the wealthy and corporations — enacted these policies. They were not the result of some natural force, except the natural tendency of humans to think only of their own short-term interests and not in the long-term interests of the community.
Most quibbles about Capitalism in the Twenty-First Century are criticisms of Piketty’s unrealistic solution for reversing the trend to ever-greater inequality of wealth and income throughout the world. He proposes a worldwide annual tax on extreme wealth by all governments, plus a very steep, progressive worldwide income tax on top of current income taxes. Based on his analysis of past income tax rates, Piketty proposes that we could implement a marginal rate of 70 percent on income above $500,000 or a $1 million. The government would transfer this wealth back to the poor and middle class with government programs. Piketty says that unless all nations of the world agree to these taxes, the wealthy will transfer their income and wealth to those that don’t agree to the plan. It is, however, pie-in-the-sky thinking to imagine that all the countries in the world will get together and suddenly decide to play Robin Hood.
It might be more realistic to take the same kind of gradualist approach that the wealthy have taken since the mid-1970s to take a greater share of the wealth-and-income pie. The 90 percent could grab back a little at a time by gradually changing policies in the industrialized world. For example, former Secretary of Labor Robert Reich proposed ten incremental changes we can make in the United States in a recent article by Robert Reich in The Nation (“10 Practical Steps to Reverse Growing Inequality”), including raising the minimum wage to $15 an hour, unionizing low-wage workers, making the tax on Social Security and Medicare progressive, raising the estate tax, and eliminating big money from politics.
I also believe Piketty is wrong to view the diminishment of economic inequality as a primary goal of society, as wrong as those who propose freedom from government regulation as a goal. To my mind, we would be far better off if we instead based the constraints we put on the “free market” on the idea that all human beings deserve a minimum standard of living, which includes free health care and education, a living wage, a safe work place, an unpolluted environment, and a comfortable retirement.
Certainly, ensuring that we all enjoy these economic basics will require us to raise taxes on the wealthy. Where else will we get the funds to do it? But to hold shrinking inequality as a goal in and of itself doesn’t directly address the myriad problems we face. Martin Feldstein is right in his criticism of Capitalism in the Twenty-First Century when he says that the problem is not inequality but the persistence of poverty. Of course, as a defender of the interests of the ultra-wealthy, the solutions that Feldstein proposes will only lead to greater wealth and income inequality.
As I write in the article, Capitalism in the Twenty-First Century is a formative and groundbreaking work that will be studied and cited by economists and will direct the political discourse in democratic countries for decades to come. I highly recommend to all readers.