A major book on capitalism's flaws by a French economist reignites the debate on income inequality. But why must capitalism's past be prologue if capitalism can help trim its excesses?
Hard to imagine but only 25 years ago the world was still divided over whether to put an end to capitalism. But with the collapse of communism at the end of the cold war, a big divide now exists over how to fix capitalism’s excesses. Enter a major book, published last month in English by French economist Thomas Piketty, that has reignited the debate over whether capitalism is a main cause of economic inequality.
The book, “Capital in the Twenty-First Century,” has been hailed by some as a data-driven tour de force that once again puts capitalism on the defensive. Tapping into historical information back to the 1800s, Dr. Piketty makes three basic points:
1. Left alone, people with money to invest (capitalists) have tended to accumulate wealth at a faster rate than those who rely on income mainly from the general economy, such as wage earners. Over the centuries, capital has earned 4 to 5 percent in real terms while other sources of income have grown only 1 to 2 percent.
2. With nothing to disrupt this concentration of wealth – such as the two world wars and Great Depression did in the 20th century – wealth distribution will only worsen in this century. The rising disparity of income will be “potentially terrifying” to democratic societies and push many nations to pull out of the global economy.
3. A worldwide mechanism is needed to track the income of the wealthy and tax them at universal rates reaching 80 percent, which would help keep them from shifting money to low-tax countries.
If there is a big weakness in this work, it is that it projects the past into the future, offering few allowances for other kinds of wealth equalizers than higher taxes. Critics note that many modern technologies, such as smart phones and 3-D printers, can help individuals as much as corporations to earn money. More cities and countries are learning how to build “innovation hubs,” such as those in Boston and Silicon Valley, or nurture stable communities to help foster the networking needed to start new businesses. And the new ways of delivering knowledge, such as remote e-learning, are nothing like the educational systems of the previous century.
Also relatively new are incentives for workers to become capitalists, such as the tax breaks and employer matching used to build up retirement savings. In the United States, a majority of workers now have a direct financial stake in Wall Street.
Such developments serve as unexpected antidotes to income disparity. They rely on a view of capital as an intangible, or the value a person puts on a new idea for the economy that is worthy of an investment of money. “Progress and prosperity depend not just on the efforts of a privileged knowledge elite but on how well we can unleash the creativity of each and every human being,” states a 2011 survey known as the Global Creativity Index that ranks countries by such measures as openness to fresh thinking.
Wealth disparity has many causes. But expanding capitalism to more people and in new ways, and thus creating more incentives to invest in new insights, is a good answer to one of capitalism’s excesses.