Posts Tagged ‘thomas piketty’

I try to vary my reading. Should I read books on science and scepticism? Or science fiction novels? Or classics? I aspire to a mix of all three.

Sometimes this seems like a silly thing to do. Take Jane Austen for example. I remember reading Pride and Prejudice and thinking to myself “why am I reading this? It is just a bunch of women gossiping, this is neither entertaining nor useful to my life.”

Little did I realise that a year later I would be reading Thomas Piketty, who decides to illustrate the otherwise very dry economic theory with comparisons to the characters of Austen’s novels.

There is a use for the petty troubles of the landed gentry after all…

When I was a kid, working out what class you were was simple. If you brought TV Times you were working class, if you bought Radio Times you were middle class and if you had a man to read the TV listings to you, you were upper class.

As I have grown older though, I have begin to wonder whether it might be slightly more nuanced than that.

A traditional British view might divide people into the aristocracy, the lords and ladies, the middle or ownership class, who own factories and businesses, and the working class, who work in them. I use traditional in a loose sense here because that has only been the case since the industrial revolution. This view fits with the wider social description of the class “between” the peasants and the nobility.

In more recent times, many new definitions have been brought forward. Some of which may have been promoted by governments in an attempt to create an aspiration. The advantage of this being that people will make sacrifices in order to achieve it, thus suppressing criticism of their policies.

Further education being a good example. Did you parents go to university? Or enjoy a high-prestige job such as a doctor or lawyer? Under some definitions this would categorise you as middle class.

In Capital in the Twenty-First Century Thomas Piketty divides society up into the top 10%, the middle 40% and the bottom 50%. Though he does this with the explicit statement that these are arbitary boundaries that are useful for statistical comparisons across states and not meant to be taken as definitions.

He does note however that one of the major changes of the last century was a shift away from a 10% owning everything, to 10% owning most things, while the 40% managed to gain a house (the bottom 50% still owning nothing). Home ownership could therefore be considered the qualification for middle class.

Ultimately then it would seem there is no agreed definition of what the middle class actually is. It would therefore seem wise to define it in the context of any debate being had.

How has wealth inequality changed over the previous few centuries and what does that tell us about the present? That is the rather large question that French economist Thomas Piketty attempts to answer in this book.

No doubt his writing is in a far more coherant and structured format than my description of it, but here goes.

H begins with a global outlook. Poor countries are gradually catching up with rich countries, and he notes that wealth inequality is primarily within a country. China is making rapid progress in catching up with Europe for example, while the working class of Europe are not making the same gains on the upper class.

Nevertheless, it is a long and hard struggle. Once one country has an advantage, it can essentially own another. This is how European nations managed to maintain colonial domination while running a trade deficit. We could simply put our colonies into debt and then force them to work for us to pay it off.

Once they do grow, they are unlikely to overtake us because as they become a first world country the growth levels off. They are also a long way behind. Europe has 2000% the wealth of China for example, so even growing at 8% a year, once you factor in that Europe is also growing, that is a long way to catch up.

The oil countries could see huge growth though because of their sovereign wealth funds.

Europe itself remains incredibly rich. Richer than anyone else in the world. Though admittedly the United States are the only real competition. However this wealth is all in private hands. European governments themselves are heavily in debt, mostly to their own citizens, and typically have a capital of 0, because their public assets only just cover said debts.

It is traditionally highly unequal wealth. Far from being the land of the financially free, it was the United States that pioneered high tax of the wealthiest and it is only in recent decades that America’s wealth inequality has become greater than Europe’s.

This wealth is very concentrated. One way is labour inequality. Some people are paid far more than others. Though this is not always the close. In 1970s Scandinavia the top 10% of earners claimed 20% of the earnings. This seems a reasonable level of inequality to me.

A much more pressing issue though is capital inequality. Even in the most equal societies the bottom 50% will typically own nothing. Before the World Wars 1% typically owned 50% and 10% owned another 40%. The Wars changed this, but only as far as to allow the next 40% to buy their own home, which is not much by comparison, and still leaving 50% without assets.

Capital inequality is typically inherited. Thus it is not a useful form of inequality because it does not provide motivation for people to earn money. The point of inequality is to motivate people to work hard and earn money, but there is no utility in allowing people to merely inherit large amounts of capital – in fact this encourages them to do nothing.

It is also worth noting that labour inequality does not necessarily provide this motivation either. This is because the differences in “super manager” compensation cannot be directly related to a persons output but rather by industry and non-talent based conditions (luck).

Once people are rich the problem of wealth inequality perpetuates itself. Inflation, which many assume would reduce wealth, actually makes the situation worse. This is because poor people see their savings eroded by inflation while large amounts of capital is able to better protect itself.

It does this in a number of ways. By being larger, the capital of American university endowments when compared to individual savers for example, can afford to spend far more on management. Harvard has around $30 billion, so can spend $100 million a year on management with that only being 0.3% of their capital, which will be more than made up for in growth.

Secondly, with a bigger fund you can diversity into more risky assets. This produces a less predictable short term but a more profitable long term. Thirdly, many options that Harvard invest in may simply be entirely unavailable to small amounts of capital, such as products which require a large minimum investment.

Thus the rich get richer and the poor get poorer with no relation to the work, productivity or utility of the individual. There is no self-correcting mechanism for this.

What can we do about this?

Free university could be one way. It seems to have reduced inequality in the Nordics, though this has not been entirely proven. Picketty also suggests minimum wage will not help in the long run.

He suggests a global tax on capital. This would be low, initially at 0.1% of total capital, progressively rising to 0.5% for the largest fortunes.

This would have to be done in a global level, or at least a European level and require cooperation from banks. Otherwise people would just hide their assets. Indeed, it should be noted that the balance of payments for Earth is currently negative! More wealth flows out that comes in. This is of course theoretically impossible, but could be accounted for by tax heavens not being transparent.

A global tax on capital would encourage people to generate money and become rich, which ensuring that these fortunes cannot be used by future generations to unfairly dominate the economic landscape.

In summary, the following points:

• Capital inequality is the biggest form of inequality
• The twentieth century saw some reduction in the importance of inheritance, but this is now returning
• Large inherited fortunes serve no utility to society
• Large fortunes are able to perpetuate themselves and thus the rich get richer and the poor get poorer
• There is no natural self-correcting mechanism for this
• The best way to tackle this would be with a global tax on capital