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General · 5th October 2014
Ray Grigg
A 696 page book on economics is unlikely to be a publishing sensation. But Thomas Piketty's Capital in the Twenty-First Century is an exception. It quickly climbed to bestseller status in 2014 and has stayed there for months. Anyone who gives a serious thought to economics has found this difficult book by an obscure French professor to be mandatory reading. Scholars have ranked it as one of the most important books in economic history, placing it in the rarified company of such seminal thinkers as Adam Smith, David Ricardo and Karl Marx.

Why all the attention? First, Capital in the Twenty-First Century explains, with simple elegance, why the rich get richer and the poor get poorer, a fundamental social problem that has fomented civil unrest in the past, is irritating modern cultures today, and is becoming an increasingly acute malaise as we wade further into the 21st century. Second, unlike most books on economics, Piketty has reversed the usual process of advancing a theory and then correlating it to reality. Instead, he and his team undertook 17 years of exhaustive research that laboriously analyzed the history of taxation in almost 30 countries — the emphasis was on France, Britain and America during the last 300 years — and then drew conclusions from the evidence. This empirical approach gives his ideas a special credibility that authorizes a thoughtful re-evaluation of modern economic practice. Third, Piketty has established that wealth inequality rises as an unregulated capitalist economy matures, the opposite of most current theory. And fourth, Piketty is not a Marxist describing a doomed system; he is an avowed capitalist who is trying to identify its faults so the economic system can be adjusted to becine more stable, sustainable and beneficial.

So, why do the rich get richer and the poor get poorer? Simply put, the rate of return on capital tends to exceed that of economic growth. Everyone without money to invest — the wage-earners whose prosperity is directly linked to the gradual increase in society's collective wealth — finds that their rising prosperity is routinely surpassed by those who have money to invest. Over a period of time, the gulf between the rich and the poor widens.

This widening gulf eventually has dire social consequences. The economic bifurcation — the division of people into two disconnected groups — ultimately culminates in antagonism. Social order is based on an underlying principle of fairness; when that fairness is violated by excessive differences between those who have more than they can even spend and those who struggle in economic distress to satisfy even basic needs, then the result can be an uprising against an unjust system. According to Piketty, the economic distance between the rich and poor today is almost exactly what it was in 1789 at the beginning of the French Revolution.

Revolution is only one of the uncomfortable forces that can level the economic differences between the rich and poor. Some of the economic disparity of so-called Gilded Age — the few decades prior to 1914 when about 1% of the population owned about 50% of all wealth in Europe and North America — was levelled by the First World War. The distance that was rebuilding between the rich and poor shrank again with the hyper-inflation of the Great Depression of 1929 — the two economic classes moved closer together because the rich lost proportionally more wealth than the poor. The Second World War also inspired social changes that eased the distinction between the two economic classes. This levelling trend continued until about 1970 when taxation and wage policies flatlined the income of the middle class and the distance between the rich and poor began to increase again. The gulf has now widened sufficiently that Piketty anticipates trouble — he uses the word “terrified” to describe his concern that, once again, the past will “devour the future”.

The difference in wealth also causes trouble indirectly. As the rich get richer, they accrue more political power. Economic and policy controls, even in democratic societies, shift toward those with money, toward the billionaires and corporations that gain a disproportionate influence over political processes. The shrinking middle class and the expanding populations of the relatively poor lose influence and autonomy over their own lives. The facade of fairness can only be maintained for so long before dissatisfaction and discontent create tensions that rise to explosive levels. The rich don't want to yield power and the poor won't tolerate the inequality. History, according to Piketty's research, suggests the resolution can be messy.

Piketty doesn't explore the environmental ramifications of the rich getting richer and the poor getting poorer, but they are fairly obvious. Because invested capital wants to maximize returns, it engineers and maintains a culture of consumerism and resource extraction. Oil, gas and coal are the traditional and entrenched energy sources closely linked to the entire economic structure generating profit for the wealthy. Furthermore, the vast amounts of superfluous capital accrued by the wealthy must be put to use. This insatiable quest to optimize profits is always seeking and devising lucrative places to invest. Not surprisingly, nature is routinely assaulted by ingenious profit-producing schemes. Moreover, the pace of exploitation rises to match the ascending amounts of invested capital, and global climate change becomes exceedingly difficult to stop. Predictably, those with heavy investments offer stiff resistance to any social, economic, structural or environmental changes that attempt to redesign the existing system — even though the changes are intended to make the system more sustainable, they are invariably interpreted as disruptive and threatening to invested capital.

Piketty's book has stimulated many ideas for a more equitable distribution of wealth and a wiser utilization of capital. A capitalism improved by closer supervision, tighter controls and clearer guidance would better serve society and the planet. The alternative, to use his word, is “terrifying”.