Thomas Piketty on inequalities




| Update:
Jan. 10, 2021, 9:50 p.m.


Thomas Piketty has written a book on a subject that has long been familiar to many, which has recently taken on critical importance. The income inequality associated with the capitalist development of the economy has attracted the attention of economists and policy makers since capitalism became a dominant mode of production and distribution. With ownership of the means of production skewed in favor of a few, the distribution of national income has become asymmetrical in most countries with weak regulatory regimes. In the era of neoclassical economics, two opposing views emerged, one defended by Karl Marx and the other by Symon Kutznets, standing at opposite poles. According to Marx, the dynamics of the accumulation of private capital inevitably leads to a concentration of wealth and income in a few hands which becomes unstoppable. Symon Kutznets, writing a hundred years after Marx, believed that economic growth, competition and technological progress would lead, in the later stages of capitalist development, to a reduction in inequalities. Shaken by these two opposing views, Piketty wanted to know how wealth and income have evolved since the 18th century and what lessons can be drawn from this knowledge for the 21st century.

Although Piketty dealt with the same subject as Marx and Kuznets, he had the advantage of using more comprehensive historical and comparative data than was previously available. He was able to use data spanning three centuries from more than twenty countries in his research. In addition, he was able to use a new theoretical framework that offers a deeper understanding of the underlying mechanism of growth and income distribution. While admitting that economic growth and the diffusion of knowledge and technology have helped countries avoid the dire consequences of capitalist exploitation and infinite accumulation, he pointed out in his book that the inherent tendency inherent in capital to inequality has not disappeared. For him, the crux of the problem with capitalism is the inevitability of the rate of return on capital to exceed the rate of growth of production and income. In other words, owners of capital are paid more than managers and workers, which generates arbitrary inequalities. However, he believes that under a democratic regime it is possible to exercise control over capitalism and ensure the promotion of general interests.

Where Piketty differs from others in the study of the distribution of income and wealth is in his approach to the task at hand. He insists that the distribution of wealth and income is too important an issue to be left to economists. Instead of the traditional approach, he favors what he calls “a method of social science”, which cannot transform economics, sociology, history and philosophy into exact science, but can make it a wide base. By patiently seeking the facts and dispassionately analyzing the multidisciplinary factors at work in the economy, the right questions can be asked about the course of economic growth, income and distribution, he believes.

What he was looking for in his research was to avoid economist determinism by finding the phenomenon of economic inequality. After giving a brief overview of the point of view of classical economists on the subject, moving from Marx to Simon Kuznets, he discusses with them his divergences of findings and points of view, in particular with Kuznets whose U-curve served final conclusion on the issue of income inequality since the mid-1950s.

By way of recap, Piktetty reminds his readers that according to Kuznets’ theory, income inequality automatically decreases in late stages of capitalist development until it stabilizes at an acceptable level. He points out that it was the first theory to rely on a formidable body of statistics. But Kuznets’ statistical series on income covered only one country (USA) and covered only a period of thirty-five years (1913-1948). Kuznets ‘sources drew on two sets of data that were not available to the previous researcher: federal tax returns and Kuznets’ own estimate of U.S. national income from a few years earlier than the first. Based on these statistical data over time, Kuznets concluded that everywhere inequality can be expected to follow a “Bell curve”, indicating an initial increase in inequality followed by a decrease over time. economic development. But Piketty throws a hole in Kuznets’ theory, arguing that the sharp decline in income inequality observed in all developed countries between 1917-1948 was due to two world wars and the severe economic and social shocks inflicted on the rich by the Great Depression. He thus puts the distributional question back at the heart of economic analysis. It’s the first thing new in Picketty’s book and it’s very important. By emphasizing this, he dismantles Kuznets’ theory of a U-shaped reduction in income inequality. In debunking Kuznets ‘popular theory, he also criticized economists’ long neglect of the issue of inequalities in the past and today.

For this new task, Piketty used new data sources, in addition to those used by Kuznets. But here he comes up against a dilemma: Were Kuznets’ predictions wrong because his sources and data pertained to a period that was not normal (war, depression) or were they inherently flawed? Obviously, Piketty finds fault with the former, that is, the data relating to an abnormal period of economic growth and distribution. As for the intrinsic merit of the data, he had no dispute with Kuznets ”; rather he was full of praise for them.

To avoid the problem of anomalous years and the geographic limitation of a single country, Piketty extended the period to three hundred years during which he collected data in twenty countries. This is a formidable body of statistical data covering some 20 countries, which is sufficient to capture both normal and abnormal years of economic growth and thus determine average or general trends in the distribution of income. Piketty, however, is too smart to avoid the pitfall of average numbers and attempts to combine periods of inequality with those when it has declined. Excluding external shocks, such as war and depression, he identified periods when income inequalities decline due to the expansion of education, skills development and the diffusion of technology, periods when forces of ‘convergence’ of income and wealth are firmly at work and periods of ‘divergence’ when the opposite occurs. It took very careful research and detailed analysis of the data to identify those periods for which Piketty deserves praise. Its general conclusion is that over a long period of time the forces of divergence outweigh the periods of convergence in frequency and robustness, making the aggregate outcome of capitalist economic growth a result of increasing income inequality. This reinforces the essential characteristic of the capitalist system to generate a rate of return on capital higher than that of production and wages. Because of this inherent tendency towards asymmetric return, the process by which wealth is accumulated and distributed contains powerful forces pushing towards divergence which results in a high level of inequality. He admits that forces of convergence may also exist in some countries at times such as the expansion of education, the diffusion of knowledge and skills and the diffused use of technology, but he believes that the forces of divergence can. at any time regain the upper hand as it seems to be the case. is now happening at the start of the 21st century. While Piketty’s conclusion moderates Marx’s infinite accumulation and perpetual divergence somewhat, this does not change the inevitability of the inequality emerging during capitalist growth, which can at best be slowed down in times of convergence.

In Piketty’s analysis of capitalism, inequality remains a fact of life, despite its occasional attenuation. Economic growth, over time, does not curb its tide or slow the process as Kuznets had demonstrated. This is the major difference between the findings of Piketty and those of Kuznets. Although he says he has no interest in criticizing inequality or capitalism per se – especially rare social inequalities are not per se a problem for him as long as they are justified, that is – that is, based solely on the common utility, it is keen to make its contribution. organize society in the best way with the most appropriate institutions and policies to achieve a just social order. Perhaps the apparent contradiction here can be explained by its refusal to adopt “violent measures” to eliminate inequalities instead of democratic moderation. To solve the problem, he recommends the use of the instruments of progressive income tax, progressive inheritance tax and a comprehensive wealth tax as a remedy for growing inequality. It is on the third option that reservations will be made by governments and it is the weakest of its political prescription. Instead of trying to impose a worldwide wealth tax, it would be easier to opt for a national wealth tax and a progressive income tax by a country. Piketty’s recommendations for corrective action are not only lacking in novelty, they are also unrealistic. In a democracy, it would be difficult to impose a high rate of progressive income or inheritance tax on the rich because they wield considerable political power. This brings back the question of the “violent way” of reducing the size of wealth to the root, namely inheritance tax and a cap on the rate of return on capital (salaries, bonuses for managers). But the common criticism of Piketty’s analysis will be the utility of the idea of ​​convergence (towards less inequality) and those of divergence leading to an opposite result. Since they will not operate on a regular basis and to the same extent, how will they help estimate the magnitude of inequality in a given year when tax liability is to be assessed? Sporadic and irregular events like convergence and divergence cannot be the basis of a permanent policy, simply because the calculation of the result of their interaction cannot be done in real time in a given year. Thus, Piketty’s views on convergence and divergence, however new, remain in the realm of possibility, uncertain. In view of the familiar fact of the inequality resulting from the functioning of a capitalist system and the known facts about the difficulty of imposing a very high level of progressive tax, one wonders if the hard and painstaking work on which the book is based was worth it. problem. His only point of originality in the book is to point out how Kuznets made a serious error in his theory of the decrease in inequalities during growth.

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