<>This was not published: 22 May, 2014.
Keywords: Distributional Economics; Political Economy & History;
Thomas Picketty’s book Capital in the Twenty-First Century ‘has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to’. So said Paul Krugman explicitly and ever so many other eminent economists implicitly by the attention they have given the book.
It has come at the right time. There has been increasing concern about the rising income shares of those at the top. It is true even in New Zealand.
I wrote ‘even in New Zealand’ because one might expect the growth of top incomes to be slower in a small economy where it is easier for investors to go offshore. Not surprisingly, the growth of top incomes in America has been much greater. Their upper income inequality is about double our level. Since America’s wealthy set the ideological framework for the whole world, the ideological discourse may be revolutionised by the inequality issue. It is not at all obvious that the coalition between the American rich and the conservative and populist Tea Party will hold.
Picketty presents income evidence from many countries, often going back more than a century, together with long-term estimates of wealth shares (but not New Zealand’s, which don’t exist). He concludes that the rich world was highly unequal up to the Great War, after which inequality fell sharply, staying low until recently. Now it is rising again – back to pre-1914 levels.
The French economist’s theoretical model says that while some of the rich world’s economic inequality comes from exceptional inventions or from very great ability, the majority of the enormous inequality at the top arises from high after-tax returns on wealth, transmitted through the generations by inheritance; the rich get richer and pass it on to their children. The conventional assumption that extreme inequality converges to moderate levels is not happening. Picketty says it wont without significant taxing on capital (wealth taxes, capital gains taxes, progressive income taxes).
He uses his model and empirical findings to project into the future, concluding we may return to a society with vast differences between a small wealthy and powerful elite and the rest of us. It is not just that they will consume more than everyone else, but that they will have considerable influence over the direction of society; a direction which will reflect their interests rather than those of the population as a whole.
It is even possible that the middle classes will find their real incomes squeezed; it’s happening already in the US. Perhaps we shall return to the social turbulence from which many of our ancestors fled 150 years ago. Piketty calls today the ‘New Belle Epoque’; Krugman the ‘New Gilded Age’, terms that mean little to New Zealanders because at the end of the nineteenth century the country was not dominated by the fabulously wealthy.
Piketty’s is an extraordinary vision underpinned by solid analysis. I am yet to find a thoughtful response which is critical of it except in detail, although some have been uneasy about his policy conclusions of an international regime of higher taxes on the rich.
The importance of his work is that it has put an unfashionable topic back into the centre of economic analysis. As one who has tended the lonely garden of the analysis of economic inequality for over four decades, it is heartening to see so many economists beginning to take an interest. Whatever the future will hold, inequality is now unavoidably on the political agenda.