How much capital there is in the twenty-first century may not be relevent to our prosperity. What is likely to be more relevant is the resource base and our capacity to create money. Taxing the rich would be one, hardly original, way to deal with inequality. Another way would be to increase competition so that there are fewer profits to tax and to introduce a basic income scheme which would reduce the supply of workers.
These thoughts are prompted by all the hype about the book Capital in the Twenty-First Century by Thomas Piketty. I must state I have not read the book. For this post I have relied on several articles in The Economist.
As I understand it this guy has collected a lot of data which shows how inequality has been increasing. One of the big criticisms has been that some of his data may be inaccurate. So? There is a lot of anecdotal evidence that the rich are getting richer and the poor are getting poorer.
One of my concerns is with the word wealth because I think it may be misleading. The word wealth derives from the part of the definition of money which says money is a store of value. But the store of value does not always hold. Wealth can sometimes be lost a lot quicker than it can be earned. Inflation, the failure of enterprises or government haircuts can very quickly rob people of their savings or wealth. All of these have happened and are likely to continue.
Piketty says we have inequality because the return on capital tends to be higher than growth. But wealth may not be relevant for economic growth. Much more important are the ability to create money (the availability of credit) and the availability of easily accessible energy and mineral resources. It may be that people with some “wealth” have easier access to the credit which is necessary for economic projects. One of the reasons for the current economic downturn may be that we have consumed the most accessible energy and mineral resources. What remains is difficult to extract.
A while age I enjoyed reading about the building of the pyramids because this was done without money. The Egyptians may have stored some materials but most of the work was done “in real-time” without capital. Our own economy may work in a similar way with money representing “real-time” purchasing power. When one invests money one is transferring current purchasing power to somebody else. The money supply or the supply of credit is more important than wealth or capital because what is needed is purchasing power to facilitate economic activity. Purchasing power which has been transferred will not always be returned intact. It can be reduced by enterprise failure, inflation or a government haircut. Money or the supply of credit is created when the banks make loans.
Apparently a good part of this book is statistics to show the concentration of wealth in several industrial countries. But inequality is a two-sided coin. It may be that inequality is increasing because there is less income going to workers and this is because wages are falling from changes in the supply and demand for labor. During the industrial revolution and the recent golden age of prosperity there has been a steady demand for workers and wages have risen. With the recent improvements in technological productivity and the economic downturn the demand for workers has fallen and so have wages.
The rich are getting richer because they operate in fields where government legislation restricts competition and because they are good at working the system to exploit others. During the golden age of prosperity when there was abundant production and wages were high this wasn’t a problem for the rest of us. Now that the economy is on a down trend the inequalities are becoming more noticeable.
Piketty starts his analysis of inequality with the industrial revolution but I have it in my mind that inequality has been a feature of most large-scale civilizations through the millenia. A longer-term analysis might give a different perspective. I suspect the a high degree of inequality is the norm and we have recently been through an abnormal period.
Piketty proposes to deal with inequality via taxation of the rich. Some other ideas might be to increase the amount of competition in the economy which would reduce profits or to introduce a universal basic income scheme which would work to decrease the supply of workers and thus bring up wages.
So far as I can see the main accomplishment of this book is to generate some economic hot air and to divert some “wealth” to its author.