Capital in the Twenty-First Century – What Does it Mean for CED? (Part I)

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This book by French economist Thomas Piketty, published in France last September, has become known worldwide, especially since its English publication by Harvard University Press in April. The book has been one of the top selling books in the USA since its publication and is the Harvard University Press most sold book in its 100-year history.

A Brief Description

Piketty shows that modern economic growth and the diffusion of knowledge have allowed us to avoid inequalities on the apocalyptic scale predicted by Karl Marx. But we have not modified the deep structures of capital and inequality as much as we thought in the optimistic decades following World War II. The main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—today threatens to generate extreme inequalities that stir discontent and undermine democratic values. But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, Piketty says, and may do so again.

~ Excerpt from the Harvard University Press.

Since its publication, the numerous articles which have appeared in influential outlets such as the New York Times, the Economist and the Wall Street Journal testify to its impact.  The book was rather unnoticed in French language media until it became a buzz in English speaking media. Now the French speaking media is also talking about it.

The explanation of why inequality is a product of the capitalist system is unequivocal. Four centuries of data about wealth in France and in the United Kingdom and about 100 years of data about GDP and wealth in key OECD countries speak for themselves.  The author explains quite well how income from capital is higher than income from work (wages).

In particular, the book clearly identifies how wealth has become so concentrated in the top 10% and even more in the top 1% over the last 40 years, bringing the concentration of wealth back to where is was in the 1880s and 1890s.  The total wealth in some countries (UK, France, Spain, Italy and others) is about 6-7 times annual GDP.  From 1914 to 1945, this went down to 2-3 times GDP because both World Wars caused massive destruction of wealth and the great depression also had devastating effects.  Wealth as a ratio of GDP stayed quite low for some time after the Second World War because of very progressive taxation on income during that period.  Since nobody expects (or wants) wars causing so much destruction and misery, and nobody wants economic crises like the 1930s, this period is more an exception that lasted for some time, but this era is now past.

Many other summaries of the book can be found online. Here are just two.

The Economist
New York Times

Pikkety's "Solutions"

Pikkety proposes to reduce inequality with measures that are not new.

  • Reinvigorate fully progressive income taxes with much higher rates on very high incomes. He reminds us that rates were up to 90% in the USA after the Second World War.
  • A higher inheritance tax than exists now, especially since they have been lowered – and even abolished – in many countries.
  • His main proposal is a tax on wealth. This has been done before. He gives the example of France after the Second World War when a high tax on wealth (about 10%) was implemented to rebuild the country after the war. This was a one-time tax. Piketty proposes instead a yearly tax on all wealth held by individuals, with different rates. For example, 1% for wealth of 1 to 5 million Euros, 3% for 5 to 50 million, 5% for over 50 million, etc.
There is a huge problem with international
financial flows to tax havens

He explains in length that besides the resistance that can be expected from the wealthy to such proposals, there is a huge problem with international financial flows to tax havens. However, he notes that this is strictly a problem of international agreements. It would be easy to set up a system to track all transactions, since they are all electronic. (Maybe the NSA could be put to better use!)

The proposals, if applied, would certainly reduce inequality. This is much needed and would help a large part of the population in many countries. If the income generated by these measures were well spent, mainly for the 50% of population with lesser income, we would live in countries where all benefit from economic activity.  This "solidarity", even if forced upon the wealthy, would certainly improve our societies.

Are These Solutions Sufficient?

Some people propose that another way of reducing inequality would be to increase income from work and reduce income from capital. Again, this would help, and as in the 1950s and 1960s, an increase in real wages (in constant dollars – above inflation) would greatly improve family income for most sectors of the population. This would mean that the wealthy would not increase their wealth as much. The most optimum situation, higher work income (and a very progressive tax system) could give us societies similar to Scandinavian countries in the 1960-1975 era. Unfortunately, few people believe that we can go back to this, or even less extend it to the whole planet.

The fundamental problem is that none of Piketty's proposed solutions tackle the fundamental question, which is the the ownership and concentration of wealth.

Some people propose a State model of ownership, like the Soviet Union where everything was owned by the State.  This involves nationalizing by force all private property.  This is not the place to explain in detail why this is not a solution, except to say that the Soviet experience was an utter failure.  One reason is certainly the fact that in reality, this produced another type of elite 1%, Communist Party leadership, which concentrated power and control for itself.

Another reason for tackling the issue of ownership and concentration wealth is linked to our democratic societies.  Citizens do not need a degree in Political Science to see that the wealthy also influence, or even control, political power in modern societies. The billions spent by the wealthy to influence elections (the case of the USA is exemplary), and the fact that they also own most media, means much more than the number of ballots that they can cast.

Read Part II


Yvon Poirier is President of CCEDNet's International Committee and Secretary of the Board. He has a long history of involvement in the labour and social movements in Québec and Canada and has been very active in the Intercontinental Network for the Promotion of the Social Solidarity Economy (RIPESS). He represents the CDÉC de Québec in CCEDNet.

 


*The opinions expressed in blog posts are those of the author(s) and do not necessarily reflect the position of CCEDNet