#thomas picketty

[thorsteinulf]

I wrote a summary of Capital in the 21st Century by Thomas Picketty

http://thorsteinulf.tumblr.com/post/172305231238/summary-of-picketty-capital-in-the-21st-century

[thorsteinulf]

Summary of Picketty, Capital in the 21st Century

Picketty: Capital in the Twenty First Century

Introduction

This summary was written from memory and thus does not always provide evidence unlike the book. It also includes a number of my own examples.

Key Findings

1. Capital to Earnings Ratio. What are the consequences on wage growth when the rate of return on capital is greater than economic growth?

In recent history, the average rate of around on capital investments is around 5% whereas, in contrast, economic growth rarely exceeds 2% in the OECD. Therefore, people who own significant amounts of capital and are able to invest this money will be able to increase their wealth faster than comparative wage increases. Wealthy investors control more of the world's economy each year as a result of these factors and this relationship between capital and income is increasing inequality.

Capital vs. Income

Due to the aforementioned relationship between capital and economic growth, those in possession of great wealth who no longer work but own shares, among other investments, are continuously increasing their income without working. This explains why the heiress to L'Oreal has a significantly greater fortune than Steve Jobs did before his death. Ultimately, simply having access to a large fortune is enough to increase your wealth even when compared to the man who created the world's most valuable company and was engaged in productive work. This relationship can be illustrated by the fact that when wealthy people retire yet possess capital earnings, their earnings are unaffected because of the capital to income ratio. Bill Gates is an example of this as his earnings did not decrease after he stepped down as the CEO of Microsoft due to his investments.

People who derive their earnings solely from income have no chance of competing with these very wealthy people. However, a willingness to aspire to become as wealthy as those who derive their wealth from capital may explain why those in the highest income brackets are also increasing their wealth through pay rises. This would provide an explanation for the growth in CEO pay over the last several decades.

As documented through interviews with people in the highest income brackets, millionaire stock brokers do not feel rich compared to people within their social group who derive their income from capital rather than productive work. This may lead them to seek further pay increases to reduce the gap and may help explain why the majority of GDP growth in recent history is going to the highest income brackets as those in the highest income bracket desire to close the gap between themselves and those who derive wealth from capital.

Why are those in the top income brackets asking for pay increases now and not 30 years ago?

Another important change is that previously, income tax rates on high earners were very high. At one point in the 1970s in the UK income tax for high earners was set at 97% and similar rates existed in the US. Consequentially, high earners would not benefit personally from higher pay as the majority would be taxed. This explains why the inflated bonus culture to top bankers and executives in the US and UK is a recent phenomena as previously there was no impetus to negotiate for higher pay.

What do the super rich have that the rich don't?

Besides the obvious such as yachts and the ability to buy greater quantities of more expensive assets such as real estate in areas such as Central London, very rich families, who derive their wealth from capital, possess their own asset management firms which are able to employ highly skilled workers and make greater and higher quality investments which provide greater return on capital and which continue to widen the gap between rich and poor and rich and super rich. It is examples such as this which signify the differences between the rich, the very rich, and the richest people on the planet as each possess different resources and naturally those resources depend on access to capital.

Imagine a firm, foundation, or trust which invests a significant amount of money in the stock market and as a result of this makes £200 million per year. The £2-5 million spent on owning an asset management firm covers its own costs and can provide a level of service unattainable to those without the original starting capital of funds such as the sovereign wealth funds of Qatar, UAE, Norway or even The Church of England which has an investment fund which produced a return on its capital of 20% last year. A rich person, owning up to £5 million, can not compete with these resources but would have access to resources far superior to a person owning up to £500,000.

How much of the world do billionaires and investment funds worth over £1billion own?

Even though it is often noted that billionaires control a large amount of wealth in the world, altogether billionaires own about 1.5% of global GDP and sovereign wealth funds own a similar amount. While this is not a huge amount, it is continually increasing and a grave concern is that the richest are accumulating an increasing share of economic growth. Imagine a country which increases its GDP by 3% and wage growth is also 3%, what we have seen recently is that a significant portion of this wage growth is going to the highest earning people in our society whether that be sports stars, managing directors, or CEOS. This has led to a squeeze and even decline in working and middle class incomes and altogether is a process which is fuelling resentment to globalisation and Picketty predicted that there would be a backlash against this. Therefore it is no surprise that the USA and the UK, the most vocal supporters of globalisation are the places where those backlashes have occurred.

In other words, those who derive their income from capital are increasing their wealth at a greater rate than those who derive their wealth from work, simultaneously, those people earning high incomes are increasing their wealth at a greater rate than middle/working class people who have largely seen their incomes stagnate which suggests that most economic growth and therefore income growth is for the benefit of those who derive their income from capital or those at the top end of the income bracket. The fact that those with capital are increasing their wealth at a greater rate than those with high incomes may also be a significant factor for high income people to desire pay increases.

To put it simplistically, once the wealthiest people have taken their share of economic growth, there is little left for others.

Inflation: A tool for reducing inequality?

Inflation in an economy simply means increasing the money supply. It follows a very basic economic law, the more of something there is, the less valuable one of those becomes. Therefore, as a result of inflation, both debts and savings are reduced. Inflation, therefore, is an effective tool in the management of debt. Following the second world war, most central European countries reduced their debt considerably through inflation and it was also used to some extent following the global financial crisis although it was called 'quantitative easing'. There are several very important differences between then and now. Following the second world war, most people did not have savings thus reducing the inflationary effects on those who had money while alleviating those in debt. In contrast, US and UK societies are quite diverse with many poor and young people suffering from heavy debt burdens but these societies also possess a large number of wealthy and older middle class citizens who have amassed a significant amount of savings. Inflation would harm these people significantly but would have a negligible effect on the wealthiest people because those people possess diversified investment portfolios. This means that, instead of having their wealth in money deposited in the bank, it is spread around in such things as art, real estate, currencies, stocks and shares, government bonds, or commodities such as gold. Therefore, if the value of currency increases, it is unlikely to affect those wealthy enough to reduce their exposure to currency fluctuations. Indeed, certain investments such as art and gold are designed to be stable as the supply and therefore value is fixed which protects against fluctuations in the value of currencies.  Instead, inflation may result in very wealthy people increasing their wealth as investors lose confidence in inflated currencies and instead look to more secure investments such as gold. Therefore, while inflation can be useful, it is not an ideal solution to inequality.  

2. Population Demographics and Economics:

A stagnant population leads to reduced growth and thus greater impact of inheritance.

Since the beginning of the industrial era, economic growth in the developed world has been profound due to technological advancement. However, this technological advancement was accompanied by significant increases in population growth which was also an important driver of economic growth and the reduction of inequality.

Illustratively, the population of the United Kingdom where the industrial revolution originated, was seven times smaller than France's population prior to the industrial revolution and is of comparable size to France's population today which conveys just how transformational technological progress and population growth can be.

Why does population growth reduce inequality?

Population and economic growth are inextricably linked. The greater the population, the more people are engaged in productive activity and thus the greater economic growth is. Economic growth as a result of technological and population growth creates new money and thus people are not endlessly competing for the same resources. The creation of new wealth limits the importance of inherited wealth.

If there was no new wealth, no technological progress, and no population growth then assets would be stable. Wealthy people would derive their wealth through finite investments such as land and then pass this onto their children after which the cycle would repeat itself. This was how the world functioned before the industrial revolution. Global population and wealth were stable, people generally died in the social class they were born into and there were limited opportunities to expand one's wealth.

This situation was also due to the lack of inflation. All wealth was based on gold which had a fixed supply. The world operated more to a Malthusian perspective in which population growth without technological advancement in the production of food or production etc would lead to increased poverty and starvation. It was a world of fixed resources which could accommodate a fixed number of people and this explains why there was very little if any economic growth in the previous 700 years prior to industrialisation.

Picketty often evokes the world depicted by Balzac and Jane Austen as a means to understand the reality of the pre-industrial age. Firstly, absent from modern literature, is the inclusion of numerical figures in these novels to describe wealth. In the world these books were written, everyone knew the value of an estate and how much one would need to earn to live like an aristocrat which would not be possible in modern literature with the increasing influence of inflation. Altogether, a world with reduced economic growth means that existing wealth is much more significant in a society which in turn increases the importance of inherited wealth.

Following the great population booms of the industrial age, population growth in the developed world is stagnating and even declining in certain cases such as Germany. Consequently, we are moving back into a world where inheritance defines an individual's success and this, along with the relationship between capital and income, means that people of modest means will find it more challenging to attain entry to the upper echelons of society.

What is also interesting is that this relationship between capital and income was found in each country studied. In the past it was difficult to find precise information and thus the book focuses on the countries which maintained good financial records which are the UK and France. Despite the French revolution and the impression that the UK was a country ruled by royalty and aristocrats, there were very few differences between the economic structures of each nation. The only exception was the USA as there was an abundance of land, it was difficult for people to attain meaningful capital until much later in its history with the exception of slaves. As land was abundant, it was essentially worthless whereas slaves were not. Population growth was also very high which diminished the significance of inherited wealth until early in the twentieth century and the prevalence of American billionaires such as Rockefeller and Carnegie in what became known as the 'gilded age'. This transformation in American society is reflected in novels such as those by Henry James and of course, 'The Great Gatsby' which depicted a new type of sophisticated American aristocrat. It was the great depression and the world wars which alerted people to the perils of inequality which tore into the heart of an American identity, and which defined itself as contrary to the unfairness of inherited wealth in 'Old Europe'.

Old Europe, i.e. France and the UK alludes to Europe up until the world wars whereby the majority of citizens had limited economic power. The difference between, for example, 1913 and now, is firstly that inflation is more widespread which has removed the 'rentier' who are people who possessed wealth and used it to buy government bonds, the interest of which was very stable and which they lived on for the rest of their lives. These 'rentiers' were a fixture in society until inflation stopped this form of wealth accumulation. During Britain's unrivalled pre-eminence in the world during the 19th century, despite huge trade surpluses, the government ran large debts which resulted in a more than satisfactory rate of return for many wealthy people who invested in government bonds.

Significantly, one third of the population are now property owners and rich countries possess a middle class who can wield a significant amount of power and influence whereas previously the wealthy were seemingly all powerful. Finally the diffusion of knowledge has resulted in the population of developed countries to develop sought after skills which positively affect their bargaining power when it comes to wage negotiations. This expansion in skills and education has enabled middle class citizens to increase incomes enough to be able to afford to earn small amounts of capital which has diminished the power of the richest. However, the richest in society still control an abundance of capital. Arguably, the rise of skilled workers in the developing world and the effects of globalisation are now reducing the bargaining power of many skilled workers.

Ultimately, although the relationship between capital and income is returning to levels not seen since 1931, the progress made is unlikely to be completely reversed and it is unlikely that people will accept a return to the conditions of 1913.

Economic Growth since the Industrial Age

Picketty explains that economic growth is largely political and misunderstood. In reality what is important is being at the forefront of technological development

Developed countries are at the forefront of technological development and possess comparable wealth, wages, and livings standards etc. Once a country is at the forefront of technology, economic growth is slow as new technology has to be invented whereas a country catching up, such as China, can grow quickly as it imports pre-existing technologies. As a result of this, it is natural that developing countries achieve much higher rates of economic growth than wealthy countries and intuitively, developing countries which reach the technological frontier will no longer be able to sustain high levels of economic growth.  

During the industrial age, economic growth averaged about 0.5% to 1% per cent per year which sounds quite small but is significant when you consider the size of the economy and the effects of cumulative growth. To illustrate this, if a country's economy was worth £100million and this increased by 1% each year then after 100 years it would be worth £270 million. This, coupled with technological advancement, has altered our lives significantly and continues to do so. On television, radio, and in newspapers it is often argued that younger generations have no right to express indignation about reduced job opportunities, salaries, in and out of work benefits, and access to affordable housing because living standards have increased dramatically due to technological progress.

3. The Politics of Economic Growth:

The 1980s signalled the end of the post war economic deal in the UK and US and resulted in economic policies which generally reduced taxes for wealthier people and in turn increased inequality.  The post war consensus was focused around high taxes on the wealthy along with a strong welfare state to preserve an egalitarian society in which the poorest person born could become the richest. However, the US and UK were at the front of the technological frontier having not suffered significantly as a result of second world war and thus achieved low and stable rates of economic growth.  

France, Germany and Italy, for example, suffered greatly as a result of war and thus achieved impressive rates of economic growth as their economies were rebuilt. This was not understood at the time, instead the US and the UK focused on issues on pride and found it unacceptable that other economies could be outperforming their own. It was this that led to economic liberalisation which may have helped somewhat in increasing growth rates but ultimately the momentum behind western European economies would have dissipated upon reaching the technological frontier.

The reforms implemented by Thatcher and Reagan may have assisted increased economic growth although ultimately they resulted in increased inequality which places the UK and USA in an unenviable position in regards to the capital to income ratio, particularly the US. However, despite the relative stability of France and Germany, neither of their economic policies are sufficient to hinder the progression of inequality and are both on the same trajectory followed by the US and UK.

GDP and GDP per capita.

To this day, the size of a national economy is very political. Both France and Britain claim the title of world's fifth largest economy and this can be investigated using GDP (Gross Domestic Product), GDP per capita, and GNI (Gross National Income) and the USA is quick to define itself as the richest and most powerful country in the world.

GDP is simply a process of adding up all the economic transactions within a nation and defining this as the value of the nation's economy. These figures can be misleading for a number of reasons. Firstly, it does not mention how much of that money leaves the country which is what GNI measures. Secondly, there is no information as to the efficiency and quality of those economic transactions. The USA is a very good example of this, GDP always scores higher relative to European countries but consider that the enormous cost of healthcare and education which are included in these figures even though they are economic transactions that mostly do not benefit people comparative to more affordable healthcare of comparable quality in many European countries or taxpayer funded universities in Germany. These kinds of economic transactions can artificially inflate GDP and may even portray something negative as increased costs for healthcare and education can increase private debt and may only benefit a very small percentage of the population. GDP PPP

GDP by purchasing power parity (PPP) is slightly different as this takes into account the cost of products. People in the USA earn more than people in India but goods in India are a lot cheaper and thus £10 will purchase a lot more in India than in the USA. GDP PPP elevates the status of developing countries however, as these countries are not at the forefront of technological progress, this means that these countries must import technology from countries who are and pay the same prices. Therefore, in Nigeria food may be very cheap but a Playstation will cost the same or more than in Germany. People in developing countries may also not earn enough money to encourage the development of industries. Farmers in West Africa may earn less than £3000 per year (more likely much less) in this situation there would be no reason to produce farming technology which increases productivity as they could not afford it. People in this position may be able to buy more staple foods such as rich with £1 but they are unable to make technological purchases which will significantly improve their lives.

GNI

GNI is similar to GDP with the exception that is takes the final figure and includes the difference between money coming in and going out of the country. For example, If an American company makes a lot of money in the UK then it counts towards UK GDP but a percentage of this money will most likely go to the US to staff and shareholders. Likewise UK companies make profits in other countries which are repatriated.

Tax Competition

Generally, the majority of countries own the same amount of resources in other countries as other countries do in theirs. The planet as a whole is in debt which is, of course, impossible. This is due to the prevalence of tax havens around the world which hide wealth and capital which would otherwise be taxed and used productively.

Europe is a striking example of the dangers of tax competition whereby companies are free to move to the lowest tax jurisdiction without repercussions. A UK company can choose to relocate to Dublin, pay a small fraction of the corporation tax it would pay in the UK and continue to serve the European market from its low tax base. In effect, the government policy of one country is stealing resources from another country which would otherwise be spent on social services. There are many other examples of this occurring throughout Europe and this reveals the importance of setting tax rules on a European wide level to prevent aggressive tax competition between states. Tax competition is resulting in lower taxes which reduces the amount governments can spend on the welfare state. The welfare state, Picketty argues is responsible for Europe's pre-eminence in the world in the rights and protection afforded by the state to its citizens. States which pursue policies which minimize corporation tax in order to attract business include tax havens such as Luxembourg however the practice is far more widespread with each country in Eastern Europe adopting low corporation taxes to improve the attractiveness of setting up business. In this situation, it is difficult to imagine how nearby states with much higher corporation tax such as Eastern Germany can compete.

One issue facing many countries is the issue of government debt. Governments possess two means of raising money, through taxation or debt. Countries such as the UK and the US which are borrowing money to fund public services are paying more in debt servicing than, for example, the yearly cost of education. Countries in situations such as this may be under pressure to reduce government spending such as on welfare in order to reduce the deficit. Meanwhile, private wealth in Europe is the highest in the world despite governments being relatively poor. This is another reason as to why taxes on capital to revitalize governments are another important consequence of any tax on capital.

Balance of Trade

In 1913, Britain and France owned foreign resources equivalent to 700% of GDP through their respective colonial ventures. In other words, they owned a significantly higher portion of the rest of the world than the rest of the world owned in these two countries. The rise of colonial empires made this possible and heralded a period of global economic integration which has only recently been matched.

In modern times, Germany and Japan are the two developed countries which possess large trade surpluses through exports. These positions are clearly unsustainable as those with deficits can not maintain them indefinitely as this has resulted in a significant imbalance, especially in the Euro zone between the rich north and the poor south. Unless the Northern European countries address this issue then it could cause a breakup of the European Union as inequalities between north and south are exacerbated as less technologically advanced countries will struggle to compete with the technological and efficiency advantages that German industry possesses.

4. The role of the language of meritocracy and the shaming of those on benefits by those defending and pursuing a more inegalitarian society.

In former times, people did not believe in the necessity to justify their wealth. Wealth was inherited and that was it. These days people associate wealth with hard work and/or the hard work of their parents or grandparents. The language of meritocracy is being used widely to justify reducing welfare programs and reduce taxation on high earning individuals. Rather contradictorily, the language of meritocracy is being used to pursue a more inegalitarian society.

This trend is evident in celebrity culture. Stella McCartney may be a talented designer but there is no doubt that the path to success is easier with access to the best schools, large amounts of capital, and the connections and reputation which come by having famous and wealthy parents.

5. Germany and France not suffering as badly as US and UK but on the same trajectory.

The trends seen from the capital to income ratio can be seen across many countries. While the UK/US are the most extreme since adopting neo-liberal economic policies in the 1980s, France and Germany are also following the same trajectories. Taxes on capital and income in these countries are not sufficient and action will need to be taken to ensure that we continue to live in an egalitarian society. Each country studied by Picketty is following the same trajectory and this is of grave concern for the future economic well-being of the world.

6. Tax competition in Europe. The race to the bottom. Solution to this i.e. global taxation policy or at least European wide and the challenges behind a global tax on capital i.e. Switzerland, Ireland, city of London, Netherlands, Luxembourg etc.

The US is more advanced in prosecuting tax avoiders whereas Europe is suffering heavily from tax competition. Harmonization of tax in Europe is a priority to ensure that the Euro functions correctly as a currency and to avoid a race to the bottom in which corporations reap the benefits of low taxation whereas social welfare programs suffer. The first step is to apply a capital tax of 0.01% for example. This wouldn't raise a huge amount of money but would require everything owned by capital to be declared. It would significantly reduce an individual's ability to hide assets offshore as this would be a transparent system necessary in order to understand who owns what and where. Following this, taxes on capital may involve a tax of e.g. 5% on people who own huge amounts of assets.  

Picketty believes that a tax on capital would also promote more dynamic investment. Investors would have to be more proactive with their capital in contrast to now where in general investments are safe and provide, on average, a return greater than yearly economic growth.

Importantly, a tax on capital of the highest earnings would preserve the egalitarian society the west has built over the last 70 years and provide necessary funds for poor governments to sustain the welfare state.

Conclusion

Ultimately, the key to understanding Picketty is to understand the capital to income ratio and multiple effects it will have on the economy and society. Picketty provides comprehensive evidence for each of the claims he makes and the subjective element of his work mostly comprises his defence and support for the benefits of a relatively strong government which is able to provide services through taxation without having to resort to debt and/or privatisation and that the welfare system is a fundamental part of the European identity with regards to the rights and treatment afforded to its citizens which is the source of Europe's moral leadership in the world.

[ploculus]

Picketty’s Critics Include a Trans Woman Economics Professor

I recently sat next to an economist named Steve on a plane. I had lately been listening to a lot of media about Thomas Picketty’s Capital in the 21st Century. I asked him what he thought of Picketty’s assertion that r > g (return on investment is greater than economic growth), leading to the eventual absorption by the super-rich of all the wealth of the land, by inheritance.

My plane-ride economist friend Steve said that if I want to understand why Picketty’s argument is simplistic and likely false, I should read some other economists who have dealt at length with the issue. He gave me the names Deirdre McCloskey, Tyler Cowen, Gordon Tullock, and Joel Mokyr.

Deirdre McCloskey seems like a super-cool lady. She’s a trans woman professor at U Chicago with an extensive bibliography and vita. I want to read all the economists from the ad hoc bibliography Steve gave me, but I’m starting with her. As someone who identifies as progressive and Left, I always like to challenge myself by reading the smartest thinking of people who disagree with me, and McCloskey seems like the gold standard. Her Vita and Bio here.

[belacqui-pro-quo]

In the United States in recent years, one frequently has heard this type of justification for the stratospheric pay of supermanagers (50-100 times average income, if not more). Proponents of such high pay argued that without it, only the heirs of large fortunes would be able to achieve true wealth, which would be unfair. In the end, therefore, the millions or tens of millions of dollars a year paid to supermanagers contribute to greater social justice. This kind of argument could well lay the groundwork for greater and more violent inequality in the future. The world to come may well combine the worst of two past worlds: both very large inequality of inherited wealth and very high wage inequalities justified in terms of merit and productivity (claims with very little factual basis, as noted). Meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither.  It also bears emphasizing that the role of meritocratic beliefs in justifying inequality in modern societies is evident not only at the top of hierarchy but lower down as well, as an explanation for the disparity between the lower and middle classes. In the late 1980s, Michele Lamont conducted several hundred in-depth interviews with representatives of the "upper middle class" in the United States and France, not only in large cities such as New York and Paris but also in smaller cities such as Indianapolis and Clermond-Ferrand. She asked about their careers, how they saw their social identity and place in society, and what differentiated them from other social groups and categories. One of the main conclusions of her study was that in both countries, the "educated elite" placed primary emphasis on their personal merit and moral qualities, which they described using terms such as rigor, patience, work, effort, and so on (but also tolerance, kindness, etc.).

Thomas Picketty, Capital in the Twenty-First Century

[belacqui-pro-quo]

Notwithstanding the extravagance of some of their characters, these nineteenth-century novelists describe a world in which inequality was to a certain extent necessary: if there had not been a sufficiently wealthy minority, no one would have been able to worry about anything other than survival. This view of inequality deserves credit for not describing itself as meritocratic, if nothing else. In a sense, a minority was chosen to live on behalf of everyone else, but no one tried to pretend that this minority was more meritorious or virtuous than the rest. In this world, it was perfectly obvious, moreover, that without a fortune it was impossible to live a dignified life. Having a diploma or skill might allow a person to produce, and therefore to earn, 5 or 10 times more than the average, but not much more than that. Modern meritocratic society, especially in the United States, is much harder on the losers, because it seeks to justify domination on the grounds of justice, virtue, and merit, to say nothing of the insufficient productivity of those at the bottom.

Thomas Picketty, Capital in the Twenty-First Century

[belacqui-pro-quo]

As noted, the vast majority of top earners are senior managers of large firms. It is rather naive to seek an objective basis for their high salaries in individual "productivity." When a job is replicable, as in the case of an assembly-line worker or fast-food server, we can give an approximate estimate of the "marginal product" that would be realized by adding one additional worker or waiter (albeit with a considerable margin of error in our estimate). But when an individual's job functions are unique, or nearly so, then the margin of error is much greater. Indeed, once we introduce the hypothesis of imperfect information into standard economic models (eminently justifiable in this context), the very notion of "individual marginal productivity" becomes hard to define. In fact, it becomes something close to a pure ideological construct on the basis of which a justification for higher status can be elaborated.

Thomas Picketty, Capital in the Twenty-First Century, p.330

[poemofcomrades]

It therefore came as a revelation when Piketty and his colleagues showed that incomes of the now famous “one percent,” and of even narrower groups, are actually the big story in rising inequality. And this discovery came with a second revelation: talk of a second Gilded Age, which might have seemed like hyperbole, was nothing of the kind. In America in particular the share of national income going to the top one percent has followed a great U-shaped arc. Before World War I the one percent received around a fifth of total income in both Britain and the United States. By 1950 that share had been cut by more than half. But since 1980 the one percent has seen its income share surge again—and in the United States it’s back to what it was a century ago. Still, today’s economic elite is very different from that of the nineteenth century, isn’t it? Back then, great wealth tended to be inherited; aren’t today’s economic elite people who earned their position? Well, Piketty tells us that this isn’t as true as you think, and that in any case this state of affairs may prove no more durable than the middle-class society that flourished for a generation after World War II. The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties

Paul Krugman, New York Review of Books

[popthirdworld]

Picketty's R v G explained

Picketty's book Capital is a big deal because it has basically proven that capitalism over time naturally concentrates wealth in the hands of a few unfairly. That is, it leads democracies to turn into oligarchies, the poor to grow in numbers, and the rich to shrink to a number of super-rich. The 1% and 99%. And then the 0.1% and 99.9%.

This is all because R > G.

R = rate of return on ‘capital’.

G = rate of economic growth.

What R > G basically means in real life: Rich people have a lot of excess money. Without them doing anything, this money makes money because they invest it or put it in a bank. The rate at which that money makes money (R) is faster than the rate at which our economy grows (G). What this means is, slowly and steadily rich people are getting a bigger and bigger piece of the pie, and the pie isn’t growing fast enough to keep up. So over time, there is getting less and less pie for the large bulk of us. Again, noone is doing anything to bring this about. It's just if you leave capitalism to work the way it does, this is what happens.

This is why Picketty argues to undo this trend, we gotta not leave capitalism unchecked. We should deeply interfere in the market to stop this trend and redistribute money. That is, have big welfare programs and tax the rich heavily.

The reason this book is causing such a commotion is because his maths and analysis is airtight.