Why Thomas Piketty matters to you

How are you affected by his 700-page tome of an economics book?

Almost three years after its initial publication, Thomas Piketty’s bestseller ‘Capital in the Twenty-First Century’ continues to astound economists and revolutionize thought on capitalism, wealth distribution and income inequality.

The six-hundred and ninety six page tome was first published in Piketty’s native French language. An English translation was pushed forward and the book quickly shot up the Amazon best sellers list, briefly resting at its top. Outlets were left fighting over copies as stock ran dry at both Harvard University Press and Amazon. But what is it about Piketty’s discovery that has taken the world of economics by storm?

and why on earth should you care?

For decades, if not centuries, left-wing writers and academics have argued that ultimately, capitalism is flawed. Governments and ‘free market’ thinkers however, have tossed the issue aside, suggesting that there is nowhere near enough data to support the idea. And what has Piketty given them? Reams and reams of it. ‘Capital in the Twenty-First Century’ is the equivalent of Darwin’s ‘Origin of the Species’. It challenges the Status Quo and the elite don’t like it.

For those who don’t use this sturdy book as their bedtime reading, here’s a summary of some of Piketty’s discoveries.

Piketty’s main argument is that deep-set wealth inequality (and particularly inherited wealth) is not a by-product of capitalism. Instead, the ever widening chasm between the ‘top 1%’ and ‘the 99%’ is capitalism working as it should be – capitalism working to design.

Piketty expresses this as the rate of return on income against economic growth (or: r > g). Although he accepts this simple equation is not the answer to all forms of inequality both past and present, it is a significant factor in producing 1,286 billionaires in 2015 whilst 80% of humanity live on less than $10 a day.

Even worse, Piketty believes the equation r > g amplifies over time. To explain this, he takes r = 5 and g = 1 as a basic example. For a wealthy family to keep their investments level with the general economy, they need only invest 20% of their income (or return). This is the minimum sum required to keep them afloat. The remaining 80% however, can be spent on the consumption of goods. This makes it easier to build and sustain large fortunes over the generations. This is the cause of catastrophic disparity in wealth.

WHY DOES THIS MATTER?

Piketty acknowledges that larger rates of returns on income over economic growth is not always bad for society. But if this trend sets in over time, a gradual accumulation of wealth can act as a magnet that draws in power, excessive land-ownership and irresponsible investments.

The economy is no longer based on merit. Instead, capital gains are made by those with good birth rather than good ethics.

You may be asking – why not have economic growth outstrip returns on income and reverse the equation? This is certainly an interesting point and to a degree, nationalising key public industries has worked in achieving this.

But if ‘g’ outgrows ‘r’, then the value of serious wealth would collapse. Seeing as there are little natural forces to counter r > g, technological advances, government intervention and rapid population growth are the only realistic factors that could alter the normal pattern of events. Piketty therefore, concludes by advising governments to impose a +80% tax on ‘wealth’ across the globe. (note this is not a tax on income, an issue Thomas Piketty keeps separate throughout the piece)

In his work, Piketty points out that the practice of wealth accumulation limits social mobility and is defenceless against external factors of macroeconomics (e.g. war, revolution, financial depression and ecological disasters). Small-scale microeconomics also come into play. Take into consideration the number of children a wealthy family produce. This can decrease the amount of inherited wealth each child receives, adding the lottery of family to the list of barriers preventing billions from reaching the top of the economic ladder.

Although he may not have yet been received as ‘the next Marx’, Piketty has succeeded in bringing income inequality into the political mainstream – something Marx could never do today.

Marx’s work was about production and the mechanisms of it. Piketty however, examines what comes out of the other end of an economic cycle. Ten years of research has produced some interesting findings on the real-term effects of income inequality and capital in recent years. In this sense, his work is more useful in understanding the nature of capitalism in the modern world.

Regardless, ‘Capital’ has provided us with a platform to discuss the future of a capitalist system, struggling in a world of deep recession, political unrest, war, famine and environmental chaos.

At the very least, we should thank Thomas Piketty for that.

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