Rarely does the “dismal science” – as economics is sometimes called – cause much excitement, at least in the popular imagination. But the publication, first in French and then in English, of the French economist Thomas Piketty’s book Capital in the Twenty-First Century has generated wide-ranging, and often vitriolic, discussion on economics and inequality between rich and poor.
The Piketty analysis is that returns on wealth have, historically, risen faster than economic growth. And so in the absence of a seismic shock – he gives the example of a rising population or rapid technological progress – the returns that people with wealth get will always increase faster than the economy is growing. In simple terms, the rich get richer.
To offset this, Dr Piketty suggests government intervention, in the form of wealth taxes, which he says should be applied globally.
Some of what Dr Piketty’s research suggests is undoubtedly true. Relative incomes across the West have fallen, inequality has risen and the wealth of the richest has increased rapidly. But these have not all happened at the same time. In addition, viewed from this region, the “shocks” he talks about can come from outside the economy. Indeed, that is one of the main flaws with his argument: that he seeks to generalise from the economies of the West to capitalism in general.
The biggest “shock” to capitalism in recent decades has come from globalisation. No doubt, globalisation has made some people and some companies extremely rich. But it has also made many more people moderately better off. That is part of the explanation that appears to be missing from Dr Piketty’s focus on western economies. The stagnation in wages of the middle and working class of the West has been caused in large part by the distribution of wealth overseas, to the middle and working classes of the developing world.
Some of the poorest people – in the world, not in the West – have been lifted out of poverty, and many of these rising middle class, especially in China, India and parts of Africa, view inequality as something that can be overcome. There remains a feeling that this generation can do better than the last. To some degree, that feeling has faded in the West, which is possibly why Dr Piketty has received such a rapturous hearing. But his solution of a global wealth tax may actually make global inequality worse, by taking wealth away from the poorest in the world and giving to the moderately well-off in the west.
