French economist Thomas Piketty's grim view of the wealth gap

French economist Thomas Piketty's new book challenges the assumption that free markets will automatically deliver widespread prosperity

PUBLISHED : Monday, 28 April, 2014, 4:43am
UPDATED : Monday, 28 April, 2014, 5:25am

Thomas Piketty, the French economist who helped popularise the notion of a privileged 1 per cent, sounds a warning in his new book: The US economy has begun to decay into the pattern of aristocratic Europe of the 19th century. Hard work will matter less, inherited wealth more. The fortunes of the few will unsettle the foundations of democracy.

Capital in the 21st Century has drawn huge interest as US political leaders debate whether widening income disparity is a problem that requires action.
The 700-page opus has been praised as one of the most important economic works in recent years, using data from the past three centuries to argue that the wealthy are hoarding more of an economy’s income than ever and that existing policies only mean that will increase.

Supporters cite his work as proof that the wealth gap must be narrowed. Critics dismiss him as a left-wing ideologue.

Piketty’s book soared to the top of Amazon’s bestsellers last week.

Digging through 300 years of economic data, tax records, 19th century novels and modern television programmes, Piketty challenges the assumption that free markets automatically deliver widespread prosperity.

Instead, he writes, the rich will get richer, and everyone else will find it nearly impossible to catch up.

Investments in stocks, bonds, land and buildings – the “capital” in his title – almost always grow faster than people’s wages. By its nature, capitalism fuels inequality and can destabilise democracies, Piketty argues.

Economists once viewed the three decades after the second world war as proof of capitalism’s ability to build and share wealth. Piketty counters that the period was a historical outlier, a result of two world wars and the Great Depression levelling the fortunes of the old establishment.

Piketty thinks higher taxes on wealth can curb inequality’s spread. He also thinks that sending more people to university and sharpening their skills through training could help slow the “inegalitarian spiral.”

In an interview with The Associated Press, Piketty, 42, discussed the “dangerous illusion” of the meritocracy, and his fix for limiting inequality.
Here are excerpts of the interview, edited for length and clarity.

What is the impact of a growing wealth gap?

The main problem to me is really the proper working of our democratic institutions. It’s just not compatible with an extreme sort of oligarchy where 90 per cent of the wealth belongs to a very tiny group. The democratic ideal has always been related to a moderate level of inequality. I think one big reason why electoral democracy flourished in 19th century America better than 19th century Europe is because you had more equal distribution of wealth in America.

Your research shows that profits on investments – capital – increase faster than wages and economic growth. But a lot of people think greater inequality can help fuel stronger growth.

When inequality gets to an extreme, it is completely useless for growth. You had extreme inequality in the 19th century, and growth was not particularly large. Because the growth rate of productivity was 1 to 1.5 per cent per year [in 19th century Europe], and it was much less than the rate of return to wealth, which on average was 4 to 5 per cent, the consequence was huge inequality of wealth. It’s important to realise that innovation and growth in itself are not sufficient to moderate inequality of wealth.

Are we on a course that leads us back to the Gilded Age?

Nobody knows. The main message of the book is that there is no pilot in the plane. There is no natural process that guarantees that this is going to stop at an acceptable level.

Would inequality matter if wages were still growing for the middle class?

There are two big forces that are squeezing the middle class. One is the rise of the very top executive compensation, which implies that the share of labour income going to the middle and lower class is shrinking. That has been quite spectacular in the United States. The other force we see is that the share of a country’s income going to labour tends to decline when the share that goes to capital is rising.

You call meritocracy a “dangerous illusion.” That goes against how a lot people think the US economy works.

Our modern democratic ideal is based on the hope that inequalities will be based on merit more than inheritance or luck. Sometimes, meritocratic arguments are used by the winners of the game to justify the role of unlimited inequality. I don’t think there is any serious evidence that we need to be paying people more than 100 times the average wage in order to get high-performing managers.

People in Europe and the US have a nostalgic view of the post-second world war period. We saw growing national prosperity that benefited everyone. Is it possible to get back to that?

It was really a transitory period due to very exceptional circumstances. Growth was extremely high, partly because of post-war reconstruction. Also, growth was exceptionally high because population growth as a rule had been extremely large in the 20th century. This isn’t really an option for policymakers. The other reason I think we should not be nostalgic is that part of the reason the inequalities were lower in the 1950s and 1960s is that the wars destroyed some of the inherited capital that were the sources of earlier inequality.

Why do you think a wealth tax would address the destabilising force of rising inequality?

Instead of having a flat tax on real estate property, you would have a progressive tax on individual net worth. You would reduce the property tax for the people who are trying to start accumulating wealth.

Every American politician says education is the answer to inequality and immobility. Is more education the answer?

This is the most powerful equalising force in the long run. But it’s not enough. You need both education and taxation.

How did watching US television programmes like House, Bones, The West Wing and Damages help you with this book?

They tell us stories about how you can get rich, get poor, and so on. The people who are heroes of the series, many of them have PhDs. They represent the model of skill-based inequality ... [The programmes are] like novels in the 19th century. They’re able to show in an extreme way a kind of deep justification or deep criticism of the inequality structure.

Your critics see you as pushing a political agenda.

This is a book about historical facts. People can do what they want to do with it. The book has four parts, and part 4 is about policy implications ... To me, this isn’t the most important part. If you disagree with these 100 pages, that’s fine. The whole purpose of the first 500 pages is to help people to make their own conclusions.

Before Piketty and his fellow researchers produced their research findings, economists relied on less precise indicators of inequality.

For example, there’s the Gini index. The name comes from Corrado Gini, an Italian statistician who developed the idea in 1912.

The index measures income distribution on a scale of 0 to 1. A zero means everyone has the same income. By contrast, a 1 indicates that all income belongs to a single individual.

The Census Bureau says the United States has a Gini index of 0.48, up from 0.40 in 1967. But without the tax data pioneered by Piketty and others, it would be harder to determine what that change signifies.

On its face, the slight increase masks just how much money has accrued at the top 0.01 per cent.

Additional reporting by Agence France-Presse


Thomas Piketty

Born: May 7, 1971

Current position: Professor of economics, Paris School of Economics and L'Ecole Des Hautes Etudes en Sciences Sociales, Paris.

Degrees: M.Sc., mathematics, Ecole Normale Superieure, Paris; PhD, Economics, L'Ecole Des Hautes Etudes en Sciences Sociales and London School of Economics and Political Science.

Major research: Historical and theoretical work on the interplay between economic development and the distribution of income and wealth.