By Geoff Simmons*
‘Rock star economist’ or ‘inequality messiah’ French economist Thomas Piketty’s book Capital in the Twenty First Century has outsold every other book on the planet this year.
The book is so popular because it floats the idea that money makes money, so the wealthy will forever become better and better off than the rest.
The idea has sent shivers down the spine of the wealthy, appealed to the "Occupy Movement", and stirred up the economics profession.
But has he really discovered an immutable law of economics? We don’t think so, at least not yet.
Piketty’s basic idea
Piketty’s central thesis is that capital, wealth, assets (whatever you want to call them) make money faster than people can.
This means that people who start out with a silver spoon in their mouth can stay ahead of any of their contemporaries without any effort at all.
It is a bit like starting a running race with some of the kids poised right beside the finish line. It challenges the very idea we have of equality of opportunity that you can work hard and get ahead.
So what?
To some, Piketty’s idea might seem like the obvious. But our faith in globalisation, the market, capitalism, whatever you want to call it – is based on the idea that we all gain from it.
Sure, some people will get rich, but as long as the rising tide lifts all boats, it’s okay, right?
Well Piketty’s suggestion is that the way the economy naturally works makes the rich richer faster than anyone can catch up, which might threaten our acceptance of it.
The New Zealand Institute’s response to this conundrum is that education is the answer to social mobility – an idea echoed by the Treasury. But this completely misses the point – that some people could get a massive head start in life via inherited wealth.
Our education system would have to offer intensive support to the poorest kids to reduce this gap, which isn’t on the cards anytime soon.
If anything the middle and upper class make sure their kids end up doing better out of the education system too.
Picking holes in Piketty
In terms of its analyses Capital in the Twenty First Century has been subject to intense scrutiny, and some of the criticisms are valid. There are too many problems with the data for Piketty to claim he has discovered a natural law of economics.
In order to back up his claims, Piketty has assembled a data set going back centuries. It is an impressive undertaking, but also a reason for caution.
We really can’t be sure that the numbers are based on a firm grounding. Also the big data anomaly in Piketty’s story is in the mid 20th century – the time for which he has the best data. He puts this anomaly down to two world wars, but if we ignore the dodgy long term data and focus on the twentieth century we could just as easily construct a different narrative.
Whose inequality?
Contrary to what Piketty suggests, the rising tide could be lifting all boats. It all depends on who you include in your analysis.
Piketty’s numbers solely look at the developed world – those areas for which he could get long-term data – basically Western Europe.
In the middle of this century these countries got a lot more equal, but that fell away as the twentieth century neared its end. Piketty argues that improved equality came about through world wars (which affected the rich more) and because countries had policies that promoted equality. When these were removed, the economy reverted to the natural order of things (the rich getting richer).
Recent OECD data looks broader than just Western Europe and provides a different possible interpretation, one that suggests that capitalism has succeeded in improving the lot of everyone.
Since 1980, inequality within countries has grown, while inequality betweencountries has dropped. Overall people are better off, and inequality is about the same as it was back then.
This suggests that globalisation may have hurt the working class in the developed world, but it has benefited the poor in developing countries far more. Surely that isn’t so bad – unless you think people in developing countries aren’t worth as much as people in developed countries?
In other words globalisation might actually be working as we hope – i.e. making us all better off. It’s just that we in developed countries haven’t seen it so much in recent years because the benefits have been realised in developing countries.
As a result, when we look around it feels like we have growing inequality.
Piketty still has a point
But what Piketty has highlighted still rings true in part. The wealthy in developed countries have not faced the same competition as the working class have (at least, until recently). They have benefited from the cheap products that globalisation provides, without any of the cost.
Globalisation has provided some with the opportunity to amass large fortunes. And once the fortune is in place the compounding return to capital can – in some circumstances – lead to a spectacular accumulation of wealth for the owner. It is pretty hard to disagree with this basic thesis.
The critical questions are whether that consequence is harmful, equitable, or necessary.
What do we do?
On one hand we shouldn’t forget that accumulation of wealth is a necessary driver of a capitalist economy. There have to be rewards for effort, otherwise people will not bother to put in the hard work to achieve success.
On the other hand, extreme polarisation of wealth can cause social instability.
As we have previously discussed, our main concern is equality of opportunity. This relies on all kids getting a fair start in life, which is not the case when it comes to inherited wealth. Squaring this circle isn’t easy.
Yet perhaps the greatest inequity we face is that not all accumulated wealth is subject to the same tax impost as other forms of accumulated wealth.
In our next blog we will look at whether it is possible to deal with some of the issues Piketty has raised, without stunting the incentives to do better.
We think so – we’ll look at how tomorrow.
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Geoff Simmons is a senior economist at the Morgan Foundation. This article was first published on the blog garethsworld.com and is re-published here with permission.
27 Comments
Am i witnessing a stagering exageration of statistics?
Say
A wealthy person is worth $100 million and the average Westener is worth $100k. The average third world person is worth $1k.
That is, the ratio between the wealthy person and the rest is $100 million to $101k
Now, after globalisation, the wealthy person is worth $200 million, The average Westener is worth $140k (an increase of $40k) and the third world persons wealth has increased wealth to $62k
ALL boats have risen (ha ha)
As the ratio is the same ($100 mil to $101k) there is no problem
Boy, what planet did you come from?
Geoff floats the popular mantra in support of capitalism "But our faith in globalisation, the market, capitalism, whatever you want to call it – is based on the idea that we all gain from it.
Sure, some people will get rich, but as long as the rising tide lifts all boats, it’s okay, right?" and herein lies the flaw.
Capitalism drifting to the right will not necessarily lift all, as the capitalists, in extremis, are firm believers in slave labour. The current economic models mandate ongoing growth, and I think that for some, they see this as 'in profits' and the only way they can achieve it is by driving down wages, thus reducing a fundamental cost, and is cheaper than investing to improve productivity. So the net effect is that the working class are slowly drifting back towards the 'slave labour' definitions as business owners lobby and 'bribe' Governments to hobble the ability of workers to demand reasonable pay. Unions can get too 'bolshe' to and in their attempts to reverse this trend cause as many or more problems.
Just like extreme communism doesn't work, extreme capitalism doesn't either - balance somewhere in the middle is what is required.
If Lorde can get it at 17.....then surely economists can get it......Hint.....You'll never be Royal.....but you can be Queen Bee!!!
If you want to be wealthy......don't you have to make sure you have a wealthy mindset first!
What are the wealthy doing that is different?
Does our western education system give us a wealthy mindset? I'm an emphatic NO on this one.
One of the things wealthy people have going for them is that they work hard on the right things.....and they don't have a lot of competition when they get there......that is because the majority of a population tend to work hard on the wrong things and if you're in a western democracy you whinge and work towards socialising the majorities lack of competitive drive and creativity.....so people tend to stick with other similar minded people....it's called group mentality!!
I am aware of a former butcher apprentice and a former panel beater who are now quite well off.
And a butcher who started with one small store in Mangere.
And a transport operator now living in some principality.
And, and, and.
If you are prepared to take the risks and work for it you may get better off.
It is all about the choices we make in life.
Is life equal to all, no. But we are all equal to making choices.
If you are born in a family with some money life will probably be easier, you can thank your forebears for that. But even then plenty of those families have lost if all, because of choices they made.
Of course the rich well get richer if they continue making the right choices. 5% on a million gives you more in $ then 5% on 100K.
Remember the days when the hype was that Japan was going to rule the economic world?
When Britain was a world power?
When Egypt was the centre of the universe (nah no one today can remember that).
We can't help where we are born, but we have a choice to making the most of what we are given or not.
Stop complaining.
Life may not be equal to all, but we all have equal rights. The right to your own labour should be a basis of any fair society and a true liberal would embrace with principle. It is a question of morality.
As part of our ability to make decisions we can make moral or immoral ones, it would seem you prefer the latter.
I see a few don't get it, no surprises there, but can someone please how we came to a time where it is starting to look like unless you make it big you aint going to make it at all. Whatever happened to Average Joe who does not aspire to great heights or have any great talent who just wants an ordinary life with an ordinary family, now that person is marginalised in this stupid try to get as rich as you can world.
... yes , I think there's some assumption here that more of us aspire to be " wealthy " as an economist would define it , whereas many of us have a holistic work/life balance ..
It's not so bad just being mortgage free , with room to grow some of your own food , good friends and robust health , some books and a bottle of the local vino ...
... you can be that " wealthy " in any country , if you set your mind to it ...
Raegun.....I'm not sure that you get it........Average Joe has actually destructed himself by partaking in the group mentality and demanding all the Government interference at every point in one's life, business etc!
The Average Joe's obsession with control via demanding legislation and regulation and continual increases in Government run services is what has ruined Average Joe......
The Average Joe will eventually implode because they refuse to stand up for constitutional rights, individual rights and other documents which were recognised as being at the forefront of ensuring Average Joe could have that simple ordinary life with an ordinary family......Average Joe has actually marginalised him/herself through the politics they follow and the relentless pressure they apply to get Governments to keep on taxing and regulating them!!!
... so true Mr notaneconomist ... whenever I'm around folks who're nearing 65 , I get a churning in the pit of my stomach as they whitter on about looking forward to " collecting their pension " ....
The welfare state has alot to answer for , surgically removing the spines of average Kiwis , turning them into limp jellies , submissive , obediant , compliant ...
... praise be for the few who remain stoic , tough minded , independent !
... praise be for the few who remain stoic , tough minded , independent !
Yes indeed - characteristics sadly lacking across the ditch.
Australia briefly became an independent state during the Whitlam years, 1972-75. An American commentator wrote that no country had “reversed its posture in international affairs so totally without going through a domestic revolution”.
Whitlam ended his nation’s colonial servility. He abolished Royal patronage, moved Australia towards the Non-Aligned Movement, supported “zones of peace” and opposed nuclear weapons testing.
On 11 November - the day Whitlam was to inform Parliament about the secret CIA presence in Australia - he was summoned by Kerr. Invoking archaic vice-regal "reserve powers", Kerr sacked the democratically elected prime minister. The “Whitlam problem” was solved, and Australian politics never recovered, nor the nation its true independence. Read more
Sadly, the Austalian spine just got softer.
Australia’s senate has endorsed new anti-terror laws that will grant its intelligence agency the right to spy on any citizen with just a warrant, while journalists and whistleblowers “recklessly” exposing special ops can face up to 10 years in jail. The anti-terror laws, which cleared the Australian Senate on Thursday – and will almost certainly pass the House of Representatives on Tuesday – grants extraordinary powers to the nation’s spying agency, ASIO, to effectively monitor the entire Australian internet. Read more
The whole world revolves around control....those who can't control themselves seek to control others.....and their techniques are varied and many.........it is the biggest joke played upon the people......gullible and naively they all work from pay cheque to pay cheque.....they would rather take in any form of side entertainment than to use some of the extra equipment in their brains.
I think one has to take all these spying and anti-terror laws with a good dose of humour......when you forget what you were doing and where you have been or where you were going....just ask the GCSB.....that's if you can remember them.
I think it is absolutely rediculous that NZ PM Key seems to know that we have people in our country who have gone overseas to fight for these causes like IS ISIS ISIL etc and then we let them back in here.....WTF.....is all that about? There are no morals, ethics or common sense......so instead these fighters are freely granted the right to "hide" in our country and we all lose our freedoms........and it appears we are not allowed to condemn them on their religion or other beliefs and actions!!!
It is you notaneconomist who does not get it, the natural progression of the free market, free everything is that fewer and fewer accumulate more and more till Average Joe CAN"T get any traction, that is when things like ISIS and other revolutionary groups rear their heads above the parapet and use all they have to try and square things back up again. It has happened over and over and over and over.......................................... and will happen again. We actually do need some checks and balances on our own greed and willingness to shut out the next guy in our quest to make sure we are alright, Jack.
Don't get too cosy with that sentiment. Even John Key was able to figure out what can happen when people become disaffected and disenfranchised. There is some nasty stuff on the way and you best hope like hell those "people" do not get their hands on nuclear technology, something they are quite keen to do.
They may not be revoutionaries in your mind but I will bet you anything you like they are in theirs.
This suggests that globalisation may have hurt the working class in the developed world, but it has benefited the poor in developing countries far more. Surely that isn’t so bad – unless you think people in developing countries aren’t worth as much as people in developed countries?
Haha, trying to say that those that consider alternatives to capitalism value people in developing countries less than pure capitalists?? Oh man, don't insult our intelligence dude - that paragraph looks like a comment that would be left by one of the neo-lib mob on this website!
And then you contradict yourself - after admitting that globalisation has hurt the working class in the developed world you say that everybody's better off. As for "us" in the western world not having seen much of the wealth in western world recently - have you never been to Auckland? There's a freaking McLaren dealership on Great North Road!
Come on interest.co - I expect better than this...
The worn out cliche about raising all boats probably doesn't impress those with nothing but a small dingy anchored firmly to the sea bed with a short economic chain!
The reality appears that governments around the world are limiting promises of retirement benefits and looking to extend retirement age while doing all they can to suppress wage rises and exhorting people to save more -- but most people in the bottom 66% of income earners no longer have anything left to save after meeting their living expenses. Their share of the nations created wealth and resources keeps rising up to the few floating on the surface.
While the countries economic health may be improving, the number of wretched increases.
I dont agree with this idea that money makes money, the person managing the money makes the balance grow. The saying was, the first generation makes it, the second generation maintains it and the third generation spends it - wealth gone.
The middle and working class in NZ. Once they get over the fact that it is now the norm to upskill throughout your working life, there big issue is the cost of somewhere to live that they can afford (most people that own there own home, have a job and are mortgage free seem quite happy). I think in this case the market is broken and NZers pay too much for a roof over there head, I blame this partly on "working for families". Are families really better off? or does rent and housing just cost more?
Inequality is a pointless metric (unless you think everyone should be poor) without alot of qualifying information. High inequality can be good.
I see trhe New Zealand economy has been doing so well under our experts, that our top performing city (Auckland) is having problems funding it's Christmas Parade?
"The costs of installation have gone up over the years as the other sources of funding have actually been reduced."
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11346679&…
Will all their expertise, with all our progress... not only can't they afford to make such items, they can't even afford to use the ones they already own.
At what point our our "leaders" and "experts" wake up to the FACT that what they "know" is _wrong_, and they're busy paddling the economic boat the wrong direction (higher pay, less productive, more overhead). This is factual evidence that they ARE failing, that the KPI's and eduaction that justifies them is _faulty_.
expertise indeed
The chief executive of Auckland's publicly funded Heart of the City organisation has been charged with tax evasion.
The Inland Revenue Department has laid 39 charges against Alex Swney, 57, in regards to $1.8 million in unpaid tax. He also allegedly owes $1.4 million in penalties, Newstalk ZB reports.
Cowboy, I read james Kynge's book on China, Where he talked about cheese being a derogatory term for the way westerners smelt.
http://www.amazon.com/China-Shakes-World-Troubled-Challenge/dp/06187056…
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