Confronting inequality: review article on Thomas Piketty on ‘Capital in the 2st Century’

Abstract

This review article on Thomas Piketty’s ‘Capital in the twenty-first century’ opens with a discussion of the trends in income and wealth inequality reported by Piketty and his co-workers. The significance of the rising trends of inequality after 1980 in contrast to the pre-1980 trends is elaborated. It is noted that rising inequality has been accompanied by slower growth. Piketty identifies the relationship between the rate of return on wealth and the rate of growth as a major issue. It is argued here that an excess of savings out of return on wealth over the rate of output growth is unsustainable. It may lead, following Piketty, to rising wealth inequality, but we argue the difference would be deflationary and cause high levels of unemployment. While Piketty favours high income and wealth taxation to address that difference (from which we do not differ), there are additional ways such as enhanced worker power, corporation tax on a coordinated basis to reduce tax competition.

Keywords:

• inequality
• wealth distribution
• income distribution

JEL Classifications:

• D31
• D63
• O15

Notes

1. In Sawyer (1976) I sought to look at inequality amongst OECD countries on the basis of comparable data. I found significant differences in inequality between the 12 countries for which comparable data could be found, and a mix of broadly constant inequality and downward trends, but no case of rising inequality in the post-war worlds until the early 1970s.

2. Derived from Office for National Statistics, UK Wages Over the Past Four Decades – 2014.

3. Calculated from Office for National Statistics, Summary: Tables from the Effects of Taxes and Benefits on Household Income, 1977–2012/13).

4. The term r is ‘the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value’ (p.25).

5. An essentially similar argument applies with regard to the distribution of income between wages and profits: when an economy is deemed to be wage-led then a shift away from wages and towards profits reduces demand and employment, see, for example, Lavoie and Stockhammer (2013).

6. ‘To simplify the text, I use the words “capital” and “wealth” interchangeably, as if they were perfectly synonymous’ (Piketty 2014, 47).

7. Calculated from OECD Economic Outlook Statistical Tables.

8. See Cingano (2014) for recent empirical support of that proposition.