It of human behavior, and those two things

It seems that since the
publication of Thomas Piketty’s Capital, the
book has garnered widespread attention among the general public and economists
around the world. This attention has come in the form of much discussion and
argumentation both in publication as well as online. Again, another economist’s
theory has come under detailed scrutiny, and once again, one economist’s theory
never simply holds up to the barrage of questions aimed at toppling his empire.

The multifaceted nature of economics, of human behavior, and those two things
coming together then, is perhaps ultimately the most convoluted science.

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However, among all the economic theories and predictions that often notoriously
wrong, Piketty has made a call for economists to go back to the scientific
basics of studying historical and empirical data. Such data, derived from
France and Britain, which stretches back to the 17th century, is the
greatest backbone of Capital, without
which none of his ideas, predictions, and propositions would have any
credibility. However, despite the sheer amount of data that is compiled and
then presented to us, the validity of that data nonetheless still poses a large
problem, from which Piketty concludes that a global progressive tax is
necessary in order to prevent an apocalyptic wealth inequality. Just from a
first glance, any one would say that is highly problematic that best. In order
to attack this problematic conclusion, we shall take a look at some of his data
and then inherited wealth, which to Piketty is a highly important factor that
plays a large role in wealth inequality.

     We will first take a look at the problem
Piketty is seeing with the direction capitalism is headed towards before
considering his problematic conclusion in light of his inheritance argument. The
study of economics, like every science, will always be on some level “imperfect
and incomplete” (1). However, having sifted through a large amount of data
which “only since the end of the twentieth century” has the world had “statistical
data and… the indispensable historical distance to correctly analyze the
long-run dynamics of the capital/income ratio and the capital-labor split,”
Piketty has concluded that capitalism tends to brew economic inequality due to
the inevitable accumulation of the wealth of capital, which grows faster than
that of labor’s: r > g or r – g > 0, where r is understood as the average
annual rate of return on capital and g is annual economic growth (292). This
equation is historically true for well-established societies in which growth is
slowing down, or is already quite slow. In such societies, accumulated wealth
becomes more important than income from labor, which means inherited wealth is
more valuable than any large salary. If the already rich are sitting on a large
amount of capital, and this is compounded with high returns on capital, then
the results will be devastating over a long period of time. The wealth will
inevitably be in the hands of the very few, while the rest of society suffers.

These claims are valid insofar as they are predictions and conclusions drawn
from the data Piketty compiled. However, are these predictions accurate, and if
they are, for what reasons are they accurate?

Here I will begin to outline some
of his thinking that is supported by his graphs of the data he compiled. Looking
at beta (capital/income ratio) from the 1700s up to 2000s, we see two large
shocks that occurs right along one another. These shocks were the two world
wars, and in Britain and France, before the wars, beta was at 700%, but right
after, beta dropped to around 300 percent and remained there until mid 20th
century when it began climbing, and finally this century he projects that beta
will once again reach that 700% of the belle époque/Jane Austen days.

What were some of the reasons
that the world wars caused such a large shock in the capital/income ratio? War
always forces countries to mobilize human labor, as they all scramble to
assemble weapons, manufacture heavy machinery, and so on. War also destroys
large amount of capital, and in post war years there must be human labor to
rebuild and to reconstruct cities and infrastructure. Even more significant
however is after the first world war, the plunge was attributed to spending
foreign capital in order to pay for the war. Figure 3.1 and 3.2 show large
shrinkage of all these assets of Britain and France respectively. The following
increase in capital after the two world wars is mostly just in housing, under
400% in Britain and over 400% in France.

Comparing these two countries to
the United States, the states has had a more consistent increase, but
nonetheless experienced the shocks, though not as drastic. Beta increased from
over 300% 1770 to almost 500% in 1910, falling only almost 100% due to World
War I, and bounced back just as quick due to speculation in the stock market,
though the second world war caused beta to plunge 120% to around 380%. For the
decades later, the United States has seen a slow but consistent growth to about
450%, the slow rise mostly having to do with an increase of immigrants, which
increases the amount of people to divide capital between.

Taking these data together then,
Piketty tries to create a world beta from 1870 to 2010, and keeps projecting
that ratio until 2100, which is highly questionable. Y Whether the three
countries together is able to reflect the general direction of the economy of
the world, no one will be able to conclusively say, and whether these
projections are accurate, only time will tell. The world ratio was 500% in 1910
according to him, and was 260% post world wars, and is around 440% today. Continuing
this trend, he projects 600% by 2010. This global view is also highly dubious given
the nature of information systems and technologies and artificial intelligence,
though markets are becoming more open everywhere and will lend themselves to
globalization.

Hence, study of the way capital
works and the way capital is directed in society is crucial in understanding
inequality. Within capital and within labor, both have their own inequalities. Labor
income is an example, where the distribution is astoundingly unequal, as shown
through the recent boom of supermanagers, who are considered to be financial
superstars earning multimillion salaries by virtue of shareholders. Now many
get educated just to be able to have a position at a prestigious financial firm
in order to earn those astronomical sums of money as salaries. Piketty concludes
that the return on capital has been a historical 5%, and will not change very
much, though recently 5% in the pre-Trump election days was a highly optimistic
projection if based on a relatively risk-averse investment portfolio.

If it is true that the average
return on capital is steady, while growth of economic growth is slowing, as
human labor will be replaced and the population increase will slow, then it is
highly conceivable that beta will continue to increase. Savings rates on paper
according to Piketty are also quite steady regardless of economic conditions.

All of these important factors of the economy playing together lead to
Piketty’s conclusion that capital will play an increasing role in the stability
of society, which will take power away from the hands of the many.

This is the barebones version of
the conclusions he arrived at from his data, and we are left asking some
questions. Behind all of this, are the conclusions and questions he is making
and asking about in the graphs and numbers really form an accurate picture of
the direction capitalism is headed towards today?

Let’s then look at his solution:
a global and progressive tax on capital itself, and along with it a high level
of international transparency with financial information in order to collect
taxes. This transparency can expand the limited information we currently have
and improve regulations across the globe especially in times of crisis where it
is most needed. Such high level of transparency will also force governments to
collaborate with one another and share financial data. Ultimately, the system
will be capable of estimating with a very small margin of error every single
person’s net worth. The revenue generated by the global tax would be somehow divided between all the
countries in the world. How that could be done without breaching current laws
surrounding safety and privacy is unclear.

Piketty is motivated by many
factors stated above, but also he wants to shut down illegal tax shelters the
rich use to hide their wealth from governments and avoid paying taxes. This
also will eliminate the harmful tax competition so prevalent in Europe, which
incentivizes people to move to countries with lower taxes.

However, the very slim
possibility that this could be a feasible policy to implement across the globe
makes the proposal seem pointless. Logistics aside, would this really help
reduce inequality or simply incentivize the hiding of wealth in other ways?
Would it cause more harm than good? How do we get everyone to be on board and
trust not only their own governments but also a much bigger conglomerate?
Piketty is indeed aware of all these problems, and hence his statement that
such a proposal is utopian. The more important point here seems to be that
there must be a drastic effort of the wealthy countries to begin wondering
about the effects of increasing wealth inequality.

Having understood Piketty’s
proposal, then let us take a look at his theory of wealth inheritance, and what
he believes to be a large driving force behind wealth inequality, and will
continue be. Granted, “in stagnant societies, wealth accumulated in the past
naturally takes on considerable importance,” the rentiers ultimately do not
seem to be able to maintain an endless stream of income for their future generations
especially in America with a high inheritance tax of 40% for estates greater
than 345,000 dollars, and is staggered for values below. In order for the
wealthy to keep such an inheritance as well as their children to pass on such
an inheritance, they face multiple obstacles today that tend to diminish and
dilute inherited family wealth. First and the most obvious is the inevitable
consumption of a certain amount of wealth. This could be very minimal for individuals
like Bill Gates and Liliane Bettencourt.

Even after the super wealthy
covers food, shelter, clothing and luxury items (political, philanthropic
contributions) and the maintenance of their lifestyle and items, they are still
left with a substantial amount of wealth to pass on to their children. But once
they pass away, the inheritance tax in America is absolutely capable of
distributing that wealth among more and more people. This is assuming wealthy
people will not give any money away towards philanthropic deeds written on
their will. That inheritance is then further divided among children, and
marriage is not often between two people of equal wealth. Only in a very few
extreme cases inheritance money will promote the sort of apocalyptic inequality
Piketty sees. If the child marries someone just as wealthy, and bequeaths all
of the money to one child, is very conservative with money and has a high risk
portfolio that performs well throughout his life and on top of that spends
almost next to nothing and has a tax haven to hide some if not most of it, then
we will definitely see a troubling spike in wealth inequality in the coming
years.

Today is very much different from
19th century France where the top decile were landowners who had
80-90% of the wealth. Though limited and even flawed empirical data that
Piketty uses suggest is moving towards inequality once again, this inequality
will be different due to the proliferation of information technology and coming
soon, the replacement of human labor by robots. We all agree that population
growth is will continue to decrease, and for the middle class in developed
countries like Japan and the United States, a lot of it is due to people making
considerations and compromises when it comes to the quality of life they can
give to their children, and whether their own life will improve if they do have
children. The work-obsessed Japanese tend not have children in Japan because
they understand that the job-market is extremely tough, along with unsteady
work employment. These people’s inheritance will either be given to those close
to them, to charity, or largely spent. It is likely that these economic
pressures will soon face many wealthy and developed countries in light of
robotics as well which will inevitably replace human labor.

For others, they will not have a
child unless they can provide them with a private education and unless they can
afford to buy them a house. For these people, it is a matter of a standard of
living, not about the mere birth of a child who can carry on some genetic
legacy of two human beings. Inequality here, then, is reflected by the life
choices people make, and a mid-life crises many of these men and women must
face. This however, is hard to quantify, as it is a qualitative judgment
whether they consider their own lives as fulfilling or not.

However, we also must recognize
that based on projected statistics that validate the theory that inherited
money will play a larger and larger role even in middle-class families where
both husband and wife work. Even if it were true, it is softened by the fact
that people are having fewer and fewer children who are receiving better
educations who have access to better and better healthcare. Hence the increase
of wealth inequality from 15% in 1910 in WWI back to 24% in 2030 like back in
1790 (Figure 11.9) is not as dark as Piketty predicts. This focus on
inheritance does not simply favor the 1% who simply sit on their capital and
put it in investments. This is rather would be more indicative of the
life-choices of people who do not live paycheck to paycheck. Those who do, who
are stuck in the bottom 50% are still left to scramble to find some job that is
sustainable, but there will always be a 50%, and if the lower 50% have an
increase of living standards, then there is no real issue to debate here.

People who capitalize on opportunity will have higher chances of climbing the
socioeconomic ladder.

Wealth inequality is not a
problem in itself, but it is a matter of how much. There should be nothing
objectionable to a hard working person who earns a high salary who deserves to
earn that salary. No reasonable person living in a capitalistic society should
disagree with that. That said, it is also important to keep in mind the bottom
50% who do not have equal opportunities to climb the socioeconomic ladder, and
it is rightly said by Piketty that “modern growth, which is based on the growth
of productivity and the diffusion of knowledge, has made it possible to avoid
the apocalypse predicted by Marx and to balance the process of capital
accumulation” (294). Education has its own problems, and it might be necessary
in the future to incorporate money-managing skills within school curriculums.

This way, a low-income earner can have the tools and the knowledge to become a
capitalist if he chases good opportunities. These seem to be reasonable
solutions, not a global progressive tax that is too difficult to implement in
this day and age.

At this point it is clear that
there are many areas that could use reforming in the current economy, but the
overarching theme that Piketty should have emphasized more on is labor and the
inequality of labor, which is where new ideas are formed. Currently, teachers,
research scientists, are poorly paid and those areas are usually poorly funded.

Profits generated from new ground-breaking ideas that benefit society are often
earned by financial and logistical sectors, not the creative ones. Future
reform for the economy should focus on these ideas that allow a constant and
greater growth and diminishes the ever-increasing influence of capital.

In conclusion, Piketty’s account
of wealth inequality has a lot of useful information, but ultimately his advice
falls short of anything practically implementable. He seems to have given too
much weight to the harmful reasons why wealth inequality is increasing, but not
enough on current bad policy that does not encourage the young to pursue areas
of the world that are worth expanding on. Instead, they attend prestigious
schools and study economics and finance in order to land that dream job of a
super manager at a top firm. Of course, that is also an exaggeration, but the
point is to garner interest in new sectors where the economy can help ideas
take off, give large growth, and make a positive impact on the world. Incentivizing
innovation seems to be the practical solution here.

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