Some colleagues and I are starting to work our way through Thomas Piketty’s new book “Captial in the 21st Century”. There has been lots of discussion on the interwebs concerning this book and there are many particularly interesting reviews out there. For those who haven’t heard of it there are a few novel contributions that Piketty makes. The first the data that Piketty and his team collected. This little gem from Piketty sums up why this data acquisition is so novel: “For far too long, economists have neglected the distribution of wealth, partly because of Kuznet’s optimistic conclusions and partly because of the profession’s undue enthusiasm for simplistic mathematical models based on so-called representative agents”. The other thing is that he focuses not only on income as a factor inequality, but, and this is central to his overall argument, on wealth as well. This leads him to the central overarching argument of the book: r>g (where r is the rate of return on capital and g is the growth rate of the economy). So when r>g then wealth grows faster than the economy as a whole which leads to a structural form of inequality that will continue unless checked through some form of political intervention in the system.
While there were many interesting aspects and themes that my colleagues and I discussed, there is an issue that is still percolating in the pack of my mind. In collecting his data, Piketty has provided a substantial extension to existing studies about inequality, most notably the work of Nobel Laureate Simon Kuznet’s whose infamous Kuznet’s curve provides the basis for many free-market ideologues to argue that the market will ‘sort itself out’ and that any argument for increasing inequality that was a structural component of capitalist systems was nonsense. Piketty, in focusing on wealth in addition to income, was able to extend his analysis earlier in time that Kuznet (who relied on income tax data which began in response to WWI, while estate and inheritance taxes existed prior) as well as incorporate more contemporary data. While some questions have emerged concerning the data itself, and I am by no means qualified to assess those claims and arguments (one great piece about the data specifically is this piece by my friend’s cousin Nate Silver) the overarching conclusion seems to be that the data the Kuznet’s curve is primarily based on is an aberration resulting from the shocks of two world wars and the great depression and not the norm.
In social scientific terms this is known as ‘selection bias’, which is a fancy way of saying that you shouldn’t generalize from unusual circumstances. But the question it raises is what is a proper time frame to properly assess these kinds of questions? I’m interested in studying long-term governance issues for my dissertation so you can understand where this question is coming from. Questions of “sustainability” are precisely focused on the long-term stability of economic, social, and ecological systems. If you’ve got data showing that over time inequality lessens, there is reason to hypothesize that this is a ‘natural’ outcome of capitalist systems. But as the saying goes, correlation does not mean causation. The argument at hand is whether inequality increases or decreases due to inherent structural or systemic forces within capitalist economic systems. In other words, will capitalists systems lead to a place of relative equilibrium or does it lead to increased inequality that will be socially unpalatable because of the exponential power of compound growth of wealth (wealth begets wealth). Piketty’s work suggests the latter.
The good news, however, is that Piketty’s work also suggests this is not a deterministic reality of capitalist systems. Capitalism does have an immense power to efficiently, and rapidly distribute goods and services to a broad population that continually encourages increases in productivity and efficiency: doing and making more with less. Capitalism works best when everyone is playing on a level playing field. It is, or can be, a very meritorious economic system, which is why so many ‘conservative’ types find it appealing – you get out what you put in. Unfortunately, capitalism simply assumes equality. This assumption is the basis for many ‘liberal’ critiques of this economic system because some people (there will always be some) are marginalized and thus at a structurally disadvantaged position. Assuming everyone started out in the same socio-economic position, after the first generation there would be winners and loser. This is all well and good, but when being among the winners increases your odds of winning again, this establishes structural inequalities.
To use an analogy from hockey, the Los Angeles King’s are 1 win away from the Stanley Cup. Currently the NHL’s draft system is designed to keep teams competitive by giving the greatest chance to draft first (and thus draft the most skilled prospect available) to the team that did the worst. The Los Angeles King’s, assuming they win this year, will draft last. Imagine if the NHL draft was designed so that those who won the Stanley Cup drafted first (perhaps arguing that it is a reward for success)? What do you think would happen after 5 seasons? (One could also posit that Stanley Cup winning teams earned a higher salary cap as well, or even had more of their people on committees that decided on the rules such that they could alter the rules to suit their teams style of play. You get the picture). You would likely see a team that would be unbeatable for generations to come (better than Team Canada in the Olympics, imagine picking an All-star team from Olympic players). Would that be fair? Would that even be enjoyable to watch for anyone not from southern California? The NHL’s current design isn’t “robbing the rich to give to the poor” it is an institutional design aimed to keep the league as competitive as possible. Capitalism thrives on competition. Questions of social justice aside, my main hope for this book is that it can help illuminate the fact that structural inequality is bad for competition, and as a result, bad for capitalism.