France: Revolutionary analysis questions basic distribution of wealth - by Paul Sweeney

Few economists inspire popular movements, but Thomas Piketty has. “We are the 99 per cent”, the slogan of the Occupy Movement, was based on his in-depth analysis with Emmanuel Saez of income distribution and inequality in the US in 2003. 

The Frenchman’s new book Capital in the 21st Century is already causing a stir. Some reviewers have called it the economic book of the year, others of the decade.

Piketty’s ground-breaking work on the historical evolution of income distribution is impressive, but he covers many other areas, including the erosion of meritocracy by inherited wealth, public debt, education, health and taxation. He also proposes challenging ideas for funding the social state in the 21st century. 

Piketty’s central point is that when the rate of return on capital exceeds the rate of economic growth, the economy automatically generates arbitrary and unsustainable inequalities which undermine the meritocratic values on which democracy is based.

Unless capital owners consume all of the return on their capital, more will remain for them and they get richer, effortlessly. 

In the late 19th century, the amount of private wealth was a staggering six or seven years of national income.

Two world wars and the Depression wiped out much of this wealth and, since the second World War, the emergence of welfare states, nationalisation of monopolies, labour-friendly governments and high income and inheritance taxes greatly reduced accumulated capital. 

In the public mind, that trend towards equality seemed to be normal, but Piketty shows it was an exceptional period, which will not be repeated on current trends.

It is already over in the US, where average real incomes have hardly risen since the 1970s, despite high productivity. The labour share of national income has been declining in most countries for over 30 years.

This optimistic public misperception was shaped by the work of Nobel economist Simon Kuznets, who argued that, as economies developed, inequality appeared to fall and then stabilised. The labour share of national income seemed to stabilise at about 75 per cent. The distributional issue seemed to be settled and economists ignored it and most still do. 

However, Kuznets only examined a short period of time (1914-1948) and only the US. It was the wars, the Depression and state “interference” that reduced the inequality, rather than any self-correcting market mechanism, he argues.

In Capital ’s 650 pages of tightly argued data-based economics, Piketty and others have compiled their argument from data stretching back to the 1700s. 

Note EU-Digest:  Capital in the 21st Century is a must read book for every economist and Government  Ministers of Finance and Economic affairs. Also people who have no educational economic background can read it because of its simple and very clear definitions as to the workings of economics.

Read more: Revolutionary analysis questions basic distribution of wealth - Economic News | Ireland & World Economy Headlines |The Irish Times - Fri, Mar 28, 2014