More Effec­tive Reme­dies for Inequal­ity than Piketty’s

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I will launch Sack the Econ­o­mists, by Geoff Davies, on Sun­day 4 May (3:30pm for a 4pm start) at Glee­books, 49 Glebe Point Road Glebe NSW 2037 Syd­ney.  The event is free, but an RSVP is required here or via phone at 02 9660 2333.  Fol­low­ing is an edited extract per­tain­ing to Thomas Piketty’s recent best-seller.  I hope to see Syd­ney-side read­ers of this blog at the launch.]

This is a guest post from Geoff Davies

 I have read only reviews of Thomas Piketty’s Cap­i­tal in the Twenty-First Cen­tury, but clearly it is valu­able for doc­u­ment­ing the nature and his­tory of inequal­ity over the past cen­tury or three, and for high­light­ing the exces­sive polit­i­cal power that flows from super-wealth.  Yet he frames it in terms of cap­i­tal and cap­i­tal­ism and, for all the qual­ity of his diag­no­sis, his main pre­scrip­tion evi­dently is just to tax the wealthy, through income and inher­i­tance taxes.

The trou­ble is, cap­i­tal and cap­i­tal­ism are very ill-defined.  To speak of cap­i­tal­ism is to invite an un-con­struc­tive shout­ing match.  Cap­i­tal­ism has caused great harm to peo­ple and the world!  Yes but cap­i­tal­ism is what has made us rich!

A more use­ful fram­ing is that there have been, and can be, many ways to struc­ture a mar­ket econ­omy.  When one looks into the mech­a­nisms that have oper­ated in mar­ket economies, one can read­ily iden­tify mech­a­nisms that pump wealth from the 99% to the 1%.  One can then think of ways to stop or reverse these flows, so wealth flows more fairly to every­one involved in its gen­er­a­tion.  It will be much more effec­tive to fix the prob­lems at the source than just to apply tra­di­tional retro-active bandaids like taxes.

In my own book Sack the Econ­o­mists, I iden­ti­fied seven fairly obvi­ous such mech­a­nisms.  Below is an edited excerpt that sum­marises mech­a­nisms iden­ti­fied in the course of the book’s analy­ses.  (Dean Baker has also made lists, short and longer, which are a lit­tle more detailed and only partly over­lap­ping with mine.)

Finan­cial mar­ket spec­u­la­tion

The finan­cial mar­kets are dom­i­nated by spec­u­la­tion and other activ­i­ties whose sole objec­tive is to siphon wealth from the pro­duc­tive econ­omy.  The amount of wealth involved is very large.  Some indi­ca­tion might be obtained from the fact that finan­cial sec­tors in the US and Aus­tralia now account for 30–40% of cor­po­rate prof­its.  Because cor­po­rate prof­its would be a large frac­tion of GDP, this means a sig­nif­i­cant frac­tion of total wealth is pumped to the rich by this mech­a­nism.

Cap­tur­ing emer­gent com­mu­nity wealth

This is the wealth that results from the prox­im­ity of indi­vid­ual assets and invest­ments.  It belongs to no indi­vid­ual, it belongs to the com­mu­nity.  In some places some of this wealth is cap­tured for com­mu­nity use, but very com­monly the wealth passes as a wind­fall to pri­vate inter­ests, much of it to devel­op­ers and land­lords.  In this way small prop­erty hold­ers and renters lose their share of com­mu­nity wealth to those rich enough to be able to cap­ture it.

Inter­est charged on new money

Our money is cre­ated in the course of mak­ing loans, and inter­est is charged as though it were sav­ings, rather than hav­ing been cre­ated out of noth­ing.  Because we need money for the econ­omy to func­tion, this bur­den of inter­est weighs on the whole econ­omy.  Banks profit by max­imis­ing loans, so the amount of money in cir­cu­la­tion is max­imised, and this increases the bur­den on every­one.  This is effec­tively a pri­vate tax on the entire econ­omy that pumps wealth to the rich­est ten per­cent.  A sim­ple charge for the ser­vice of pro­vid­ing a medium of exchange, along with stronger reg­u­la­tion of loans, would be far less bur­den­some on the econ­omy.

Access to loans

The rich can obtain loans much more eas­ily than the poor.  They can invest their loans and become even richer.  This mech­a­nism is widely recog­nised and clearly an impor­tant fac­tor, though it is hard to esti­mate the amounts of wealth involved.  Mohammed Yunus demon­strated, with his Grameen Bank in Bangladesh, that it is pos­si­ble to give loans to the poor­est peo­ple and so to reduce this iniq­uity.

The own­er­ship esca­la­tor

We use only a restricted range of own­er­ship options in our present eco­nomic sys­tem.  As a result own­er­ship is highly con­cen­trated.  Even though pub­lic cor­po­ra­tions are owned col­lec­tively, it is the rich who own shares dis­pro­por­tion­ately.  Even though many peo­ple own some shares through retire­ment funds, the dis­tri­b­u­tion of own­er­ship is still strongly skewed to the rich.  Once you gain own­er­ship of sig­nif­i­cant assets, wealth begins to flow to you.  If you are poor and have to rent your accom­mo­da­tion, wealth drains away from you.  Own­ers are on an up esca­la­tor.  The poor are on a down esca­la­tor.

As William Grei­der observed, the prob­lem is not that cap­i­tal is pri­vately owned, the prob­lem is that most peo­ple don’t own any.  We already have many forms of own­er­ship that can change this.  Own­er­ship can be dis­trib­uted much more equi­tably by actively pro­mot­ing less com­mon forms such as own­er­ship by employ­ees and other stake­hold­ers.  Own­er­ship can also be con­di­tional, with time lim­its and pro­gres­sive trans­fers of own­er­ship, or own­ing build­ings but not land, and so on, as dis­cussed ear­lier.

Cor­po­rate wel­fare

There are many sub­si­dies paid to cor­po­ra­tions or rich minori­ties that ben­e­fit the rich at the expense of the poor.  Often they harm the envi­ron­ment as well, thus harm­ing every­one.  Even a decade ago per­verse sub­si­dies amounted to per­haps $2 tril­lion annu­ally, a con­sid­er­able frac­tion of global wealth gen­er­a­tion.  Sub­si­dies to fos­sil fuel use amount to per­haps $300 bil­lion glob­ally.

Tax avoid­ance

This is closely related to cor­po­rate wel­fare, because it is prac­tised mainly by large cor­po­ra­tions, par­tic­u­larly transna­tional cor­po­ra­tions.  They do this by com­plex inter­nal trans­fers of money that exploit loop­holes in tax laws, or dif­fer­ences in tax sys­tems among nations.  They are abet­ted by a few small nations that charge min­i­mal cor­po­rate tax.  Such tax havens could be closed down overnight by con­certed action of a few rich nations, but those nations’ gov­ern­ments are owned by the rich, so it doesn’t hap­pen.  The pro­por­tion of taxes col­lected from cor­po­ra­tions has dropped by about half over the past half cen­tury.

This list will not be exhaus­tive, but it already demon­strates that vast amounts of wealth are trans­ferred to the rich by mech­a­nisms that can­not be jus­ti­fied as the fair oper­a­tion of mar­kets.  Either the mar­kets oper­ate per­versely, through the invis­i­ble fist instead of the invis­i­ble hand, or they have been rigged, with the con­nivance of com­pli­ant leg­is­la­tors.  Cor­po­rate wel­fare and much tax avoid­ance result from explicit inter­ven­tions.  The other mech­a­nisms are due to mal­func­tion­ing mar­kets that allow some indi­vid­u­als to exploit an insta­bil­ity, an up esca­la­tor, that allows the rich to become richer.

If we sim­ply elim­i­nated the mech­a­nisms that unfairly pump wealth to the rich, our soci­eties would be con­sid­er­ably less unequal.  The need for wel­fare would be greatly reduced.  The effi­ciency of the econ­omy would be increased, because pro­duc­ers would pay closer to the full costs of pro­duc­tion, mar­kets would oper­ate more effec­tively, and costly wel­fare bureau­cra­cies could be reduced.  The dig­nity and self respect of the less wealthy would not be com­pro­mised by hav­ing to accept wel­fare, and by being per­pet­u­ally robbed and vil­i­fied by the greedy.  Fix­ing the prob­lems at their sources would be far more effi­cient and effec­tive than the var­i­ous retroac­tive mech­a­nisms that have been devel­oped through the twen­ti­eth cen­tury.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Piketty’s book cer­tainly has the buzz, it’s hard to say whether it will be impor­tant or not. I like Piketty’s idea, there is the haz­ard of another obtuse, “Human Action”. 

    The book’s short­com­ing (I have not read this book, either) is that it does not address the mat­ter of real cap­i­tal and its (rapidly van­ish­ing) place within indus­tri­al­iza­tion. Instead of very basic exam­i­na­tion as to whether indus­tri­al­iza­tion can pay its own way or offer any remu­ner­a­tion there is the assump­tion that the process is an inevitable evo­lu­tion­ary state of nature, that it can be reformed. 

    We’ll see what Mr. Piketty says between the lines … in the mean time there is David Graeber’s “Debt, the First 5,000 Years”, Hall & Klitgaard’s “Energy and the Wealth of Nations”.

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  • ken

    Peo­ple like asset bub­bles because it seems to be mak­ing them rich. Unfor­tu­nately it is mak­ing the rich richer, and when it all col­lapses it tends to have less effect on the rich.

  • Steve Hum­mel

    Directly sup­ple­ment­ing indi­vid­ual incomes with a per­ma­nent and vari­able div­i­dend depen­dent upon the freely cho­sen con­sump­tion deci­sions of indi­vid­u­als is not the be all and end all solu­tion to eco­nomic problems.…just the solu­tion to capitalism’s biggest and deep­est prob­lem which is the inher­ent scarcity of indi­vid­ual incomes in ratio to even min­i­mal prices simul­ta­ne­ously and con­tin­u­ously pro­duced through­out the entirety of the economic/productive process, and whose enforce­ments and effects are price infla­tion and the con­tin­ual build up of debt. These real­i­ties are obscured by the con­tin­ual and over injec­tion of debt into the econ­omy by Banks and to a lesser degree gov­ern­ment in an attempt to equate incomes and prices, but which only pal­li­ates the prob­lem because those injec­tions all go into the econ­omy only via enterprises.…which of course re-ini­ti­ates the scarcity of total labor costs (total indi­vid­ual incomes) to total costs/prices.

    It is an observed phe­nom­e­non that when a neu­rotic con­fronts his/her major prob­lem that other attend­ing prob­lems either dis­ap­pear or tend to dis­si­pate. Human sys­tems, espe­cially one’s whose biggest and deep­est prob­lems are resolved and so then being reflec­tive of healthy human nature would be the same. Accom­plish the above more sub­tle and less obvi­ous sys­temic eco­nomic prob­lem and rea­son­able reg­u­la­tion of read­ily deci­pher­able lesser prob­lems that are the pet hates of gar­den vari­ety mon­e­tary reform­ers like frac­tional reserve lend­ing or inter­est would appear as they are.. epiphe­nom­ena.

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