More Effective Remedies for Inequality than Piketty’s

Flattr this!

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.

Bookmark the permalink.

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.