Welcome to the third and final instalment of ‘The economy is APESHIT’ (Carter and Knowles-Carter, 2018). Where the topic of discussion will be Global Wealth Inequality.
In my blog post on inequality between nations I briefly touched on the work of Thomas Piketty. His book, Capital in the Twenty-First century is perhaps one the most important economic text in the 21st century. Paul Krugman a distinguished professor of economics famously named Capital in the Twenty-First Century as the most important economics book of the decade.
Piketty’s central argument is that when the rate of return on capital is greater than the rate of economic growth, over time this leads to a greater and greater concentration of wealth. He also contends that when the concentration of wealth becomes too unequal, we get social and economic instability (Piketty, T. and Goldhammer, A., 2017).
Of course, I believe it cannot be argued that extreme inequality does not lead to economic instability. Indeed, I would argue that every major revolution in history has primarily been caused by inequality between the elites and the mass of ordinary people. Take the revolutions that occurred in the Arab world at the start of this century. They were kicked off by revolution in Tunisia which was ignited by the leaking of details of the lives of Tunisia’s President and his family (Leaked by WikiLeaks, in particular it was the life of the President’s son and daughter in law that sparked the most outrage) (WikiLeaks, 2008). The people, suffering from high unemployment, inflation and poor living conditions revolted. And they were right to, this was a complete abuse of power, that failed its own people.
It is no doubt true that the richest in our society derive their wealth from the ownership of assets (stocks, bonds, land, property etc). Focusing primarily on income while ignoring wealth in analysing inequality would completely miss this. It also logically follows that wage increases are determined primarily by increase in economic activity. So, if asset prices rise faster than wage increase people who rely on a wage to live find themselves increasingly locked out of owning property. We are seeing this in the U.K at a massive scale, particularly with regards to land and home ownership. House prices have risen substantially in the past 30 years, even including the devasting effect of the recent Corona Virus Crisis, a clear upward trend can be observed throughout the years (UK House Price Index, 2020). Benefiting those who own property while punishing those who do not.
Piketty’s suggestion for remedying this is to create a global system of progressive wealth taxation. The aim is to avoid wealth coming under the control of a tiny minority. This is where my thinking diverges from Piketty. He has correctly identified a real problem in our economy. If we allow property/asset ownership to only be accessible to a smaller and smaller group of people, our economies will stagnate. It is the ownership of property that allows people to take risks, to innovate, to start businesses and to propel economic growth. However, in a world of nation states Piketty’s suggestion is politically unachievable. And even if it were, we go down a dangerous road if we too excessively infringe on property rights. It is all a balancing act; the question is finding the sweet medium.
It is worth noting that the U.K has had in reason years its own flirtations with the idea of increased wealth taxation, notably the idea of a mansion tax which has been a Liberal Democrat policy (adopted by Labour in recent years also).
To conclude this third and final post, we can observe wealth inequality as a serious issue, the most important work on this in recent times was that of Piketty (and his colleague Emmanuel Suez). And while he identifies and articulates the problem brilliantly, we don’t as of yet have workable solutions. In my view we must seek market-based solutions that do not infringe of property rights, in a bid to provide compromised resolution. On the topic of inequality in general it is something that will always be inevitable, however the task remains to implement and adopt measures in a bid to shrink the size of the inequality gap between the rich and poor.
O’Brien, R. and Williams, M. (2016) Global Political Economy Evolution and Dynamics. England: Palgrave.
Piketty, T. and Goldhammer, A. (2015) The economics of inequality. Cambridge: Belknap Press of Harvard University Press.
Piketty, T. and Goldhammer, A. (2017) Capital in the Twenty-First Century. Cambridge: Belknap Press of Harvard University Press.
UK House Price Index (2020) House Price Statistics. Available at: https://landregistry.data.gov.uk/app/ukhpi/browse?from=1960-01-01&location=http%3A%2F%2Flandregistry.data.gov.uk%2Fid%2Fregion%2Funited-kingdom&to=2020-02-01 (Accessed: 26 March 2020).
WikiLeaks (2008) Corruption in Tunisia: What’s yours is mine. Available at: https://wikileaks.org/plusd/cables/08TUNIS679_a.html (Accessed: 26 March 2020).