French economist Thomas Piketty’s bestseller presents a massive empirical analysis of the dynamics and structure of wealth and income in countries with capitalist economies since the late 18th century. His book relies primarily on the historical experience of the rich countries of France, Great Britain, the United States, Japan, and Germany. The result is a discovery of an empirical law that produces an ever-increasing growth in wealth relative to national income in these countries. Ever increasing wealth leads to extreme concentrations of wealth in the hands of the wealthiest 10% and income earned by the highest 10% of income earners in the population. The concentration of wealth is so great that much of it is passed on to the next generation in inheritances so that eventually economies tend to be dominated by a high proportion of inherited wealth. This outcome violates the “meritoric” value of democracy — that the inequality of income and wealth are just only if they are the result of hard work and skill. Inherited wealth is not the result of hard work and skill of the recipients.
Piketty’s analysis begins with the relationship between wealth and income. Note that wealth and capital are terms that mean the same thing and that they are used interchangeably throughout the book. Capital represents the market value of assets of real estate, stocks and interest bearing assets such as bonds, GICs and savings accounts in banks. These capital assets generate annual incomes in the form of rents, profits, stock dividends, capital gains, royalties and interest all of which are “income from capital”. Income from capital is then added to “income from labour” (in the form of wages, salaries and self employment income) to produce income. So when Piketty refers to income he means the sum of income from capital and income from labour. The distinction between these two types of income is significant because they are distributed in very different ways among the three broad classes in society: the rich, the middle class and the poor. Income from capital amounts to around 30% of national income in Britain and France and 20% in the United States and Canada.
Increasing inequality is most dramatic in the US where the share of total income earned by the top decile of income earners rose from 33% in 1970 to almost 50% in 2010. Approximately 70% of this increase reflects the share of income earned by the top 1% of income earners which rose from 8% in 1970 to 20% in 2010. The latter set of figures has led to the unrest in the US that was manifested in the Occupy Wall Street movement in 2011. Whether or not this unrest will be destabilizing depends on the future organization and strength of the Occupy movement relative to the effectiveness of other organizations that are engaged in justifying the inequality. Since the 1980s neoconservative groups in the US have aggressively asserted justifications for these inequalities. These include the arguments that inequalities are justified because the increase in wealth represents a reward for hard work, ingenuity, and entrepreneurship or because higher tax rates on high income earners to correct the inequality would reduce incentives to work hard or, alternatively, act as incentives for them to move production activities out of the country to the detriment of all citizens.
Continue reading (PDF download, 13pp): Review: Capital in the Twenty-First Century