Why Does Inequality Exist In Capitalistic Society?

Today’s discourse on capitalism and inequality is grossly incomplete without any mention of Thomas Piketty. He shot to fame in 2014 after the publication of his book ‘Capital in the 21st Century’. His TED talk on the same made him a household name, earning him the title of a “rockstar economist”.


Piketty is a French economist teaching at the Paris School of Economics. In his earlier works, he collaborated with Emmanuel Saez, the Director of the Centre for Equitable Growth at UC Berkeley. Their study devised an innovative way of framing inequality by comparing the wealth of the richest 1% with the rest of the population. It posed as a stark contrast to the Gini coefficient, a useful measure but difficult to comprehend for the layperson.


Capital in the 21st Century (the title is a very conscious echo of Karl Marx’s Das Kapital – published almost 150 years ago) is the result of a fifteen-year research. It is a seminal work on the structures and faultlines of modern-day capitalism, highlighting the inefficiencies of the system with data from different countries spanning over 250 years. Filled with charts and tables, Piketty frequently refers to literary sources such as Jane Austen’s Pride and Prejudice and Honoré de Balzac for the masses to understand and relate to the extent of wealth inequalities in 18th and 19th century Europe.


After analysing the historical data, Piketty arrives at the most important conclusion of the book that the rate of return on capital and wealth owned disproportionately by the richest (r) has always been higher than the rate of growth of the economy (g):

r > g


“This fundamental inequality [r>g] will play a crucial role in this book. In a sense, it sums up the overall logic of my conclusions. When the rate of return on capital significantly exceeds the growth rate of the economy, then it logically follows that inherited wealth grows faster than output and income.” (Piketty 2014)


From 1700-2018 the world economies grew at 1.6% (g), while the growth rate of capital (r) has been between 4-5%.


Piketty posits that this inherent contradiction in capitalism results in perpetuating and increasing inequality. And, whenever there has been income equality it has been because of external shocks to the economy from wars and depressions, and not because of a spontaneous, rational order created by the market.


He highlighted the extreme inequality present in the world in the 19th and 20th centuries – the years before World War I when wealth was majorly inherited rather than earned. The global wars and the Great Depression (1929) wiped out this historic inequality. Public policies of diffusion of knowledge, skills and training following World War II also “compressed the inequalities".



During the Trente Glorieuses, also known as the golden years of capitalism, from 1950-1980 the world experienced the lowest inequality in recent human history due to the massive interventions undertaken by governments across the Western countries. Steep progressive income taxes, estate taxes, government-funded social safety nets – healthcare, education, unemployment benefits – and union representation ensured that growth in income and wealth were controlled.


However, these policy interventions were overturned during the Thatcher-Reagan revolution of neo-liberalism in the 1970s. Piketty recognized that this change was not merely about reducing government, decreasing budgetary allocations and cutting deficits, it was also about more fundamental questions of what a government should do. The resulting policies included massive reductions in top marginal income tax rates. The tax rates were reduced from 80-90% to 28% after the Reagan tax reform in 1986 in the United States. This led to the emergence of high-level managers whose remunerations skyrocketed – known as ‘super managers’. The Reagan tax reforms became the reason the United States of America emerged as the hub of super managers in businesses. And, these tax reforms have immensely contributed to the exponential increase in income inequality since the 1970s. Moreover, since inheritance tax was also opposed by the Reagan administration, a part of today’s inequality can be attributed to wealthy Millennials with large inheritances.




The resurgent importance of inheritance in wealth is leading to the reintroduction of patrimonial capitalism – the system of inheritance-based capitalism from 18th and 19th century Europe. In this, the heights of the economies would be commanded by family dynasties (r) - “profits, dividends, interest, rents, and other income from capital” - rather than talented, entrepreneurial individuals. This trend is likely to continue in the absence of interventions by the governments globally.


To counter this, the primary solution Piketty proposes is a global-coordinated-progressive tax on wealth to the tune of 1-2% with transparent banking institutions.


Inequality has started to strain the social fabric and the functioning of democracies. It has birthed a vastly poor, wronged populace and catalysed the rise of populist-nativist movements led by staunch authoritarians. Diminishing class harmony and meritocracy have made way of plutocratic governments challenging the soul of a liberal democracy.

“In every country, the history of inequality is political – and historical.”


In 2020, Thomas Piketty released another tome exploring this idea titled Capital and Ideology. This book scrutinises inequality through the lenses of history, political science, political theory and economics. As the title suggests, it concludes that the division of wealth in society is influenced by the prevailing ideology, a term implying a kind of public brainwashing, or “false consciousness” in Marxist terminology. Naturally, Piketty is also a strong advocate of eliminating nation-states and establishing a “vast transnational democracy”, quite akin to Marx’s clarion call for an international workers’ movement.

One of the most interesting findings in this book is that the left-wing parties across the world have abandoned their mission of improving the rights of the working class and rather have started focussing on the “Brahmin Left” – the most educated and supposed beneficiaries of meritocracy and knowledge economy. Meanwhile, the right-wing parties are being influenced by the “Merchant Right” or the wealthy plutocrats. The resulting polarization has made it impossible to debate over the question of redistribution, so the lower classes channel their anger into racism and xenophobia – debating migration and borders (another diversion aided by right-wing populist ideologies).


A lot changed from 2014 to 2020. Democratic socialism matured in the United States with Senator Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez, populations started demanding increasing social safety nets, ‘Occupy Wall Street’ movement grew, and several authoritarian-populist leaders arrived at the world stage.

Piketty recognized this and proposed greater radical interventions in the form of progressive taxation on income and wealth reaching up to 90%. This revenue, he proposed, will then be used to fund schemes of universal healthcare, education and a one-time cash endowment to everyone.


Dr. Sigmund Freud in Civilization and its Discontents (1930) quotes "A civilization which leaves so large a number of its participants unsatisfied and drives them into revolt neither has nor deserves the prospect of a lasting existence."

The society today is at a juncture where both futures - a continued oppressive capitalist system and a violent revolution - sound bleak and daunting. Piketty remains to be one of the few optimists that aim to reform the system before it is too late.

Author:

Rishabh Ahuja is an undergraduate student of Cluster Innovation Centre, University of Delhi. He is interested in International Relations, Public Policy and Philosophy. E-mail ID: Ris.ahuja@ducic.ac.in


References:

  1. Kahloon, Idrees. "Thomas Piketty Goes Global". The New Yorker, 2020, https://www.newyorker.com/magazine/2020/03/09/thomas-piketty-goes-global. Accessed 15 Oct 2020.

  2. Pemberton, Justin. Capital In The Twenty-First Century. 2019.

  3. Piketty, Thomas. Capital And Ideology. Harvard University Press, 2020.

  4. Piketty, Thomas, and Arthur Goldhammer. Capital In The Twenty-First Century. Harvard University Press, 2014.

  5. Rajan, Raghuram. "Thomas Piketty’S ‘Capital And Ideology’: Scholarship Without Solutions". Ft.Com, 2020, https://www.ft.com/content/5a393b5a-4f23-11ea-95a0-43d18ec715f5. Accessed 15 Oct 2020.



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