The lottery of birth
The lottery of birth

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The lottery of birth

4.2.2 Capital in the Twenty-First Century

In 2014 French economist Thomas Piketty caused quite a storm with the publication of his book Capital in the Twenty-First Century.

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When it comes to inequality, Thomas Piketty's "Capital in the 21st Century" says we should all worry about capital, not so much incomes and bonuses. So what does he mean by capital? Well, that's anything that can be owned and that generates an income. That can be housing, land, stocks or shares.
Now that idea isn't new, in fact the link between capital and incomes is very familiar, not least to readers of Jane Austen and Honore de Balzac. Piketty says, that by 19th century novelists and their readers, the two ideas were used interchangeably. The book's big innovation has been to build a massive data set that allows them to look at patterns in the ownership of stuff going back centuries. His research found that in the 18th and 19th centuries, the value of capital grew faster than the economy at large. So by 1900 the amount of wealth had grown to around seven times national output in Britain.
And since that wealth started off being owned by rich people, that means that the rich pulled away from the rest of us. Now you can see that in the way that the proportion of national wealth over the top 1% rose - and the top 10%. But in the 20th century, things were a little different. First of all, because of war. Between 1910 and 1950, the World Wars and decolonisation clobbered the European rich. All that stuff that accumulated got, well, blown up or handed back to other people.
Then after the war, the recovery was historically unusual, partly because it was all catch-up growth. The capital stock grew more slowly than the economy at large and was more heavily taxed. So owning all that stuff didn't really help the top 1% power ahead. The rest actually caught up a little bit. Since 1980 however, Piketty thinks that things have reverted to the older pattern. Capital has been growing faster than the economy at large and, since the rich start off owning more stuff, that drives up inequality.
So far, so uncontroversial. But Piketty's thesis is that this trend might well continue. And if the rate at which capital grows remains faster than the growth of the economy at large, then the rich will keep pulling away and the world could look, once again, like a Victorian age. The rich will be rich because of who their parents are, not who they are, and that's a major public policy challenge.
Piketty's diagnosis might upset people, but his prescription will make him even more enemies. His proposed solution is a global wealth tax, a policy that he suggests is pretty unlikely to happen. Still, Piketty's data collection and analysis is likely to win him a Nobel Prize, even if his policy suggestions aren't taken up.
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Piketty’s vast data analysis is based around a certain equation. That R (the rate of return to capital) exceeds G (economic growth). Piketty argues that inequality of income and wealth is not a problem per se. It’s a question of degree. Now inequality is extreme and we are drifting back to levels of inequality within some countries last seen in the late nineteenth, early twentieth century. And this extreme inequality, says Piketty, really matters because it is bad for economic growth, it’s bad for social and economic mobility and it’s bad for democracy.

Piketty opens out the debate to include some highly controversial tactics to tackle inequality such as greater transparency of national and international banking organisations, and redistribution of wealth through taxation and a global wealth tax.

Next, hear Danny Dorling’s observations on one of the most unequal countries in Europe, the UK.


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