4 Pages Essay: Does Capitalism Promote (Social) Equality?

Thomas Piketty Inequality

Thomas Piketty • Born 1971 • Studied at the École Normale

Supérieure (ENS) in Paris. • Professor at the Paris School of

Economics • Authors of Capital in the Twenty-

First Century (2013/14) • Academic bestseller: As of January

2015, the book had sold 1.5 million copies

The Kuznets Curve • Simon Kuznets investigated in the 1950s the

relationship between capitalism and inequality • His conclusion became known as the Kuznets Curve:

Inequality first increases up to a certain level of income per capita and then decreases with growing wealth

• The Kuznets Curve became the dominant view on the relationship between capitalism and inequality in the postwar period

Kuznets curve

Piketty’s correction • Piketty starts his investigation where Kuznets left off: He

continues analysis of inequality based on US tax records • The result is a time series that lasts from 1910 to 2010;

inequality is measured by the share of the top 1 or top 10% income earners in total income earned in the US

• Piketty finds that inequality in the US has indeed increased until 1930 and then decreased until 1980

• But contrary to Kuznets’ prediction, inequality started to increase again in the 1980s, exceeding the high point of the 1920s

Piketty’s findings (distribution of income) I

• The share of the top 10% in total income in the US almost reached 50% before the Great Depression and exceeded 50% on the eve of the Great Recession

• In 1970 the richest 10% in the US earned about 35% of total income

• Capital gains explain some of the growing the inequality, but certainly not the whole story

Piketty’s findings (distribution of income) II

• If we look more closely at the top 10%: what we see is that is was actually the top 1% (annual income above 352,000 $) that has gained most

• The share of the top 1% increased from less than 10% in 1970s to almost 25% before the outbreak of the Great Recession

• Piketty: “Income inequality has exploded.”

Piketty’s findings (distribution of income) III • In the US rising inequality is mainly the result of

growing wage inequality and in particular high remuneration among top managers of large firms (the top 1% of the wages)

• Piketty calls this development “the rise of the super manager”

• He doubts that this development has something to do with the growing importance of skills in the Knowledge Economy because this is largely a US phenomenon

Piketty’s findings (distribution of income) IV

• The growth of inequality is greater in the US than in Europe; while in the US the income share of the top 10% accounted for almost 50% of total income before the crisis, in Europe it accounted for 35%

• But inequality also increased in Europe: the share of the top 10% income earners increased from 30% in 1980 to 35% in 2010

Piketty’s findings (distribution of income) V

• There are significant differences within Europe: Income inequality in the UK is much higher than in Sweden, with Germany and France being in the middle

• This should not surprise: According to the Varieties of Capitalism literature, the UK has the same variety of capitalism as the US

Piketty’s findings (distribution of income) VI

• The main difference between northern and continental Europe and the US-UK is that the share of top 1% increased to a much lesser extent

• Continental Europe the top 1% earns between 7 and 11% of total income; in the US 25%

Piketty’s findings (distribution of income) VII

• Income inequality also increased in the developing world: In China the top 1% share in national income increased from less than 5% in the mid 1980s to 10% in the 2000s

• You can also see the growth of inequality in India and South Africa since 1980: In South Africa the top 1% managed to almost double their share of income since the end of apartheid

Piketty’s findings: Distribution of wealth

• The share of capital income as proportion of total income has increased from between 15 and 25% in 1970 to between 25 and 30% in 2010

• Whereas income inequality in the US exceeds the peak before the war, inequality in wealth has not reached the level before the war yet

Why is inequality increasing? I • Piketty’s main conclusion is that inequality

increases when the growth of the rate of return to capital (r) exceeds economic growth (g) (r= profits, rents, dividends, interest etc.)

• From this perspective falling inequality during the postwar period was the result of high economic growth rates and low returns on capital

• Piketty argues for the introduction of a global wealth tax to tackle inequality

whereas income inequality in the US exceeds the peak before the war, inequality in wealth has not reached the level before the war yet.

Why is inequality increasing? II

• Others (e.g. Dumenil and Levy) have argued, the increase of inequality since the 1980s has to do with the “neoliberal counter-revolution”

• The revolution included tax-cuts for the rich, welfare state retrenchment, attacks against trade unions, wage stagnation etc.