UK: Monday Briefing: A Piketty Primer

Last Updated: 13 May 2014
Article by Ian Stewart

Most Read Contributor in UK, August 2017

A personal take on economics from Ian Stewart, Deloitte's Chief Economist in the UK.

  • One of the surprise entries to the New York Times best seller list is a dense 700-page tome on economics, Capital in the Twenty-First Century. Written by the French economist Thomas Piketty, it offers a sweeping critique of capitalism, which echoes the original Das Kapital, published by Karl Marx in 1867. Like Marx, Piketty foresees a crisis of capitalism driven by the competing interests of labour and capital.
  • Piketty argues that capitalism has an inherent tendency to create greater inequality and backs up this view with an impressive array of data. The book has created a buzz among journalists, economists and policymakers, and, in the wake of the Global Financial Crisis, his message seems to resonate with a wider public.
  • Piketty has earned the moniker "rock star economist" from a number of commentators. For the General Secretary of the Unite public sector union, Len McCluskey, Capital in the Twentieth Century is "manna from heaven".
  • We have dipped into Capital in the last week, though probably like most readers, have not made it through all 700 pages. What follows are initial thoughts, not a review or a critique.
  • The idea that inequality has risen across the West over the last quarter of a century is uncontroversial. But Piketty makes two unique contributions to the debate.
  • First, he and a small group of colleagues have used a vast amount of data, much of it previously unanalysed, to show how inequality has developed since the early eighteenth century. The data show that, for most of the last 300 years, wealth has been heavily concentrated in the hands of a small group. The exception is the period from the 1930s to the 1970s, a period which, at least in terms of equality, Piketty seems to view as a golden age. First the Great Depression, then war followed by the expansion of the state and, finally, inflation eroded wealth and created a more egalitarian society. These trends had run their course by the 1970s since when inequality has risen.
  • The second insight of Capital comes from the idea that over time the rate of return on capital rises faster than the rate of growth of the economy (summarised as r > g). This fundamental relationship means that capital tends to accumulate at a faster rate than wages, leading to the inequality that Piketty sees as a fundamental characteristic of capitalism.
  • Piketty goes on to offer a set of policies designed to redistribute wealth: including a top marginal rate of income tax of 80% on incomes in excess of $500,000 to $1 million, full disclosure of all wealth and a global wealth tax.
  • Such redistributive policies seem unlikely to command support among many mainstream Western political parties. Piketty acknowledges this and the improbability of such policies being adopted on a global basis as he thinks would be desirable.
  • While Capital's policy prescription has stoked controversy - and many economists contest the idea that growth in wealth outstrips growth in GDP - few commentators disagree with the notion that inequality has risen.
  • Piketty emphasises the role of capital and inheritance in this process. We see growing income inequality as being at least as important, with technological progress, globalisation and the expansion of financial markets squeezing unskilled labour and bolstering the returns to high-level skills.
  • The fundamental view of Capital is that widening inequality is a bad thing, which could, in time, threaten social stability and democracy itself. We are less convinced that capitalism faces incipient crisis.
  • The precondition for radical economic change is deep and widespread dissatisfaction with the status quo. There is certainly dissatisfaction, yet probably not on a scale which would drive radical redistribution. Some economists may foresee revolution, but voters don't seem in the mood. This does not feel like one of those tectonic political shifts, as was seen in 1945 in Britain or in the 1960s in much of Europe and the US.
  • Part of the reason may be that while inequality has risen, incomes for the bulk of households in most countries have risen over time (the notable exception is the US). To this extent, capitalism has made most people better off, albeit at widely varying rates.
  • And, as my colleague Debo points out, people are more likely to accept inequality if they believe the system gives them and their children a chance of making it to the top. Pre-revolutionary France and Russia combined inequality and social immobility; in America, where inequality has risen sharply in recent decades, a widespread belief in the possibility of advancement seems to persist.
  • Piketty is rightly sceptical about the chances of his radical policies being implemented. But his book has won plaudits and may well prove influential. The idea of a global wealth tax seems far-fetched, but Capital is likely to bolster support for more redistributive policies, from a higher minimum wage to taxes on property.

MARKETS & NEWS

UK's FTSE 100 ended the week up 0.2%.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

  • Ireland's long-term borrowing costs fell below those of the UK for the first time in 6 years
  • Sales of new cars in the UK rose for the 26th consecutive month in April, matching the longest ever run of growth, last achieved in the late 1980s
  • The British manufacturing sector expanded by 1.4% in the first quarter of the year, the best rate of growth since 1999
  • The National Institute of Economic and Social Research (NIESR) forecast that the UK economy has now recovered the output lost since the financial crisis
  • Sir John Cunliffe, deputy governor of the Bank of England, said rising UK property prices are "the brightest [hazard] light" on the Bank's dashboard
  • The Swiss government signed a pledge to respect a new global standard for sharing account details, in an effort to fight tax evasion
  • A Survation poll found that just 16% of Britons believe there is adequate regulation of private companies, compared to 59% who thought there is not
  • The European Central Bank estimated that capital flight from Russia since the Ukraine crisis may have reached €160bn, 4 times higher than admitted by the Kremlin
  • Global commodity prices have risen 7% in the first 3 months of the year according to the Dow Jones-UBS commodities index, having fallen nearly 10% in 2013
  • Apple is reported to be close to securing a deal to buy Beats Electronics, the headphone maker and music streaming operator for $3.2bn
  • The Economist reports that there have been 15 M&A transactions each worth more than $10bn so far this year, the most since the record M&A rush of 2007
  • Colorado approved the world's first financial system for the marijuana industry, seeking to make it easier for the recently legalized industry to secure banking services
  • Imperial Tobacco posted a 22% fall in pre-tax profits for the 6 months to April, with smokers in Western Europe moving onto cheaper products or quitting smoking altogether
  • Diageo PLC is to acquire a majority stake in Indian liquor firm United Spirits Ltd, with India responsible for roughly half of all whiskey sold in 2012
  • A Chinese company – WinSun Decoration Design Engineering Co – 3D-printed 10 homes in 24hrs, using recycled materials to form concrete aggregate
  • Research has suggested that Westerners tend to be more individualistic than Asians because the West has its rural roots in wheat farming, whereas Asian rice farming requires much greater time and co-operation – 'agri-culture'

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