Since the global financial crisis triggered in 2008, a prominent debate over the inequality has been gaining ground. Not only politicians and scholars have started to lay out their thesis about the disparities across the globe, but also, common citizens in many countries have seen that as one of the greatest dangers in the world .
In this chiaroscuro scenario, Thomas Piketty published his 577-page book: “The capital in the Twenty-First Century” in 2013, and as The Economist then claimed it was “an overnight sensation”. No one remained indifferent to this book. Some have enthusiastically embraced this painstaking contribution while others have harshly criticized it.
To summarize, Piketty in order to explain the historical variations in wealth inequality, establishes an important correlation between two variables: the rate of return on capital (r) and the growth rate (g). Accordingly to the author, when r exceeds g the inequality increases. Of course, as he clarifies, it’s “one of the important forces” With that equation in mind, Piketty analyses three centuries and over 20 countries since the Industrial Revolution. For the author, inheritance it’s at the centre of this “dysfunctional capitalism”. As a conclusion, Piketty sketches a policy response to tackle with this phenomenon: a progressive global income tax. Having said that, in a brief way, this essay will intend to assess the main critics to the Piketty’s book taking into account the statements of two highly qualified experts: the Nobel Prize-winning economist, Joseph Stiglitz and those of Mark Warshawsky, senior research fellow at the Mercatus Center.
Other factors in the diagnosis of world inequality
Stiglitz, often referred as a progressive economist, has claimed that “Thomas Piketty [got] income inequality wrong” . Stiglitz states that “a large fraction of the increase in wealth is an increase in the value of land, not in one amount of capital goods.[…] in addition to an increase in the wealth/income ratio, is a capitalization of the increase in other kinds of rents, like monopoly rents”.
As Piketty has highlighted, institutions have played an important role in widening the gap between haves and have-nots. In the same direction, Stiglitz reinforces that perspective by illustrating his assumption over monopoly rents: “we’ve had monetary authorities allowing […] banks to lend more. But this lending has not gone for creating new business […] it has gone to increase the value of land and other fixed resources”. Inevitably, the consequence is that wages don`t have the chance to increase if at the end of the day landing has not gone to productive activities.
Furthermore, for Stiglitz, the “study that Piketty and his associates did on the effect of an increase in taxes on the top 1 percent” is useful to understand the characteristics of that 1%. For example, it enables us to identify if the wealth of that group comes from a hard work and/or from inheritance, as Piketty has often commented.
Stiglitz in his recent book “The price of inequality” attempts to go further than Piketty. He asked: “what can we do to reduce inequality of before-tax and transfers income, and what can we do to improve the after-tax and transfers income? In that sense, Piketty only essays a before-tax policy, that is, the progressive global income tax. In this part, Warshawsky marks a hiatus from the idea of taxation as an outstanding solution for reducing inequality. To this author, income tax rates no necessarily have had an impact on income shares, even if they “have steadily increased”. Additionally, Warshawsky considers “Piketty is also quite concerned that tax competition between countries in Europe has led to cuts in corporate tax rates and to the exemption of capital income from the progressive income tax” (11).
As Stiglitz, Warshawsky recognizes the importance of the empirical basis provided by Piketty’s work. Notwithstanding, this author notes some internal differences in that capital, in his words: “Piketty looks at the role of inheritance versus saving in the accumulation of private wealth” (8). Upon that outlook, Piketty in a certain wayis “stigmatizing” the wealth accumulation. To support that idea, Warshawsky notes:
It is surprising that Piketty does not give retirement savings a greater role in explaining recent trends and in projecting the future. […]Retirement savings may explain (by rough estimate) at least half of capital accumulation in the United States, which undercuts Piketty’s explanation that the primary motive of the rich is stockpiling a large inheritance for future generations (9).
In addition, Warshawsky underlines that Piketty “severely understates the role of entrepreneurs and overstates the role of inheritance in the creation of wealth”(10). He gives an example: “in the United States, mega-billionaires like Bill Gates and Warren Buffet did not inherit their assets and are setting up charitable foundations to receive those assets for the benefit of future generations”. However, both Piketty and Stiglitz have “demystify” the self-made man legend. Piketty “attributes the rise of top income shares in the United States over the 1980–2010 period mainly to rising inequality in access to skills and higher education” (17). Stiglitz in a more precise way has remarked that some entrepreneurs have amassed their wealth through monopolies: “Gates got his money through monopoly power, and Slim got his money through monopoly power in Telemex”.
In general terms, it can be told that Stiglitz and Piketty have more coincidences than differences. Stiglitz it’s not far from the Piketty’s thrust, rather he complements the points that Piketty suggests. At the end, both consider institutions and redistributive policies as core variables of tackling inequality. Meanwhile, regarding Warshawsky, it can be stated that they have a more evident tension, mainly that involves the debates over inheritance and entrepreneurship and over taxation as an effective tool against inequality.
The validity of the critics
In a certain way, it has been suggested the validity of those critics. Although the Piketty’s work is impressive, painstaking and sound, it has some limitations. Of course, it’s impossible to pretend an omni-comprehensive book and in the case of inequality particularly it’s an illusion to take into account all the variables at stake. For sure, inequality is an endless reflection.
On the one hand, as it was mentioned before, concerning to the Stiglitz assessment, that doesn’t pose deep difference respect to Piketty’s thrust. It can be said that Piketty and Stiglitz have the same starting point: questioning the capital as an immutable concept; also, they share the same arrival point, that is, the necessity of an effective policy design to tackle inequality and to regulate wealth accumulation.
Notwithstanding, as Stiglitz has underpinned the increase in the value of land and monopolies have constituted serious factors in deepening inequality. If the Piketty’s book it’s carefully read it can be observed that less than ten times the word “monopoly” appears in it. In that sense, it can be assumed that this factor has been disregarded by Piketty. And, it has been remarked by Stiglitz, “the new era of monopoly is here”. Monopolies have promoted the rapid concentration of income and wealth.
On the other hand, the Warshawsky’s example of retirement savings as a demonstration of non-inheritance-oriented capital accumulation is fairly misguided. First, the Piketty’s main thesis is not essentially about the use of that accumulated wealth, even though he establishes some patterns in the accumulation process and underlines the predator role of a sort of patrimonial capitalism. Second, in the case of retirement savings could be said it’s only anecdotal evidence that limits the possibility of a comprehensive generalization.
Finally, the desirable results of “entrepreneurship” as a variable to reduce inequality are still marginal, as several reports, surveys and rankings have demonstrated. Being a rich entrepreneur is more an exception than a general law. Of course, it’s needed to encourage that idea, but that depends more on institutional conditions than individual tenacity.
Inequality as the undeniable debate
The most conservative economists have interpreted the book as a sort of an ideologised research. They have insisted on the existence of social mobility across the centuries. Nevertheless, historical data has contradicted those assumptions or at least, it has cast them doubt.
Certainly, it’s undeniable that inequality has steady growth in last ten years. An OXFAM Report, presented in January 2016, has clearly depicted that reality: “The richest 1% now have more wealth than the rest of the world combined”. Therefore, it’s not surprising that the Piketty’s book has set out some guidelines for the debate.
It’s not an outlandish hypothesis to say that an unregulated free-market have had a natural tendency to promote the increase of wealth concentration as Piketty suggests throughout his book. Rather, it can be easily tested around the world. The free-market for some economists has become more a dogma than a paradigm, and it’s not the case of Piketty.
Also, what it’s clear is that inequality in wealth and inequality of opportunities are strongly intertwined. As Stiglitz and Piketty have depicted, the top universities in the United States have elevated its tuition fees in an astronomic way. Nowadays, those institutions are more unaffordable than ever. Education is a public good and it must not be privatized.
Although Piketty attempts to go further in giving a new response to tackle this soaring inequality, namely, the progressive global income tax, it could be quite utopian. Certainly, new regulations and limits to wealth accumulation are essential, but first, they must be implemented at domestic level.
However, in the international arena, some initiatives have started to gain ground, for example, the United Nations, some NGO’s and governments have started a “crusade” against tax havens. In the same direction of the Piketty’s claim, they have demanded more transparency. As most of Piketty’s critics have pointed out the data collected by him are not exact. For sure, one of the reasons could be that most of part of accumulated wealth has been created under shadows; therefore, it’s difficult to trace back the capital accumulation patterns. Undoubtedly, lack of transparency has become a hindrance in the struggle against inequality and Piketty has given strong evidence to continue this pathway.
