Capitalism vs. Democracy - Severe Social Disruption

Secer Social Disruption - Income Inequality - Capitalism vs. Democracy

Thomas Piketty’s new book “Capital in the Twenty-First Century” disputes the view that new-liberal capitalism in a true laissez-faire economic environment will increase income equality. As Milton Friedman put it - a free market system “distributes the fruits of economic progress among all people.” Friedman used as evidence the “the enormous improvements in the conditions of the working person over the past two centuries.”

He also argues that - capitalism and democracy are incongruent. Capitalism's "powerful forces" threaten democratic societies. People with capital will always win over people with just their labor.

Based on Piketty’s research, that equality growth was a result of unique circumstances. Especially the period between WWI and the early 70s where growth income equality was a result of two world wars and the great depression.

According to Piketty, those halcyon six decades were the result of two world wars and the Great Depression. The owners of capital – those at the top of the pyramid of wealth and income – absorbed a series of devastating blows. These included the loss of credibility and authority as markets crashed; physical destruction of capital throughout Europe in both World War I and World War II; the raising of tax rates, especially on high incomes, to finance the wars; high rates of inflation that eroded the assets of creditors; the nationalization of major industries in both England and France; and the appropriation of industries and property in post-colonial countries.

As this chart reflects:

Thomas Piketty - Income Inequality - Capital in the Twenty-First Century.jpg

Piketty is a bit of a contrarian – he argues that inequality is a result of free market operating precisely as they should:

This has nothing to do with a market imperfection: the more perfect the capital market, the higher” the rate of return on capital is in comparison to the rate of growth of the economy. The higher this ratio is, the greater inequality is.

Piketty’s analysis is bleak and suggests that large-bore changes are needed to avoid social disruption (which will surely result from the increased inequality). Some of the structural changes include:

  • global progressive tax on wealth
  • annual graduated tax on stocks and bonds
  • significant capital ownership by the working class

You can read Thomas B. Edsall's full article here. It is definitely worth a read, but I do wish such economic analysis didn't overlook a critical dimension - climate/environment. Human kind in parallel to income inequality is hurling down down another path – living outside of the planetary boundaries. The structural changes mentioned above don’t take that into account. Prosperity in terms of material wealth is the progress benchmark and that is it.

Piketty's analysis should be lauded as it will help progress the discussion around the free markets and income inequality. But, it isn't enough. Hopefully we will recognize that there are bigger fish to fry before it is too late .

[Image credit GR8 Telangana]