Tuesday, April 1, 2014

The Inequality Snowball

You have probably heard of this book already – Capital in the 21st Century by Thomas Piketty. It has just been released in English, and is causing quite a stir. It’s a very important book and it is being compared to the great classics of economic literature – Adam Smith’s the Wealth of Nations, Marx’s Capital, Keynes’ General Theory and others. Piketty’s general idea is simple – if the rates of return on investment are greater than the rate of growth of the overall economy, wealth will continue to concentrate without bound. And the wealthier you are, the more it can concentrate – the term “one percent” is accurate. This makes sense – the wealthy have nothing else to do but look for ways to invest their income and make it grow. Note how the latest tech ventures are funded by professional venture capitalists. Note also that wealth (as opposed to income) is really possessed by a tiny sliver of people in the economy. The new economic industries are global and capital-intensive

Piketty’s second big idea – that the dispersal of income and the creation of a middle class in industrial economies is an aberration caused by two world wars, a great depression, and the political aftermath of those events. In the twenty-first century we are returning to the norm of capitalism – increasing concentration of wealth and pauperization of the workers. The great compression of incomes described by the Kuznets curve, he contends, is an anomaly. We are returning, he contends, to the "patrimonial capitalism" of the past where wealth and inheritance, not work, is required to guarantee a decent life.

Anyway, reviews are all over the Web, so I doubt I can say much more about it than has already been said by others. Here are some reviews:

Eleven (so Far) Worthwhile Reviews of and Reflections on Thomas Piketty’s “Capital in the Twenty-First Century” (Equitablog)

Two More Worthwhile Reviews of Piketty’s “Capital in the Twenty-First Century” (Equitablog)

Kapital for the Twenty-First Century (Dissent)

Everything Wrong with Capitalism as Explained by Balzac, House, and the Artistocats (Quartz)

American Patrimony (Paul Krugman)

Death of Meritocracy: How Inheritance is Poisining the American Economy (Salon)

Is Surging Inequality Endemic to Capitalism? (The New Yorker)

The Age of the Obvious: Thomas Piketty’s Capital (Ian Welsh)

Thomas Piketty's Capital in the Twenty-First Century: Its Uses and Limits (Monthly Review)

The Top of the World (Book Forum)

Another book has gotten less attention, but is on a similar theme – The Son Also Rises by Gregory Clark. It’s conclusions are equally dim. It says that social mobility is a myth – that despite the vast and transformative changes wrought by industrialization, wars, depressions, economic dislocations, political upheavals, economic mobility is very slow, and only moves at a glacial pace across many, many generations. To arrive at this conclusion, he does not look at income, he looks at surnames. Some surnames are common, and others are rare and associated with the upper classes of various countries. For status he looks at enrollment in professional occupations, elite universities, political appointments and so on. His conclusion: nothing really makes a difference in the overrepresentation of the rich and powerful in elite circles. He finds this irrespective of government policies – so even egalitarian Sweden has as little social mobility as class-ridden England. Even in China which went through a peasant revolution, you see the same people coming out on top. Here is information:

Choose Your Ancestors Carefully (Enlightenment Economics)

Is Upward Mobility in America a Fantasy? (Mother Jones)

The Value of Choosing the Right Parents: Greg Clark (Equitablog)

I started off as a libertarian economist, but now I've come full circle (Prospect Magazine)

Exceptions to this rule (like the Clintons, the Obamas) are used to justify this, but it’s just survivorship bias – we pay attention to the few exceptions and assume that defines the system, rather than the millions of people who prove the rule.

I wonder how mobility in humans compares with mobility in other hierarchical ranked social animals such as chimpanzees, baboons, meerkats, etc. If the supposed superiority of the rich is genetic, I suspect we would see it mirrored in other societies. I suspect it’s due to institutional factors more than anything else. Humans create institutions to cement their status, preserve inequality, and make sure wealth and status, not just genes, are passed to their offspring. Everything in America is specifically designed so that if you have wealthy parents, you will be better off. The entire college\educational complex is designed to maintain this, along with unpaid internships, social connections, and so on. It’s a lot easier to seek out opportunities if you’re not perenially struggling to keep food in your belly and a roof over your head (I should know).

Two factors which are not considered by these books (to my knowledge; I have not read them), but make their conclusions even worse:

1.) Piketty makes the case that slow economic growth exacerbates inequality, since wages are limited by growth, but returns to capital are not. But we know that slow growth is almost assured due to resource constraints and climate change. Even if you discount resource constraints, other economists have pointed out all sorts of other problems, such as diminishing returns to innovation, the slowing of population growth, full education running its course, high debt levels, and even inequality itself as “headwinds” to future growth.

2.) Automation will allow capital to increase while hiring very few workers. Tyler Cowen, an economist of a very different bent, has also claimed that inequality in America will explode bifurcating society into a small segment of prosperous individuals, and a majority of people living precarious lives in Mexican-style poverty. He makes his case using automation, without even considering the above arguments.

Put all of these together, and it's pretty obvious that the diamond-shaped social structure of the past is gone, and we are returning to the pyramid-shaped repressive social system where most people have very little chance of having a decent life aside from a lucky few. As the wealthy and powerful become even wealthier, they gain control over the political process to enhance their wealth and power even further. Already plutocrats are floating the idea of allocating votes based on wealth, and they're not joking. It's a runaway process with no end in sight.


  1. So? So? What's to be done? Money is a human construct -- if it concentrates wealth in a small percentage of over-aggressive people and their heirs, then let's change money! I mean, what an idea... everybody acts like money is immutable.

    1. How will changing money prevent over-aggressive people from getting what they want? Money is not the problem – humans are.

    2. Well, yes, but "humans" are not the problem: the overagressive people are.

      The thing about money is... anyone can create it. And we (the rest of us) can create a different kind of money, the kind that does not funnel wealth directly to them, but keeps it among us. Would be a step in the right direction, no?

    3. Sadly, Dr. Zoidberg is correct. It's really ownership of assets that is the problem, whether you use money, land or stocks. In the ancient empires the same thing happened with land-it became concentrated into the hands of the powerful,leaving most people landless and hopeless. Pliny claimed just five people owned all of North Africa. Of course, we know what happened there - desiccation, abandonment and eventual political collapse.

    4. Vera, and how long will that work before somebody finds other ways to exploit others?

      And how come only over-aggressive people are the problem? Aren't we, the submissive masses, part of the problem, too? We are willing to do (and put up with) almost anything as long as we feel that we are part of something bigger, something important, something more permanent, and as long as we feel compensated. We play into the hands of those people. And aren't many of us eager to become wealthy? Given the chance, wouldn't we accumulate as much wealth as we could?

      So let's agree to disagree. Because of my pessimism and/or poor imagination, I can't see any hope for a just and egalitarian life.

    5. "From the crooked timber of humanity nothing straight was ever made." said Kant.

      However, and I always like to remind people of this fact, if you put aside Utopian notions you can look at the fact that income inequality actually decreased from the Great Depression to the mid-1970's, and the amount of wealth controlled by the rich actually declined during that period as well. So there is historical precedent. In fact, that is one of the only times in human history where that has occurred. Now, there was still poverty during that time, and there were still plenty of problems (the turbulent 1960's was during that peoriod), so it wasn't some utopian ideal, but you did not have the pervasive sense of hoplessness, decay and despair that you see today everywhere.

      So, it seems to me that if you want a more equitable society, you need to look at that period and see how it came to be. Then, you can do the It also seems to me that if you look at egalitarian societies and what makes them work,

      Note that in both cases, this was not caused by libertarian antigovernment philosophy. Scandinavia has very generous government welfare systems. The same is true for the New Deal. In fact, I know of no real-world instance, aside from abstract theory, where libertarian philosophy has promoted stronger societies and greater equality (as opposed to greater fortunes for the wealthy and more miserable workers). In fact, there are numerous real-world examples where it has done the exact opposite, from the Robber Baron era in America to present-day Latin America and the Middle East.

      So if you look at what makes better - not perfect- societies in the real world, you have a toolkit as to how to help bring that about. What's unfortunate is that the rich have studied this as well, and have taken all the necessary countermeasures (most notably control over the media and divide-and-conquer). As Ian Wlesh put it:

      "Political decisions are important: in 1929 Hoover, the Fed, and later FDR did not bail out the rich. They were allowed to lose their money, and thus much of their power. That was a decision: another decision could have been made, and in 2008 it was made: the rich were bailed out. It was made differently in 2008 because the rich have spent the last 80 odd years obsessing over what went wrong in 1929 that allowed FDR, the New Deal and everything which flowed from it. Ben Bernanke’s entire career was “how do we make sure the rich don’t lose their money so that FDR doesn’t happen.” He was chosen to be the Fed Chairman precisely to ensure that the next Great Crash, which everyone who wasn't an idiot knew was coming, wouldn't wipe out the rich."

  2. ”Life's a piece of shit / When you look at it …”


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