Rich worse off for being richer

I HAVE finally waded through Thomas Piketty’s Capital in the Twenty-First Century.
When I say “waded through”, I do not mean “read”, rather the book was read to me from the iphone as I went on my morning cycle ride, because I downloaded the audio version.

And yes, Senator Brandis, I did pay for it – unlike you who gets great chunks of his library and the bookshelves to store it on free, courtesy of the taxpayer, and then runs up and down the country hounding any poor sod who dares get a bit of intellectual property without paying for it.

It is easy for some. And that is the thesis of Piketty’s work. It has a major message for Australia.

Piketty is a French economist and takes the long view. France, of all nations, has the best dataset of any nation on earth on things like wealth, income tax, estate duty and the like because the French are quintessentially bureaucratic as borne out by the revolutionaries’ zealotry and Napoleon’s control freakism.

Britain and the US follow closely behind.

The greatness of Picketty’s work is that it points out the obvious and self-evident – at least obvious and self-evident after he has pointed it out.

He tells us that the greater equality and meritocracy of the mid-20th century, which we all thought were permanent elements of the economic and social order, are merely ephemeral aberrations caused by the unusual events of war and depression from 1914 to 1946.

He says that the natural order of capitalism is for widening inequality and an increasing importance of inherited wealth, and that is where we are headed in the 21st century, unless we look out and do something about it.

He says that large fortunes get a greater return on capital than smaller ones. The return on capital is higher than the growth rate. And people who own those fortunes do not need to spend more than a fraction of the income to sustain even their lavish lifestyles so the capital base will inevitably grow.

The result is that the upper centile (and indeed the upper decile) will get ever richer. Unless something is done about it, it will result in political instability as the lower lot will get as mad as hell and not tolerate it any more.

Of course, our politicians take the very short view – an horizon of three years. Many of our economists, sociologists, journalists and others take, at best, a medium view. So Piketty is on fresh ground. Unlike us, whose certainties are grounded in the experience of the post-war period he stretches back to before the French Revolution. We imagine the post-war period is the norm. Picketty tells us it is an aberration.

The high economic, population and wages growth since 1945 meant that inherited wealth became less significant. But with lower growth, it will become more important.
We have grown up with understanding that effort and merit will prevail. Wrong. The ravages of depression, war and high inflation wiped out the old wealth, but it is returning. The rich are getting richer and fewer people are controlling a higher percentage of wealth and are passing it on to richly undeserving offspring. This is the natural order of capitalism.

But Piketty is not Marx. He understands the need for incentive and for the dynamism of capitalism to improve the lot of us all. He is warning, however, that without some significant change to tax policies and policies to maintain equal opportunity, do not expect political harmony.

Much has been made of the trickle down effect. Allow the rich to make more and it will trickle down to the toes — to everyone. But that has not been the experience of capitalism. At best it has been a dribble down effect to the waist. In 1910 the top 10 per cent owned 80 percent or 90 per cent of wealth. The bottom 50 per cent owned practically nothing.

These days the bottom 50 per cent still own practically nothing. But the 40 percent between the top 10 and bottom 40 now own about 40 per cent of wealth and the top 10 per cent own 50 or 60 percent.

So the big change of the 20th century is the creation of a middle class. Much of it comprising baby boomers.

But Piketty points out that inheritance will start playing a greater role here. Since 1980 the top 1 per cent have been getting hugely more wealthy. They own 20 per cent of the wealth. And the top 10 per cent own 60 per cent of it.

Does this matter? It sure does, because with that wealth comes power. We are seeing it now — big wealth supporting political parties and candidates who in turn support the wealthy.
After a time people see the unfairness and do something about it, sometimes revolt as in France in 1789.

A certain amount of inequality of outcomes is healthy and promotes effort and innovation, but when the wealthy drive those in power to adopt inequality of opportunity, political unrest will follow.

The present government, with its bevy of business advisers, has moved from inequality of outcome to inequality of opportunity. Those with wealthy parents will get a university education and all the visits to a GP they want. Those without wealthy parents will miss out.

The quantitative increase in inequality of the 1980s, 1990s is now resulting in a qualitative difference for the worse.

The great irony here is that it is the worse for everyone, wealthy and poor alike.
To put it in economic terms, the marginal utility of an extra $1 million a year on an income of, say, $2 million, or of an extra $20 million on top of an existing fortune of $20 million is worse than zero if the price is a radically more unequal society. In a society like that, with higher crime, resentment and political dysfunction, the wealthy will be worse off.
CRISPIN HULL
This article first appeared in The Canberra Times on 21 June 2014.