Feb
5
A Step in the Past (Alex Lam)
February 5, 2015 | Leave a Comment
It’s impossible for economists to ever agree, so when they even slightly agree on something, the world needs to pay attention. This seems to be the case for Thomas Piketty’s book, Capital in the Twenty-First Century. While most economists may not agree with his viewpoint, nor do all of them believe it is a book that deserves the attention that it has gathered, they do seem to agree it is worth it to analyze and argue against his ideas. Overall, Piketty seems to argue that we, as a society, are not making progress in resolving the issue of economic inequality. Rather, we are taking a step into the past and allowing the wealth gap widen and remain in families instead of the most knowledgeable.
Piketty’s approach is admirable, as he and his team did not take the easier route and use easily accessible survey data. Instead he used tax documents, which may not be completely accurate, but does seem to have a less chance of errors. More noteworthy is the extra time he received from his methodology. For the American data, he managed to take into account more than four decades of extra data when compared to the data of other economists who used survey data. The main significance of this is four decades is a large amount of time that can reveal many trends.
The arguments gathered from his work and the data presented are extremely interesting due to their links to the past. While the fact that wealth used to be hereditary is not new, and neither is the argument that the inequality is increasing, few have been as outspoken about its similarities to the situation being faced today. While, the wealth is becoming hereditary again, it is not necessarily true that those who inherit the wealth are not the most knowledgeable. As mentioned in an earlier post, wealth is being maintained in families due to their abilities to give their children the best education, experiences, and opportunities. The capital these children inherit are beneficial, but the beneficiaries are likely to also be some of the most intelligent in society due to their parents’ network. This is one area the Piketty should analyze more before simplifying the situation.
While critics are skeptical about Piketty’s view on the importance of capital, it is an idea that seems highly plausible. The fact of the matter is, while the actual income between the rich and the poor are widening, they are not different enough to constitute the large gap between the two classes. Having capital allows for the wealthy to gain additional sources of income, in addition to gaining an opportunity to re-invest into upcoming and high-potential areas. This allows them to continue growing their wealth, while the lower classes have to work slowly to even gain the capital to attempt such an act.
Piketty calls for a global progressive tax in order to avoid concentration of the wealth within a small group. This proposal harms his credibility for a couple reasons. The first and foremost is that this is an over-simplified and idealistic solution. Every area has a different situation, despite having inequality, and therefore suggesting one solution for the world is not possible. Having a progressive tax may also harm work ethics and productivity in areas, which would evidently be a negative effect for the entire world.
Capital in the Twenty-First Century deserves the recognition it received for bringing new ideas into the current field of economics. While the arguments may not be true, as economists will always argue, they inspire thought. They inspire people to look at the situation in a new way, and for the first time, heavily compare it to the past and hopefully work to avoid the situation. Pressure needs to be added to politicians to address this issue and make progress, before we end up falling decades behind again.
-Alex L.
