Capital in The Twenty-First Century


Recognized as a bestseller by worldwide famous list of books of The New York Times, Capital in the Twenty-First Century promises to be the 2.0 version of Karl Marx’s “Das Kapital” (“The Capital”), that will change the way we think about free-market capitalism as an economic system that promotes the generation of wealth and well-being of individuals worldwide.

His author, Thomas Piketty, is a French economist who graduated from the London School of Economics and Professor of the Paris School of Economics and the Ecole des Hautes Etudes en Sciences Sociales in France, who has over 20 years of experience studying issues on poverty and wealth distribution. With his work, Piketty not only could attract the attention of the academy, but he has received praise from renowned figures in the field of economics, including Nobel Prize winners Joseph Stiglitz (2001) and Paul Krugman (2008).

The main thesis of the book states that when the rate of return on capital –in other words, the income received by capital owners exceeds the rate of economic growth, the capitalist system produces a level of inequality in income distribution that threatens the sustainability of democratic institutions, so that society, predicts the author, will end in chaos or revolution!

It should be noted that the idea that the capitalist system is unsustainable is not a new contribution of Piketty since, in 1848, Marx and Engels had established in his Communist Manifesto that the capitalist regime “will destroy and disappear the society” because of the inequality caused. These predictions, of course, are still rejected by the historical evidence.

Piketty observes a statistical phenomenon and makes it the main support of his thesis: the significant increase in the inequality of income distribution that occurs from the industrial revolution is only reversed by the occurrence of catastrophic world events, such as the First and Second World War. For example, in the case of the United States, the percentage of income received by the top decile of the distribution fell from 50% in 1920 to less than 35% in 1950. Since 1970, the level of inequality has risen significantly until return to levels of 50% in 2010. According to Piketty, this should draw the attention of policymakers to take action before any phenomenon that threatens social peace occurs. The Piketty’s solution proposed is to establish a significant global tax on wealth: a tax on capital income.

Despite the great work on the collection of statistical data, Piketty makes no attempt to offer a theory to support his prediction. Furthermore, if the data show that income inequality is a phenomenon that can increase and decrease over time, there is no reason to exclude that in the future the level of global inequality can be reduced by other economic phenomena or technological revolutions increasing the worker’s income.

We must be very careful when dealing with measures of economic welfare that are based on relative concepts as these can be significantly affected by phenomena, individual decisions and events that are not related to a decrease in the life quality for workers. Let us consider a case.

By 2013, the total income of the Dominican Republic, as measured by GDP, was US$62.000 billion. If this income were distributed equally among the nearly 4 million employed that year, each worker would receive about US$15,500 a year (or one 0.000025% of total revenue).

Suppose now that Bill Gates, who has a fortune worth of US$81.600 million, decides to become a Dominican citizen and move into one of our beaches. If Gates receives a 6% on his capital return, this fact would make him the owner of annual revenue flows of nearly US$4.900 million. That is, from the total income that the Dominican Republic now owns (US$66.900 million), 8% would be owned by a single resident, involving a radical change in the distribution of income!

Now, it is to ask: The economic situation of Dominican workers worsened due to Mr. Gates’s decision to move to the Dominican Republic? Is it unfair that Mr. Gates receives this amount of income?

There are a variety of factors that can affect the relative income distribution measures ranging from increased divorce rates in medium and low income familes and the choice of career to the phenomenon of globalization. One of my colleagues, Raymer Díaz, recently published a paper that shows remittances received from abroad raises income inequality in Dominican Republics. (¿Can someone even think about to suggest to impose a restriction on the income from remittances to reduce income inequality?). Finally, the list can be quite extensive. Piketty, like other scholars, fails to incorporate these elements into the discussion in his book.

By this I do not mean that we should ignore the problem of income inequality. In the same way that, by individual actions, income inequality can emerge through political decisions when, for example, some interest groups get privileges from the state. These privileges can range from monopolistic licenses to benefits for corruption. In this case, inequality occurs when state transfers resources from other citizens to the privileged ones. This is a type of inequality I think we do our best to cope.

Finally, Piketty makes a great contribution by gathering statistics on a wide range of countries, both developed and developing, over an extended period of time. Moreover, all this information is publicly available through the purchase of the book, which will promote the realization of future research. For someone who thinks that “the price system has no morals or limits”, Piketty was not shy about putting a list price of his book of US$24. However, with no solid arguments to based his hypothesis, his book is no more than extensive collection of statistics.

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