Capitalism vs. Democracy - NYTimes.com - 0 views
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capitalism inequality entrepreneur unemployment history Marx economics
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Thomas Piketty’s new book, “Capital in the Twenty-First Century,” described by one French newspaper as a “a political and theoretical bulldozer,” defies left and right orthodoxy by arguing that worsening inequality is an inevitable outcome of free market capitalism.
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He contends that capitalism’s inherent dynamic propels powerful forces that threaten democratic societies.
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Capitalism, according to Piketty, confronts both modern and modernizing countries with a dilemma: entrepreneurs become increasingly dominant over those who own only their own labor
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in the long run, “when pay setters set their own pay, there’s no limit,” unless “confiscatory tax rates” are imposed.
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suggests that traditional liberal government policies on spending, taxation and regulation will fail to diminish inequality.
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Conservative readers will find that Piketty’s book disputes the view that the free market, liberated from the distorting effects of government intervention, “distributes,” as Milton Friedman famously put it, “the fruits of economic progress among all people.
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Piketty proposes instead that the rise in inequality reflects markets working 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.
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One is that the six-decade period of growing equality in western nations – starting roughly with the onset of World War I and extending into the early 1970s – was unique and highly unlikely to be repeated. That period, Piketty suggests, represented an exception to the more deeply rooted pattern of growing inequality.
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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;
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The six decades between 1914 and 1973 stand out from the past and future, according to Piketty, because the rate of economic growth exceeded the after-tax rate of return on capital. Since then, the rate of growth of the economy has declined, while the return on capital is rising to its pre-World War I levels.
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“If the rate of return on capital remains permanently above the rate of growth of the economy – this is Piketty’s key inequality relationship,” Milanovic writes in his review, it “generates a changing functional distribution of income in favor of capital and, if capital incomes are more concentrated than incomes from labor (a rather uncontroversial fact), personal income distribution will also get more unequal — which indeed is what we have witnessed in the past 30 years.”
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The Piketty diagnosis helps explain the recent drop in the share of national income going to labor (see Figure 2) and a parallel increase in the share going to capital.
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Piketty’s analysis also sheds light on the worldwide growth in the number of the unemployed. The International Labor Organization, an agency of the United Nations, reported recently that the number of unemployed grew by 5 million from 2012 to 2013, reaching nearly 202 million by the end of last year. It is projected to grow to 215 million by 2018.
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Piketty’s wealth tax solution runs directly counter to the principles of contemporary American conservatives who advocate antithetical public policies: cutting top rates and eliminating the estate tax.