On capitalism, inequality and wealth distribution

BREAKTHROUGH - Elfren S. Cruz - The Philippine Star

In this time of increasing income inequality, the idea that capitalism is the best means of distributing wealth has been questioned by many people including Pope Francis. The idea that as the wealthy few become richer, their wealth will “ trickle down” to the poor just has not happened. One concrete evidence is that wealth is being concentrated in fewer and fewer people in recent decades. Today 67 individuals have as much wealth as the bottom 50% of the world’s population. This means that the richest 67 persons in the world have as much wealth as the poorest 3.5 billion people in the world. How can this tragic phenomenon be explained.

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the 19th century and seems likely to do again in the 21st, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.” This is the main thesis of Thomas Piketty in his book CAPITALISM in the Twenty-First Century.

The issue of distribution of wealth is very critical to all sectors of society. However, economists and businessmen would like us to believe that this is a topic that should be left solely to their discretion. Issues like the minimum wage are viewed differently depending on one’s perspective. The businessman believes that he or she is “creator” of wealth and that the most important motivation in creating wealth is the maximization of profit. Labor is, therefore, viewed as a cost that reduces profit; and, efforts should be made to minimize this “cost.”

Another perspective is that wealth is created by many factors including land, resources, technology and labor. In addition, society has an obligation to ensure that every human being is entitled to equal opportunity and that a decent life is a right not a privilege. In this case, the task of society, through institutions like the government, is to find ways to distribute wealth in order to ensure that every human being has access to a decent life. This is done either through a living wage or by providing social services that provide equal opportunity to every citizen. If the provision of social services – education, health, housing, transportation – is left to capitalism or the so-called market forces, there will be severe inequality as the inequality of wealth continues to worsen.

The debate about the distribution of wealth has been long based on ideological prejudices and short of facts. For those who seriously and sincerely want to study such a critical subject matter, Piketty’s book is must reading. Based on 15 years of research, the book is devoted essentially to understanding the historical dynamics of wealth and income. In his introduction, the author explains his book.

“The distribution of wealth is one of today’s most widely discussed and controversial issues. But what do we really know about its evolution over the long term? Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the 19th century? Or do the balancing forces of growth, competition and technological forces lead in later stages of development to reduced inequality and greater harmony among the classes as Simon Kuznets thought in the 20th century? What do we really know about how wealth and income have evolved since the 18th century, and what lessons can we derive from that knowledge for the century now under way?”

Thomas Piketty is a French economist. His book was awarded business book of the year by several entities including Financial Times, Washington Post, Economist, Wall Street Journal and Mckinsey. Paul Krugman wrote: “It seems safe to say that CAPITAL in the Twenty-First Century, the magnum opus of the French economist Thomas Piketty, will be the most important economics book of the year – and maybe the decade.”

This 793-page book has some conclusions that have become controversial. Here are some conclusions:

When the rate of return on capital significantly exceeds the growth rate of the economy, which is the case in the 21st century, it follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin and the concentration of wealth will attain extremely high levels – levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.

Another conclusion Piketty made is that one of the reasons for the spectacular increase in inequality is evidenced by the fact that “...top managers by and large have the power to set their own remunerations, in some cases without limit and in many cases, without any clear relation to their individual productivity which in any case is very difficult to estimate in a large organization.” 

“Modern redistribution of wealth does not consist in transferring income from the rich to the poor. It consists rather in financing public services and replacement incomes that are more or less equal for everyone, especially in the areas of health, education and pensions...For education and health there is real quality of access for everyone regardless of income or parents’ income, at least in principle. Modern redistribution is built around a logic of rights and principle of equal access to a certain number of good deemed to be fundamental.”

It seems that the central theme of the book is that income inequality is a feature of capitalism that can only be controlled through state intervention. Piketty also argues that if capitalism is not reformed, democracy, as an ideal, will be threatened. 

Creative writing classes for kids and teens

Young Writers’ Hangout on May 11, 18, 25 (1:30 pm-3pm; stand-alone sessions) at Fully Booked BGC. For details and registration, email [email protected].

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