Picking Piketty Apart (4) Inequality

Part 3 of Capital is called Structures of Inequality. In this part, Piketty analyses the nature of inequality. He says that,

By definition, in all societies, income inequality is the result of adding up these two components: inequality of income from labour and inequality of income from capital. The more unequally distributed each of these two components is, the great the total inequality.

The third decisive fact is the relation between these two dimensions of inequality: to what extent do individuals with high income from labour also enjoy high income from capital.

The distribution of capital ownership (and income from capital) is always more concentrated than the distribution of income from labour.

To analyse inequality, he divides the population of society into three groups.

• Lowest fifty percent
• Middle forty percent
• Top ten percent (top decile)

To understand what is happening in the top ten percent, he sometimes investigates the top one percent (percentile).

Piketty prefers this approach to analysing equality over other measures like Gini coefficients. His approach makes sense, because it describes inequality very graphically.

In the United States, the top decile owns 70 percent of the wealth. The bottom fifty percent owns only 5 percent, and there are five times as many of them. The middle forth percent owns only 25 percent of the wealth, and there are many of them too.

The big change in the twentieth century was the emergence of the middle class. In 1910, this group held very little wealth. Their share increased significantly during the century. This was achieved mainly through the ownership of residential housing and superannuation.

The other big change in last few decades is the emergence of the super salaries in the top decile.

The final and perhaps most important point is the increase in very high incomes and very high salaries of “supermanagers,” that is , top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labour.

This has made the top ten percent more dependent on labour income.

The last chapter of this part looks at inheritances.

We find a spectacular decrease in the flow of inheritances between 1910 and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s.

Turner Turns (6) Inequality

Like everyone these days, Adair Turner is concerned is about inequality.

Within any society, richer people have a higher propensity to save. If there is a dramatic increase in inequality, there can be a situation where intended savings are not matched by investment decision. This would normally create a deflationary impetus, except that rich put their money in the bank, and they lent it out subprime mortgages to people trying to make up for deficiencies of income.

Inequality will have to be eliminated to prevent this problem.

His concern about inequality comes from a Keynsian dislike of saving. I am concerned about inequality too, but saving is not the problem. Saving is essential for supporting capital formation. Without capital funded by real saving an economy cannot grow. If savers want to save more than entrepreneurs want to invest, interest rates will fall (provided central banks are not meddling) and more capital projects will be viable and the excess savings will be absorbed. So excess saving is not a serious problem. While poverty is a problem, it is foolish to say that there is too much saving.

Central Banks and Inequality

Inequality of Incomes is becoming a significant political issue.

In an interview with Jennifer Cordingly, Frank Hollenbeck discusses the contribution of central banks to income inequality.



Central bank inflation is a major cause of inequality, but this problem is usually missing from the discussion. A fuller discussion of the problem is in this article called How Central Banks Cause Income Inequality.

Inflation assists asset holders, because they get a capital gain. Often it is tax free. The people in the financial sector who manage financial assets do extremely well too.

People on fixed incomes, such as wages and pensions are hurt by inflation.

Muller on Capitalism (8)

I have quoted extensively from Jerry Z Muller, because he raises some important issues for those who care about the future of society.

An advanced capitalist economy does indeed require an extensive financial sector. But whatever the benefits and continued social value, the financialisation of society nevertheless had some unfortunate consequences, both in increasing inequality by raising the top of the economic ladder ( thanks to the extraordinary rewards financial mangers receive) and increasing insecurity among those lower down ( thanks to the intense focus on short-term economic performance to the exclusion of other concerns).

Capitalism today continues to produce remarkable benefits and continually greater opportunities for self-cultivation and personal development. Now as ever, however, those upsides are coming with downsides, particularly increasing inequality and insecurity. Marx and Engels accurately noted, what distinguishes capitalism from other social and economic systems is its “constant revolutionising of production, uninterrupted disturbance of all social conditions and everlasting uncertainty and agitation.”

Now as then, the question at hand is just how to maintain the temporal blessing of capitalism while devising preventative and correctives for the evils that are their eternal concomitant.

This last para is really important. The benefits of capitalism are amazing, but the downsides cannot be ignored. All the secular and socialist solutions to this problem have failed. Christianity offers a solution that will work, but unfortunately it has not really be tired. Unrighteous wealth should be given away and righteous wealth should be shared. See Jesus on Money and Secular Capitalism. Christians should be comfortable with insecurity, if they understand God's plans for the future.

Muller Capitalism (7)

Jerry Z Muller suggests that education is not the solution to equality.

In today’s globalised, financialised, post-industrial environment, human capital is more important than ever in determining life chances. This makes families more important, too, because as each generation of social sciences researchers discovers anew (and much to their chagrin), the resources transmitted by the family tend to be highly determinative of success in school, and in the work place.

As the political scientist Edward Banfield noted a generation ago in The Unheavenly City Revisited, “All education favours the middle and upper-classes child, because to be middle- or upper-class is to have qualities that make one particular educable.” Improvements in the quality of schools may improve overall education outcomes, but they tend to increase, rather than diminish, the gap in achievement between children from families with different levels of human capital.

The unrecognised and unleashed power of Christian discipleship is that it can created the middle class attitudes necessary to build human capital.

Muller Capitalism (6)

Jerry Z Muller discuses the impact of capitalism on the roles of men and women.

One crucial impact of the rise of the postindustrial economy has been on the status and roles of men and women. Men’s relative advantage in the preindustrial and industrial economies rested in large part on their greater physical strength—something now ever less in demand. Women, in contrast, whether by biological disposition or socialisation, have had a relative advantage in human skills and emotional intelligence, which have now become increasingly more important in an economy more orientated to human services than to the production of material objects. The proportion of the economy in which women could participate has expanded and their labour has become more valuable—meaning that time spent at home now comes at the expense of lucrative possibilities in the paid work force.

The redeployment of female labour from the household has been made possible in part by the existence of new commodities that cut down on necessary household labour time (such as washing machines, dryers, dishwashers, water heaters, vacuum cleaners, microwave ovens). The greater time devoted to market activity, in turn, has given rise to new demand for household-orientated consumer goods that require less labour (such as packaged and prepared food) and the expansion of restaurant and fast-food eating. And it has led to the commodification of care, as the young , the elderly and the infirm are increasing looked after not by relatives but by paid minders.

As the economy has passed from an industrial economy to a postindustrial service and information economy, women have joined men in attaining recognition through paid work, and the industrious couple today is more likely to be made of peers, with more equal levels of education and comparable elves of economic achievement—a process termed “assertive mating”.

Given the family’s role as an incubator of human capital, such trends have had important spillover effects in inequality.

A family with two professional parents has a huge advantage over a family with one or two unskilled parents.

Muller Capitalism (5)

Jerry Z Muller writes about the growth of service industries and decline of manufacturing. Globilisation has reinforced the trends.

In 1973, the sociologist Daniel Bell noted that in the advanced capitalist world, knowledge, science and technology were driving a transformation to what he termed “post-industrial society’. Just as manufacturing had previously displaced agriculture as the major source of employment, he argued, so the service sector was now displacing manufacturing.

In a post-industrial, knowledge-based economy, the production of manufactured goods depended more on technological inputs than on the skills of the workers who actually built and assembled the products. That meant a relative decline in the need for and economic value of skilled and semi-skilled factory workers—just as there had previously been a decline in the need for and value of agriculture labourers. In such and economy, the skills in demand included scientific and technical knowledge and the ability to work with information. The revolution in information technology that has swept through the economy in recent decades meanwhile has only exacerbated these trends....

Globalisation has not caused this pattern of increasingly unequal returns to human capital but reinforced it. As the manufactured goods and routine services are outsourced, the wages of the relatively unskilled and uneducated in advanced capitalist societies decline further, unless these people are somehow able to find remunerative employment in the untradeable sector.

Muller Capitalism (4)

Jerry Z Muller explains the tension between dynamism and security that is produced by capitalism.

For most of history, the prime source of human insecurity was nature. In such societies, as Marx noted, the economy system was orientated toward stability-and stagnancy. Capitalist societies, by contrast, have been oriented towards innovation and dynamism, to the creation of new knowledge, new products, and new modes of productions and distribution. All of this has shifted the locus of insecurity from nature to the economy.

Hegel observed in the 1820s that for men in a commercial society based on the breadwinner-homemaker model, one’s sense of self-worth and recognition by others was tied to have a job. This posed a problem, because in a dynamic capitalist market, unemployment was a disctint possibility. The division of labour created by the market meant that many workers had skills that were highly specialised and suited for only a narrow range of jobs.

The market created shifting wants, and increased demand for new products meant decreased demand for older one. Men who lives had been devoted to their role in the production of the old products were left without a job and without the training that would allow them to find new work. And the mechanisation of production also led to a loss of jobs. From its very beginning, in other words, the creativity and innovation of industrial capitalism were shadowed by insecurity for members of the work force.....

The dynamism and insecurity created by nineteenth-century capitalism led to the creation of new institutions for the reduction of insecurity, including the limited liability corporation, to reduce investor risks; labour unions to further protect worker interests; and mutual aid societies to provide loans and burial security.

Muller Capitalism (2)

Muller says that a serious consequence of the dynamism of capitalism is increased insecurity.

Capitalism’s intrinsic dynamism, however, produces insecurity along with benefits, and so its advance has always met resistance. Much of the political and institutional history of capitalist societies, in fact, has been the record of attempts to erase or cushion that insecurity.

The right has largely ignored the problem, while the left has sought to eliminate it through government action, regardless of the cost. Neither approach is viable in the long run. Contemporary capitalist polities need to accept that inequality and insecurity will continue to be the inevitable result of market operations and find ways to shield citizens from their consequences- while somehow still preserving the dynamism that produces capitalism’s vast economic and cultural benefits in the first place.

Capitalism is a system of economic and social relations marked by private property, the exchange of goods and services by free individuals, and the use of market mechanisms to control the production and distribution of those goods and services….

Throughout history, most households had consumed most of the things that they produced and produced most of what they consumed. Only at this point did a majority of the population in some countries begin to buy most of the things they consumed and do so with the proceeds gained from selling most of what they produced.

The growth of market-orientated households and what came to be called “commercial society” had profound implications for practically every aspect of human activity. Prior to capitalism, life was governed by tradition institutions that subordinated the choices and destinies of individuals to various communal, political and religious structures. These institutions kept change to a minimum, blocking people from making much progress, but also protecting them from many of life’s vicissitudes. The advent of capitalism gave individuals more control over and responsibility for their own lives than ever before- which proved both liberating and terrifying, alowing for both progress and regression.

Three Mountains (14) - Solutions to Inequality

Inequality of income becomes a festering sore the weaken society. Secular societies have come up with two solutions to inequality.

1. The most popular solution to inequality is progressive taxation. This solution is immoral. There is not moral basis for confiscating the wealth of the rich and giving it to the poor. The other problem with this solution is that progressive taxation destroys many of the incentives that have made free-market capitalism so productive.

2. The other popular solution is revolution: shoot the rich and let the poor grab what they can. This solution is immoral and destructive. Revolution destroys the productive capacity of a society, so it generally makes everyone worse off.

Secular solutions to inequality have failed. The Bible provides two solutions.

1. In Old Testament times, the main form of capital was land. The Jubilee laws ensured that land remained reasonably evenly distributed across the entire population. If a family became poor and sold their land to settle debts, the purchaser of the land was required to return it to the original owner in the jubilee year. This mean that the distribution of income generated wealth was distributed evenly again at the beginning of each new generation.



2. The New Testament brought an even better solution to the problem of inequality. Acceptance of the gospel of Jesus leads to a great outpouring of giving that can counteract the flow of wealth from the bottom to the top. The gospel creates a continuous voluntary Jubilee.

Paul explained God’s will.

Our desire is not that others might be relieved while you are hard pressed, but that there might be equality (2 Cor 8:13).

God does not want those who have much to get more and those who little to get less. He prefers the opposite; that everyone should have what they need, and no one should have more than they need.

Secular Capitalism (1)

Secular capitalism does not work long term. It has one serious problem that will always tend to undermine it from within.

Free market capitalism has solved the production problem. It allowed human initiative and inventiveness to flourish. The accumulation of capital has massively increased human productivity. Free trade has supported a greater division of labour. These factors have led to massive increases in the wealth of the western world. We have moved from a life of subsistence to a world of prosperity in a couple of centuries.

The flaw with free market capitalism is that wealth tends to be concentrated in the hands of a few.

1. Efficient entrepreneurs are rewarded with increasing wealth. That is as it should be. Many use the increase in wealth to expand their enterprise.

2. Wealth flows to those who already have wealth. Those who inherit wealth will find it much easier to increase their wealth than those with none. Wealth begats wealth.

3. The corrupt, crafty and unscrupulous will often do even better. They will often manipulate and swindle the less misfortunate to defraud them for their own benefit.

4. When wealthy people collude with political rulers, the flow of wealth to the rich and powerful is really boosted.

5. Some wealth trickles down to those at the bottom, but the flow up is far greater.

6. When governments produce economic depressions, the poor usually suffer the most.

Secular capitalism increases the wealth of most people in society, but it also produces huge inequalities.

Free Markets (24) - Upset by Inequality

Christians should be upset by inequality of incomes, but they must be precise about their response. Concern about inequality can mean either of two things.

1. I got too much income from market activity.
2. Those people over there gained too much.

The first possibility is easy to deal with. People who think that they have earned too much can give some away. Many of them already do.

The second option is different. It usually has a corollary:

The government should force those with too much to give it others.

Many people just assume that governments should take from those who gained “too much” and give it to those who are poor. No justification is given.

If they people have used force or stolen from others, they should be forced to make restitution to their victims. If they have gained “too much” by honest trading, or by producing good quality products, or by producing services that many people want, it is hard to understand why they should be punished.

Those who expect the government to deal with inequality are really saying,

• I do not like the state of the world
• I want the state to force the world to change.

Church leaders and theologians assume that the state should be involved solving poverty and inequality, but they do not think about what this means. What they are really saying is:

• Love cannot change this situation.
• Compassion will fail.
• We must use force.
• Only coercion can deliver the required change.

I can understand Marxists being advocates of force and coercion, but Christians have a better way. Love and compassion should be our trademark.

God has a Solution
God is actually more concerned about poverty than most Christians. His gospel is “good news to the poor”. Paul was certain that He does not want inequality.

Our desire is not that others might be relieved while you are hard pressed, but that there might be equality. At the present time your plenty will supply what they need, so that in turn their plenty will supply what you need. Then there will be equality (2 Cor 8:13-14).

God objective is equality, but his solution is unique as it does not require force or coercion. God’s solution to inequality is love and compassion.

God’s requires people with plenty to give generously to those who are hard pressed. He expects people who have prospered to demonstrate compassion for those who have not done so well. Compassion and sharing create equality.

Theologians who are concerned about inequality should be teaching Christians how to assist the poor. Paul did this all the time, because caring for the poor was the heart of his gospel. His letters are full of exhortations about giving.

Now about the collection for God's people…. On the first day of every week, each one of you should set aside a sum of money in keeping with his income, saving it up, so that when I come no collections will have to be made (1 Cor 16:1-3).

Paul taught the Corinthians about the Lord’s Supper, because he was concerned about their lack of sharing (1 Cor 11:20-22).

Free Markets (23) - Unequal Outcomes

The exchange of goods and services in a free market will often produce unequal outcomes. People will generally reject transactions that make them worse off, but a few will make mistakes that push them into poverty.

Some mistakes will be made when naïve or innocent people are “ripped off” by bad people (they should be forced to make restitution), but most poverty is not the result of evil actions, but flows from the vagaries of life. Trade in free markets can push people into poverty without any immoral action being taken.

• A bad decision in a free market can produce a huge loss.
• An unwise offer will sometimes be accepted.
• A desperate seller may be forced to accept a very low price.
• Some people are foolish buyers.
• Others are foolish sellers.
• Some people are not as clever as others.
• People with rare skills can achieve higher pay than others.
• People who do not use their skills and capital may find themselves in poverty.

  Lazy hands make a man poor (Prov 10:4).

• The sick and handicapped will struggle to prosper by buying and selling.
• Producing goods that no-one wants will leads to losses.
• People with surplus goods can improve their situation.
• Market only benefits those who participate.
• People in desperate circumstances may have not surplus to sell.
• People with nothing to sell gain nothing from free markets.
• Many are harmed when the people they depend make mistakes.
• Employees are harmed by the mistakes of their employers.
• Economic power is really the power to harm other people.
• People caught up in a war can lose everything they produced.
• Droughts, tornadoes and floods push innocent people into poverty.

Markets provide opportunities, but some people will be unable to take them up. Some people will benefit more than others. Transactions in a free market can produce inequality, even when every participant is honest and good.