Democ­racy in the 21st cen­tury

Financial Mirror (Cyprus) - - FRONT PAGE -

The re­cep­tion in the United States, and in other ad­vanced economies, of Thomas Piketty’s re­cent book Cap­i­tal in the Twenty-First Cen­tury at­tests to grow­ing con­cern about ris­ing in­equal­ity. His book lends fur­ther weight to the al­ready over­whelm­ing body of ev­i­dence con­cern­ing the soar­ing share of in­come and wealth at the very top.

Piketty’s book, more­over, pro­vides a dif­fer­ent per­spec­tive on the 30 or so years that fol­lowed the Great De­pres­sion and World War II, view­ing this pe­riod as a his­tor­i­cal anom­aly, per­haps caused by the un­usual so­cial co­he­sion that cat­a­clysmic events can stim­u­late. In that era of rapid eco­nomic growth, pros­per­ity was widely shared, with all groups ad­vanc­ing, but with those at the bot­tom see­ing larger per­cent­age gains.

Piketty also sheds new light on the “re­forms” sold by Ron­ald Rea­gan and Mar­garet Thatcher in the 1980s as growth en­hancers from which all would ben­e­fit. Their re­forms were fol­lowed by slower growth and height­ened global in­sta­bil­ity, and what growth did oc­cur ben­e­fited mostly those at the top.

But Piketty’s work raises fun­da­men­tal is­sues con­cern­ing both eco­nomic the­ory and the fu­ture of cap­i­tal­ism. He doc­u­ments large in­creases in the wealth/out­put ra­tio. In stan­dard the­ory, such in­creases would be as­so­ci­ated with a fall in the re­turn to cap­i­tal and an in­crease in wages. But to­day the re­turn to cap­i­tal does not seem to have di­min­ished, though wages have. (In the US, for ex­am­ple, av­er­age wages are down some 7% over the past four decades.)

The most ob­vi­ous ex­pla­na­tion is that the in­crease in mea­sured wealth does not cor­re­spond to an in­crease in pro­duc­tive cap­i­tal – and the data seem con­sis­tent with this in­ter­pre­ta­tion. Much of the in­crease in wealth stemmed from an in­crease in the value of real es­tate. Be­fore the 2008 fi­nan­cial cri­sis, a real-es­tate bub­ble was ev­i­dent in many coun­tries; even now, there may not have been a full “cor­rec­tion.” The rise in value also can rep­re­sent com­pe­ti­tion among the rich for “po­si­tional” goods – a house on the beach or an apart­ment on New York City’s Fifth Av­enue.

Some­times an in­crease in mea­sured fi­nan­cial wealth cor­re­sponds to lit­tle more than a shift from “un­mea­sured” wealth to mea­sured wealth – shifts that can ac­tu­ally re­flect de­te­ri­o­ra­tion in over­all eco­nomic per­for­mance. If mo­nop­oly power in­creases, or firms (like banks) de­velop bet­ter meth­ods of ex­ploit­ing or­di­nary con­sumers, it will show up as higher prof­its and, when cap­i­talised, as an in­crease in fi­nan­cial wealth.

But when this hap­pens, of course, so­ci­etal well­be­ing and eco­nomic ef­fi­ciency fall, even as of­fi­cially mea­sured wealth rises. We sim­ply do not take into ac­count the cor­re­spond­ing diminu­tion of the value of hu­man cap­i­tal – the wealth of work­ers.

More­over, if banks suc­ceed in us­ing their po­lit­i­cal in­flu­ence to so­cial­ize losses and re­tain more and more of their ill-got­ten gains, the mea­sured wealth in the fi­nan­cial sec­tor in­creases. We do not mea­sure the cor­re­spond­ing diminu­tion of tax­pay­ers’ wealth. Like­wise, if cor­po­ra­tions con­vince the gov­ern­ment to over­pay for their prod­ucts (as the ma­jor drug com­pa­nies have suc­ceeded in do­ing), or are given ac­cess to pub­lic re­sources at be­low-mar­ket prices (as min­ing com­pa­nies have suc­ceeded in do­ing), re­ported fi­nan­cial wealth in­creases, though the wealth of or­di­nary cit­i­zens does not.

What we have been ob­serv­ing – wage stag­na­tion and ris­ing in­equal­ity, even as wealth in­creases – does not re­flect the work­ings of a nor­mal mar­ket econ­omy, but of what I call “er­satz cap­i­tal­ism.” The prob­lem may not be with how mar­kets should or do work, but with our po­lit­i­cal sys­tem, which has failed to en­sure that mar­kets are com­pet­i­tive, and has de­signed rules that sus­tain dis­torted mar­kets in which cor­po­ra­tions and the rich can (and un­for­tu­nately do) ex­ploit ev­ery­one else.

Mar­kets, of course, do not ex­ist in a vac­uum. There have to be rules of the game, and th­ese are es­tab­lished through po­lit­i­cal pro­cesses. High lev­els of eco­nomic in­equal­ity in coun­tries like the US and, in­creas­ingly, those that have fol­lowed its eco­nomic model, lead to po­lit­i­cal in­equal­ity. In such a sys­tem, op­por­tu­ni­ties for eco­nomic ad­vance­ment be­come un­equal as well, re­in­forc­ing low lev­els of so­cial mo­bil­ity. Thus, Piketty’s fore­cast of still higher lev­els of in­equal­ity does not re­flect the in­ex­orable laws of eco­nomics. Sim­ple changes – in­clud­ing higher cap­i­tal-gains and in­her­i­tance taxes, greater spend­ing to broaden ac­cess to ed­u­ca­tion, rig­or­ous en­force­ment of anti-trust laws, cor­po­rat­e­gov­er­nance re­forms that cir­cum­scribe ex­ec­u­tive pay, and fi­nan­cial reg­u­la­tions that rein in banks’ abil­ity to ex­ploit the rest of so­ci­ety – would re­duce in­equal­ity and in­crease equal­ity of op­por­tu­nity markedly.

If we get the rules of the game right, we might even be able to re­store the rapid and shared eco­nomic growth that char­ac­ter­ized the mid­dle-class so­ci­eties of the mid-twen­ti­eth cen­tury. The main ques­tion con­fronting us to­day is not re­ally about cap­i­tal in the twenty-first cen­tury. It is about democ­racy in the twenty-first cen­tury.

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