Clem Sunter

The truth about inequality

2014-04-24 11:48

Clem Sunter

The No. 1 book on Amazon at the moment is not a gripping thriller or passionate romantic tale. It is an economic treatise of nearly 700 pages entitled Capital in the 21st Century, written by a Frenchman called Thomas Piketty.

The basic thesis of the book is that the prime driving force behind material inequality in society is when the return on capital in a country consistently exceeds its economic growth rate over a long period of time. Return on capital is, among other things, derived from corporate profits, interest, dividends, capital appreciation of shares and gains in property values.

The underbelly of La Belle Epoque

His prime example is what happened in the 20th Century. At the beginning of it, Europe was experiencing “La Belle Epoque” or a golden age where new technologies, scientific discoveries and masterpieces in arts, music and literature were commonplace. The period was marked by optimism and peace and ended abruptly in 1914 with the onset of the First World War. However, largely ignored is the fact that there existed a large economic underclass who did not share in the prosperity and good times.

In 1910, the top 1% of the European population earned 20% of the national income; the next 9% earned 30%; the next 40% earned 30% and the bottom 50% earned 20%. In other words, the wealthiest 1% of citizens earned as much as the poorest 50%. The cause was unequal ownership of assets, not unequal pay. In those days, it was better to marry into money than get a decent job.

Subsequently, the two world wars as well as the Great Depression destroyed much of the capital of the moneyed aristocracy. Then, from 1945 onwards, 30 years of spectacular economic growth outstripped the return on capital. It also meant a surge in salaries and wages that led to a dramatic fall in the inequality of income by the mid-1970s. By contrast, in the remainder of the last century and the first decade of this one global economic growth has been more subdued and recently the return on capital has considerably exceeded the economic growth rate in most developed economies and particularly America.

Patrimonial capitalism

The net result is that the US in 2010 had an income distribution among its population which is equivalent to the figures quoted above for Europe in 1910. In other words, there has been a gigantic ‘U’ in inequality over the last 100 years and we are back to what Piketty calls “patrimonial capitalism’ dominated by oligarchs and inherited wealth. He also adds that the super salaries and bonuses earned by numerous company executives have contributed to the current state of affairs. It is no longer just sports heroes, movie stars and pop musicians making a fortune. It is your run-of-the-mill CEO.  In this regard, it is interesting to note that for the first time in the modern economic era the US middle class no longer has the highest income per head in the world. That position is now held by Canada. Obviously, in the billionaire class, America remains in premier place.

Piketty’s recommendation to correct the problem is a global wealth tax of 2% and a progressive income tax structure which rises to 80% at the highest income levels. This is obviously very controversial. Many critics argue that such measures would dampen economic growth even further in a world where ageing demographics are already adversely affecting economic prospects in the foreseeable future. The rich will hide their money and governments will spend the additional revenue inefficiently.

Nevertheless, the value of his research is that it provides a valid frame of reference within which we can debate the issue of income inequality in South Africa – rating alongside poverty and unemployment as our biggest scourge. The first thing we should do is get the figures for the last 50 years in order to compare them with the trends in Europe and America. My bet is that we suffer from our own brand of patrimonial capitalism as well.

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