Synopsis: A summary of “Capital in the Twenty-First Century” by Thomas Piketty

Click here to read the original article.

Discussion: This article summarises “Capital in the Twenty-First Century”, by Thomas Piketty, a book that discusses past inequality trends and predicts future ones.

Mr. Piketty, along with a handful of other economists, has gathered data from the beginning of the Industrial Revolution about the change in the concentration of income and wealth. During the 18th and 19th centuries in Western Europe, wealth inequality was rampant. National income was less than private wealth, the latter of which was concentrated in the hands of the elite few. Even when industrialisation increased the wages of the working class, this problem persisted. When WW1, WW2 and the Great Depression hit, the inequality of income and wealth reduced, due to high taxes, inflation and bankruptcies. After these shocks faded, the same problems are creeping back, so much so that the importance of wealth is reaching levels pre-WW2.

From here, Piketty outlines general patterns between wealth and growth. He explains that wealth grows faster than economic output in general, which represents in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate). Ceteris paribus, “faster economic growth will diminish the importance of wealth in a society”, and the same vice versa. “Demographic change that slows growth will make capital more dominant”. However, it is only rapid growth or government intervention that will disperse the concentration of wealth, and prevent it from entering the patrimonial situation Karl Marx was worried about.

Mr. Piketty ends by saying that governments should step in now and impose taxes on wealth, lest it leads to soaring inequality or political instability.

Critics have question Piketty’s assertion that the future will resemble the past, arguing that returns to wealth decreases as the amount of wealth increases. They also add that today’s generations come upon wealth by working for it, rather than through inheritance. Furthermore, they question the feasibility of Mr. Piketty’s recommendations to governments, stating that they are ideologically, rather than economically, driven. Regardless, Piketty’s book as received major critical acclaim for its data gathering and analysis.

Key terms:

1) Welfare state: According to Brittanica, this is where the government plays an active role in taking care of the citizens of a state.

2) Return on wealth: This is the income from investing in wealth.

Context:

It is worth discussing Piketty’s idea of inequality. He discusses how r > g in general. He states that if the economy grows faster, then the importance of wealth will reduce, and if the economy grows slower, the importance of wealth will increase. This concept is illustrated in the diagrams below:

If the rate of return to wealth increases faster than the growth rate, then inequality increases. In other words, Piketty claims that inequality = r-g. Whether this is true or not will be discussed in another blog post.

In the introductory blog post I had posted about this inequality series, one of the questions I said that would be discussed is the link between growth and inequality. According to Piketty, faster growth reduces inequality.

Synopsis: A short timeline and discussion of income inequality.

Click here to read the original article.

Discussion:

This article discusses the historical trends of income inequality in different western countries, as well as the causes of the change in trends.

In the 1920s, the countries whose citizens were mostly immigrants had less inequality in income (perhaps because they were all equally poor?). Such countries included the US., Australia and Canada. Conversely, countries like Germany, whose citizens in general were not immigrants, had higher levels of inequality.

During the next 50 years, the share of the top 1 percent pretty much halved globally, and the share of the top 0.1 percent fell even more. This is because governments introduced harsh progressive taxes to encourage equality.

In the 1970s, Germany still had usually high inequality in comparison to other countries. This could be because entrepreneurs were well remunerated, while working-class citizens were not.

Post 1970, inequality rose very sharply worldwide. In France and Germany, the share of the top 1 percent and the top 0.1 percent stayed stagnant. In the US, it rose to levels higher than in the 1920s. In the UK, it rose as well, though it did not reach the level of the 1920s.

The reasons why it rose so sharply in the US, and the UK to a lesser extent, are:

1) Corporate executives were remunerated highly, higher than working-class citizens.

2) Doctors and lawyers are paid very highly. In other countries, public healthcare and limited role for litigation prevented this from happening.

3) Finance professionals are experiencing an increase in the top 1 percent (from 8% to 14%) and in the top 0.1 percent (from 11% to 18%). Countries resisting what the author calls ‘financialisation’, such as France and Germany, are not experiencing such drastic increases in inequality.

Key terms:

A progressive tax is, according to Wikipedia, where “the tax rate increases as the taxable base amount increases”. In other words, as the income of a person increases, they pay a higher share of income as taxes. The most common example of a progressive tax is tax on income. The reason why progressive taxes are “forces of equalization”, as the author says, is because in real terms, the amount being taken from a person for taxes increases as their income does.


There are two other main types of taxes:

1) Proportional tax, where the tax rate is stagnant regardless of the taxable base. An example of this is a poll tax, as the tax rate is fixed.

2) Regressive tax, where the tax rate increases as the taxable base decreases. An example of this is a sin tax, such as on cigarettes. The tax is usually a flat rate. For example, if the tax on a pack of cigarettes is $1, for a person earning $100, this represents 1% of his income, but for a person earning $200, this represents only 0.5% of his income.

Context:

Income should not be confused with wealth, which is accumulated assets. This article specifically talks about income inequality, not wealth inequality. In other words, income is a flow concept and wealth is a stock concept. For example, you could be wealthy with many inherited assets, but not have year-to-year income. Conversely, you could have a high yearly income but not have much of accumulated assets. 

Synopsis: Does Amazon have too much market power?

Click here to read the original article.

Discussion:

This article discusses the market power Amazon has. Paul Krugman is under the opinion that, as a monopsonist, “Amazon [has the ability to]… systematically [disadvantage] books with a particular political bent.” Mr. Krugman gives the book “Sons of Wichita” as an example of a book that is being disadvantaged in that particular way. In retaliation, the author argues that Amazon is not a monopoly in the U.S., citing Barns & Noble as a potential competitor. However, Krugman argues that it is not on the bookselling front that all Amazon’s power is concentrated: it is on the ‘buzz creating’ front, i.e. the ability to create buzz about a book. Once again, the author dismisses this point, saying that nobody hears about books through Amazon; it can neither create nor kill buzz on a large-scale. For these reasons, the author argues that Amazon is not as dangerous as others claim it is; its market power itself is not as abundant as it is portrayed to be.

Key words:

1. Monopsony: One big buyer for many sellers

2. Anti-trust action: Anti-monopoly law

Context:

1. R.A. (Ryan Arvent), the author, mentions Jean Tirole’s work on regulating monopolies. More about this can be read here.

2. A point of my own that I want to add that supports Krugman (although I agree with Arvent) is that Amazon might get some of its power from brand loyalty, as well as the fact that customers are accustomed to Amazon. Just like many people are hesitant to switch from Apple to Microsoft (or vice versa) because they may know one better, people may be hesitant to switch from Amazon to Barnes & Noble. In other words, although Arvent points out that there are many other online bookstores, just because consumers can switch, it does not mean that they will.

3. There is a similar famous antitrust law case in 2001 where the Department of Justice in the United States of America accused Microsoft Corporation of abusing its monopoly power. It claimed that Microsoft used its power to bundle Internet Explorer to the Microsoft Windows operating system, which may have been what caused Internet Explorer to be so successful. In the end, the Department of Justice required Microsoft to share its programme with other search engines. Wikipedia has a good synopsis of this case.