August 1, 2014

Living with Inequality

Garett Jones

Senior Research Fellow

As Piketty reminds us, human beings can be pretty bad at living with economic inequality. But when it comes to capital, simple economic theory is right: the more, the merrier. And if we can reduce covetousness, we can begin to say the reverse: the merrier, the more.

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This article appears in the August/September edition of Reason Magazine

In Capital in the Twenty-First Century, the French economist Thomas Piketty claims to have uncovered "the central contradiction of capitalism." When a major scholar like Piketty-a man who has contributed real value to empirical economics-makes such a bold claim, it deserves to be taken seriously.

So what is this flaw at the heart of the economic machine, a flaw somehow overlooked by economists for centuries? That sometimes the interest rate (which Piketty correctly uses as a stand-in for the total average return on different types of capital, including profits, interest, and capital gains) is greater than the overall economic growth rate. Piketty sums this concept up with the simple equation: r > g. If r > g for decades, he argues, capital's advantage contains the seeds of deep social conflict.

If the wealth of capitalists grows at the interest rate, and if that wealth grows faster than the overall economy, capitalists will take over more and more of the economy until something genuinely awful happens, goes the idea. Piketty is vague about what this awfulness might consist of, but the memory of the last century brings to mind quite a few unpleasant scenarios in which average citizens get mad at elites: anything from banking overregulation to a full-blown Marxist revolution, with dozens of possibilities in between. In the meantime, ultra-wealthy economic elites can buy massive political influence, prodding the government to favor well-connected insiders and thus slow down the economy.

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