The heart of French economist Thomas Piketty’s now famous book Capital is the argument that the accumulation of money is a bad thing because it leads to inequality. But are certain types of inequality created by family firms actually a price worth paying?
Piketty’s book is organised around the formula r > g, where r stands for the return on capital, and g for the rate of economic growth. When r > g, wealth accumulated in the past grows faster than wages with the result that the existing distribution of wealth becomes entrenched and inequality grows. The rich get richer, and the poor get poorer, as the old song goes.
Piketty accepts that some inequality is acceptable, of course – total equality would mean a forced redistribution of wealth. At the heart of his project, though, is the idea that inequality is bad. That is a commonplace these days, ever since the book The Spirit Level argued that unequal societies are unhappier.
But there are different kinds of inequality, which are conflated in most discussions about this subject. Piketty writes about Jane Austen’s England and the late-19th Century France of Balzac to illustrate that inequality can be static, sclerotic, and thwarts social mobility.
Well, yes. But it doesn’t always have be like that. It can also look like early 21st century China or India, where the gap between the richest and poorest are very great, but that gap can be seen as a necessary side-effect of a system that offers millions of people the chance to lift themselves out of poverty.
It is (relatively) easy to be relaxed about the accumulation of riches in emerging economies where new opportunities are present for so many people. Inequality is something that can be dealt with later. (That doesn’t help poor people now, of course.) In the Old World countries where Capital was most popular the big problem is inequality of opportunity, not wealth. These two sorts of inequality – of wealth and of opportunity – are related, but distinct.
Those who criticise inequality of wealth often ignore at how that wealth is accumulated. In most cases is by setting up successful businesses. Yes, one by-product of those businesses is capital, or pooled wealth, but others include jobs and tax revenues.
Established businesses also pool knowledge and produce stability in society. From this point of view, income inequality is in fact a side-effect of other, good, things. So inequality is a trade-off – the point at which inequality becomes too great is still a matter for debate, but this is the real context.
The problem is that pools of wealth are often transmitted through families, which entrenches inequalities of opportunity. Is there a way of having job and wealth-creating businesses, which inevitably create some wealth inequality, without unacceptable levels of opportunity inequality? That is the real challenge. R > g masks a deeper tension.