WEALTH IN THE 21ST CENTURY

BLOG 159

WEALTH IN THE 21^ST CENTURY

I have been reading Thomas Piketty’s book, Wealth in the 21^st Century.  I read somewhere that most buyers don’t get far past Chapter 1.  If so, that’s a shame.  I found the first two-thirds fascinating but was disappointed with the rest.  It was also a bit wearing.  It is clear that Mr Piketty has a very dim view of other economists.  They mostly botched the research and the world has had to wait until now for Mr Piketty to come along and do it properly.

The first bit of the book is about economics.  Mr Piketty goes to great lengths to prove his theory that in the long run the return on capital exceeds the rate of growth throughout the world.  That is a convincing theory.  Indeed, it is probably a statement of the obvious.  Growth is an average of established businesses and innovation.  It is hard to see why anyone should take the risk of investing in innovation if he did not think that would give him a better return than a less risky established business.

Perhaps, more importantly, Mr Piketty shows that money begets more money, so the effect of return on capital exceeding growth is that the rich get richer and, by doing so, own an increasing share of national capital.  The theory was disrupted by two world wars but Mr Piketty says that we are now back to where we were in the middle of the 19^th Century.  That is apparently a world disaster because it means either that in the very long term (assuming the world lasts that long) the top 1% of the world population will own everything, or the poor will have revolted long before we reach that stage.

Don’t panic, says Mr Piketty, there is a solution.  It will be very difficult to achieve but we must do so for the sake of the world.  There are no other options.  There is a single magic one: we must have a worldwide wealth tax!

I’m not an economist, but I did find Mr Piketty’s return on capital exceeds growth theory compelfling.  I do however have an interest in tax and I found his wealth tax theory rather silly, poorly thought through and based on no discernible evidence whatsoever.  It makes me wonder if I was convinced by the economic bit of the book largely because I am not an economist and an economist might have found it riddled with flaws.

But the purpose of this note is not to discuss economics; it is to look at Mr Piketty’s global wealth tax.  Wealth taxes do of course already exist in some countries.  Others have had wealth taxes and scrapped them – although in the Piketty world that is because a wealth tax has to be truly comprehensive and countries that scrapped their wealth taxes did so because their tax contained too many exemptions to be effective.  A true wealth tax must have no exemptions.  You must be taxed on the value of your house, your pension fund, your investments, your jewellery, your clothes, absolutely everything.  Otherwise the rich will move their money into non-taxable things so the tax will be ineffective.  Similarly the tax has to be global so that the ultra-rich cannot avoid it by moving to another country.

The purpose of the Piketty wealth tax is not wholly clear to me.  At one point he says that it does not really matter if it yields very little; the tax returns and record-keeping required will still be a good thing as it will produce statistics for future economists who will find it easier to write books and form theories.  Mr Piketty does not seem to question whether the economic cost of generating statistics for economists is actually a good use of the money.  However the main purpose of his wealth tax is to stop the ultra-rich becoming too rich.  He thinks the wealth tax should be graduated 0.5% - 1.00% of our wealth each year is probably the right level for you and me but Mr Branson and the Duke of Westminster should be deprived of 10% of their wealth each year.

Actually I think that the purpose of the wealth tax is that Mr Piketty thinks that inequality of income is undemocratic.  My dictionary defines democracy as a form of government in which the sovereign power is in the hands of the people and exercised by them directly or indirectly.  That carries no inference of equality.  I am not a historian either, but my understanding is that even in ancient Greece, democracy was not about equality and indeed not even about all the people but rather all the richer people only.  It seems to me that if my neighbour chooses to work harder than me, or spend less than me, or take more risks than me, it is only fair that he should end up richer than me.  Mr Piketty seems to think this view so outlandish that he does not even attempt to explain why it is wrong.  He simply starts from a position that inequality of wealth is so patently wrong that there is no need to explain why.  Mr Piketty does acknowledge that by and large the rich of today are not the descendants of the rich of 200 years ago, but it seems to be richness per se that offends him.

I am not seeking to defend the super-rich or even the mildly rich.  I am neither for nor against excessive wealth.  I certainly support equality of opportunity because I think that is a basic human right, but I think that equality of wealth has very little to do with equality of opportunity.

But that is by the way.  It is clear that Mr Piketty sees his universal wealth tax as a means of shifting wealth from the rich to the State (as agent of the citizenary).  The State cannot afford to build new schools and hospitals because, for example, Bill Gates has such a large chunk of the US national wealth that he chooses to squander on medical research.  Mr Piketty does not put it quite that bluntly but that is the thrust of his argument.  It relies of course on a number of assumptions that are not explored by Mr Piketty.  Firstly, that, if it had the money, the US government would spent it on schools and hospitals and not on warplanes or nuclear arms.  Secondly, that in the 21^stc  century when everything else is going online, there will be a continuing need for schools and hospitals to the same extent as in the 19^th and 20^th centuries. Thirdly, that a civil servant in Washington who has never run a business is better able to decide how to spend money for the good of mankind than the Bill and Melanie Gates Foundation which has access to the entrepreneurial flair of Mr Gates.  Personally I think there is a better chance of Mr Gates benefitting humanity than of Mr Obama doing so if he had access to an extra 10% of Mr Gates’ wealth.  I may well be wrong.  My point is that Mr Piketty does not consider any of these questions worthy of debate.

The question of the efficacy of private wealth rather than State wealth in the development of society, is one that I would be interested in seeing an economist address.  I hope it is not Mr Piketty though, because once he departs from economics, he seems to depart from the reliance on evidence and substitute his personal opinions instead.  I am myself sceptical whether many, if any innovations were generated by the State in the history of the Western world.  Railways, canals, mines, even hospitals all derived from private enterprise and were taken over by the State only once they had been largely developed.  Even today there seems little appetite for the State to finance innovative national infrastructure projects; on the contrary the State generally delays such projects for year after year because it is inherent in democracy that people are generally not in favour of innovation if it risks disrupting their own lives.  Giving the State extra finance is unlikely to change that!

ROBERT MAAS