PIKETTY: Is Inequality Innate to Capitalism?

inequality it's nasty its mean and it's getting obscene but for the longest time we haven't really had much of a sense of just how bad inequality is you see the rich in their macaque nations to avoid paying higher rates of taxes also do a pretty good job of hiding their information from economists therefore the task of compiling the data alone is a formidable task and perhaps the single most important achievement doing all of this was published in 2013 it was known as capital in the 21st century and it was published by French economist Thomas Piketty now perhaps the single most important thing that Suffolk any apart from a lot of his peers was that in working in collaboration partly particularly with the California based economist Emmanuel Saez he was able to get an incredible amount of tax data in order to do estimations going back more than two centuries for the French he was able to go back even further in light of the sheer significance of the amount of work that the Cadi put into his book one would think that it would remain all the rage after all inequality remains one of the defining issues of contemporary times and at first it seemed like this book was really gonna go for the top call Krugman in the New York Times wrote a glowing review of it the Financial Times named it one of their top 10 books of the year and more broadly the intelligentsia seemed ready to finally confront these staggering levels of inequality in our societies but that wasn't ultimately meant to be as it would turn out 2013 would be the year in which capital in the twenty-first century burned right and then burned out in fact it was commonly noted that Amazon in surveying data from readers of capital in the 21st century on Kindle found that many readers scarcely got past at the 27th page in essence the fact that his book was a book a tome and not a manifesto proved to be both its blessing in academic circles and its downfall amongst the popular press but even that isn't quite true well it's undeniably the case that piketty's and his collaborators most importantly the california-based economist Emmanuel Saez put an incredible amount of work into their data incidentally which it's all available online even academia as some have gone to note has really shown the book in terms of serious engagement with it despite its predictions this is of course where the internet kicks in today we're going to be talking about inequality specifically through the lengths of the Ketty I'm going to walk you through the major arguments that Paquette e presents and you're going to be disarmed by how simple they are and yet in light of the sheer amount of resources and empirical data that back it up I really want to impress to you both how serious the issue of inequality is and how demonstrable Paquette E is able to confirm some of the troubling trends that define contemporary society we'll be talking about all this and more on today's adapte so like all good things Piketty decides to work in threes there are three laws that he asserts in his book that broadly prefigured a lot of the analysis that he does I'm gonna walk you through all of them they're basically just equations and inequalities and don't be put off by the math enos if you think long and hard about it and I'll do my best to get you there you'll find that you're able to get a pretty straightforward toolkit for analyzing and equality better yet once you understand what the nature of the fundamental laws are a lot of the data speaks for itself so let's move on to the first law this law is one that stipulates that alpha equals beta times R what does that even mean well stripped of jargon it means this alpha which for Poquette e equals the pure rate of return on capital must be equal to beta which is equal to the capital income ratio multiplied by R the pure rate of return on capital still not following with me let's break it down one level further beta is actually explained by the second law beta is equal to the amount of capital which is all of the productive assets that exist in society divided by the income or Y or you can think of it more broadly it's like the GDP of society so in other words we're measuring the stock of total wealth that exists in society as a ratio over the total amount of income that exists in society that ratio is equal to beta Nobita Coquet II analyzes typically tends to fall in the range of being between four and seven don't worry we're going to get there so knowing that beta tends to equal between four and seven what Paquette e is saying in a roundabout accounting type way is that the amount of wealth that exists collectively in society tends to be worth between four and seven years worth of the annual income that everybody in society draws in okay so now that we have beta we need to plug it back in to our first law you recall that the first law states that alpha or capital share of income is equal to beta remember the capital income ratio multiplied by R which is equal to the pure rate of return on capital which tends to wobble between four and six percent now remember that's the pure rate of return on capital meaning after you start out things like inflation and other things that tend to reduce the return on assets so what Paquette e is saying is not just a statement of a law but in a way a kind of accounting identity he's saying the amount of wealth that those in society pull home from owning capital is equal to the ratio of the amount of capital relative to the size of the economy multiplied by how much on average they can pull from it so what you're seeing here is that he's drawing a relationship between the store of previously accumulated wealth and the amount that those who own that wealth pull from the wider society typically this amount has been believed to be relatively stable in fact one famous British economist known as Nicholas Kaldor named the stability of alpha the capital income ratio as being one of his fundamental Kaldur facts stipulating that it was an empirical regularity that roughly forty percent of all of the wealth in society is going to be earned by those who own the means of production housing capital the like for those that think that our contemporary society is a paragon of individualism where by muscle alone you're able to make your way in the world and own what you keep the fact that about for and every $10 is uncontroversial believed to be owed to those who already own wealth and assets should probably be thinking a little deeper about the assumptions of their belief but in any case we're moving on alpha equals beta times R that's the relationship that we have we now need to ask what influences the capital income ratio that beta that we've been talking about beta Paquette e says in his second law is influenced by the savings rate divided by the growth rate now an intuitive way this makes a lot of sense just as we've said that it's the capital rate over income so – does it make sense that the amount of capital the amount of collective wealth that we store should be directly related to the savings rate and conversely that the income level in society should be proportional to the growth in the economy as a whole so hopefully I've been able to get you through the first two laws in a pretty straightforward way now I promise this is going to get less boring and academic in a moment but it's really important that you understand those fundamental bits because they're foundational to what comes after and it's so important that piketty's spends quite literally about 400 of those pages discussing and analyzing the nature of these equations and relationships no wonder no one got past page 27 now what piketty's says is that beta has a tendency to rise over time and the reason for this is stipulated in his third law which states R is greater than G don't worry we'll unpack R remember from the first equation is the pure rate of return on capital that's the amount on average after inflation and the like that those who own wealth are able to pull on their assets and GE if you'll remember from our second equation is the average rate of growth in the economy in a broader sense what Hetty is saying is on average the amount the rate at which people earn income from owning things tends to consistently grow faster than the rate at which the economy overall grows and therefore the rate at which wages for most people tends to rise as a result of this fact beta which from the first equation tends to plug directly to capital share of income has a tendency to rise over time importantly for him and in Contra distinction to people like Nicholas Kaldor would pick any notices is that the fact that beat arises over time rather than remaining flat is important because it's only been punctuated by two events in the last century unhelpfully for us those were World War 1 and World War 2 hardly a good precedent again what Paquette ii is arguing is that the tendency of capital to accumulate itself consistently outstrips the growth of the economy as a whole and as a result the concentration of wealth and income into fewer hands tends to be self reinforcing in the 20th century this was unquestionably true punctuated only again by confiscatory rates of Taxation hyperinflation and literally total war within and between societies that's the dire prediction that we're dealing with but pick any shows further is that not only was beat arising and out there for alpha rising in the general rate of inequality rising but that after it was punctuated by the two world wars he'd kept right on rising to the present perhaps one of the most distressing and contemporary findings the Paquette II notes is that today in countries like the United States France the UK really globally inequality is almost universally on the rise and in many countries like the United States and France is higher than it was in the roaring 20s in the case of the US and Anabella peak which is a period in Taurus for equality in France around the turn of the 19th century now what does this mean for us today now at this point I want to add a little bit of a caveat because I know a lot of people are saying ok sure maybe inequality is rising here and there and maybe there are some super rich but laws of supply and demand market competition surely all of these things are whittling down levels of inequality right know in piketty's own words the fact that capital yields income which in accordance with the original meaning of the word we refer back to as the annual rent Purdue by capital has absolutely nothing to do with imperfect with the problem of imperfect competition or monopoly if capital plays a useful role in the process of production it is natural that it should be paid when growth is slow it is almost inevitable that this return on capital is significantly higher than the growth rate which automatically bestows outsized importance on inequalities of wealth accumulated in the past this logical contradiction cannot be resolved by a dose of additional competition rent is not an imperfection in the market it is rather the consequence of a pure and perfect market for capital as economists understand it straight from the book in short this isn't something that we can simply legislate away it is a fundamental defect of the system and it demands robust action to be fixed so we've been dealt a pretty dire hand what Paquette ii has told us through his three laws is that there is an inexorable tendency towards inequality in capitalistic market societies these tendencies are not structural flaws they exist by design and they demand incredibly robust or if history is any guide a completely casts traffic action in order to be solved arrested or reversed what are we gonna make of this how does this flavor our contemporary politics to meet the Cadi is important today as in 2013 and indeed since he began collecting research not because of its a merely academic question because this prefigures much of our politics today the take away should be very clear in an era of record inequality which I've discussed in previous videos anyone who isn't seriously able to discuss these issues is not really seriously engaged in politics people who want to promote incremental reforms on the side are all well and good if they're well-meaning but often the reality is they're not well-meaning and they're simply trying to evade fundamental questions when people today for example advocate for a $15 minimum wage as the fight for 15 has most famously done they're seen as economic radicals were advocating for a form of economics that is simply untenable or against business savvy but this couldn't be further from the truth apart from the fact that had the minimum wage merely tracked with inflation in productivity many surveys find that the minimum wage wounded' today if tracked from levels in roughly the 1960s the about if not more than twenty dollars there's a real foundational question that we need to ask about our form of economics and politics today are we seriously committed to having a more fair egalitarian society in which all members are able to equally participate or are we simply interested in perpetuating the inequalities of the past as far into the future as we can it's no surprise to most that they don't feel like politics engages them but by nature of how our economy has run we really couldn't expect any other outcome if we're serious about living in a democracy and not merely some form of plutocracy then fundamental reforms in the way that income is distributed and the way that capital is allocated is an essential first point initiatives recently proposed by senator Bernie Sanders are a good example of how we can help fix this by D linking the divide between capital and labor we can help more equitably distribute the inefficiencies and inequalities that tend to be produced by market societies but ultimately it is a product of rational deliberation and conscious choice that will take us there and it will require some strident measures to those that simply think that this is a far left dogma apart from the fact that empirically if one looks at polling it's the opposite of the case I can turn to even the words of the most famous moderate to classical liberals from one point the laws and conditions of the production of wealth partake of the character of physical truths there is nothing optional or arbitrary about them it is not so with the distribution of wealth that is a matter of human institution solely the things once were mankind individually or collectively can do with them as they like the lesson from Poquette II is clear today as in the past inequality rules but will it rule the future hey guys thanks so much for watching the video it's really cool to be able to do these and I love just being able to share some of my nerdy thoughts with the world I've been posting on Reddit around and I've gotten some really nice replies people have given some feedback we're doing our best to integrate those if you have any ideas any constructive comments or criticisms always happy to hear them and if you have any videos topics that you'd like us to cover of course always happy to do those as well thanks again for watching and as always don't forget to Like and subscribe

  1. I just started trying to learn macroeconomics, so that I could see if my belief in socialism can be justified, past the moral arguments. Nice to see some more digestible content about more "progressive" economics, so I don't have to learn everything about them through books. Learning everything through books and not through conversation makes me feel like maybe noone would know wth I was talking about, if I was to try and explain my views

  2. Love the topics you present and how thoroughly you present them, but … those hand gestures are sometimes pretty distracting.

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