Superphysics Superphysics
Conclusion Part 1

Conclusion of Piketty's Capital in the 21st Century

by Piketty
September 9, 2015 3 minutes  • 605 words
Table of contents

The Central Contradiction of Capitalism

The Central Contradiction of Capitalism is:

r > g

A market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills. It also contains powerful forces of divergence, which are potentially threatening to=

  • democratic societies
  • the values of social justice on which they are based.

The principal destabilizing force is rate of return on private capital r being significantly higher for long periods than the rate of growth of income and output g.

The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages.

  • This inequality is a fundamental logical contradiction.

It turns the entrepreneur into a rentier, more and more dominant over the workers. Once constituted, capital reproduces itself faster than the increase in output. The past devours the future.

The consequences for the long-term dynamics of the wealth distribution are potentially terrifying. This is especially true since=

  • the return on capital varies directly with the initial size of capital
  • this divergence in the wealth distribution is occurring on a global scale

The problem is enormous, and there is no simple solution. Growth can be encouraged by investing in education, knowledge, and nonpolluting technologies. But none of these will raise the growth rate to 4-5% a year.

Only the countries that are catching up with more advanced economies can grow at such rates. Examples are:

  • Europe during the three decades after World War 2
  • China and other emerging countries

The natural growth rate for backward countries, and the planet as a whole, will not exceed 1–1.5% in the long run, no matter what economic policies are adopted.

If the average return on capital of 4–5%, then r > g will again become the norm in the 21st century. This is the same as just before World War I.

In the 20th century, it took two world wars to wipe away the past and significantly reduce the return on capital. It created the illusion that the fundamental structural contradiction of capitalism r > g had been overcome.

Capital income can be taxed heavily to reduce the private return on capital to be less than the growth rate. But this might kill the motor of accumulation and thus further reduce the growth rate. There would no longer be any entrepreneurs who might become rentiers.

The right solution is a progressive annual tax on capital.*

This will prevent an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.

For example, a capital tax schedule with rates of:

  • 0.1% on fortunes under 1m euros
  • 1% fortunes between 1-5m euros
  • 2% between 5-10m euros
  • 5-10% for fortunes of several hundred million euros

This would contain the unlimited growth of global inequality of wealth. This progressive tax on capital will require a high level of international cooperation and regional political integration. Nation-states cannot do this alone.

People fear that such political integration=

  • will undermine the existing achievements of welfare states [that already have high taxation]
  • will only really just create more competition even if such competition cannot change inequality r > g since this inequality is not caused by imperfect competition

But we have no choice. If the people are to regain control of capitalism, we must bet everything on a large-scale democracy.

Larger political communities such as the United States and China have more options. But small European countries who leave the EU will just have even worse frustration and disappointment.

Only regional political integration can lead to effective regulation of the globalized patrimonial 21st century capitalism.

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