Question

Discuss Thomas piketty's main arguments related to wealth and income inequalities in the western world.   

Don't just provide link, explain here properly

Answer 1

Piketty's argument is that, in an economy where the rate of return on capital outstrips the rate of growth, inherited wealth will always grow faster than earned wealth. So the fact that rich kids can swan aimlessly from gap year to internship to a job at father's bank/ministry/TV network – while the poor kids sweat into their barista uniforms – is not an accident: it is the system working normally.

If you get slow growth alongside better financial returns, then inherited wealth will, on average, "dominate wealth amassed from a lifetime's labour by a wide margin", says Piketty. Wealth will concentrate to levels incompatible with democracy, let alone social justice. Capitalism, in short, automatically creates levels of inequality that are unsustainable. The rising wealth of the 1% is neither a blip, nor rhetoric.

Piketty accepts that the fruits of economic maturity – skills, training and education of the workforce – do promote greater equality. But they can be offset by a more fundamental tendency towards inequality, which is unleashed wherever demographics or low taxation or weak labour organisation allows it.

Piketty’s strategy is to start with a panoramic reading of the data across space and time, and then work out from there. He and a group of associates, most notably Emmanuel Saez, another young French economist, a professor at Berkeley, and Anthony B. Atkinson of Oxford, the pioneer and gray eminence of modern inequality studies, have labored hard to compile an enormous database that is still being extended and refined. It provides the empirical foundation for Piketty’s argument.

Piketty’s argument and conclusions build on long historical series of data on capital, wealth, income, and tax returns, primarily from the author’s native France, the United Kingdom, and the United States. For lack of comparable series for all but a few developing countries, Piketty cannot say much about the dynamics of inequality in the developing world, where almost six of the world’s seven billion people live, and where about half of world product is now generated; nor can he address whether today’s thoroughly globalized form of capitalism is fueling global inequality.

Noneconomists will find Piketty’s argument easy to follow independent of the three mathematical relationships (his “fundamental laws of capitalism”) that constitute his model. Simply put, as long as the rate of return to all kinds of wealth r (5 percent a year, for example) exceeds the rate of growth of an economy g (1 percent a year, for example), the stock of capital (or wealth) in an economy will increase and the share of capital in national income will grow. As that stock and its income from capital increase relative to total income in an economy, those who own the capital, and those who inherit some of it, need only reinvest enough of it to grow ever wealthier.

Not all economists have been convinced by Piketty’s explanation though. The most prominent sceptic is the New York University economist, Debraj Ray. Ray agrees with Solow on the fact that Piketty has come up with a fairly robust description of historical trends in inequality in the developed world but finds Piketty’s explanation based on the divergence between the rate of return to capital (r) and the rate of economic growth (g) unconvincing. In a blog post, Ray points out that such an explanation (r>g causing widening inequality) is problematic because we are then trying to explain one endogenous variable with other endogenous variables. Also, what is driving inequality is not the mere fact that the rate of return on capital is greater than the rate of growth but the implicit assumption in Piketty’s argument that owners of capital save more than others. It is this assumption that is driving Piketty’s main result, Ray argues. If the propensity of the rich to save were lower, or they choose not to save in the form of dividend-paying capital assets, Piketty’s thesis would not hold true, Ray argues.

Piketty, however, finds the enormous inequality that he documents deeply problematic in itself. Why? Not because it is a worrying signal of unequal opportunity. Instead, he fears for the future of the social state that developed in the postwar democracies of the advanced economies. In that sense he is very much an economist with French (not Anglo-Saxon) sensibilities. Nor is his concern that—in the textbook warning—taxes impose deadweight losses on economies (for example, by reducing incentives to work) or that high government spending can be inefficient and wasteful. His concern is political: he worries about the political ability of today’s rich democracies, as wealth becomes increasingly concentrated and global, to finance the health, education, and social insurance typical of the European social state. (In fact he is at some pains to clarify that he is not arguing for redistribution per se. The “modern redistribution” of today’s Western social states is not about “transferring income from rich to poor, at least not in so explicit a way.

Piketty’s Proposal
What would Piketty do about inequality and its pernicious effects? He calls for progressive income taxes and, even better, more progressive wealth and estate taxes. The progressive income tax, he explains, was first invented in the early twentieth century in European countries and in the United States. In the United States it was installed in the Progressive Era of Teddy Roosevelt—not for revenue purposes but to avoid the concentration of wealth associated with the leisure aristocracy of class-ridden Europe. After World War I top marginal income tax rates skyrocketed to almost 80 percent in France, Japan, the United Kingdom, and the United States; in the United States they remained at or above 70 percent until 1980.