What’s Missing in the Debate About Thomas Piketty?

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The theories famously presented in Thomas Piketty’s Capital in the Twenty First Century can be summarily boiled down to: "Whoever owns capital accumulates ever more of it, and the widening wage gap further exacerbates this concentration."

But is this necessarily a capitalist law of nature, as Piketty asserts, or is he ultimately introducing a different debate that should have been addressed ages ago: how to unite labor and capital without one hurting the other?

Income and inequality

Piketty’s chain of argument comes complete with an inequality formula: r > g. The r is return generated on capital that is greater than total economic growth, or g. According to Piketty, the interaction of these two fundamental components of capitalism results in inequality, which is further exacerbated by the growing shift away from labor income toward capital income. Here, Piketty sees growing signs of dual inequality in terms of wages and capital ownership.

The answer is equity ownership

Although the discussions surrounding the theories voiced by the French economist have been extremely diverse, one key question is not being asked: If capitalism, defined as an economic model that is based on private ownership and subject to the laws of a market economy, truly is capable of producing prosperity, and if the challenge is to counter the concentration of capital without abolishing capitalism, then why not eliminate the divide between labor and capital via equity ownership? This aspect seems to be missing in the debate about Piketty’s theories. Although Piketty suggests a few reforms—including a global tax on wealth—he ignores the option of equity ownership by wage earners.

Where income comes from

Income can be generally understood to mean earnings from both labor and investments. Ultimately, however, it is irrelevant which type of earnings make up total income in an economy. During periods of major demographic and technological change in particular, focusing less on this distinction would be an effective means of preventing the further concentration of labor income and capital that Piketty fears. The income side of total economic added value offers some hints about the declining importance of labor vs. capital income.

The percentage of US gross domestic product contributed by wages and salaries dropped from around 50 per cent in the 1970s to around 41 per cent by the middle of the decade, according to the US Department of Commerce’s Bureau of Economic Analysis. Or, to put it another way, if you analyze the income side of GDP, the share contributed by capital income has grown to around 60 per cent. Significantly more than one US dollar out of every two generated as income accrues to owners of capital. The trend in Europe differs from one country to the next, but a shift away from earned income and toward investment income can also be seen there.

Robots to the rescue

Apart from equity ownership’s importance in being able to participate in capital income, it also helps society cope with vast demographic and technological changes. If the workforce is shrinking because of baby-boomer retirement, advanced robotics and automation could fill the void. Why not let machines do the work for humans and, consequently, replace or supplement wages and pensions with investment income?

Creating a more highly automated and advanced economy would solve several problems at once: a declining workforce, machines displacing humans from the remaining jobs, and the issues caused by concentration of capital and declining income. Eventually, human employees would become the owners of capital. That should be the first choice and final answer in the debate about inequality. So why not support capital formation in the hands of the workforce by investing savings in equities?

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


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© Allianz Global Investors

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