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The Crisis of Neoclassical Economics (Part II)

Increasing Inequality: A law of Capitalism

Prior to the publication of Piketty’s book, Piketty and Saez used Internal Revebue Service data to track US income inequality from 1913 to 2010. These data show that the rise in inequality, as measured by the share of income going to the top 1 percent of “tax units” (not exactly comparable to families or households), in much greater in the United States than in any other rich capitalist country, although the United Kingdom is not far behind.

Income inequality in the US has not been this high since the early Roaring Twenties depicted in F. Scott Fitzegrald’s The Great Gatsby.

The richest 1 percent now takes home more than 20% of the nation’s entire income, up from about 9% in the 1970s. In addition, the top 1% income recipients has seized most of the past few decades’ gains in income. Of the increase in total household incomes from 1977 to 2007, the richest 1% got almost 60%, ant the richest 0.1% (the top one-thousands-in 2010, those earning more than $1.5 million a year) garnered roughly half of that. By comparison, the poorest 90%saw their income grow by “less than 0.5% per year.
Expanding upon these earlier conclusions, Piketty in Capital in the Twenty-First Century elucidates four key findings. First, similar trends, though less marked than in the US, are found in almost every part of the globe. Second, in the US, a major factor in this trend is the rise of an elite of “super managers”, top officials of the largest corporations who take home enormous salaries and have much power that they can literally set their own pay.

Third, Piketty stresses that the richest 1% enjoyed similar distance from the rest of us throughout most of capitalism’s history. The only period in which the capital-income ratio becomes more equal and the dominance of inherited wealth diminishes in the rich countries as a whole is that between the beginning of the WWI in 1914 and the mid-1970s. This was a truly exceptional time, marked by “shocks” to the system: two catastrophe wars, the Bolshevik Revolution, the Great Depression, and the rise of the social welfare state after the WWII. Heavy taxes were placed on top of incomes, fortunes were lost in both the wars and the Depression, and working-class movements arose and forced higher wages, benefits, and social insurance from employers and governments-both of which were willing to make concessions if only to avoid a deeper radicalization of the working class. However, once elites regained their bearings, capitalism began to return to the norm of growing inequality.

Fourth, during the sixty-odd years of expanding equality, a substantial “middle” class rose-professionals, civil servants, and unionized workers-which, while not wealth, had enough income to live well above subsistence and to accumulate a certain amount of wealth, mainly in the form of housing. The rise of this intermediate “petty patrimonial” propertied class of home owners, he argues, has had profound effects on the political trajectory of the rich nations, because there is now a sizeable portion of society outside the upper class intent on maintaining the value of their wealth and increasing it if possible.

Most individuals earn incomes by working. However, very substantial incomes derive from ownership of wealth. What is more, certain types of wealth, such as stocks, bonds, and other financial instruments, represent control over the commanding heights of the economy and government. If these are divided in an unequal manner, then so is the power that flows from their ownership. The data show with great clarity that the distribution of wealth is extraordinarily unequal and likely to become more so.

To make matters worse, those with the largest amounts of capital (wealth) almost always get a higher rate of return on their wealth than do those lesser amount. Piketty gives a telling example of this by looking at the returns garnered by the endowments of US colleges and universities. He finds that there is a direct and significant correlation between the size of the endowment and the rate of return on it. Between 1980 and 2010, institutions with endowments of less than $100 million received a return of 6.2%, while those with riches $1 billion and over got 8.8%. At the top of the heap were Harvard, Princeton, and Yale, which “earned” an average of 10.2%. Needless to say, when those already extraordinarily rich can obtain a higher return on their money than everyone else, their separation from the rest becomes that much greater.

Reality could not be different than what neoclassical theory leads one to expect. In the US, real weekly earning for all workers have actually declined since the 1970s and are now more than 10% below their level of four decades ago. This reflects both the stagnation of wages and the growth of part-time employment. Even when considering real median family income that includes many two-earner households there has been a decrease of around 9%from 1999 to 2012-51.

Source: DIGEST 2015
By: John B. Foster and Michael D. Yates

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