Capitalism’s fatal flaw

Economist Thomas Piketty's conclusions on inequality are blowing apart the ideological pillars of modern capitalism

EDMONTON, AB, May 5, 2014/ Troy Media/ – You know you’re a famous economist when you’re being compared to legends like Adam Smith, Karl Marx and John Maynard Keynes. Thomas Piketty’s new book Capital in the Twenty-First Century has stunned the science of economics by demonstrating that rising (wealth) inequality is structural, built-in to the fiber of modern capitalism.

Piketty studied historical returns to capital over 200 years and discovered that they consistently exceeded real growth in wages and output. More importantly – apart from a few decades in the mid-20th century – they have always done so.

His research and his conclusions on inequality are blowing apart the ideological pillars of modern capitalism.

One of the most popular ideological pillars in capitalism today is the notion that – left to their own devices – free markets deliver optimal results, distributing capital efficiently to the most desirable ends and justly rewarding individuals for their contributions to economic productivity.

Economists assure the public that free markets trend toward equilibrium, and that equality is assured by the ‘trickle down’ effect.

The notion of “a rising tide that lifts all boats,” popularized by United States President John F. Kennedy, argues that economic growth – however accomplished – is by definition a social good, in that the benefits of economic growth will automatically ‘trickle down’. In other words, spread effortlessly throughout all sectors and classes in society.

Regrettably, none of these assumptions are true. Even before Piketty’s research, this optimistic notion was taking a beating. The gap between the rich and everyone else has widened dramatically. U.S. government statistics indicate that in the 50 years from 1960 to 2010, economic productivity almost quadrupled, while median household income essentially stagnated in real terms.

The results are shocking. Today the top 1 per cent of Americans own 40 per cent of all asset wealth in the country and take home 24 per cent of all income. Meanwhile, the bottom 80 per cent takes home only 7 per cent of the national income; almost one in five Americans live in the starvation zone, below the poverty line.

None of this was anticipated. For decades now economists have been telling us that Western industrial economies are the pinnacle of capitalist achievement: we are the ‘developed’ economies after all. As a result of this mental block, the trauma of our present circumstances is shocking.

The question is, if the economic data is so readily available and the effects so observable, why has it taken this long for economists to realize the obvious?

The reason they missed the obvious is economists don’t study capital; the focus of their research is squarely centered on the exchange process. In other words they analyze markets, supply and demand dynamics, and other flow side effects; that’s about it. The shocking truth is the vast majority of academic economists would never have discovered what Piketty found.

The truth is, modern (neoclassical) economists have created a politically safe and uncontroversial area of study, where the larger (messy) questions of capital concentration and inequality are simply out of bounds.

This narrow area of analysis hides from economists most, if not all, of the ethical and political issues that drive conflict in modern capitalism. These problems can’t be addressed because a discussion of them (as valuable as it might be) is not technically economics.

And more importantly for the rest of us, all the economic actors that take their lead from the science of economics, including politicians and economic policymakers, the press, the accounting profession, business school program heads, and front-line business managers, have basically fallen in line with this logic.

So as a society we have come to accept the economic myths and half-truths and hope that everything works out for the best.

Controversy of this sort is nothing new. Economics, despite being a highly-respected and sophisticated science, has been on the defensive for centuries. It was in difficulty even before Thomas Carlyle levelled his famous “dismal science” charge in 1850. Now, thanks to Piketty, economists are back in the firing line.

Piketty has reminded economists of some hard realities, and warned the rest of us that if we want equality of opportunity and a generalized prosperity in our society we’re going to have to take matters into our own hands.

Leaving our economic fate to economists and market forces alone will not get the job done.

Robert McGarvey is an economic historian and co-founder of the Genuine Wealth Institute, an Alberta-based think tank dedicated to helping businesses, communities and nations built communities of wellbeing. Robert is the author of The Creative Revolution, an historical guide to the future of capitalism.

Read more Robert McGarvey

Follow Robert via RSS

Download this edited column. Prices start at $14, based on circulation/monthly unique website visitors. Login at Troy Media Marketplace.

Unlimited Access member? Login for instant download.

Troy Media Marketplace © 2014 – All Rights Reserved

One year contract. Weekly

You must be logged in to post a comment Login