Heroes Not Zombies

If you haven’t heard about Thomas Picketty, the economist, and his vast work, “Capital”, then start here. His formula which explains increasing inequality is succinct and clear –

inequality grows when the rate of return on capital (“r”) is larger than the rate of growth in the economy (“g”); or, in his already well-known formulation, inequality grows when “r > g.”

He makes many, well argued points, but I want to focus just on this one about wealth producing wealth and how that trends towards a greater and greater share of wealth being inherited.

the share of inherited wealth in total wealth has grown steadily since the 1970s. Inherited wealth once again accounted for the majority of wealth in the 1980s, and according to the latest available figures it represents roughly two-thirds of private capital in France in 2010, compared with barely one-third of capital accumulated from savings. In view of today’s very high inheritance flows, it is quite likely, if current trends continue, that the share of inherited wealth will continue to grow in the decades to come, surpassing 70 percent by 2020 and approaching 80 percent in the 2030s. Piketty says that the “normal” state of affairs in which anyone has a crack at fame and fortune is a blip in the long run of human history that has been largely characterized by a self-serving, greedy hereditary aristocracy whose comfort was only possible because of the enmiseration of nearly everyone else. Absent some kind of extraordinary intervention, hereditary wealth will reassert itself as the primary political mover in our world. The people at the top have always convinced themselves that they live in a meritocracy, because hey, they’re the best people they know, and they’re at the top of the pyramid. QED. But this story is impossible to square with the data

He claims we now have a new aristocracy who increasingly live on the wealth created by their wealth…..not by their efforts, contributions, activities or anything else.

Take a particularly clear example at the very top of the global wealth hierarchy. Between 1990 and 2010, the fortune of Bill Gates — the founder of Microsoft, the world leader in operating systems, and the very incarnation of entrepreneurial wealth and number one in the Forbes rankings for more than ten years — increased from $4 billion to $50 billion. At the same time, the fortune of Liliane Bettencourt — the heiress of L’Oréal, the world leader in cosmetics, founded by her father Eugène Schueller, who in 1907 invented a range of hair dyes that were destined to do well in a way reminiscent of César Birotteau’s success with perfume a century earlier — increased from $2 billion to $25 billion, again according to Forbes. In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working. Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.

Picketty’s proposed solution is a global wealth tax, but I can’t imagine that being agreed any time soon! A Marxist (as opposed to Capitalist) analysis I suspect would say only revolution or total collapse of the economic/social order will bring this concentration of wealth to an end.