THERE is a book that has been exciting the international economic community lately. It is titled Capital in the Twenty-First Century (Harvard University Press, 2014), written by French economist Thomas Piketty and translated into English by Arthur Goldhammer. After decades of focusing on development—in particular, how to increase economic growth—economists are being redirected by this tremendous book to the issue of distribution. We in the Philippines should be interested in the book, given that we have been riveted to the problem of poverty in the last several decades.
In Piketty’s words, do the dynamics of economic change inevitably lead to the concentration of wealth in ever fewer hands, or do they lead to reduced inequality and greater harmony among the classes?
After analyzing data on the wealth and income of various countries dating back to some 300 years, Piketty tells us that inequality, already evident in the earliest societies, rose to an extreme degree during the Industrial Revolution, came down steadily at the end of World War II, and then began going up again. Developments in social life reflected these changes: revolutionary ferment in the late 19th century, when capitalism was emerging; relative peace and quiet in the 50 years that followed; and renewed social upheaval over growing inequality in the current generation.
The most disturbing finding of Piketty, however, is that capital will become even more dominant as we approach 2100. In his fundamental equation B = r/g, B—the capital intensity of gross domestic product—increases because r—the rate of return to capital—is higher than g, which is the growth rate of the economy. This will deepen and widen the inequality between a capital-owning class and a working class.
Worse, Piketty says, there is nothing in the capitalist system to halt or slow down this slide to the abyss, and any action to slow it down or halt it must come from outside the system. Historically, this outside force has come only from wars and depressions.
What is in store for capitalist societies? More wars and depressions? More instability? More Occupy movements?
At the end of his magnum opus, Piketty proposes, in addition to strengthening governments in executing bold social-development programs, the imposition and collection of a global progressive tax on capital, a counterpart to the progressive income tax.
Our reaction? We admire Piketty’s analysis, but do not know exactly how to respond to his tax proposal. We in the Philippines are embarked on attracting as much foreign investments as we can for the acceleration of our country’s development. We would want to make the country as congenial as it can be to foreign investors, as well as to our domestic ones. We cannot afford to talk of a progressive tax on capital. Not yet, anyway.
Image credits: Jimbo Albano