Blog Archives

The Crisis of Capital

The undeniable reality of the 21st century economy is that capital has gained while labor has stagnated. While various critics quibbled about his methodology, Thomas Piketty’s core finding–that capital expanded faster than GDP and wages/salaries (i.e. earned income from labor)–is visible in these charts.

Real wages have gone nowhere for decades. Only the top 5% of wage earners have outpaced inflation’s erosion of the purchasing power of their earnings.

Household net worth has soared $60 trillion while GDP expanded by $9 trillion.Compare the relative growth trajectories of the economy and net worth of assets. Clearly, capital has expanded at rates far above the expansion rate of the economy.

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Is There Capitalism After Cronyism?

The more the Status Quo pursues the same old Keynesian Cargo Cult script of central planning and free money for financiers, the more self-liquidating the system becomes.

Judging by the mainstream media, the most pressing problems facing capitalism are:

1) income inequality, the basis of Thomas Piketty’s bestseller Capital in the Twenty-First Century, and

2) the failure of laissez-faire markets to regulate their excesses, a common critique encapsulated by Paul Craig Roberts’ recent book The Failure of Laissez Faire Capitalism.

These critiques (and many similar diagnoses) reach a widely shared conclusion: capitalism must be reformed to save it from itself.

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A Critique of Piketty’s Solution to Widening Wealth Inequality

The real problem with Piketty’s taxation/social welfare solution to wealth inequality is that it does nothing to change the source of systemic inequality, debt-based neofeudalism and neocolonialism.

Those of us concerned by widening wealth/income inequality have been following the work of Thomas Piketty and Emmanuel Saez for many years. I’ve cited their analysis many times; for example: Two Americas: The Gap Between the Top 5% and the Bottom 95% Widens (August 18, 2010).

Thomas Piketty has taken his meticulous research and turned it into a book, Capital in the Twenty-First Century, that has catalyzed the discussion of widening inequality by essentially proving that capital expands at rates far above the overall economy and wages. Since capital grows much faster than wages or the underlying economy, the gap between earned income and unearned income (rents) widens, along with the net worth of those who own capital and those who own little to no capital.

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What’s the Primary Cause of Wealth Inequality? Financialization

Financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

Emmanuel Saez and Thomas Piketty are leading lights in the exploration of rising wealth inequality. Both are academic economists who have devoted considerable time and effort to assembling data that deepens our understanding of the issues.

For example, Saez’s recent essay Striking it Richer: The Evolution of Top Incomes in the United States, provides an in-depth look at the widening gulf between the top 1% and the bottom 90% from 2009 to 2012.

Here is a chart of the top 10% share of income, based on their research: (the note in red marking the beginning of financialization in 1982 is my own)

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