Brave New Europe is a blog that regularly reposts material that first appears here, as it also reposts work from those writing on the sites that its editors think of value.
I noted that in their latest mail that they said that one of their best read articles in the last month was by me, but that rather unusually it was one first published in 2017. If it is attracting attention there it seems worth noting again here as well. This is the post:
As the Guardian has reported that:
The richest 0.1% of the world's population have increased their combined wealth by as much as the poorest 50% — or 3.8 billion people — since 1980, according to a report detailing the widening gap between the very rich and poor.
Piketty's report on which this is based is here. It suggests that ten per cent of the world's wealth - and a much larger part of the 27% held by the top 1% of wealth owners - is in tax havens.
Why does this matter? The Guardian notes:
Thomas Piketty [has] warned that inequality has ballooned to “extreme levels” in some countries and said the problem would only get worse unless governments took coordinated action to increase taxes and prevent tax avoidance.
Which does not answer the question, which answer I have to say also appears to be absent in the report itself. My review of it this morning offers no obvious, let alone headline, explanation as to why the issue should be tackled, which I think is a major deficit. Let me offer three headline reasons why this is the case then, before dealing with the counter arguments and then drawing conclusions.
Relative inequality matters
First, this matters because inequality is both absolute and relative, as is poverty. Those with literal minds say that so long as people have sufficient to live on the distribution of the remaining wealth in society is of no consequence, and at a literal level there is, I admit, a logic to this. But it's also literally wrong precisely because we are not literal beings. We are instead relative ones and we undertsand ourselves not just in isolation, as the literal approach implies, but in relation to others who we witness all around us, as the relative appraoch implies. And since the world is now designed to highlight relative difference, largely because we are daily bombarded by advertising messages that are premised on drawing attention to the inadequacies of our relative position to induce demand, relative difference matters enormously, and we are intensely aware of it. If then that relative difference is growing, as the data implies, social stress will result and be manifested in a great many ways, from political breakdown to increases in mental ill health.
Public wealth matters
Second, as the report highlights, at the same time that private wealth and disparities within its distribution are increasing, the value of public, commonly held, wealth is declining. In other words, the capacity of the state to both correct for wealth disparity and to tackle it is reducing. The capture of public wealth for private gain, which has been the objective of a great deal of economic policy for the last 35 or more years has succeeded in achieving this result: wealth appears entrenched.
Inequality is killing capitalism from within
Third, as I argue in my book Dirty Secrets, this is intensely bad news for the future of capitalism. The fact is that risk takers, on whom market capitalism is dependent for real innovation rather than for financial returns, work best when they have little to lose. As a result those on lower income and smaller businesses innovate more with less capital than larger businesses do. And, as importantly, those with wealth to preserve put higher value on that act of preservation than they do on innovation, because their every instinct is to avoid downside risk. The consequence is the rise of the professional wealth manager, as Brooke Harrington has documented, and their deeply risk averse offshore structures that look for rentier returns and not entrepreneurial profit. In addition, the existence of perpetual trusts in offshore jurisdictions means that capital no longer passes between generations: the result is that concentration is bound to increase in the future and the chance that the funds held will be used as risk capital is very low, meaning that capitalism is itself threatened by this increase in wealth concentration.
In other words, I think that what Piketty and his colleagues note is very serious.
The counter argument
But it should be said that there is a counter-argument. For this I am, perhaps surprisingly, turning to Tim Worstall of the Adam Smith Institute who has recently published an article on CapXwhere he suggested:
Inequality is beneficial to us all.
Or rather, as he adds:
If there's more output from an increasingly efficient use of resources, more consumption is made possible. And when we see the people over in the next field being able to consume more by whipping cows at the yoke, then we start to whip cows and we too get richer.
The economists reason it thus: firstly, greater productivity leads to inequality; secondly, the increased inequality pushes all to become more productive.
Hence his conclusion. But even Worstall has the sense to caveat the conclusion:
Or rather, understanding how and why inequality arises can lead to it being beneficial, just as it can be a disaster. If that inequality arises as a product of skimming the production of those proving to be more efficient, or even just the forced confiscation of production itself, then that's not a good idea. For that means that those producing, those more productive, will slow their output and won't be spurred to improve the techniques. This makes all poorer in general even as some wax fat off what is confiscated. Economists are well aware of this; they have called it “rent seeking.”
He then discusses what he thinks rent seeking might be, referring to trade unions, regulation preventing market entry and London cab drivers, which is a highly selective view of rent seeking, because none have driven the gross inequality we are now seeing.
However, I include Worstall's argument for a reason. It is true that some are more productive than others in an economy and it is true that this has always meant, and is likely now to mean, that those who are more productive do earn higher rewards than those who are less productive. In principle I have little argument with this idea: I have no difficulty with there being some differential in earnings within any society and think them inevitable subject to their being a safety net to ensure that all can have access to the resources they need to fully engage in the society in which they live (which means much more than having a basic material standard of living). Importantly though, what Worstall's suggestion implies is that there are very obvious limits to wealth differentials, because the fact is that however clever someone might be the differences in productivity we humans have to offer is not that big.
For example, who can be sure who is the more productive in a business: the person who can use the technology that a company owns or the person in the boardroom who decided to invest in it? There is no obvious answer for a very good reason and that is that their returns are mutually interdependent. Without the skill of the user of technology the person deciding to invest in it can make no return from doing so. So who is the most valuable? Both are, of course, but that suggests that all returns in such situations must tend towards a mean, and not towards diversity, but the latter is what we actually see and that must mean there are faults in the system.
The faults that exacerbate inequality
So why is it, when we look rather more broadly than the absurd list of examples that Worstall uses, that returns are so diverse and inequality is so great as a result? It is precisely because of the impact of the rents Worstall does not name, plus another key factor.
First, let's name the rents. These include limited liability, which enables some to make money at cost to others because debts do not always have to be paid. That's a state provided benefit that should be paid for by higher taxes on income recorded in this way, and on distributions from it.
Then there are the rents facilitated by copyrights and patents, which have more than anything else facilitated the rise of new wealth and the increasing divide in society resulting from the tech economy and the growth in intellectual property rights.
After that there's monopoly power that goes unchallenged by the state even though it is an abuse.
And there are economic externalities such as pollution and the exploitation of natural resources that create rents when not corrected.
This list also ignores rents resulting from the control of land, and its non-taxation in a great many situations.
That also hints at the rent return to lobbying to permit light regulation and low or no tax. This might be at its worst in tax havens but it is commonplace everywhere.
I could go on but the theme should be apparent by now and is that far from the state being the enemy of the rentier they have gone out of their way to capture it to permit perpetuation of their abuse.
Second then let me mention the ‘other factor'. This is that productivity is not fairly distributed. Whatever our natural predispositions, the access we have to education, capital and society's resources influence the extent to which we can reap a return on ability. In other words, productivity is heavily biased by the pre-distribution of wealth and so the two are not independent variables. And in this context, the incredibly generous treatment of wealth by the world's tax systems has clearly helped fuel inequality.
Some conclusions
After saying all of which I draw some obvious conclusions. The first is that we will always have an unequal society and to the extent that the inequality is due to genuine differences in personal productivity, it is not just tolerable, but will always be tolerated by society.
The second is that I suspect that society has some tolerance for inequality at above this level. Parents will always have aspirations for their children and will seek to provide for them. Some are going to be better able to do so than others. I suspect that society has reasonable tolerance for this because most understand it.
But that said society is not, I think, now under any illusions that all wealth disparity arises for these reasons. Vast amounts of both income and wealth inequality now arise for the reasons I have noted, and others like it (like the capture of companies by senior management for personal gain). In proportion tiny amounts arise for the reasons Worstall notes. But the difference is telling.
Few resent the London cab driver their return for learning ‘the knowledge'. Nor do they resent the professional person the excess return they earn for having passed professional exams that afford them an income premium for life (I admit). Come to that, when union membership is widely available to argue that the rent they extract is a bias is a little absurd. If this is inequality then it is within the bounds society can readily accept.
But what is apparent is that the rents I noted impose costs that society is increasingly unwilling to tolerate. And so Piketty et al are right to highlight that the resulting inequalities are excessive and action needs to be taken against them. The contribution of Worstall to this debate is to a) make clear there is a rational justification for some inequality that very few would argue with and b) to suggest that over and above that some levels of inequality may be tolerated as well, of which he provided examples. But his failure to note the real causes of rent induced inequality indicates to what extent the likes of the Adam Smith Institute and other right wing think tanks are part of the problem on this issue by ignoring and even seeking to exacerbate a problem that they know exists.
Action
In that case action is required. Tax is not the only such action, but it's fundamental to progress. I have suggested short term reforms that could increase the tax on income derived from wealth here and have discussed why we need a wealth tax here. I have a chapter on wealth tax in a book linked to the World Bank out soon.
But we also need to crack open wealth in tax havens soon, and that includes refusing to recognise their trusts that are only designed to concentrate wealth. This is possible in the UK, EU and other widely used legal systems where great equality is a national objective. Only then can the abuse of these places be stopped.
And stopped it must be. Some inequality we can live with. But I agree with Tim Worstall for once; that from rents is intolerable. And the vast majority of wealth inequality derives from the exploitation of economic rents.
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There does seem to be some agreement there between you and Tim Worstall that agricultural landowner subsidies and arts subsidies should be consigned to history. Subsidies for rich landowners for re-wilding being demanded by the Royal Family this week, honestly their mouths are open and their hands are out.
All forms of economic rent.
That morsel of agreement makes this a great day.
Arts subsidies are not rents
And you are a troll
Do art subsidies create an over supply of art that would overwise not exist, then it is not rent seeking.
“the vast majority of wealth inequality derives from the exploitation of economic rents.”
You probably think I’m wealthy..I’ve got my own roofing business, started from nothing now employ 15 people and regularly work 60 hour weeks (and that’s not at a desk looking at a computer all day)..and have done for 35years… a lot of wealth has been built from hard graft..though you’ll probably spout some left wing nonsense about the “unfairness” of it all.,
I think you need to know what a rent is – go and check it
I have run a business too
I never said anything about business per se being wrong – or that you are wrong
I suggest you stop making stuff up about me. It really does not help your case, whatever that might be
The point I’m making is a lot of wealth is created through working hard and taking a chance.. you and many others like to very much try to taint those who succeed through hard work. I’m from a nard working class community and the vast majority are aspirational and want to create wealth to achieve a better life for their families.. there is little wonder there is little common ground between the working class and the moaning whinging hard left..
Have you read what I have said because your suggestions about what I am saying and think are utter nonsense
As a person who has run quite a number of businesses I am not condemning what you do at all, presuming you are a fair employer and pay all your taxes
Now, what is your response?
I will re iterate wealth for most people is created through hard work over a lifetime..that includes savings particularly through a pension again accumulated over 40-40yrs for a time when I can’t work.. mainly in shares so inadvertently I have in your world become a “rent seeker” ..so no doubt “deserve” to be taxed to the hilt.. in your view of the world anyway
Geoff
I have no idea where you got your massive chip on your shoulder from
Or why you think you have the right to talk nonsense about me
But because I am not interested in the answers to either question you are banned for time wasting
Richard
Getting rid of rent seeking means there is more room for people like you.
True
This guy’s comments are really illuminating for me. I think there’s something more to examine here in what I’d call the ‘property-political-complex’.
Anything to do with property over the last few decades has boomed and has turned what were once the ‘semi skilled’ working classes into millionaires whether that’s builders, electricians, even landscape gardeners! There is so much to unpack here.
We now have scientists, teachers, academics, health workers, police, civil servants, previously labelled as the ‘middle classes’ who, in general, are completely disrespected* and in many cases are on a financial knife edge if inherited wealth can’t be relied upon for housing/weddings/tuition fees etc.
The tories have got this sussed and exploited it no end.
*note said professor being trashed (not rationally debated) by roofer.
Geoff
I took risk in the mid 1990’s, left a fairly decent job and went back to university to study which led me to getting a job in the public sector. I also have continued to study, completing an MBA part-time whilst working to better myself and improve my skills so that services I help deliver are the best that they can be and so that I can support my family. Whilst studying, I had a part-time job as my grant by that time was paltry.
Through no fault of my own, the Government in 2003 decided to reduce my pension that I’d signed up for contractually even though it was know that public sector pay rates were lower but the pension made up for it; in 2010 another Government decided to cut my pay and conditions, ripping up my contract once again.
My sick leave record is very good; I frequently work weekends and more than my 37.5 hours a week but do not get paid over time – I have to claim it back by not working and the list of things to do get’s longer. I frequently have to carry over untaken leave because I’m so busy through out the year.
Before 2010 my wage was about £2700 above the median wage; now I’m somewhere in the region of that BELOW it.
If this trend continues, by the end of another term of the Tories I maybe in the position where since 2010 I’ve essentially lost so much money that it is equivalent to a whole years take home after tax. One way of looking at it is that I have worked one year for the Government for free by that time. For free. And I’m counting.
And what I’ve described is also the experience of many thousands of other public sector workers.
And then there’s the service itself – housing – which has been prodded and kicked about and under-funded along with the health service, this service and that service for longer than I care remember.
For me, there is no difference between you and me. I’ve tried to accumulate wealth by working too – and look where its got me. I’ve tried to do everything the right way and ended up less secure and less wealthy as a result . And what about the others?
I’d have been better off working in the banking sector, ripping people off with dodgy products like derivatives, getting bonuses and walking away scot-free from my fraudulent behaviour.
Everyone I know BTW who has gone self employed since 2010 are now in dire straights – their income is lower than it was. It’s not as easy to start out on your own as it was when you started mate all those years ago.
And as for you – I know your type, I work with you builders all the time. But this blog isn’t about people like you Geoff -you’re small fry. The people we talk about here are big time, big money corporations and individuals, transnationals etc – richer than you’ll ever be because that hard work which you and I know does not pay that sort of money Geoff – if it ever did.
There’s no need for you to feel hunted here; our eyes are on much bigger fish. Fish that even make you life harder – even if you don’t know it yet.
Your response, Geoff, doesn’t seem to be responding to the substance of the article, and you also resort to insult, which only reflects on you. Since you’re not responding to the key point, which is that wealth gained through rent-seeking isn’t earned, as you say, through hard graft, but rather simply through ownership of property/assets (I don’t think ownership can be called a job), I’m left perplexed at your outrage. I would’ve thought, since working for money is important to you, and recognition of that is important to you, you wouldn’t want people to be paid for simply owning some property (physical or intellectual), through extraction of fees for nothing in return, whilst you’re putting in 60-hour weeks?
🙂
I am rather taken by Eamonn De Valera’s comment that no man is worth £10000 a year
I have always tolerated the rich – I have not really begrudged them anything.
But what I cannot tolerate is how I and many others have begun to get poorer in contrast to the rich.
Getting rich is apparently all about ‘making money’.
The thing is, is that they are not ‘making’ money.
They are merely moving money around from one or more sections of society to theirs. As they gain, others are losing.
That’s not what capitalism is supposed be about.
But then it about what they do with their money. And it seems to me they buy political favours with it which helps them to continue to redistribute to themselves and also distribute to the politicians in their back pockets to keep things that way. That is the out and out corruption of politics and also the law.
That is why we cannot trust the rich. They’ve proven time and time again that the money they have changes their behaviour and money – this simple utility man created to exchange goods and services – becomes the sole objective itself.
This why we do indeed need to have some control over money accumulation – to stop it being used as a power of monopoly. That is why it should be distributed more widely and commensurately in society to promote better economic equality, and especially equality before the law.
So I’m all for controlling the rich’s addiction to money and the power it infuses them with. Just like we have to try to control any other person with an addiction problem. We have to limit their access to what it is they are addicted to stop them harming themselves and others.
And in this case it means wealth taxes.
Relative inequality matters because another word for it is social exclusion.
Public wealth matters because the disparities now in play are as economically dysfunctional as they are obscene, and because – witness the cases of Bill Gates and George Soros – they are anathema to any meaningful democracy.
Some odds and ends.
The Deep End project is an attempt by GPs in Scotland and elsewhere to make improvements to the quality of life of the most deprived patients. One thing that was seen by research was that the people who needed most consultation time from the GP did not get it.Those who needed it least got more consultation time from the GP than average.
It is difficult,if not impossible, to get more GPs into Deep End practices. GP numbers in Scotland have been flat for the last ten years. That is largely due to the under-funding and under-staffing of the NHS in England and the knock-on effects of that on the Barnett formula.
https://www.rcgp.org.uk/clinical-and-research/resources/bright-ideas/deep-end-group.aspx
“A man from the most deprived decile in England can expect to die 9 years earlier, and have 18.3 more years of ill health than a man in the least deprived decile. Similarly, women in the most deprived decile on average die 6.9 years earlier with 18.9 more years of ill health than a woman in the least deprived decile (1). A wide range of social and economic inequalities have been found to influence health including financial situation,…”
In 2019, the Equality Trust said this: “Unfortunately, transparency itself is not enough to effect change, and last year the highest-paid CEO in the country was earning more than 18,500 [times] people on the minimum wage. They were earning £40 per second!”
https://www.theguardian.com/society/2019/apr/26/record-number-of-uk-workers-paid-below-minimum-wage-report
“Voters across all parties overwhelmingly support raising the minimum wage to £15, a new poll has found.
Sixty-five per cent of the public support the policy, which caused a row at Labour’s conference this week after Keir Starmer set himself against it.
Just 14 per cent of the public say they are opposed to the idea, which has strong support across the political spectrum.
Pollster Survation found that 76 per cent of Labour voters and 59 per cent of Tories support the rise, which would significantly raise take-home pay for millions of workers. Just 9 per cent of Labour voters and 23 per cent of Tories were opposed.”
https://www.independent.co.uk/news/uk/politics/15-minimum-wage-starmer-labour-b1930057.html
Thank you