Piketty’s Historical Perspective on Economic Inequality

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The debate over income inequality and job loses in the U.S. too often devolves to overly simplistic and narrow arguments. Thankfully, deeper and more thoughtful analyses are emerging, and one of those — French economist Thomas Piketty’s recently-translated book, Capital in the Twenty-First Century — is making waves, at least among the center-left of the political spectrum in the United States.  And it is a major contribution to the inequality debate.  He takes a historical view of inequality, arguing that:

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”

This long-term trend, he says, accounts for the dramatic growth of economic inequality over the last thirty years. Piketty’s historical perspective reminds us that, in seeking to understand decades-long economic trends, we might be taking a view that is too narrow and too short-term.  It is worth keeping a wider perspective when it comes to thinking of possible policy responses to these trends.

This wider perspective, backed by detailed analyses of new historical data sets, promises to generate some spirited debate in the coming years.  It provides a useful counterpoint, moreover, to the continuing drum beat of articles and books, such as the very thoughtful best-selling The Second Machine Age, linking job loss and economic inequality to the more recent spread of high technology and software throughout modern economies.

The reality of inequality is far more complex.  For one thing, generalized talk of economic inequality masks several different recent developments: a fall in labor’s share of total income, an increase in the share of compensation going to top executives, and an increase in economic inequality among employees.

Moreover, short-term causal factors that might contribute to these different types of inequality are hard to disentangle.  The rise in inequality has been associated with the intensification of skills-biased technology, which increases the demand for skilled workers, and to globalization, which decreases the bargaining power of workers and decreases the pricing leverage of companies. Now, a recent study links inequality to another recent development the authors call financialization: an increase in the extent to which non-financial corporations in the United States earn income from providing financial services in addition to the core products and services that they also provide. How financialization relates to these other factors needs further study.

The role of software needs to be assessed in a fuller way as well. Too often software is linked to job loss based on nothing more than casual empiricism – like noting that if there are fewer accountants, it must be because of accounting software.  The net effect of software on job creation can’t be established simply by noticing that a job that used to take several people can now be done by one person and some software.  Unfortunately, this is how too many people approach the current debate.  The reality is that, as software spreads through the economy, it contributes to GDP, exports and employment in myriad direct and indirect ways.  SIIA will continue to examine the role of software in the economy in the coming year.

Mark Mark MacCarthy, Senior Vice President, Public Policy at SIIA, directs SIIA’s public policy initiatives in the areas of intellectual property enforcement, information privacy, cybersecurity, cloud computing and the promotion of educational technology. Follow Mark on Twitter at @Mark_MacCarthy.