The novels of Jane Austen, Honore de Balzac or Henry James, in which civilized life was confined to a small percentage of the population and the only way most people could acquire significant wealth was to inherit it or marry it.
According to Thomas Piketty’s Capital in the Twenty-First Century, there is nothing to stop that kind of world from coming back.
Piketty’s basic argument goes as follows:
• If the rate of return on investment is a higher percentage than the rate of economic growth, which he expresses as r > g, the owners of investment property will get an ever-larger share of national income.
• R > g is the normal state of affairs.
• Ownership of wealth is distributed even more unequally than income. The higher the share of income that comes from wealth, the more unequal it will be.
• The larger the amount of wealth you own, the faster it is likely to compound. So not only do the rich become richer at a faster rate than ordinary people, the super-rich become richer at a faster rate than the ordinary rich.
• At some point the process levels off, but the leveling-off point may not come until inequality reaches a point that we associate with 18th century Europe or the Third World
The economic prosperity and relative equality during 1945-1975 were made possible by the destruction of capital during the Great Depression and the two World Wars, according to Piketty. Of course war and depression left everybody worse off, not just rich people, but when economic growth resumed, a lesser share went to the economic elite.
Piketty’s conclusions are backed up by archival research that traces income and wealth distribution in France, Britain and the USA for two centuries and many other countries for shorter periods of time. That research shows that r > g is the typical state of affairs in most countries and most periods of history for which information is available.
One striking finding is that there is just as much inequality among the elite as there is among the public at large. In the USA, the top 10 percent have about half the wealth, the top 1 percent have about half the wealth of the top 10 percent, and the top 0.1 percent have about half the wealth of the top 1 percent.
Another finding, based on comparisons of American university endowment funds, is that the larger the amount of wealth you have to invest, the higher your rate of return is likely to be. This is probably because the richer you are, the better financial managers you can hire, the better able you are to diversify your investments and the better cushion you have when you make high-risk, high-return investments.
Piketty proposes to deal with inequality by means of a graduated tax on wealth to go along with graduated taxes on inheritance and income. But there are other ways.
You could figure out ways to increase the rate of economic growth, for example. Or you could figure out ways to achieve a wider distribution of wealth, such as through employee stock-ownership plans or worker-owned enterprises. Or you could strengthen labor unions, increase minimum wage or take other measures to increase the incomes of the middle class, working people and the poor.
It’s important to keep in mind that Piketty only deals with one specific issue, the concentration of income and wealth in a small elite—an important issue, but not the only one. Piketty does not tell us how to raise people out of dire poverty, nor how to achieve better productivity, or economic growth, or better education, or a cleaner environment, or any other goal.
And taking money away from the economic elite will not in and of itself make anyone any better off. A lot of financial wealth was destroyed during the Great Depression and and a lot of tangible wealth was destroyed during World War Two, but this did help anybody at the bottom of the economic scale. Piketty thinks that destruction of wealth cleared the way for the prosperity of the 1950s and 1960s, but I don’t think anybody who lived through the 1930s and 1940s would have said it was worth it.