Is r > g Really the Reason for Recent Income Inequality


Meet Thomas Piketty the new poster child of socialists that supposedly proves the unfairness of capitalism with his book Capitalism in the 21st Century.

The premise of the book revolves around a simple formula; r > g. R is the return on capital where g is the growth of the economy. His research shows that throughout history the return on capital has been greater than the rate of growth of the economy. Considering the average person’s increase in income is going to be roughly based on the rate of growth in the economy and that the rich own most of the capital, Piketty contends that this will cause the funneling of wealth to the rich. Said another way capitalism inherently causes income inequality thus flawed.

Liberals have latched on to this doctrine to justify their socialist agendas. This is exemplified by the opening sentences of The Guardian Story by Paul Mason where he says:

"That capitalism is unfair has been said before. But it is the way Thomas Piketty says it, subtly but with relentless logic, that has sent rightwing economics into a frenzy both here (UK) and in the United States.'

Unfortunately for their point, it is exactly the lack of logic that is the problem. First, even though there may be a general trend that shows that r > g, his followers if not Piketty, ignore that there is tremendous turnover in pure capitalism as to who is rich. The rich often become poor through bad investment decisions, they are not always well diversified nor logical. Even if those that create the wealth are good stewards of their wealth their children often are not. The poor and middle class also often become rich through innovation and hard work.

Not to mention that though r may be greater than g on average, there have been great spans where that has not been the case, including much of the last century.

More to the point of this post, this concept has gained traction lately because of the obvious increase in income inequality of the past few decades, and especially the last few year. Liberals now hang their hat on Piketty’s work as proof that it is capitalism itself that has caused this inequality but ignores two much more likely causes of this most recent jump in income inequality.

The first is socialism itself. Socialism literally pays the poor to remain poor, and
incentivizes people who are just above the poverty line to become poor. It is a human condition to take the easiest path to survival, and throughout our development as a species this trait, as is shared with most animals, has served us well. It’s that voice in our mind that tells us it is a better idea to hunt a deer rather than a lion. Let’s not kid ourselves and think that we have evolved past this trait. If a free lunch is offered we will take it.

Second is a more recent development, but works in concert with the first to exacerbated income inequality to a crisis level that has everyone from Bernie Sanders and Thomas Piketty to the Pope up in arms. That is Quantitative Easing. As a debt based monetary system reaches its final phases this has been the preferred method used to prevent debt from destroying the money supply. Quantitative easing (QE) is when central banks simply buys financial assets, mostly debt instruments to add money to the economy and remove debt.

Obviously QE adds demand for financial assets that the central bank decides to purchase and pushes the prices of those assets up.  And who owns most of these asset?   The rich.  So we can’t be surprised when the rich get richer as the central banks create new money and essentially hand it to the top 1%. If the central banks decided to buy commemorative plates, hand me down clothes, and couch lint (assets owned by the poor) QE might help decrease income inequality but that’s not what the central banks did to the tune of trillions of dollars over the past decade.

Socialists will never question a debt based monetary system, nor what is necessary to sustain it, because it is the only monetary system that can (temporarily) allow for their social system. Under a sound money regime the taxation necessary to allow the social systems we now have in place would not be tolerated.  Those bills will be paid but those dependent on the handouts and those in power hope the due date will be far in the future.

Before even entertaining the idea that income inequality is being caused by very gradual flaw in capitalism, r>g, we may want to stop giving money directly to the rich and paying people to limit their income.

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