Thomas Piketty’s Capital in the Twenty-First Century was an improbable blockbuster. Dense with data and dotted with equations, it took the 2008-9 financial crisis, the subsequent austerity measures and growing concerns about rising inequality to propel this weighty work to the top of the bestsellers lists. However, it provides a useful backdrop to the general election and the parties’ approaches to wealth.
His thesis is that, as stagnating wages are overtaken by returns on assets, we are reverting to levels of inequality not seen since the last economic bestseller called Capital. Piketty’s response was to call for a globally-coordinated wealth tax to prevent the accumulation and inheritance of vast estates ushering in a new Gilded Age, where vast opulence hems in brooding poverty.
Reactions from professional economists ranged from effusive praise for the sheer quantity of the data collected and presented to some serious challenges to Piketty’s ideas. The data clearly shows a remarkably consistent trend, among large developed economies, towards rising asset values as a multiple of GDP. From less than three times the value of GDP in the high-growth period of the 1960s, this rises to more than five times GDP now and Piketty projects a return to the roughly sevenfold value that was the norm during the slow-growing and highly unequal period prior to the WWI.
But the mechanisms that underlie these trends are not necessarily those described by Piketty. His theory seems to imply ever-increasing savings by the wealthy as economic growth slows, and it relies on the returns that these savers receive also not falling with lower growth and higher savings (both of which are usually expected to reduce such returns). There have been a series of articles challenging the models that Piketty uses to explain the data – and yet the data remains.
What seems to explain the contradictions between the factual data, Piketty’s own explanations and the objections of his critics, is that it is not an accumulation of capital that explains the rise in the asset value as a multiple of GDP - rather it is a change in price. We are not surrounded by many shiny new factories generated by all those extra savings, instead house prices and land values have grown massively.
If the problem is the rising price of land and housing, does this mean that the consequences for inequality are not as severe as Piketty’s would have us believe?
Of course not. High prices make it very difficult for the next generation to access property with just the income generated by their labour without access to inherited family wealth.
In this context, recent Scottish Government moves on Land Reform, if they lead to a more equitable distribution of land ownership, are to be welcomed. Similarly, the Commission on Local Tax Reform, with representatives from all the main Scottish parties (except the Conservatives who refused to take part), may recommend a more rational system of property-based taxation, such as a Land Value Tax. The Liberal Democrats and the Labour party have, at various times, called for a mansion tax which might help mitigate the trends that worry Piketty. Conversely, the Conservatives manifesto proposals on reducing inheritance tax go in entirely the wrong direction.