Citizen Action Monitor

Tim Jackson and Peter Victor find a flaw in Thomas Piketty’s “algebra of inequality” thesis

“What we found was fascinating,” says Jackson, leading to fertile ground for degrowth.

No 2120 Posted by fw, December 11, 2017

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A controversial best-selling 2013 book by France’s superstar economist Thomas Piketty, argues that, over the long term, when the rate of return on capital (r) is greater than the rate of economic growth (g) the result is a concentration of wealth. This unequal distribution of wealth causes social and economic instability. To help reduce inequality and avoid the vast majority of wealth coming under the control of a tiny minority, Piketty proposes a progressive global tax on capital.

Concerned that Piketty’s thesis, with it’s wealth-tax solution, might provoke yet another “growth imperative”, Tim Jackson teamed up with fellow ecological economist Peter Victor of Canada to investigate what Jackson labeled as Piketty’s “algebra of inequality” — which became the title of this, Section 8 of Chapter 9.

Below is my synopsis of Jackson’s account of Piketty’s thesis. In addition, Jackson highlights the good-news results of his and Victor’s investigation of Piketty’s “algebra of equality” — they found a game-changing flaw.

Based on their fruitful findings, Jackson considers the encouraging implications: “Just how much of what appears to propel us relentlessly towards growth … is an artefact of happenstance? Or the result of misunderstanding? … Charting the course towards a post-growth economics is an exercise in continually challenging the conventional wisdom.”

Tim Jackson is a British ecological economist and professor of sustainable development at the University of Surrey.

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The algebra of inequality, a synopsis, from Chapter 9, “Towards a Post-Growth Macroeconomics ” of Tim Jackson’s book, Prosperity without Growth, Routledge, 2nd edition, 2016-17

In his acclaimed best-seller, Capital in the Twenty-First Century (2013), French economist Thomas Piketty argues that the rate of capital return in developed countries is persistently greater than the rate of economic growth, causing wealth inequality to increase rapidly in the future. [As an aside, consider this recent headline: Just 8 men own the same wealth as half the world.]

Piketty’s fundamental “law of capitalism” claims that, over time, capital’s share of income approaches infinity, which Piketty expresses algebraically as the rate of return on capital times the savings rate divided by the growth rate.

To address this problem, Piketty proposes a redistribution of the benefits of capital (profits) to the poorest in society through a progressive global tax on capital. The mere mention of the words “tax on capital”, notes Jackson, “elicited a noisy backlash.”

But, in a perverse twist, the idea that “only the growth rate can save us from disastrous inequality, [rendered] Piketty’s intervention a double-edged sword. … It represents”, says Jackson, “what appears to be yet another ‘growth imperative.’”

Piketty’s double-edged “growth imperative” impelled Jackson and fellow ecological economist Peter Victor to investigate Piketty’s “algebra of inequality.”

What we found was fascinating,” writes Jackson: “Piketty’s ‘fundamental law’ regarding capital’s share of income only holds when the growth rate, savings rate and rate of return on capital remain unchanged over long periods of time.

Their good-news findings indicate that the growth rate, savings rate, and rate of return on capital do not remain unchanged over time – they “move about.” Algebra may be algebra, but reality is reality. Declining growth can lead to rising inequality in some circumstances, but in others, it can lead to falling, improved equality – a fertile ground for degrowth. 

Jackson explains: This reverse situation happens because of a factor called, in economist’s lingo, “the elasticity of substitution between labour and capital.

“At higher levels of substitutability between capital and labour, inequality does indeed escalate out of control as growth rates decline, just as Piketty predicted. But in an economy with a lower elasticity of substitution, the dangers are much less acute. In fact, when the elasticity of substitution between capital and labour is less than one, it’s possible to reduce income inequality, even as the growth rate declines to zero.”

For we economic novices, forget the jargon and just accept that it’s possible to reduce income inequality even as growth rates decline to zero without necessarily understanding what or why it happens].

There’s even more good news: Jackson and Victor’s finding is associated with the service-based sectors of the economy. Therefore, “… when we protect, nurture and properly value the time spent by people working in the service of each other, a post-growth economy has the potential to become more equal rather than less.”

Based on these fruitful findings, Jackson considers the encouraging implications: “Just how much of what appears to propel us relentlessly towards growth – under pain of collapse – is an artefact of happenstance? Or the result of misunderstanding? … Charting the course towards a post-growth economics is an exercise in continually challenging the conventional wisdom.

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