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Tuesday, January 19, 2016

Two kinds of One Percent

Piketty's book "Capital" talks about not one, but two kinds of inequality. One; wealth inequality and two; income inequality. He demonstrates through his pages that of the two wealth inequality is the more pernicious. Wealth inequality begins with income inequality, or simple colonization, but then rapidly becomes inherited wealth. Income inequality represents the power of status and position, capital and market power to favor some professions and capital control over other trades or simple labor.

The Ratio of "Return on Capital" (r) to Growth (g) And Inequity

The distinction between inequality of incomes and inequality of wealth is that the wealthy by controlling land, capital properties, business properties, financial properties or other resources -- don't need to labor. Their share of wealth is determined by something called "the return on Capital" or "r", and that "r" can be greater than or even a multiple of growth "r"; and when the later is the case; inequality can grow -- and become exponential.

r/g and Pareto Curves

On page 367 he relates the power curves that can develop under some circumstances due to the influence of wealth and power to the "Pareto Curves" developed by Vilfredo Pareto between 1880-1910. He notes that while Vilfredo Pareto insisted that inequality was a law that tended to be universal throughout time. His own statistics, drawn from tax tables from Prussia, Saxony and other places taken from 1880-1890 -- showed that inequality was actually increasing slightly during the time period Piketty was studying. [From page 367]

The power curves that Pareto discovered vary based on the ratio of r-g. The larger return on capital (r) is with respect to growth (g) the more inequality grows, and it can grow in a power curve (a pareto curve) when it is large. For example if the rate of growth of an economy is 1, but r = 5, it can grow as large as to the point where wealth can reach a concentration of 90% among the top "centile", the "one percent." In poor countries wealth is so concentrated that it freezes out most people. When that is the case the "middle class" becomes 9% of the population that are well off, or okay. And the 1% becomes very wealthy -- by comparison indeed. This is why Pareto's observation that wealthy people in similar concentrations all over the world can be found everywhere -- were valid but misleading. It wasn't a law -- it was policy.

Two Streams of Aristocracy

Thus there are two streams of aristocracy in nearly every society. A natural aristocracy based on the ability to earn more income than others from one's efforts. And a wealth aristocracy based on one's ownership of the kind of wealth that generates rents, interest, stock dividends, capital gains or other forms of "return on capital." Moreover, even wealth founded on innovation, virtue or entrepreneurship, soon gives way to inherited wealth that is not only unearned, but often comes with a culture that despises work unless it is somehow "high class"; like art, music or running estates, politics and empires.

The "old" military aristocracy of medieval ages could eschew work and gravitate to warrior professions because they owned lands that they could extract rents from. The new aristocracy seeks to own countries, business empires or any kind of rental property. The older style military brigands who became aristocrats conquered their wealth by piracy and brigandry. Modern ones do it using corporate takeovers, foreclosures and Wall Street swindles. They don't need eye-patches or peg legs anymore because they are risking "other people's money." But they still are pirates and privateers.

A hard working entrepreneur, a high status lawyer or doctor, can enter the one percent by income with effort. But the one percent by wealth is harder to enter, but doesn't require such effort once achieved. Piketty estimated that there were about 2.6 million people in the one percent by income, and a similar number in the one percent by wealth. He also said that they were joined by folks in the upper "decile" (the top 10% to 1%) who have influence and access out of proportion to the rest of us.

This doesn't mean we need to "overthrow the one percent." But because of their power we have to limit their power and redistribute some of the unearned and/or inherited income that creates injustice and inequity just by the power of it's ability to command returns.

Piketty and Pareto Curves:
http://www-leland.stanford.edu/~chadj/piketty.pdf
Further Reading:
Capital Versus Unearned Wealth
Disambiguating Capital from Simple Wealth: [http://holtesthoughts.blogspot.com/2015/10/disambiguating-capital-from-simple.html]
Progressive Taxation principles and Piketty [http://holtesthoughts.blogspot.com/2014/05/progressive-taxation-principles-and.html]
Inequality and Power; the Curse of Financialization [inequality-and-power-curse-of.html]
Joseph Stiglitz Slams Bad Economic Models [joseph-stiglitz-slams-bad-economic.html]
http://fraughtwithperil.com/cholte/2009/02/05/things-to-understand-vilfredo-pareto-and-his-curves/
http://www.amazon.com/Capital-Twenty-First-Century-Thomas-Piketty/dp/1491534656

5 comments:

  1. very simple explanations of this go back to champerowne, even before that, herbert simon (noble in econ---i saw him speak when he was like 90), yakovenko and j b rosser (i discussed this with rosser but he didnt know statistical mechanics). (r,g) is ok but its really the wrong way to go---and piketty was from mit---he should know better. i got relatives up thee too. piketty downloaded all his math economics from courses---a wrong direction.

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  2. You might want to edit the grammar and spelling in your post. I almost deleted it as spam -- and still am suspicious.

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  3. Piketty teaches Champerowne:
    http://piketty.pse.ens.fr/fr/teaching/10/44

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  4. Yakovenko's work cites Piketty:
    http://physics.umd.edu/~yakovenk/papers/RMP-81-1703-2009.pdf

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  5. And yes Rosser's book is pretty darn good. But I'm not citing them here.

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