Capitalism, to be sure, comes in different—more or less unequal—forms.
For example, the less unequal form of U.S. capitalism in the three decades following World War II was different from the periods before the first and second Great Depressions, when capitalism in the United States became increasingly unequal. The same is true across countries—in the sense that the forms of capitalism in Scandinavia are less unequal that what we are living through in the United States.
But at the heart of all forms of capitalism is a fundamental inequality: between workers and owners, between those who produce the surplus and those who appropriate and receive distributed cuts of it. Those groups play different roles and engage in different kinds of economic behaviors. For example, workers sell their ability to work, most of their income takes the form of wages, and they’re able to save relatively little; owners and high-level corporate executives are able to capture what others produce, their incomes consist of both salaries and other returns on capital, and they can save and invest a large percentage of their incomes.
That basic inequality is mostly hidden or overlooked within mainstream economic theory. But, it seems, in the debate surrounding Thomas Piketty’s new book, at least some people are discovering or finding ways of articulating the fundamental links between capitalism and inequality.
As we saw yesterday, Seth Akerman gets it:
The statistical image that emerges from these numbers is neither Piketty’s vision of rising returns to “capital” as such, nor Krugman’s picture of an increase in returns to managerial “labor.” Rather, we see the burgeoning of a general surplus: an excess of national income over and above what’s needed to pay the nation’s non-managerial workers, appropriated broadly by all those who control capital — whether as shareholders, managers, or financiers.
So does Branko Milanovic, who, in challenging the latest attempt to undermine Piketty’s argument (by Debraj Ray), makes some rudimentary observations that most mainstream economists choose to ignore:
Let me now explain why I disagree with Debraj. While r>g (or r>=g) may be a feature of all growth models it is still a contradiction of capitalism for three reasons: because returns from capital are privately owned (appropriated), because they are more unequally distributed (meaning that the Gini coefficient of income from capital is greater than the Gini coefficient of income from labor), and finally and most importantly because recipients of capital incomes are generally higher up in the income pyramid that recipients of labor income. The last two conditions, translated in the language of inequality mean that the concentration curve of income from capital lies below (further from the 45 degree line) the concentration curve of income from labor, and also below the Lorenz curve. Less technically, it means that capital incomes are more unequally distributed and are positively correlated with overall income. Even less technically, it means that if share of capital incomes in total increases, inequality will go up. And this happens precisely when r exceeds g.
It is indeed a contradiction of capitalism because capitalism is not a system where both the poor and the rich have the same shares of capital and labor income. Indeed if that were the case, inequality would still exist, but r>g would not imply its increase. A poor guy with original capital income of $100 and labor income of $100 would gain next year $5 additional dollars from capital and $3 from labor; the rich guy with $1000 in capital and $1000 in labor with gain additional $50 from capital and $30 from labor. Their overall income ratios will remain unchanged. But the real world is such that the poor guy in our case is faced by a capitalist who has $2000 of capital income and nothing in labor and his income accordingly will grow by $100, thus widening the income gap between the two individuals.
In their different ways, what Ackerman and Milanovic are arguing is that there is a fundamental class inequality at the heart of all forms of capitalism.