I just don’t get it.
The French economist, Thomas Picketty, recently published his book called Capital in the Twenty-First Century and everyone is treating him like a rock star.
He’s not saying anything new either… and much of what he says isn’t even correct. He’s just another economist who doesn’t understand the dynamics of the free-market capitalist system and thinks governments can do a better job than the “invisible hand.”
He claims that capitalism has a root flaw… that returns on capital grow faster than the economy and general productivity. In other words, he says that the rich have only gotten richer (and the poor poorer) in some kind of linear way. Or said another way, that income inequality has only gotten worse over time.
And that’s just not true…
Yes, throughout history making money has been easier for those who already have it, but there is nothing linear about it.
Yes, we have extreme income equality today, and we’ve had periods in history where that’s been the case too, but these have come and gone in waves every 55 to 80 years.
Yes, prior to the Industrial Revolution, growth was very slow at 0% to 1%, while returns on land for the owners and capitalists were around 5%. And returns on capital have always been higher than economic growth, but this is not a new insight.
But the truth is, income inequality was much greater back then than it is today.
Does any economist read the histories of Rome, the Renaissance, or watch movies from centuries back? The rich clearly dominated wealth even more in the past. Those who argue otherwise simply don’t understand history.
Damn if I only had a time machine! I could instantly cure all the Luddites that nostalgically long for the good old days and douchebag economists that live in theory and not reality.
Since the Industrial Revolution, economic growth has averaged 2%, which is huge when compounded over time. But that’s not to say it was linear.
During times when growth was higher, like in the bubble booms of 1820 to 1835, 1865 to 1872, 1914 to 1929 and 1994 to 2007, the rich did get richer faster with little gains for the everyday person.
But, during the bubble bursts and debt deleveraging that inevitably followed every boom, the rich lost huge chunks of their wealth while the lower and middle classes enjoyed improvements in their standards of living in the decades that followed (as they will again in the decades ahead).
Now, with unprecedented central bank stimulus and quantitative easing since the 2008 great recession, the rich have benefited even more, this time due to artificially low interest rates, and hence, return on capital. This increase in wealth hasn’t been due to higher growth or productivity. It’s simply been a result of government interference.
Let me give you my more objective view of income inequality, which I’ve formed over decades of studying history…
Firstly, we may be at another historical extreme in income inequality, like we were in 1929. But these extremes don’t last. They defeat themselves if natural free market cycles are allowed to rebalance and work their long term magic.
After the 1929 peak, where the top 1% controlled nearly 50% of the wealth, the rich lost nearly 24% of their relative wealth over the following 46 years. It was cut pretty much in half as the innovations from the early 1900s and Roaring ’20s bubble boom accrued increasingly towards higher productivity and real wage gains for the everyday worker.
Yes, “trickle-down” economics does work, but it takes decades and comes on a lag for the everyday person who doesn’t innovate or invest substantially.
Secondly, despite today’s extremes, income inequality was much worse in the Renaissance period (when workers were largely peasants), or the Roman Empire (when workers were largely slaves), or as far back as you want to go in economic history.
Technological innovation, which has accelerated since the Industrial Revolution, has increased the standard of living of the average person dramatically. Eight times since 1900 alone, in fact!
How could that be interpreted as capitalism working against the average person and progressively so as Picketty is claiming? His argument simply doesn’t hold up to the facts over time – only since 2000.
Before that period we were stuck in what’s called the “Malthusian Trap,” wherein growth in births and population in good times only caused more pressure on the limited productivity of the land, which then pushed standards of living down and deaths up to rebalance. Demographic growth was actually more of a disadvantage back then.
And thirdly, when the Industrial Revolution gave birth to free market capitalism, as prophesized by the great economist Adam Smith, democracy was born on a massive scale.
Democracy is the opposite of capitalism. It gives everyone a vote while capitalism gives greater rewards to those who take risks, innovate or have capital. Together they create a natural balance. Why can’t meddling economists and politicians leave that natural balance alone and allow it to work over time?
The major countries that are still top-down managed by governments to thwart or control capitalism – like Russia and China – have even greater income inequality than we do. Their government leaders and their crony business friends are even better at concentrating wealth than capitalists.
That’s why I don’t agree with economists who think we need more government intervention and endless stimulus to thwart the free market capitalist system.
Sure, we need a few basic readjustments and simple regulations to help it to work better – including a Chapter 11 restructuring of the more massive private debts today but what we really need is for government to get out of the way so that the free market can operate as it should.
Quantitative easing and endless bailouts – which only help the capitalists and the more affluent – are the worst possible solution to an economic downturn. They only create greater bubbles and income inequality. Worse still, they create an even bigger crisis down the road.
The Four Season Economic Cycle, driven by demographics and innovation and capitalism and democracy will take care of the current income inequality over the coming years and decades… but only if we let it rebalance and do what it does best!
Everyone will hurt, but the rich will hurt much more. After all, the middle and lower classes have already reached rock bottom. They have little left to lose.
It’s the rich, with all of their investments and assets, who stand to lose the most.
So heed our warning: Prepare for the great deflation ahead. Protect your assets now and take steps to protect your incomes against rising taxes and increased litigation.
Time is running out.
Managing Editor’s Note: The guys are in LA today, at their first of three stops on their Great American Reset Tour. From what I hear, attendees are loving it. I’ve asked Rodney to call me when they’re done tonight, to give me a summary of how the day went. I’ll let you know what he said tomorrow.
|Follow me on Twitter @HarryDentjr|