19 Dec 2014
Mild-mannered radical Professor Thomas Piketty proved a fascinating speaker when he appeared at London Business School to promulgate his thinking on the relationship between capital and income.
Thomas Piketty makes, perhaps, an unlikely revolutionary, being neat, modest and mild-mannered. But the Professor at the Paris School of Economics started an intellectual earthquake with his best-selling book Capital in the Twenty-First Century.
Put simply, Professor Piketty believes the return on wealth is outstripping the growth in income, entrenching a new inequality that can be overcome only with progressive taxation on capital.
Of course there is a lot more to his book than that, and he came to London Business School to talk about it, fittingly enough a few days before Christmas, the traditional season for considering the obligations of the well-off towards the less fortunate.
Gavyn Davies, chairman of Fulcrum Asset Management, took part as discussant, and Professor Piketty took questions from the floor.
Growth of income inequality
First, however, he set the scene by reprising the growth of income inequality before moving on to the even greater wealth divide.
“We were very optimistic in the Fifties and Sixties about the decline in inequality,” he said. “When there was GDP growth of 2% to 3%, everybody grew at 2% to 3%.
“In the 30 years from 1980 to 2010 it is quite a different story. It is of macro-economic significance. It is not just a few people getting richer. The trend seems to be continuing.”
Factors behind inequality
Why has this happened? Professor Piketty put forward some possible factors, such as access to education and to skills.
“Also, top managerial compensation has, I think, gone too far in some cases. The large decline in top income-tax progressivity has encouraged managers to seek very high levels of compensation.”
This was supposedly in return for higher performance, but, to laughter, he said this improved performance was well hidden in the data.
Ratios of capital to income
Turning to the capital-income ratio, measuring net wealth, he said that in Germany, France and the UK, it had amounted to between six and seven times national income in 1910, had fallen to two to three times national income in 1950 and had returned to between four and six times by 2010.
“This is not a bad thing in itself,” he said, pointing out that much of the fall in the middle of the 20th Century had resulted from the destruction of capital stock by war rather than having been caused by progressive policies. And he warned that the numbers tended to move about: “The history of capital is always chaotic. Putting a price on assets is a complicated business.”
That said, the trend since 1970 was clear, with the capital-income ratio rising from two to three times to between four and seven times by 2010.
The causes, he suggested, included an ageing population coupled with lower population growth and a big rise in real-estate values.
“This is not a bad thing in itself, but it raises new challenges,” he said.
The shift from public to private capital
Within the rise of the capital to income ratio, he said, was the shift from public to private capital. “Public capital is always less than private capital,” he said. “We are not living in a communist country, but it is always good to check!”
That said, the recent trend has been for public capital to decline relative to private capital, in part because of developments such as privatisation and in part because of the huge build-up of public sector debts, which can leave the net public asset position in negative territory.
Italy is one example, where net public capital has declined from 20% of national income in 1970 to minus 70% in 2010.
The wealthiest getting richer
Meanwhile, the stock of private capital held by the world’s richest people is growing more rapidly than either average wealth or average income.
Between 1987 and 2013, the assets of the top 100 million wealthiest people grew by 6.8% a year, against 2.1% for average wealth per adult and 1.4% for average incomes.
“You cannot have the wealth at the top rising at three to four times faster than that of everybody else forever. When will it stop? Nobody knows.”
A fund manager’s view
Mr Davies said: “I cannot think of anyone who has had such an effect with one book. I don’t know how you did it.”
The book, he said, had “opened my eyes” to the idea that a rising wealth-income ratio may not be temporary but a return to normality.
But Mr Davies went on to say that the figure given for the accumulation of wealth “seems a lot to a fund manager”, adding: “It seems like a bit of a stretch to someone like me who is trying to create that wealth in the financial markets.”
For someone whose book has helped set the terms of economic discussion round the world, Professor Piketty concluded on a characteristically modest note: “I hope it has contributed to a more informed debate.”