The Piketty Insight on the Accelerating Wealth Gap

This is the ninth post in the series “Linguistics and Cognitive Science in the Pursuit of Civil Discourse, and the title of this post is the title of a chapter in Lakoff’s book. Lakoff notes that this insight of economist Thomas Piketty and his colleagues is an insight that has not yet become framed in public discourse. Here is Piketty’s basic insight. He studied the history, not just of income but of wealth. He observed that there are two fundamentally different kinds of wealth.

Productive wealth. This is the wealth generated by work, by producing and selling things or services, and the kind of wealth Adam Smith talked about. The prototypical case concerns individuals, for example a baker and a furniture maker. Each makes and sells things, and each needs and buys what the other sells. The baker’s income pays the furniture maker, and the furniture maker’s income pays the baker. Each works for himself, produces things, gets paid for it, and in a much oversimplified market, each produces wealth for himself and for the other. This is the kind of wealth, productive wealth, measured by the GDP. Piketty calls it “G.”

*Reinvestment wealth. This is wealth generated by receiving returns on investments and then reinvesting the returns over and over. This kind of wealth grows exponentially, like compound interest. The more you have, the more you invest, and the more you invest, the more you have. Piketty calls it “R.”

Piketty looks at the proportion of the kinds of wealth, that is, the ratio between R and G over a population. Then he asks, how does it change and why?

He studied tax records in many countries dating back to the eighteenth century. He discovered that up until 1913, most wealth was reinvestment wealth. Even during the period of the industrial revolution, which is usually thought of in terms of productive wealth, R was much greater than G, thus showing that the common wisdom is false. Even in capitalist democracies where individual liberty and the market were supposed to allow for productive wealth through work, it turns out that reinvestment wealth was overwhelming. France, a capitalist democracy concerned with egalite, in 1910, 70% of the wealth was reinvestment wealth, held by the very wealthy—not productive wealth distributed over most of the population.

Because of World War I, the Great Depression, and World War II, a significant portion of reinvestment wealth was destroyed. Productive wealth became greater, more G than R. Between 1913 and 1980, most of modern economic theory was developed, whether liberal or conservative. It was primarily based on GDP—on G, not R.

In 1980, during the Reagan era in America something changed. Reagan greatly cut taxes on the wealthy, started a major attack on unions and the wages of ordinary workers, cut regulations on business and so on. Margaret Thatcher did the same in England. These economic ideas spread. There was a historic shift around 1980. R became greater than G again. Reinvestment wealth took over the reins or modern economics. Being exponential, reinvestment wealth grew exponentially—like compound interest.

In 1976 in the United States the top 1% had 19.9% of the wealth. In 2010, the top % had 35.4% of the wealth, the top 5% had 63% of the wealth, and the top 20% had 88.9% of the wealth. That left 11.1% for the bottom 80%.

So why should this be a concern? As the share of the nation’s wealth going to the wealthy rises, the share going to everyone else falls. What else falls? The freedom that wealth can buy, the power that wealth can buy. Technically, we may still have one person, one vote (but given the menacing Electoral College, not for Presidential elections). But the effect of one person on elections has gone way down.

Piketty says that this trend is reversible, but it takes political change. But what is the likelihood for political change given the systemic effect of Piketty’s insight:

*Greater political leverage. Wealthy people and corporations have great lobbying power with public officials, and it is getting greater all the time.

*Greater control over public discourse. Wealthy people and corporations can control public discourse in many ways—by owning media outlets, sponsoring shows, massive advertising, and so on. This control works via the brain. Language and imagery that activate conservative frames will also activate conservative morality—strict father morality in general. As conservative morality gets stronger, progressive morality gets weaker in the brains of the public. This effects what people believe unconsciously as well as consciously, and therefore affects how people vote.

*Greater control over the rights of others. Through state control of legislatures, the wealthy can control the voting rights of poorer populations, and state control is cheaper than national control.

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