The flipside of Piketty’s analysis

Employment & Income,Inclusive Economy20 May 2014Paul de Beer

Piketty largely ignores what the concentration of wealth means for decision-making on economic development. We should focus on distributing wealth, for example by making employees shareholders of their own companies.

Capital in the Twenty-First Century by French economist Thomas Piketty has caused a shockwave among economists. The book has been hailed by some as the most important economic work since Marx’s Das Kapital. However, what was central to Marx’s analysis, the role of capital as a source of economic power, is largely missing in Piketty’s book.

In this context, the distinction between capital and wealth is of special interest. Wealth (or net worth) is defined as assets net of liabilities. Capital refers primarily to the ownership of the factors of production (machines, factories, offices, etc.). The question which Piketty largely ignores, and which was crucial to Marx, is what the great concentration of wealth means for the balance of power in the economy. Will the increasing concentration of wealth in the richest percentile of the population also give them increasing power over economic decision-making and hence over the nature and direction of economic development?

In the 19th century, the accumulation of wealth was undoubtedly accompanied by a concentration of economic power. The capitalist class that Marx analyzed consisted largely of entrepreneurs, who had invested their assets primarily in companies that they managed themselves. Many of the super rich of today, however, have invested their wealth in a wide range of assets. This is due to the separation between management and capital ownership that occurred in the past century. As a consequence, a class of managers has arisen who belong to the highest income groups, but are usually not among the richest in terms of wealth. The real economic power seems to be in the hands of those executives rather than in the hands of the wealthiest persons who own the shares. As far as shareholders affect the management of a company, this influence is mostly exerted not by the shareholders themselves, but by the portfolio managers of the investment companies that manage their assets. They may force the management of listed companies to shed unprofitable activities and prioritize high returns in the short term rather than slightly lower but more stable returns over the longer term. Thus, increasingly, economic power seems to be concentrated in the financial sector.

Confiscatory taxation of very large fortunes, as Piketty suggests, will do little to change this. On the contrary, higher tax rates on wealth will probably increase the urge to achieve high returns. For this reason, I would suggest focusing more on distributing wealth instead of taxing it. This could, for example, be achieved by letting employees share in company profits, which would not be paid out in cash but in shares. Thus, workers would gradually acquire an increasing share of the equity of a firm. As employees become shareholders of their own company, the dividing line between employees and shareholders gradually fades. Crucial is that employees do not sell their shares, but accumulate them. This can be best achieved by depositing the shares in a fund that is collectively managed by the employees. One of the big advantages of such a system would be that it would affect both sides of the wealth distribution. On the one hand, it would result in a more balanced distribution of wealth among the population and, on the other hand, it would reduce the concentration of economic power and, thus, contribute to a more democratic economic system.