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Capitalism vs Capital: Piketty Destroys the Kuznets Curve

In my Macroeconomics class, I was taught that there was little economic growth before the industrial revolution. Very rarely did people rise above their given socioeconomic class at birth. After the industrial revolution, GDPs skyrocketed and economic inequality eventually decreased in tandem. This trend is called the Kuznets Curve: as the economy grows, inequality first increases, but eventually decreases due to market forces. This seemed plausible to me. After all, it was on the whiteboard.  

Then, in our FSEM, that curve was destroyed by Piketty. After compiling data on western European economies spanning back centuries, Piketty concluded that the Kuznets curve was flawed, even flat out wrong. Economic inequality has been growing worse since the industrial revolution. In fact, the only period of rising equality was during the turbulent world wars. What we thought was the norm was the exception. According to Piketty’s research, in an economy where the rate of return on capital (inherited wealth) exceeds the rate of total growth, inherited wealth will always be more than earned income.

So, what does this mean exactly? It means inherited wealth is the determinant factor of upward mobility. If you start with wealth, you will get wealthier. If you start with nothing, good luck. As long as there is wealth, equality of opportunity is a myth and impossibility. Essentially, capitalism naturally leans towards unsustainable inequality. There is no curve. Just a straight line trending toward inequality.

Piketty concedes that factors like increasing worker skills, training, and education can moderately lessen inequality, but their minimal gains are greatly overshadowed by systemic inequality. He contended that leftist policies, like increasing the skills of the workforce and mildly redistributing wealth, are not enough to fix the problem in the long run. He proposed quite Utopian solutions, including a 15% tax on capital and 80% income tax bracket for the highest earners in an economy.

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