Harry Geels: Is it time to 'abolish' the rich?

August 20, 2024

Politics

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

Nowadays you cannot consult the social and news media without being bombarded with outrage-inducing images about the sharp increase in inequality. The underlying explanations for the inequality are usually flawed. Higher taxes for the rich do not solve 'the problem'.

In March this year, The Economist lashed out at a number of books that advocate tackling the rich, in an article with the telling title: 'The fallacious case for abolishing the rich - Arguments for caps on income and wealth are simple, rousing and wrong'. Two authors in particular were hit hard: Thomas Piketty and Walter Scheidel. I have previously nuanced Piketty's arguments, for example that it is unfair that wealth grows faster than labor income. Piketty forgets to mention that the growth of wealth is much riskier than that of labor. Furthermore, the growth difference only applies to very large assets.

According to The Economist, Scheidel argues in his book 'The Great Leveler' that inequalities built up in the past were only restored through violent events, the 'four horsemen': wars, revolutions, demises of states or empires, and pandemics. Peaceful and gradual methods would not work. Incorrect, according to The Economist. Look at the non-violent 'honest' growth periods of, among others, New Zealand at the end of the nineteenth and beginning of the twentieth century and Scandinavia after the Second World War.

Start with the right analysis

Before we decide whether Piketty's taxes or Scheidel's wars are necessary to eliminate alleged inequality, we must ask three consecutive questions:

Is there an inequality problem?
If so, why?
What can we do about it?

Question 1 requires a nuanced answer: inequality in the world has decreased sharply since the Second World War. For example, the average GINI coefficient, which gives an indication of inequality (the higher, the more unequal), has fallen significantly. However, in the West it has increased somewhat, especially in recent years.

Let's focus on the issue of rising inequality in the West. This apparently catches the eye when we consult the media. For example, Oxfam reports that the richest 1% managed to rake in twice as much wealth as the rest of the world. And so a columnist from De Volkskrant believes that Elon Musk is proof of everything that is wrong with our times and proof that neoliberalism is a plague. However tendentious these types of articles often are, there is indeed a small group that has made significant progress, especially in the US.

Causes of inequality

Then there is the question of where the increasing inequality in the West comes from. There are roughly three causes. Firstly, the monetary policy that has been pursued in recent decades. As explained last week, this increases inequality. Investors are protected time and time again and the inflation target, as part of the policy, has a more negative effect on people with a lower income or lower assets. Central banks receive little attention in the analysis of inequality. It is understandable that Piketty ignores this: a centrally controlling institution fits in with his political vision.

The second complication is that globalization, which has occurred especially since neoliberalism reemerged in the 1980s, has had a detrimental effect on the lower layers of Western society. Less educated people have started to compete more directly with workers in emerging markets. On balance, as mentioned, the world has benefited. Globally, inequality has decreased. Globalization has also reduced the power of local unions and led to more cross-border mergers. Larger, more powerful companies have emerged, with correspondingly increased salary structures.

Third, the structure of the economy has changed. As technology advances, the phenomenon of 'winner takes all' has become increasingly prominent. Those who can link the right (digital) product to smart marketing and invest heavily in it can conquer certain industries. Think of companies like Amazon, Google, Microsoft, Booking and Netflix. Competitors do emerge, but if they threaten to affect the business model of the winners too much, they will be taken over. The founders of these winners have become mega-rich.

Taxes are not the solution

When inequality increases, calls for higher taxes (or social revolution) quickly follow. Although taxes are necessary to publicly regulate and pay for matters such as the rule of law, the army and the police, they also have major disadvantages. They are a form of expropriation. They demotivate risk-taking. An inefficient government must redistribute taxes, which on average does not promote prosperity. And from what level of wealth should someone pay more tax? Is an entrepreneur who, after forty years of hard work for a low salary without pension accrual, finally sells his business for a few million rich? Even Socrates could not define wealth.

Moreover, higher taxes for the 'rich' are counterproductive because they lead to tax avoidance. Finally, taxes usually treat the symptoms and do not solve the underlying problem. To really combat inequality, it is better to change the structure of the economy, for example a different monetary system and the prevention of oligopolies and monopolies. Or, if we want to maintain the latter, let customers benefit from it, for example by rewarding them for being allowed to commercialize their (consumer) data.

This article contains a personal opinion from Harry Geels