The curse of inequality

The finding that capitalism has an inherent tendency to lead to an ever-increasing inequality is extremely worrying.


Hammad Siddiqi April 28, 2014
The writer is a research fellow at the Risk and Sustainable Management Institute at the University of Queensland and an associate professor of economics at LUMS

Something quite extraordinary has been happening lately. A French economist is receiving rock star treatment in the US. Some are calling it a silent revolution in the field of economics. The economist is Thomas Piketty, and his claim to fame is a 700-page book he penned on inequality and its relationship to capitalism. The book, originally in French, has just been translated into English, and has made it to a number of bestseller lists in less than a month.

Rising inequality is a dominant political issue of the time. What makes Piketty’s work unique is that it uses over a century of data on US, Britain, France and other developed countries to uncover a startling, and a very disturbing fact. The finding is that an ever increasing inequality in which a small percentage of the population keeps piling up wealth at the expense of the rest of society is a natural state and the most likely outcome of the way capitalism has been practised throughout history. The advanced economies of the US and Europe are likely to descend into oligarchy in the next few decades in which wealth inherited by less than one per cent of the population will play an ever-increasing role. Wealth is not just another factor in production; it endows the rich with a great deal of power. Hence, the coming generations of super rich heirs will be in a position to simply buy the policies that they like, consolidating their hold on power as opportunities for wage earners to make a decent living diminish.



The recent findings fly in the face of conventional wisdom, which says that inequality initially rises as countries climb the ladder of progress before finally narrowing as the countries get richer. Not true, argues Piketty, armed with reams of data.

The two world wars destroyed much of the inherited wealth, weakening the power of the wealthy considerably. Hence, for a tiny blip in history, the thirty odd years after the end of the Second World War, inequality narrowed. Not so anymore. The wealthy have recovered lost ground, and have changed the rules of the game in their favour. Now, due to the favourable rules of the game, the rate at which wealth accumulates is many times greater than the rate of economic growth, and the gap is likely to get wider with time.

The finding that capitalism has an inherent tendency to lead to an ever-increasing inequality is extremely worrying. Democracy is a lot more than one person one vote. Ultimately, it has to be about equality of opportunities. The rise of the super rich heirs who live lavishly on rents from inherited wealth whereas the rest of the society toils to eke out an ever tiny sliver, is by no means a desirable state. It is likely to threaten the very notion of democracy even in the developed world.

This is all too familiar to Pakistanis. In Pakistan, we have a complete elite capture of all state institutions. As an interesting exercise, if we check the family names of members of our assemblies in 1952, and compare them to the family names of members now, we find a more than 80 per cent match.

The lesson is that wealth is not merely a factor in production. It comes with a lot of political influence, and this influence has been used historically by the wealthy to change the rules of the game in their favour. No wonder in Pakistan only the wage earners pay taxes. No wonder cartels operate with impunity in Pakistan fixing prices. No wonder there is little chance of earning a decent living, for a vast majority of us. This is what happens in a fundamentally unequal society. This is not to say that inequality is bad by nature. A degree of inequality is necessary as a reward for effort, but unlimited inequality, in which most of a society’s resources are simply captured by the elite as rents on inherited wealth at the expense of others, is fundamentally evil. It distorts the rules of the game and gives rise to a suffocating oligarchy.

Can capitalism be fixed? Apart from using the power of state to redistribute wealth, I propose that institutional capacity is developed to extend financing through profit/loss sharing contracts rather than through the traditional debt contract. If majority of financing takes place through profit/loss sharing or mudarabah contracts then the rate of wealth accumulation will be a lot more responsive to the rate of economic growth. That way, the fortunes of the wealthy will be a lot more strongly linked with the fortunes of the rest of the society; hence, the abyss of ever-increasing inequality may be avoided.

Published in The Express Tribune, April 29th, 2014.

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COMMENTS (10)

interested | 10 years ago | Reply

@Sexton: Thanks for the post. Agreed with you. Although I personally don't believe that certain 'expected' response from the Right would come from the Pakistani establishment first. In the West it's already taking place. I just read that his book 'capital' is having the ranking manipulated on amazon.com lol

Rex Minor | 10 years ago | Reply

@Sexton Blake:

You said it Sir and we all know it. There is nothing new but this man from the elite French University has compiled an encyclopedia, in my opinion about the "Capital in the Twenty First Century", its influence on the entire legislation process in western countries, in all details giving it a french flavour, 577 pages of written text with 78 notes and many appendexes. I have not read it nor have those who are all excited about it in the USA. Is it of a surprise that a French man writes whose country is in recession and those who are all excited about it are in the USA which is completely bankrupt but boast of having too many millionaires. Would' anyone miss such an opportunity to get hold of the book and learn what the real economics is all about and perhaps has the key to get out of the misery and stop waging wars around the world?

Rex Minor

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