Three little words: Follow the money. Many human activities—including politics, health care, business, law and economics—can only be understood if you follow the money. While people do not always act in their own self-interest, this is certainly a better predictor than their stated interests.
In a remarkable book, Capital in the Twenty-First Century, French economist Thomas Piketty has followed the money over the last 400 years in both Europe and America. This book has not only received high praise from economists such as Nobel Prize winner and columnist Paul Krugman, but this tome has made The New York Times Best Sellers list.
When an economic textbook takes the spot normally reserved for a book by a movie star describing their tough childhood, we should take notice.
Piketty writes about the obvious but often ignored truth that in every financial transaction, there is a negotiated price. And this price reflects the parties’ relative power. As far back as the 18th century, during the period of Jane Austen, a certain amount of money went to the person doing the farming and a certain amount went to the person that owned the land. That percentage, to a very large extent, determined the quality of life for each.
Now, 400 years later, these same negotiated transactions are going on, except now it is bankers and business owners instead of landholders. And clearly, Americans as well as Europeans are returning to an era of extreme income inequality not experienced in the last 100 years.
Piketty explains that the period between 1914 and 1945, which included two world wars and a major depression, wiped out so much wealth that it changed the power of the wealthy, and they temporarily lost their ability to dominate negotiations. But since 1945, the pendulum has swung back in favor of the rich. The tax rate on the wealthy has been reduced, the financial sector has been deregulated, and the power of unions has been reduced. These changes have all increased wealth inequality.
For us, though, living in the last 100 years, it seemed natural to believe that with the expansion of the middle class, increased wage equality would follow. We believed that each new American generation would do better than the previous one. Piketty explains why this is not true.
He predicts that wage and income inequality will continue to grow, just as they did in the centuries before World War I, unless there is a strong political and social movement that overcomes the ability of the wealthy to use their stronger bargaining position to negotiate a larger and larger percentage of the pie.
When looking at issues such as the minimum wage, taxes on the wealthy, tax loopholes, overseas tax havens, banking regulations and political-campaign donation laws, it is important to think about who will benefit. Rest assured that those who expect to benefit are hiring their lobbyists, preparing their lawsuits, making their campaign donations and girding for battle.
We need to fight back.