On Saturday afternoon, I joined the hordes of fancy cars that were causing traffic jams in Soweto on their way to see Thomas Piketty deliver the 13th Nelson Mandela Annual Lecture.

And for a deeply panic-stricken ten minute period, I managed to lose my wallet. In Soweto.


The source of the trouble: the security folk had decided that they needed to process more than one person at a time through the scanners, so someone had picked up my wallet by mistake. I realised that it was missing mid-way through the National Anthem. Fortunately, the gentleman and I found each other at the lost and found, where I also found my lost faith in humanity. In Soweto.

But even more fortunately, this all took place during the preliminary talks, so I returned just in time for Piketty’s rapturous welcome applause. And the live-tweeting commenced.

Piketty’s Speech…

…was very left-wing.

The summary:

  • Global wealth inequality is bad.
  • South Africa’s wealth inequality is especially bad, and contrary to popular expectation, it has gotten worse since the end of Apartheid. From what he can tell. Because South Africa’s wealth data isn’t all that great. PS: y’all should fix that data issue with a wealth tax.
  • That aside, having equality of legal rights is not sufficient. In order to have full equality, you need to have other rights as well (four of them, specifically – more on that shortly).
  • The blame for South Africa’s wealth inequality can be partly laid on the wealthy countries of Europe and North America, with their financial deregulation, their two-faced support of the tax-evading ways of their multinational companies, as well as their insistence on neoliberalism and unregulated globalisation.
  • High unemployment in South Africa can also explain some of it.
  • But importantly, a big problem is that the historical legacy of Apartheid has not been adequately addressed.
  • So South Africa really needs to introduce an annual wealth tax.
  • But there are also four rights that need to be emphasised in order to address the inequality:
    1. The Right To A Decent Wage – there should be an adequate minimum wage for all workers.
    2. The Right To Quality Education and Infrastructure – these will support the right to a decent wage by ensuring that people are sufficiently skilled and have the means to work for a decent wage. To be funded by that annual wealth tax.
    3. The Right to Property Ownership – there should be some kind of land reform (although this might be accomplished indirectly through the wealth tax).
    4. The Right to Democracy and Participatory Governance – workers should have representation on the boards of the companies that they work for in order to get the strategies of those companies to be more aligned with the interests of all stakeholders rather than just the interests of management and (sometimes) shareholders.
  • At the same time, the wealthy countries of Europe and North America need to fix their tax systems, and take over the private repositories of asset ownership that already exist in order to better track wealth data.

About all these policy recommendations…

So I’m planning on talking about many of his policy recommendations in my posts this week, but I want to start by saying something a bit more general.

If you go back to Piketty’s book (my summary was in Friday’s post), and you have a look at what the other big economists have to say about it, you find this:

  1. They almost all think that his economic theory on inequality, and his work on building two centuries worth of inequality data, is superb, stupendous, awe-inspiring, magnificent, and all manner of other superlatives.
  2. But the general feeling is that his section on policy recommendations at the end is weak. Even naive.

This is worth emphasising.

Piketty’s primary work is in the collecting and processing of data – which may well have real consequences for the way that he interprets the world. I don’t want to accuse him of having a confirmation bias – but speaking as a fellow human, I think it’s hard not to have some kind of confirmation bias. We believe in things, we see data/evidence that confirms our belief in said things, and then we believe more firmly in them. And at the same time, we’re more likely to interpret anything that contradicts our belief as an outlier or an anomaly, while also more likely to accept and approve of anything that supports the belief. Including the narrative that goes with the data/evidence.

And I can’t help but wonder if there is some of that going on here.

In my mind, it’s a bit like an accountant analysing the financials, and then telling the operations and sales staff that they need to stop supplying a particular product to a particular customer. He may well be right most of the time. But there will be times when the operations/sales team will saying “No, we’re not going to do that. You don’t understand. This customer brings us business with these other customers, and that’s vastly more profitable for us than any losses that we make, so it would be silly to stop supply” or “We sell this product at a loss because the product gets sold as part of a bundle, and the profits on the other products more than makes up for the lost margin on this one product”.

Which is really my way of saying that data is inherently limited because it is always simplified. It’s like a map: if you want a perfect map, then it would be life-sized and entirely useless. And if you want perfect data, than it would be completely unmanageable.

So for Piketty to use broad-based data to develop the same specific policy recommendations for every type of economy seems…questionable.

Maybe myopic?

If we go back to Piketty’s theory on inequality, he basically says this:

  1. The big downfall of Capitalism is passive income.
  2. Active income is fine – when people earn their money from working.
  3. But because there is a class of people that accumulates capital, puts it to work through lending/investing, and thereby earns passive income from it, you end up with a growing proportion of wealth/capital (and its income) being held by them.
  4. This inequality may be necessary for the Capitalist system to work.
  5. But when it starts to become extreme, you experience some really damaging social and political consequences.
  6. During the 20th century, the levels of inequality were benign because the rates of economic growth were outpacing the returns offered on capital (ie. growth in passive incomes < growth in active incomes; or r < g).
  7. But that trend has been reversing since the 1970s or so. And now, passive incomes are growing faster than active incomes, or r > g, which means that the levels of inequality are accelerating.
  8. In order to avoid the social and political consequences of a deeply unequal society, governments need to shift their tax focus away from active incomes and toward passive incomes (ie. instead of paying income tax, rather pay a wealth tax, as this captures the capital appreciation earned as a passive income).

That last part is a policy recommendation.

But it’s a policy recommendation comes with an unspoken assumption. Namely: that the economy’s capacity to grow has been maxed out relative to the returns on capital.

And it’s here that I think we run up against the accountant who’s missing some of the more qualitative information.

Has South Africa maxed out its growth?

In a word: no.

We have growth constraints, but the potential for growth is still very much there. Here’s what SA has:

  • High levels of unemployment.
  • About two thirds of the unemployed have not graduated from high school.
  • Nearly a million unfilled positions for skilled workers in the marketplace.
  • Only 12.89% of land is used for agriculture.
  • I could go on.

That all adds up to: plenty of room for growth. Which makes sense, because South Africa is still a developing economy.

And that potential growth is constrained by factors like:

  • An ineffective ministry of education;
  • Eskom concerns;
  • Absurd immigration regulations;
  • General red tape;
  • High levels of unionisation (alongside violent and frequent union action);
  • I could go on here as well.

The point is: to penalise capital alone for insufficient economic growth seems a bizarre policy response for a developing economy. It may be popular, but it is also one-sided.

And that’s not just me. There is academic support for the idea that developing economies need to focus on increasing the rather than taxing the r.

And to get the growth, you need investment. But will you get investment if you’re busy taxing it?

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.