05/26/2014 03:29 pm ET Updated Jul 26, 2014

Thomas Piketty and Capitalism Beyond the 21st Century

Thomas Piketty's Capital in the 21st Century is about more than proving that wealth inequality built up over centuries under so-called free market capitalism, or its social democratic versions in Europe, has to be its natural state. His research is also about how future generations might share in that wealth, and hence what capitalism must look like in future centuries, if it is to survive.

For it has to be no surprise that capital growth must exceed economic growth, and so earnings, for a country to be able to feed all its citizens. Because the whole system is built upon creating enough excess to invest in order to expand future growth. That is why the capitalist system was created. That excess is called profits; or the amount of capital above and beyond operating expenses, including wages and salaries. And companies need to invest most of their profits in expanding their output, if they hope to survive.

Piketty's contention is that capital has to be taxed in some way to guarantee a more equal distribution of its benefits for future generations, so as to avoid some of the risks inherent in more unequal wealth distribution -- such as Great Recessions, Depressions, or rising levels of crime and social dysfunction as enumerated in Richard Wilkinson and Katie Pickett's The Spirit Level.

There are several forms this can take. Nobel economist Robert Shiller has proposed inequality insurance as an answer to the propensity of capitalist systems to accumulate its wealth in fewer hands. This is insurance that governments could set up to redistribute the excess wealth being created under capitalism.

"Inequality insurance would require governments to establish very long-term plans to make income-tax rates automatically higher for high-income people in the future if inequality worsens significantly, with no change in taxes otherwise," says Dr. Shiller, as an example. "I called it inequality insurance because, like any insurance policy, it addresses risks beforehand. Just as one must buy fire insurance before, not after, one's house burns down, we have to deal with the risk of inequality before it becomes much worse and creates a powerful new class of entitled rich people who use their power to consolidate their gains."

The "entitled rich people" have already begun to counterattack Piketty's research data that he has posted online. They mainly contest his assertion that income and wealth inequality is built into the current capitalist systems. Chris Giles, Economics Editor of the Financial Times, even asserts that in Europe there hasn't been any inequality, historically. This is even though he doesn't challenge Piketty's main thesis, that historical returns on capital have outpaced the growth in wage and salary, and even overall economic and population growth.

Conservative economists have to be looking out of another window, if they are trying to refute his data, though Giles doesn't challenge Piketty's conclusion for the US economy. It has the highest level of inequality of all developed countries per the CIA's World Factbook, higher even than many developing countries.

For instance, we know that corporate US CEO's average CEO-to-worker pay ratio in 2012 was about 350 to 1. In 1960, the average chief executive earned 40 times as much as the average worker. By 1990, the average CEO earned 107 times as much. In the following decade, this ratio rose to 525:1 before settling back to 301:1 in 2003, after the 1991 recession.

That's because average household incomes have been stagnant since 1980 after inflation, whereas the top 1 percent's earnings have skyrocketed -- garnering some 96 percent of total US national income generated since the end of the Great Recession.

British economist Andrew Smithers observes in his new book, The Road to Recovery, one of the reasons. Stock-related bonuses for executives encourage them to make decisions that boost their share prices in the short term, rather than in the long term. The result is that they spend corporate capital less on long-term investments, which will set their companies up for future profit, and more on shoveling dividends to investors, which props up their shares quarter by quarter.

And that is the very antithesis of what the capitalist system was created to do. Otherwise it is just benefiting the few vs. the many, as we said. For instance, Smithers observed American companies devoted 15 times as much capital to investments as they disbursed to shareholders until the 1990s. Today the ratio is less than 2 to 1. And we know the top 25 hedge fund managers earned some $24.3 billion in 2013, according to Forbes Magazine.

So will the capitalist systems we know today survive? And if so, in what form, or is there a better, more equitable, economic system we cannot yet see?

Harlan Green © 2014