Capitalism's Crises, Contradictions, and Wealth Inequality

Introduction: Capital Returns and the Roots of Crisis

The crises and contradictions of capitalism originate from the system's relentless drive toward expansion at ever-cheaper costs. As Piketty (2014) points out, "there is a tendency for the rate of return of capital to exceed the economy's growth rate, and this tends to lead to high concentration of wealth" — that is, the rich get richer while the poor either stay the same or get poorer.

Free Markets, Inflation, and the Zero-Sum Dynamic

According to Elwell (2013) in Chapter 6, "Capital," the lack of central planning in a capitalist system is what leads to crises like inflation and depression. Yet, ironically, inflation occurs when a money supply is rapidly increased over a short period of time — which is precisely what a central bank does through monetary policy instruments such as quantitative easing. One can observe that the price of virtually everything, from housing to stocks, has increased since 2008. This is just one example of a crisis, however.

The real contradiction and crises stem from the fact that capitalism is ultimately a zero-sum game: every competitor is out to best the rest, and that means getting the most value for the lowest cost is paramount. Companies will offshore labor in order to obtain it as cheaply as possible, violating ethical standards and international human rights laws in the process. The domestic labor force is essentially disregarded, and "problems of unemployment and underemployment, of poverty amidst affluence — continue to mount" (Elwell, 2003, p. 174). The problem is that in a capitalist free market system, there is no control mechanism that requires business owners and companies to work for the common good. Instead, they are motivated by self-interest, which is often destructive toward others.

Piketty's Proposed Solutions: Taxation and Transparency

Piketty (2014) argues that in order to better manage the economy and deal effectively with the financial crises and contradictions inherent in the capitalist system, more information is needed about how the wealthy use their money — where they place it and how they make use of it — including the ways they hide it or avoid taxation by sheltering it in offshore havens. In short, "we need a global registry of financial assets, more coordination on wealth taxation, and even a wealth tax with a small tax rate will be a way to produce information so that we can then adapt our policies to whatever we observe."

The solution Piketty envisions is "a steeply progressive income tax and a global tax on wealth," which is unlikely to be well received by anyone, since no one enjoys paying income tax and no one welcomes having their wealth taxed (DeLong, 2014).

References

DeLong, B. (2014). Dialogue. Retrieved from http://equitablegrowth.org/equitablog/dialogue-ten-so-far-worthwhile-reviews-of-and-reflections-on-thomas-pikettys-capital-in-the-twenty-first-century-wednesday-focus-march-26-2014/

Elwell, F. (2003). Sociocultural Systems: Principles of Structure and Change.

Piketty, T. (2014). New thoughts on capital in the twenty-first century. Retrieved from https://www.ted.com/talks/thomas_piketty_new_thoughts_on_capital_in_the_twenty_first_century/transcript?language=en#t-107341