EB

This is a huge discussion. But I think that in the last five to ten years the debate has shifted, so that everyone now acknowledges that the capital–labor distribution of national income matters for inequality. Previously, say in the 1990s, when an implicit denial of the fact that we live in capitalist societies was part of civilized discourse (even in the social sciences), it seems that it was just assumed that all key inequalities in society are between different categories of wage- and salary-earners. It was a part of juste milieu thinking that classical capitalist polarization between capitalist and worker was a thing of the past in the “knowledge economy.” But whatever ideologists claim, it’s just a fact that capital incomes are an important part of the economy, and that they are very differently distributed than labor incomes are. Most people of working age have labor incomes, but very few people have capital incomes of any significance. So if the capital share grows, then inequality will increase, as the small elite who owns a lot of dividend- and interest-bearing assets benefit the most from rising capital income.

I think that there have been several important contributions to our understanding of this fact since Piketty’s book (and before that, since the important 2009 paper by Tony Atkinson, the late British economist and Labour activist among the first to draw attention on rising inequalities; his paper did a lot, I think, to call researchers’ attention to factor shares).

Daniel Waldenström and I had our paper on the historical connections between capital shares and inequality, which is mostly an empirical contribution. I think that in a sense something we have learned from this debate is that we live in a society which is much more “classical capitalist,” to use Branko Milanovic’s typology, where there are — in very simplified terms — capitalists and workers, rather than an imagined “new capitalism” where everyone has a little capital and does a little wage labor.

An economist called Ignacio Flores has a nice paper showing how using income surveys (like the often-used Luxembourg Income Survey) underestimates capital incomes and underestimates their importance for inequality. I think that this is the way the discussion — in research at least — is going now: we know that the distribution between capital and labor matters and that this has been misunderstood previously for both theoretical and methodological reasons. Now that we’ve got that misunderstanding out of the way, we can work on a more sophisticated understanding of the matter. Milanovic thinks that the solution to the problem of capital-driven inequality is equalization of capital ownership rather than the taxation of capital income which Piketty has argued for, and that’s an interesting debate — but I’m just happy that the insight is shared that we do in many ways live in a “classical capitalist” world. Building on that understanding, we can discuss what to do about it.