Picture: THINKSTOCK
Picture: THINKSTOCK

AS THE World Economic Forum gets under way in Davos on Wednesday, the topic of global inequality is high on the agenda of political and business leaders.

It is no surprise then that the Financial Times recently awarded Capital in the Twenty-First Century, by French economist Thomas Piketty, the title of business book of the year.

This volume (more than 700 pages of data on tax returns over a period of 200 years) shows that our economic model has an inherent drive towards generating and reinforcing inequalities.

This huge amount of data confirms what many progressive economists have been intimating for years: the concentration of wealth in contemporary societies resembles that of 19th-century Europe, when kings led countries, noble families dominated society and the vast majority of people were left with little or nothing on which to get by. Piketty’s book offers a diagnosis. We should use this year to generate valuable solutions.

Piketty argues that to correct this accumulation process, we need progressive taxation on incomes (especially the top 1%) and, ideally, a global wealth tax.

In the absence of that, the financial return on capital will continue being higher than that on labour, thus providing an incentive for people with money to become "rentiers" — passive beneficiaries of their accumulated wealth — ultimately undermining innovation, sustainability and democracy.

Does this matter to SA?

It is not by coincidence that Piketty’s book opens with the Marikana clashes of 2012. In the book SA is mentioned a few times as a case in point of what goes wrong when inequality reaches intolerable levels.

One does not need a doctorate in economics to recognise that SA is one of the most unequal societies in the world. We see it every day, when we drive through our cities and across the country, when we go shopping or take our kids to school.

While inequality is a fact of life (we are different people, with different capacities, interests and aspirations), it becomes a social malaise if it exceeds certain levels. And each society should democratically decide which degrees of inequality are acceptable.

For example, the US government introduced a 98% tax on the top incomes during the 1930s. For most of the previous decades, a 70% levy on top incomes was quite common. It was only with the introduction of neoliberal reforms in the 1980s that taxation for top earners was lowered considerably: first in the US and the UK, and then throughout the world.

In SA we hover at about 40% for top incomes, with little distinction between individuals earning slightly more than R600,000 a year and those making millions.

In Piketty’s analysis, the problem is not just with income differentials. There is, indeed, an even greater inequality in how wealth is distributed. Here taxation has been notoriously very permissive towards big capital, insofar as accumulated wealth has always been taxed less than labour.

Put the two together (income disparities and wealth concentration) and you have the rampant inequality we see in most of the world nowadays.

There are several reasons redistribution should be seen as a crucial step to achieve sustainable development in our country.

First of all, rent-seeking positions (concentrations of capital that allow individuals simply to use their status to earn an income) distort competition and curb innovation.

This is something free-market economists should welcome, as it levels the economic playing field.

Bill Gates, for instance, was a great innovator in his early days, when he challenged the status quo in informatics, but became a "rentier" later on, when he used his influence to build a monopoly.

Second, in times of low economic growth, wealth concentration reinforces itself.

Return on capital is indeed rather stable over time (usually at about 4%-5%), which means that accumulated wealth generates income at a much faster rate than an actual job in our present economic conditions (growth in gross domestic product of 1.4% in the third quarter of last year).

Third, if more resources were made available for the bottom earners in society, there would be more consumption and therefore more growth.

Economics 101 tells us the marginal utility of R1,000 is much greater in the pockets of a poor to middle-income household, which will put it to immediate use, than in the pockets of a rich couple, who may very well lose it in the couch or in the washing machine.

Fourth, rampant inequality has a dramatic effect on social life. It increases costs for the bottom of the pyramid, which cannot keep up with the purchasing power and lifestyle of the top. It worsens relative deprivation — the way in which people measure their level of wellbeing in comparison to the rest of society.

In turn, this has an effect on an individual’s perception of poverty that, after the satisfaction of basic wants, is directly proportional to the consumption of goods and services of others (this is something that even Adam Smith, the founder of classical economics, amply recognised).

Such a level of inequality also reinforces violence, frustration and crime.

In SA and elsewhere, economic growth has been employed as a magic wand to avoid a serious debate on inequality. The belief that the economy can grow infinitely and at a sustained pace has been comforting to the ruling elites, as this means the pie will continue expanding without the need to redistribute its shares.

Indeed, allowing the rich to become richer has been often presented as a precondition for the economy to excel for the benefit of all.

Nowhere has this been as evident as in the justification of the stellar salaries of top managers of private and public corporations.

The reality, however, is that this "trickle-down" vision of economic development is largely a dogma, as Piketty has now confirmed with his data.

Moreover, he finds no correlation between the pay cheques of "super managers" and the performance of the companies they lead.

In his view, the only thing that explains these skyrocketing salaries is the fact that managers can easily influence the scale of their remuneration, often with the support of complacent boards of directors, while common workers cannot.

In a country like SA, where business-labour relations are at a critical stage, it is therefore crucial to have an open and transparent debate about income inequality, wealth accumulation and how redistribution can lead us towards a more prosperous and peaceful future.

I will not deny that implementing redistributive policies is more easily said than done, particularly when the government is perceived to be corrupt or inefficient. This is a valuable observation but it does not negate the necessity to redistribute.

So, the real question becomes: how can we think creatively about redistribution? Are there alternatives to the classical top-down government-driven models?

In the hope to contribute to a meaningful debate on redistribution this year, my next article, next month, will deal precisely with this pertinent "how" question.

Fioramonti is professor of political economy at the University of Pretoria and director of the Centre for the Study of Governance Innovation.