Thomas Piketty - Economist HARDtalk


Thomas Piketty - Economist

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benefit costs could send it over budget. Time for HARDtalk.

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Welcome to HARDtalk. Just occasionally, a big idea makes waves

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across the world and no`one knows that better than my guest today,

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Thomas Piketty. His book, Capital in the 21st Century, has become an

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unlikely international bestseller. His thesis carries echoes of Karl

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Marx. Modern capitalism, he believes, works in favour of

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entrenched wealth and exacerbates inequality. His research and

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conclusions have come under intense fire. Has he emerged unscathed?

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Thomas Piketty, welcome to HARDtalk. Let's start with the big idea and if

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I may, I will try to put it very crudely. Is it your contention that

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capitalism tends to make the rich richer? That's what capitalism does.

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Sometimes it makes the poor richer so there are different forces going

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on at the same time. Let me say, this is a book about the history of

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income and wealth distribution in over 20 countries over three

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centuries. There cannot be one single direction, one single force,

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that is pushing everything. There are different mechanisms and

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different forces pushing inequality. Speicifically inequality between

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countries. Sometimes this can also work within countries if we are

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sufficiently inclusive, all that I'm saying is that we have also other

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forces which can push in the direction of rising inequality and

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in particular, the tendency for the right to exceed the growth rate. You

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know, that can be a force. That's key to your idea. You have this

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simple formula that says that, for those with the accumulated wealth,

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the rate of return they can get on that wealth is by and large

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outstripping the normal growth rate in the economy and the rate of

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return that ordinary workers get from the fruits of their labour.

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Right. This is what we have seen throughout most of history of

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mankind, because the growth rate was very small. Before the industrial

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revolution, the growth rate was close to zero. The rate of return to

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capital... In order to get an annual income of ?1,000, you should have a

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capital of about ?20,000. 5% rate of return. It was so effusive you

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wouldn't even say it to our readers. Everybody knows this is the relation

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between the annual return and the capital value. Of course, at that

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time it was our view that R was bigger than G. The rate of return

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was bigger. The Industrial Revolution and modern growth, it has

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not changed the basic relationship as much as one might have expected.

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That's where people get surprised. If you think about the last 250

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years and the massive unimaginable changes we have seen across the

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developing world... You think of successive technological revolutions

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and also democratisation and the impact of politics. You can include

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the systems of the 18th and 17th centuries are long gone. The world

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has changed a lot. The world GDP growth rate over the past 300 years

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has been 1.6% per year. This is a lot of growth. When you create that

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over 300 years, it is enough to multiply the world population from

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600 million to seven billion today. And also to multiply per capita GDP

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and living standards. You are perfectly right, we are better off

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than we were three centuries ago. This growth process has transformed

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the world. But the growth is 1.6% on average in the long run. In order to

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get a growth rate of 4% or 5% per year, that would be in`line with the

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typical rate of return to capital, this is not a normal speed of

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growth. 4% or 5% is what you get when you are catching up with other

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countries, like in the postwar period. To catch up with the US and

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Japan. This is what you get with China today, which is growing even

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faster than 5%. I want to talk about China. Hang on, I just want to keep

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this as simple as we can because not all of us are economists. But it

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seems to me that you focus a lot on inequality and you focus on what has

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happened to the richest people in society, in industrialised

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societies, and your contingency is to be that, yes there have been some

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blips and shocks, many connected with wars or depressions. But in

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essence, throughout industrialisation, to the present

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day, capitalism's tendency is to maximise the returns for the richest

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10% of any given population. I would put it to you that the figures for

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the 20th century don't really back that up. Well, first of all, let me

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say that capitalism has produced a huge growth, huge improvement of

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living standards. I strongly believe in market forces. So you are

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pro`capitalism? Of course. Then banging on about inequality and the

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richest 10% getting richer is looking at the wrong part of what

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capitalism is all about? We need to look at both parts. Market forces

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and capitalism is good at producing innovation, producing new ways. But

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sometimes it knows no limit in the kind of extreme inequality

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generated. If we want to protect capitalism and globalisation, it is

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important to ensure that everybody benefits from globalisation. If a

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growing segment of our public opinion feels that a

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disproportionate share of the gains from globalisation goes to a small

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group of elite, there is a risk that many people will turn against this.

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For that to be credible, we have to be confident of your data. As you

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know, in the last month, there have been serious questions about the

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credibility of your data. Not least on the front of the Financial Times

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from journalist Chris Giles. I am just quoting some of his thoughts:

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Some of his numbers appear to be constructed out of thin air. He

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reckons that two of your big conclusions, that wealth inequality

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has been on the rise for the past 30 years in Europe and that the US has

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a significantly more unequal division of wealth than Europe. In

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his view, they no longer seem to hold, if you really look at the

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figures themselves. I think the FT has made a fool of itself. I'm very

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happy that the book is stimulating debate. That's what it's here for.

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In this case, I have responded to every point. Did you get numbers out

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of thin air? Did you tweak some of the data? Of course not. The FT has

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given my book a lot of publicity and has been damaging its own

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credibility. That's all they've been doing. Everybody in the world knows

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that top managerial compensation is a lot higher today than 20 years

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ago. Everybody knows if you look at wealth rankings, including in

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London, but all over the world, have been doing a lot better than

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average. But you can't say everybody knows. That is some serious academic

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research you're doing. When he says that, for example, for the last 30

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years of inequality in the UK, you have quoted figures that are not

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from the Office of National Statistics. And therefore are highly

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questionable. In the US, you have constructed a figure for the share

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of wealth owned by a percentage of the population because there were

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figures and you decided you are just going to extrapolate. That is

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completely wrong. If I was to rewrite the book today, I'd use more

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recent data from the US and I'd show an even higher rise in inequality.

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Regarding Britain, the FT people are using data and the top of this

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distribution is missing. If you exclude the top, you do not see

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inequality. You're saying the official data on the assets is not

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reliable? Not reliable at all. It is not that there are hiding, when you

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have a small sample of wealth, if you ask people to self report the

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income and wealth, it is already not so good for income. That is why it

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is important to use administrative tax data on returns and property,

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which is insufficient. It is also important to use data on wealth

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rankings. Look, we don't have sufficient transparency about income

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and wealth. At the end of the day, if we want to take something

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positive out of this controversy, I certainly agree that we need more

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transparency about wealth dynamics. This is a reason why it we need

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progressive stats. `` tax. It's a way to produce data. At least we can

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know better what is happening and can adjust our policy. Before we get

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to your prescriptions, a few more thoughts on the problem itself as

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you see it. Just one final thing about what you call a controversy

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with the Financial Times and the veracity of your figures... I just

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wonder how personal it has been. You are one of the world's leading

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economists and you have been accused of fiddling the numbers. Every

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possible media that has looked at this has concluded that the FT has

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been making a lot of noise out of nothing. It was just extra publicity

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to me. The FT probably feels that they have to defend it for the

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interest of their readers. Their readers also want credibility. They

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have been damaging their credibility a lot. Let's get to the philosophy

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underpinning your research. Why is inequality, in your view, such a

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problem? Inequality is not a problem per se. Inequality can actually, up

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to a point, be useful. It's a condition for innovation and growth.

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The problem is when inequality gets too extreme, then it becomes useless

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for growth and can even be damaging for growth because high inequality

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leads to a perpetration of inequality over time and a lack of

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mobility. How do we know where is the tipping point? That is very

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difficult. One of the lessons from my book is that this kind of extreme

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concentration of wealth that we had in the 19th century and up until

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World War I, it was not diminishing until World War I, it was not useful

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for growth. It was reduced dramatically by World War I and the

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depression and World War II and the public policies of the welfare

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state, free school, progressive taxation that were taking place

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after the war. These did not prevent growth from happening. The fact that

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the middle class owned a significant share is not bad for growth. It's

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good for democratic institutions and growth. Isn't the point that the

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real meaningful focus to judge capitalism's success or failure has

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to be on what is happening to the general living standard of

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ordinarily people? Of course. Then, frankly, capitalism has delivered

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and continues to deliver. And a lot of your critics, I will quote a

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couple of them to you, say that your analysis is driven by envy. A

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Canadian economic commentator said inequality is destabilising of

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itself, only if one accepts the overriding force of envy. That, in a

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way is what has driven your analysis. I don't think so. The

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problem is the success of the book is people will write about the book

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who have not even opened it. Chapter one and chapter two are about the

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huge improvement in living standards that modern growth and capitalism

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have brought to of us. Look, I believe in growth, I believe in

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market forces at a think that inequality is not a problem but when

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the top is rising three times faster than the average. Just take the

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falls rankings of billionaires. It is OK to have billionaires but...

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isn't. These are people who have become unimaginably rich not because

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of inherited wealth or accumulated capital but

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because of the benefit of their ideas. Let me try to finish my

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sentence. If you look at the ranking of the Forbes billionaires list over

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the past 15 years, what you see at the top is that the average wealth

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of the top group is rising three times faster than the average wage

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of the economy. Again, inequality is not a problem per se. But the top is

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rising three times faster than the average and at some point, this has

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to stop, otherwise you will have 100% of national wealth, meaning

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nothing is left for the middle`class. Nobody knows where

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this.. `` will end. But can you concede my point that the rich lists

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we see around the world are interesting because according to

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your theory, we should see the same names year after year, decade after

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decade, because they are enjoying the fruits of this high return on

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accumulated capital, but the truth is that we don't see that. We see

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new names because capitalism is dynamic and has fresh worlds and

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fresh economic ideas and those people who succeed do so through the

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power of their economic ideas. Right, but still, if they have the

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same wealth as the GDP of the entire world, you might at some point think

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this is too much. Even if you have mobility and new wealth, the point

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is that the top of the distribution cannot increase three times faster

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than the average wage. You say that natural forces alone in the

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capitalist system do not generate the optimum system, so you say that

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politicians and politics must intervene to, I think this is the

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phrase you used, challenge patrimonial capitalism. It seems

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that in specific terms, what you want is an 80% tax rate for those

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earning over $500,000 per year and you want a global wealth tax,

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substantial annual tax on the cumulative wealth of individuals.

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Yes, so first of all, we need education. Investment in education

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and inclusive educational institutions. These are the policies

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we need in order to reduce inequality. Right now, the average

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income of the parents correspond... To the average income of the top 2%

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of the US distribution of income. This does not look like the kind of

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democratic ideal that we would like to have. Broad access to skills,

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broad access to higher education, is primary. When it comes to

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progressive taxation to income, we have to be very precise about the

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number. The question is, is it useful to pay managers $10 million

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rather than $1 million? Do you see the extra performance or the job

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creation? We have tried to get data from companies in North America and

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Japan, trying to see the performance of companies that pay their managers

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$10 million instead of $1 million, $50 million instead of $10 million.

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We don't see the extra performance. I wonder, you are a French

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economist. You have had a chance recently to assess whether Francois

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Hollande's economic programme, which was substantially built around the

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notion that the richest were going to pay up to 75% tax or something

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around that mark. You have had a chance to assess whether that

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prescription is successful. Do you think it is? It has not been applied

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yet. I don't see how you can assess anything. Look at what is happening

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in France. At the degree to which leading French... This is

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ridiculous. It has not been applied yet, so how can you ask? We have

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cross`country evidence. Again, if you look at a broad set of

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companies, comparing how much it pays a manager, if you believe that

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a company paying a manager $10 million instead of $1 million

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creates more jobs, please show me the evidence. Because when you do it

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at the micro level, comparing countries and drawing conclusions by

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comparing countries is difficult but if you compare companies, I can tell

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you that you don't see the extra performance. At what point do you

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think punitive tax rates would deter people from further investment,

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innovation, economic commitment? 90%? 95%? Are you saying that there

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is almost no limit to the top rate of tax to the richest people? The

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problem is that there is no limit to the income they are setting for

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themselves. We are in a boundless process. OK. Let me tell you that I

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understand it is very difficult to have a debate about money and

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taxation because people get very excited. What I am trying to put

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into this debate is historical evidence. So let me give you a piece

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of historical evidence. Between 1930 and 1980, the top income tax rate in

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the US was on average 82%. And this was for half a century. Apparently,

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American capitalism did not disappear. Why is it so? Because

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this was applied only to income above $1 million, $2 million, and if

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anything, the growth performance and productivity growth, innovation, was

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higher in the 1950s, 1960s and 1970s than it has been since the 1980s.

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Since the 1980s, you see rising inequality every year, except in

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growth statistics. If we have a huge growth performance with rising

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inequality, that would be fine with me, but if you look at the evidence,

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look at the historical evidence, you don't see that. I think that we need

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to have a pragmatic debate about this and I think that some people

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are not ready yet for this pragmatic debate, but, you know, we need to

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look at this whole body of historical evidence. We briefly

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mentioned China earlier. I want to get your thoughts on China today. We

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have seen extraordinary commitment to a brand of state`managed

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capitalism. It has alleviated poverty for hundreds of millions of

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Chinese people. It has also introduced new inequality in China.

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Do you regard it as something positive or do you look at

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inequality and see it as something negative and dangerous? First, it is

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something positive, of course. China getting out of poverty, and emerging

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countries catching up to rich countries and getting out of poverty

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is positive. I believe that globalisation is a positive game. We

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all have to benefit from this and adopt the right policies and make

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sure that even those who do feel they are losing can actually gain

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from this. In China, you have huge inequality problems and the way the

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Chinese government has been dealing with inequality and perhaps more

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extreme wealth concentration so far has been mostly on a case`by`case

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basis. So they tolerate extremely wealthy oligarchs up on to the point

:21:27.:21:30.

where they put in jail. It is a bit like in Russia. But they are

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starting to realise that this is not very efficient way to regulate the

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distribution and acquisition of wealth. I was in China a few months

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ago for a conference on wealth and equality and there is a serious

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political debate about introducing some form of property or wealth

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taxation in China right now because they realise that even as a single

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party system, taxation is a better way to regulate inequality than just

:21:51.:22:02.

a case`by`case solution. One final thought and it is rich in irony. You

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are a respected academic economist who has written a book that has

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taken off around the world. You have sold 500,000 copies, you have been

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invited to the White House and spoken with top politicians around

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the world. I dare say you have made a lot of money. Because your book is

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all about the way wealth works and the way capitalism works, I would

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like to know, as we end, what are you going to do with your new

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wealth? First, I think I should pay more tax than I should be paying. I

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pay a fair amount of tax but I'm ready to pay more. Will you invest

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it or hope to pass it on to your children? Do you want to be part of

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the cumulative wealth system that your book critiques? Not at all. I

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think you have misread my book. I love capital and wealth. I love it

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so much that I would like everybody to acquire wealth and capital that

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they can pass on to their children. My problem with wealth is that the

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bottom half of the population has very little of it. So as far as I am

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concerned, I have enough income and wealth and I belong to a privileged

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minority, but for the lowest part of the population, for 90% of the

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population, accessing wealth and good paying jobs is very difficult.

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All I'm trying to do is think of systems that will give them more

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opportunities. Thank you very much for being on HARDtalk. Thank you.

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I there. We have some decent weather just around the corner for this

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