Why do the rich get richer? | Fin24
 
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Why do the rich get richer?

Apr 23 2015 06:30
*Leopold Scholtz

LAST year, the world was – as it were – taken by storm by a book written by the French economist Thomas Piketty, Capital in the 21st Century. There was wide excitement about a book which promised to buttress the faltering social-democratic economic approach, especially in the West.

However, a group of German economists have just published research results which tend to undermine his basic thesis, at any rate as far as their country is concerned.

Piketty’s basic conclusion, based on a wealth of statistics, was that the chasm between rich and poor is rapidly widening. The reason for this, he wrote, is that the rich receive their money to an ever-growing extent by inheriting it from their well-off parents. In other words, they did not have to work for it, like the poor or middle class.

READ: Capitalism in crisis

And, because they invest their inheritances profitably, they get even richer, while the poor and middle class lag behind.

I must say I had my doubts about this when I first read it. In my own case, for instance, I inherited around R30 000 when my mother died in 2010 at the ripe age of 101. What I own (and I suppose I could be called middle class), I worked for. Long working days, weekends, even holidays. What I possess, I earned, fair and square.

READ: Making capitalism work

The German daily Die Welt this week reported on a new study by three economists, Timm Bönke, Giacomo Corneo and Christian Westermeier from the Free University of Berlin and the German Institute for Economic Research, also in Berlin. To a large extent they rubbish Piketty’s thesis, at least as far as Germany is concerned.

They made use of a poll by the Bundesbank and other research results. They conclude that no more than a third of German households’ capital was inherited. The rest was accumulated through salaries and savings.

They also wanted to establish whether there was a difference between the various income groups. Their rather surprising discovery is that it is approximately the same for the poor, middle class and even the moderately rich. In fact, whereas 36% of middle class possessions come from inheritance, this applies to only 27% of the moderately rich, the class above them.

Things may admittedly be different for the top 1% of the population, those possessing more than €2.5m (about R32.5m), they say. The fact is that the research results are based on a voluntary survey by the Bundesbank, and they reckon their understanding of the position of the top 1% is insufficient to come to a definite conclusion.

Nevertheless, they suspect that a full four-fifths of the super-rich’s wealth was inherited. They also concede that respondents may have given wrong answers. Nevertheless, the three economists say, they are satisfied that their conclusions are reasonably accurate and that these apply to 99% of the German population.

Now, one has to concede as well that what may be true for Germany might not apply to other parts of the world. Germany, just like other countries in northwest Europe, is known for a population with a high work ethic which handles their financial matters frugally, influenced by the Protestant approach which traditionally rests on working hard and saving for a rainy day.

The same applies to the Scandinavian countries, the Netherlands, Flanders and perhaps to a somewhat lesser extent the USA and the UK as well - not to mention Japan and China.

The world of siestas and mañana

Moving southwards, to the southern part of Belgium, France, the Iberian peninsula, Italy and Greece, their approach is (and perhaps I am exaggerating) based on siesta and mañana. In Africa, the Middle East and Latin America, one imagines, things would be even worse.

So one cannot unequivocally say that Bönke, Corneo and Westermeier have completely disproved Piketty. What they have done is to show that his data has to be viewed critically.

Now Piketty had a point in that there is a growing difference between rich and poor in most parts of the word. He was also right in warning that this may result in severe social and political problems – after all, we are already seeing the warning signs in front of our own eyes right here in South Africa.

READ: The price of inequality

His solution was typically social democratic in nature: tax inheritances and investments. Force the rich - who, according to him, get their wealth from their rich parents - to work for their money, just like you and me.

In Germany this would not work, our three German economists recommend. They concede that the super-rich would be affected, but by far the majority would be people who worked hard all their lives and accumulated their savings to enjoy a trouble-free retirement.

It remains fascinating to see economists debate among themselves. Personally, I find it extremely stimulating.

* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.

leopold scholtz  |  inequality
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