Capitalism and Inequality: History of Capitalism and inequality Part 1

Capitalism is an economic system and ideology based upon private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labour, voluntary exchange, a price system and competitive markets. As the underlying theme of capitalism is the use of wealth to create more wealth, it involves investing money in a project in return for a share of the profit. Money lending is the simplest form of capitalism, In the Middle ages the Catholic church considered usury as the sin it means that capitalism had little chance of developing .Capitalism become more evident with the formation of joint-stock companies, which were major commercial undertakings where resources were pooled from different investors and the development of factories which happened after industrial revolution. The first joint-stock enterprise established in Britain was the Muscovy Company, other best known joint stock companies were East India Company (1600), the Hudson's Bay Company (1670) and the South Sea Company (1711). Even the Bank of England, when founded in 1694, was organized at first on joint-stock lines. The development of capitalism in northern Protestant countries, such as the Netherlands and England, had prompted the theory that the Reformation is a cause of capitalism.The most immediate way in which the Reformation aided the capitalism was by removing the stigma which the Catholic church has traditionally attached to money-lending - During the second half of the 18th century visible changes were occurring in Britain as a result of the developing Industrial Revolution. Where previously land had been the traditional source of wealth, and the purchase of land was the natural investment, money was now being put into manufacturing enterprises. In 1770's Richard Arkwright opened the first custom-built and water-powered cloth mill at Cromford and Matthew Boulton,put money into the manufacture of James Watt's steam engines. The wealth of the nation was being diverted into new and productive channels, in a process which lead eventually to the emergence of a society organized on capitalist principles. The whole process was observed with a clear analytical eye by the Scottish philosopher Adam Smith. In the year 1776, Smith published a treatise which becames the definitive statement of classical capitalism and the free market. In the five books of his Inquiry into the Nature and Causes of the Wealth of Nations (1776) Smith touched many of the basic concerns of political economy. His books highlighted few important features like labour rather than land as the source of a nation's productive wealth, and pinpoints two other elements which affect prices in a developed society - rent and profit. He analyzed the role of capital in enabling labour to be productive and also discuss broader issues of the proper role of government in an economy. Smith comes down strongly against the then prevailing theory of mercantilism, which takes for granted that there is an economic advantage in protecting one's own trade by restrictive measures against other nations' goods or merchant ships. Smith argued that instead of economic benefit derives from the natural competition of the market place, where people should be free to follow their own best interests without government interference. Smith recognized the necessary role of government in many fields - defence, justice, and the infrastructure of canals and roads. His arguments against interference relate to the economic sphere, where the government should merely prevent monopolies. More than 200 years have since passed. We will leave them from discussion as of now and focus on what capitalism has achieved in terms of equatable distribution of wealth.. Detailed look at 200 years' worth of data on the distribution of income and wealth across the world tell a simple and compelling story. Wealth as a share of income held steady at very high levels in the 18th and 19th centuries, contributing to stark inequalities in wealth and income. Rising worker wages in the late 19th and early 20th centuries stabilised growth in wealth concentrations but did nothing to reduce inequalities, which were only eliminated by the great shocks of the period from 1914 to 1950. Economists tricked themselves into thinking that the resulting compression in the income and wealth distribution was a natural feature of the maturation of capitalist economies. But as the shocks receded wealth began to accumulate again and growth in income inequality resumed. From the perspective of 21st century, concentration of wealth and income begins to look like the natural state of capitalism rather than an exception. French economist Thomas Piketty, in his book “Capital in the Twenty-First Century” argues that, inequality is not an accident, but rather a feature of capitalism, and can only be reversed through state interventionism. The book's central thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability. When the rate of growth is low, then wealth tends to accumulate more quickly from r than from labor and tends to accumulate more among the top 10% and 1%, increasing inequality. He further argues that the world today is returning towards "patrimonial capitalism", in which much of the economy is dominated by inherited wealth. Piketty recommends a progressive annual global wealth tax of up to 2%, combined with a progressive income tax reaching as high as 80%, would reduce inequality.Alternative view put forth by Bill Gates in his reply "Why inequality matters" to Pikettys analysis, Gates agree with the Piketty on THREE points that are Firstly High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal, Second ,Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked and Thirdly Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so. But he does not agree with Piketty that the world is getting worse. Gates argues that that rather than moving to a progressive tax on capital, a progressive tax on consumption will be better option, and we should not tax capital used for reinvestment and for philanthropy. There is Third angle to this discussion as put forth by noted Economist Tony Atkinson,who died recently. Atkinson in his book ‘Inequality – What can be done?’ argues that, we have to go beyond placing new taxes on the wealthy to fund existing programs. Atkinson recommends ambitious new policies in five areas: technology, employment, social security, the sharing of capital, and taxation. Some of policies recommended by Atkinson include; Technological innovation in a form that increases the employability of workers and emphasises the human dimension of service provision,The government should adopt an explicit target for preventing and reducing unemployment, there should be a national pay policy,A public Investment Authority should be created, operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and in property,More progressive rate structure for the personal income tax, with marginal rates of tax increasing by ranges of taxable income, up to a top rate of 65 per cent, accompanied by a broadening of the tax base, Child Benefit should be paid for all children at a substantial rate and should be taxed as income,Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income. In short while there are different opinions about how to tackle inequality,everyone conform with the view that inequality is growing.