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Bill Gates is currently the second richest man in the world. He therefore has more than a purely intellectual interest in the arguments put forward by Thomas Piketty in his best-selling book Capital in the Twenty-First Century. 

Bill Gates being Bill Gates has the read the book, had a chat with the author on Skype and has posted his thoughts on his blog. On the basics, Gates and Piketty are of one mind:

‘I very much agree with Piketty that:

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.

Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.

Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.’

Gates does point out that the world as a whole is getting more “egalitarian” (i.e. inequalities between nations are getting smaller), but is far from relaxed about the fact that inequalities within nations are getting bigger.

Piketty’s central argument is that the latter trend is an inevitable feature of capitalism – as encapsulated in his now (in)famous equation r > g:

‘…where r stands for the average rate of return on capital and g stands for the rate of growth of the economy. The idea is that when the returns on capital outpace the returns on labor, over time the wealth gap will widen between people who have a lot of capital and those who rely on their labor. The equation is so central to Piketty’s arguments that he says it represents ‘the fundamental force for divergence’ and ‘sums up the overall logic of my conclusions.’’

Can it really be that simple? Gates doesn’t think so:

‘I fully agree that we don’t want to live in an aristocratic society in which already-wealthy families get richer simply by sitting on their laurels and collecting what Piketty calls ‘rentier income’—that is, the returns people earn when they let others use their money, land, or other property. But I don’t think America is anything close to that.’

By way of evidence, he points to the ‘Forbes 400 list of the wealthiest Americans’ (guess who comes top of that one):

‘Contrary to Piketty’s rentier hypothesis, I don’t see anyone on the list whose ancestors bought a great parcel of land in 1780 and have been accumulating family wealth by collecting rents ever since. In America, that old money is long gone—through instability, inflation, taxes, philanthropy, and spending.’

Then there’s the power of risky investment. For instance, in the first phase of the American automobile industry before the war, the overwhelming majority of car manufacturers went bust – taking a lot of rich people’s money with them. (Gates adds that the same process can be seen today in the IT industry.) Though much of the cash staked and lost may come from people who Piketty defines as rentiers, it still serves a socially useful function – by allowing new industries to experiment with different innovations and business models.

What isn’t so useful is when rentier wealth piles into ‘safe’ investments such as land and property. Not only does this risk the inflation of asset bubbles, it also deprives the economy of a vital resource – capital that is tolerant of risk and patient for a return.

Bill Gates invites us to consider three types of wealthy individual: the entrepreneur, the philanthropist and the playboy. Each may have the same amount of capital, but they use it such different ways that the Piketty’s call for an across-the-board ‘wealth tax’ (i.e. the systematic confiscation of capital) makes no sense. Even if one assumes an exemption for charitable giving, there are all sorts of other distinctions that need to be made.

The fairest and most effective tax regime for the rich is one that pushes surplus money away from safe-haven investments and towards the frontline of industrial and social innovation.

Instead of the state deciding how much money everyone should have, we should create an environment within which those who can afford to lose money are incentivised to take constructive risks with it. That way, individual fortunes effectively prune themselves, while the economy as a whole benefits.

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