The two super economists Thomas Piketty and Hernando de Soto both agree that the capitalist system is flawed. But where Piketty thinks there is too much capitalism, de Soto thinks there is too little, which is the fundamental reason why millions of migrants right now are banging on the doors of Europe, writes Nils Elmark.
Six months ago The Independent published an article by the Peruvian economist Hernando de Soto under the headline ”Why Thomas Piketty is wrong”. Here de Soto criticises his famous French colleague and his book “The Capital in the 21st Century” which sold 1.5 million copies when it was translated into English in 2014.
Both economists have lost public attention since then, not least due to a new overriding agenda created by a wave of migrants threatening to flood Europe. But this only proves the point stated by both economists: capitalism is flawed and needs to be fixed.
Thomas Piketty is the World’s foremost expert on economic inequality. He claims there is a systemic flaw in global capitalism. He expresses this in the statement:
r > g
meaning that the rate of return on capital is higher than the rate of economic growth; those who own capital will become richer than those who only have their labour. This eventually leads to an unequal distribution of wealth.
Piketty is certain that this uneven ownership of capital will lead to civil unrest and rebellion as the world’s population refuses to accept this perceived unfairness. Piketty should know – he comes from a country formed by a revolution, one ignited by an unfair distribution of wealth.
HERNANDO DE SOTO
Yet, Hernando de Soto regards Piketty’s research merely as a first-world analysis. 90 per cent of the global population is from the developing world or from former communist countries, and for them the answer is not less, but more capitalism.
He says the majority of the global population is desperate to attain capital and need to capitalise those values they de facto own but which are not registered, and therefore not part of Piketty’s data material. Piketty’s analysis holds water in the Western economy but not in the rest of the world, according to de Soto.
I don’t think the two economists fundamentally disagree. They just compare apples with pears. Hernando de Soto advocates for the poor man’s capitalism; for more than 20 years he has worked for numerous governments in developing countries trying to improve the economy of the poor population, an effort that provoked the terrorist organisation “Shining Path” so much they tried to murder him three times. It’s not only cartoonists who live dangerous lives. Economists sometimes do too.
The Peruvian economist thinks capitalism is at a crossroads – it excludes 2/3 of the global population and doesn’t work in large parts of the world. And the problem is growing. Each year urbanisation sends millions of families into cities where they want to be part of capitalist society and its infrastructure. But they are stopped by a bureaucratic paper wall. 4 billion people do not have a legal identity and therefore they cannot prove what the own, which means that they cannot take out a loan and built the capital they need to start a business or buy a home.
These 4 billion people are de Soto’s errand, and according to him, this excluded majority will knock on capitalism’s door again and again until they are let in. He recently worked in Tunisia and Egypt, and claims that it was not lack of democracy that started the “Arab Spring” it was lack of capitalism.
When you compare the works of Piketty and de Soto, it is obvious they approach the problem from different ends, and that’s the beauty of it. They are two different personalities with different approaches to fixing capitalism. Piketty is the young, politically engaged academic, who has researched statistics for 15 years, whereas de Soto is a socially engaged economist, 20 years his senior and a regular visitor of slum cities and shanty towns all over the world.
Thomas Piketty’s point is that the rich are becoming increasingly richer. The 80 richest people on the planet now own more than the poorest 3.5 billion. Hernando de Soto’s point, on the other hand, is that the poorest (excluded) majority of the global population needs to be included in the capitalistic community. Piketty wants to tax the rich capital owners globally whereas de Soto wants to give the poor population a simplified legal system that enables them to create their own capital.
The economists have their hearts in the same place but their focus on different solutions. They are breathing new life into an urgent debate, which the migrant crisis underscores each day, and their research gives ordinary people opportunity to participate in the formulation of New Capitalism or Capitalism 2.0 – or whatever we choose to call a much needed new global operating system.
So what happens in the Middle East may not have much to do with lack of democracy or religion as we are being told; maybe it is simply a sign of too little capital invested in the people living there. And maybe the wave of migrants trying to cross into Europe is only a warning of a potential tsunami of 4 billion people who want to be included in a new model of global capitalism.
What they want: the same as the rest of us
What they offer if we invest in their lives: Economic growth and prosperity
Nils Elmark is founder of the business and finance consultancies Incepcion and BankingLab.london. He is a futurist who helps companies create better and braver dreams. Nils has written three books on his old Remington typewriter and is a great motorcycle enthusiast.
Photo Credit: Royal Navy Media Archive on Flickr.