Why Covid-19 Exacerbates Inequalities and What to do About It

My latest contribution on Covid19 and inequalities. The main ideas are :

  • Covid-19 exacerbates inequalities and pre-existing socioeconomic disparities, thereby threatening the stability of many countries
  • Inequalities’ transmission factors include education, job exposure to infections, job availability, housing, transportation and safety nets
  • Supporting the income of disadvantaged households and boosting job supply should be the priority. Impact finance and philanthropic funds, such as zakah and waqf, are important in complementing government-supported mechanisms

Full article at IRTI Blog : https://blogs.irti.org/why-covid-19-exacerbates-inequalities-and-what-to-do-about-it/

Book review : Reimagining capitalism in a world on fire by Rebecca Henderson

In a nutshell

In this book published on April 14, 2020, Rebecca Henderson, a business economist at Harvard University, defends free markets and argues that the issue is not free markets but rather “Unchecked “ and “uncontrolled free markets”. The author believes that markets can save the world provided the right public policies are in place. She proposes a five-step framework that rebalances the relationship between the market and public institutions by rethinking the theory of the firm and empowering governments. One of the critiques of this book is its blurry definition of capitalism. Surprisingly, Henderson does not clearly identify the key concept that she seeks to reimagine!

The starting point: The world is on fire !

The author points out to three main systemic issues:

  • Environmental degradation
  • Economic inequality
  • Institutional collapse

I will not spend much time on this because there is a consensus on the fact that markets have led to a misallocation of resources and to suboptimal social outcomes. More on this could be found in my previous book reviews of Thomas Picketty, Muhammed Yunus, Jeffery Sachs and Rutger Bregman.

Correcting markets’ failure supposes striking the right balance between public goods and entrepreneurial dynamics, which can be achieved through:

  • Rethinking the purpose of the firm by moving beyond profit maximizing 
  • Rebuilding institutions
  • Bringing markets and governments back on balance

A reimagined capitalism: The framework

Rebecca Henderson’s framework in built around five pillars, none of them sufficient on its own but each building on the other and each a vital part of a reinforcing whole.

  • 1) The business case for “Shared value

First coined by Mark Kramer and Micheal Porter,  “Shared value” seeks to solve societal challenges through business solutions and help companies fulfill a purpose beyond profits alone.

Changing the firm’s paradigm through shared value supposes building a successful business case that aligns profit and sustainability motives.  If the business case for shared value is appealing, then the firm needs to build a purpose driven organization.

  • 2) Building a purpose driven organization

Purpose driven orientation has to cascade across all the organization. It has to be clarified, aligned to the firm’s mission, linked to strategy, embraced by employees and integrated into day to day business operations.

However, building a purpose driven organization supposes:

  • Long term investments
  • Understanding and measuring the value of purpose
  • 3) Rewiring finance

Investors’ short-termism is an issue to raise money for purpose driven organizations.

The author proposes three routes to rewiring finance:

  • Providing better data for investors and the development of reliable, standardized metrics that have not historically been included in the financial accounts (governance, reputation, staff well-being…).  Well designed, material, auditable and replicable ESG metrics (which is not the case today) can play an important role in matching purpose driven firms with long term investors
  • Relying on impact investors who are by essence purpose driven. In addition, the author discusses the possibility for purpose driven organization to raise funds from employees and customers.
  • Changing the rules that govern corporations to shelter managers from investors’ pressure and adopt a more balanced stakeholders approach

However, many problems we are facing today are public goods problems that can only be fixed through:

  • Business cooperative actions (collective shared value)
  • Effective governmental policies
  • 4) Businesses creating collective shared value

Self-regulation is a powerful way of creating collective shared value and can strongly contribute to frame appropriate policies.

Rebecca Henderson cites many examples of industry wide cooperation as in Palm Oil. However, she recognizes that cooperation is fragile and ultimately requires government support.

  • 5) Effective government(s) policies

While many problems we are facing today require global solutions, national institutions are under stress and global institutions are weak. Thereby, strengthening institutions is key.

To correct market failures and get things done the way they should be, governments have two options:

  • Economic incentives
  • Regulations

“We need governments to provide either the economic incentives that will move firms to action, or the regulations that will force everyone to do the right thing”

Six steps to make a difference

Rebecca Henderson closes her book with recommendations on how to make the world a better place, these are :

  • Discover your own purpose
  • Do something now
  • Bring your values to work
  • Work in government
  • Get political
  • Take care of yourself and remember to find joy

Book review : The Ages of Globalization by Jeffrey D. Sachs

In a nutshell

What a good timing to read a book on globalization! Indeed, Covid19 crisis has strongly challenged the relevance of globalization and has raised the following questions:

  • Is globalization over?
  • Is open trade too dangerous?
  • Should we revert to closed borders and national self-sufficiency?

“The Ages of Globalization” by Jeffrey D. Sachs, published in the midst of the Covid19 crisis, seeks to understand the complexities of globalization through an historical perspective of the long experience of global interconnectedness since 70 000 BCE.

For J. Sachs, a globalization supporter, it is “important to understand the threats arising from globalization (disease, conquest, war, financial crises and others) and to face them head on not by ending the benefits of globalization but by using the means of international cooperation to control the negative consequences of global scale interconnectedness” . Disease control is not the only area where global cooperation is vital today. The case for global cooperation extends to several global issues including climate change, internet control and the loss of biodiversity. Sachs acknowledges that the book does not provide concrete answers to these issues. The author rather offers in the last chapter broad guidelines to benefit from globalization while minimizing its downside.

All in all, I feel that the book did an wonderful job in analyzing globalization historically combining insights from agronomy, economics, anthropology, archeology and engineering (although fully embracing evolution theory in the second chapter).  However, I personally expected more from J. Sachs with regards to the evolution of globalization going forward as the proposed insights at the end of book are somewhat generic (cf. below).

The seven ages of globalization

Sachs defines globalization as “the interlinkages of diverse societies across large geographical areas. These interlinkages are technological, economic, institutional, cultural and geopolitical. They include interactions of societies across the world through trade, finance, enterprise, migration, culture, empire, and war”  

Sachs believes that “humanity has always been globalized”. In fact, globalization has only “changed its character” throughout seven distinct ages:

  • The Paleolithic age when humans were still foragers
  • The Neolithic age when farming first began
  • The Equestrian age when the horse and development of proto-writing enabled long distance trade and communications 
  • The Classical age when large empires first emerged
  • The Ocean age when large empires first expanded across the oceans and beyond the accustomed ecological zones of the homeland
  • The Industrial age when a few societies led by Great Britain ushered in the industrial economy
  • The Digital age when the entire world is instantaneously interconnected by digital data

The author notes that changes “have come at a rising rate with the largest changes occurring in the very recent past”. Three examples cited in the book illustrate this exponential pattern: World population, urbanization rate and global output.

The interplay of Geography, Technology and Institutions

To understand the historical evolution of globalization, the author frequently relies on the geography, technology and institutions framework.

James Watt’s steam engine, one global innovation cited in the book, is an illustration of the dynamic interaction of geography, Technology and Institutions that made possible the development of such an invention in Britain.

  • Geography : Availability of coal in England that could be mined and transported at low cost
  • Institutions : Britain offered legal protection for ideas and a global market to sell the product
  • Technology : James Watt leveraged and improved existing steam machine innovations (albeit imperfect) in Britain

Globalization going forward

The current digital age has three enormous challenges: Rising inequalities, massive environmental degradation and risks arising from major geopolitical changes.

According to J. Sachs, one major takeaway from globalization’s history is that major technological changes create new inequalities of power, which in turn leads to wars.

The author argues that humanity cannot afford a global war and proposes several orientations to manage globalization and to avoid devastating conflicts, including:

  • Sustainable development : A holistic approach to governance that combines economic, social and environmental objectives
  • Social democracy: An inclusive and participatory approach to political and economic life.
  • Subsidiarity and the public sphere: Setting the right boundaries between public goods and private goods. Solving problems related to public goods at the proper governance level (local, national, regional and global)
  • A reformed United Nations because the existing institution that does not fit anymore with the realities of the new multipolar world.

Transitioning to a decarbonized world: A guide for banks

COVID-19 has had damaging economic, sanitary and social consequence on all countries. The death toll exceeded 670,000 globally and, according to the World Bank, current projections suggest that global recession will be the deepest since the end of World War II. Consequently, progress that was made in many SDGs over the last years is now being wiped out causing many millions to fall back into poverty.

The lack of visibility on how this crisis will evolve over the next coming months further complicate the situation. However, there is a growing consensus on the centrality of the environmental issue in the world’s recovery process, for at least the following reasons: 

  • Despite all the dire consequence of COVID-19, the global warming risk is far more challenging.  In fact, finding an effective and affordable vaccine or cure for COVID-19 will fix the crisis once for all and the economy and social live will eventually resume to normal. However, climate change damages might be irreversible and far more complex after crossing a tipping point
  • Limiting global temperature increase to well below 2 degrees Celsius (as stated in the Paris agreement) requires massive investments to decarbonize the world (electricity production, transportation, industry, buildings…)  and thus can put the world economy back on track

A recent report “Financing climate action with positive social impact” by LSE and the University of Leeds sheds light on the role of banking in a green and inclusive transformation. The report’s findings apply to conventional and Islamic banking alike.

According to the report, the banking sector should be a central pillar of this green transformation to rebuild trust, align with stakeholders’ expectations (customers, investors, staff, government…) and create new business opportunities driven by the green economy.

The report recommends a list of actions to embed the green transition across banking operations:

  • Leadership & purpose: A strong commitment from the bank leadership to ensure that the green transition is incorporated into the institution’s governance, culture, strategic objectives and business model
  • Strategy:  A clear institutional action plan for how the bank plans to operationalize the transition. This plan should cover culture, governance, risk, opportunity, compliance as well as the treatment of customers
  • Customers: Developing a core portfolio of financial products and services that contribute to achieving a green transition in a socially inclusive manner
  • Place: Working with key stakeholders in different geographical areas (in both rural and urban settings) to respond to the diverse needs for achieving a green and just transition
  • Policy: Engaging actively with policymakers to encourage the right enabling environment for the green transition through economy-wide policies, financial regulation and public finance initiatives
  • Partnership: Engaging in dialogue with government, business, trade unions and civil society to listen to emerging needs and develop breakthrough partnerships
  • Accountability: Reporting on progress against goals set in the strategic objectives

This article was first published in Islamic Finance news Volume 17 Issue 32 dated the 12th August 2020

Book review : “Winners Take All: The Elite Charade of Changing the World” by Anand Giridharadas

When I decided to read Anand Giridharadas’s book “Winners Take All: The Elite Charade of Changing the World” I was looking for answers to my questions on changing the world through business. I finally ended up with even more questions! I read the book a second time, the list of questions kept getting longer, and many of my “mental models” were strongly challenged. Lastly, “Winners Take All” helped me conduct a deep introspection to reframe assumptions to make the world a better place. May be that was the author’s intention after all!

The book is an in-depth critique of many accepted “truths” today, such as:

  • The market is the most powerful vehicle for addressing the world’s problems;
  • The ideal market solutions blend social/environmental benefits and financial profits;
  • Technological innovation has the potential to solve most problems;
  • Governments and bureaucrats are obstacles for real change. Hence, solutions have to designed avoiding the public sector as much as possible.

The limits of changing the world within the “system” boundaries

 “Winners Take All” is a strong critique of rich elites self-appointed as leaders of social change.  The author argues that these elites, all in all, do more harm than good and contribute to or sustained the problems they are wanting to change.

Giridharadas claims that “elites believe and promote the idea that social change should be pursued principally through the free market and voluntary action, not public life and the law and the reform of the systems that people share in common; that it should be supervised by the winners of capitalism and their allies, and not be antagonistic to their needs; and that the biggest beneficiaries of the status quo should play a leading role in the status quo’s reform”.  As a result, rather than fundamentally questioning the rules of the game, looking at the big picture and shaking up the system, business saviors prefer focusing on impact investing, entrepreneurship, corporate sustainability, social responsibility, philanthropy and tech-driven solutions to save the world. According to the author, the do-gooders failure stems from the fact that they are “trying to solve the problem with the tools that caused it” in the first place without challenging mainstream assumptions, addressing systemic and questioning root problems because of conflicting interests. “Those who propose to solve problems in other ways—especially by looking at power and resources and other things unsettling to winners—are sidelined” Giridharadas says.

How to take it from there?

I feel that the book’s main recommendations are as follows:

  • Supporting and improving public institutions to be a central driver of change for the good of all.
  • Yes, it is good to make doing good easier but what is more effective is to make doing bad harder (through public institutions)
  • Real and sustainable solutions to our world’s problems require daring to ask “tough” questions and address root causes not the symptoms

Selected quotes from the book

“The only thing better than controlling money and power is to control the efforts to question the distribution of money and power. The only thing better than being a fox is being a fox asked to watch over hens.”

“There is no denying that today’s elite may be among the more socially concerned elites in history. But it is also, by the cold logic of numbers, among the more predatory in history.”

“For when elites assume leadership of social change, they are able to reshape what social change is — above all, to present it as something that should never threaten winners,”

“To fight inequality means to change the system. For a privileged person, it means to look into one’s own privilege”

“Inequality is built on antecedents—preexisting conditions ranging from ingrained prejudice and historical racial, gender, and ethnic biases to regressive tax policies that cumulatively define the systems and structures that enable inequality to fester.”

“Elite networking forums (…) groom the rich to be self-appointed leaders of social change, taking on the problems people like them have been instrumental in creating or sustaining.”

“More often, though, these elites start initiatives of their own, taking on social change as though it were just another stock in their portfolio or corporation to restructure. Because they are in charge of these attempts at social change, the attempts naturally reflect their biases.”

“It is difficult to get a man to understand something when his salary depends on not understanding it. —UPTON SINCLAIR”

“Stories promoted by MarketWorld that tell us that change is easy, is a win-win, and doesn’t require sacrifice.”

“Those who propose to solve problems in other ways—especially by looking at power and resources and other things unsettling to winners—are sidelined”

“MarketWorld had shown itself willing and able to engage in the arena of politics—to “change the system”—when it came to seeking lower taxes, freer trade, the repeal of laws like Glass-Steagall, debt reduction, scaled-back regulation (…). Yet the reversal of some of the very things it had fought for was deemed too hard, too political, too vast to take on.”

“Generosity is not a substitute for justice”

“Businesspersons calling themselves “leaders” and naming themselves solvers of the most intractable social problems represent a worrisome way of erasing their role in causing them.”

 “If you want to be a thought leader and not dismissed as a critic, your job is to help the public see problems as personal and individual dramas rather than collective and systemic ones.”

“It is hard to get a man to understand something he is being paid not to understand.”

Book review: Humankind a Hopeful History by Rutger Bregman

After the success of his first bestseller Utopia for Realists, Dutch historian Rutger Bregman has just published his second book “Humankind: a hopeful history”.

The main idea in a nutshell

The book’s main thesis goes as follows: “Most people, deep down, are pretty decent” and if we want the best from people, we need to believe in their innate kindness and ability to organize themselves for the common good. Inversely, if we are looking for the worst in people, we are bound to find it even when it does not exist!

Why this is important? Because of self-fulfilling prophecy: If we assume that most people are selfish and cannot be trusted, then we will design our institutions based on that assumption, which will create exactly the kind of people that our human nature view assumed.

Rousseau vs Hobbes debate on human nature: and the winner is …

The author cites two basic ways of understanding human nature. On one hand, Thomas Hobbes, claiming that, left to their own devices, people will wage a “war of all against all”. Hence, they need the institutions of civilization to restrain their instincts. Hobbes’ view aligns with the veneer theory stating that human morality and kindness is just a thin layer over an otherwise nasty human nature. On the other hand Jean-Jacques Rousseau, stating “that man is naturally good, and that it is from these institutions alone that men become wicked”.

When we look at how schools, leisure centers, companies, prisons have been designed, it is clear that the Hobbesian view dominate (ie. our natural selfishness and aggression can only be contained by strict laws, rules and regulations). However, Bregman, which sides with Rousseau, says that scientific evidence suggests that Hobbes’s assumptions are flawed. Bregman’s solution is to leverage people’s innate kindness to rethink” the way we organize our lives and societies.

Bregman’s plethora of examples and anecdotes

The book is full of examples, research and case studies to support Bregman’s argument and to overturn many common preconceived ideas based on Hobbes view. Examples include:

  • Agora: The school with no classes, no classrooms and no curriculum.
  • Buurtzorg : The “best employer” and “Best marketing in health care” in Holland with no HR nor a marketing team!

Bregman’s 10 takeaways:

In the book’s epilogue, Bregman recommends 10 rules to live by :

  1. “When in doubt, assume the best.”
  2. “Think in win win scenarios”
  3. “Ask more questions”
  4. “Temper your empathy, train your compassion”
  5. “Try to understand the other, even if you don’t get where there are coming”
  6. “Love your owns as others love their own”
  7. “Avoid the news”
  8. “Come out of the closet : Don’t be ashamed to do good”
  9. “Be realistic”

Selected quotes from the book

  • “Crisis brought out not the worst but the best in people”
  • “Basically, (…) we are trained to see selfishness everywhere. See someone helping an elderly person cross the street? What a show-off”
  • “There is a persistent myth that by their very nature humans are selfish, aggressive and quick to panic”
  • “A drug we use daily, that’s heavily subsidized and is distributed to our children on a massive scale. That drug is the news”
  • “Poll among twelve thousand parents in ten countries revealed that prison inmates spend more time outdoors than most kids”
  • “The opposite of play is not work (…) the opposite of play is depression”
  • “Our biggest shortfall isn’t’ a bank account or budget sheet but inside ourselves. It is a shortage of what makes life meaningful. A shortage of play”

Book review : Utopia for Realists by Rutger Bregman

Utopia for Realists is a book by Dutch historian Rutger Bregman. Originally written as a series of articles in Dutch, the book has been published in several languages.

The book starts with highlighting the benefits of free trade and globalization in terms of economic prosperity and social progress in the last 200 years: life expectancies, technological advances, military conflicts at historic lows, unprecedented levels of wealth …Then, Bregman presents the flaws within the existing deregulated neoliberal economic model, such as :  

  • Raising inequalities : He is in line with the ideas of Thomas Picketty (cf. Capital & ideology book review)
  • Wages not reflecting the value of the work: Bregman cites the social effects of strikes of bankers in Ireland and garbage men in New York City in the 60s and 70s. In the latter case, the city was on its knees after few days of strike, while in Ireland, the country continued to function normally over several months during the strike.
  • “Bullshit” jobs: Bregman cites David Graeber’s work on the existence and societal harm of meaningless jobs. Bregman mentions that 37% of British workers believe that their jobs are worthless and have no value to society
  • Gross domestic product: GDP is criticized as a popular indicator to measure economic progress.

Finally, the author proposes three recommendations (utopia) to rebuilt modern society and promote a more productive and equitable life:

  • A universal and unconditional basic income paid to everybody
  • A short working week of fifteen hours
  • Open borders worldwide with the free movement of citizens between all states

First utopia: A universal and unconditional basic income paid to everybody

The most developed of three ideas is the proposal for a universal basic income (UBI). Bregman’s underlying point is that poverty reduction pays for itself, socially and economically. Indeed, simply giving people free money, leads to reductions in crime and health problems, to improved school performance, to better mental health and to economic growth. Rather than discouraging work, UBI would instead enable people to seek jobs with true opportunities for growth and advancement.

Second utopia: A short working week of fifteen hours

In 1930, Keynes predicted that we would be working 15 hours a week by 2030. Since the 1980s, economic growth has translated, however, into more working hours instead of more leisure leading to stress and overwork, which actually reduces productivity.

According to Bregman, working less reduces stress, ecological footprint, inequality and unemployment, among others. It also fits with the needs of an aging population.  What is more, Bregman argues that a shorter working week is needed to deal with the erosion of jobs caused by automation.

Third utopia: Open borders worldwide with the free movement of citizens between all states

This is the definitely the most utopian proposal. Bregman argues that open borders could wipe out all poverty and raise everybody in Africa above poverty line. Open borders for people would make the world as a whole roughly twice as rich and would boost global wealth by roughly 65 trillion US dollars

It looks great but many questions remain without clear answers …

Most of the book focuses on “the why” and “the what” and less and on “the how”. In addition, Bregman’s concepts are presented from a very Western-centric standpoint and are not challenged from developing countries perspectives. Below are some question that I think the book did not address clearly:

  • Is UBI affordable for all countries?
  • Is UBI on the top of other government welfare programs / cash benefits or it is rather a substitute?
  • What is in the increase in the tax rates to fund UBI? Will it be acceptable?
  • Is free movement possible with only some countries applying UBI? Can we really expect a country’s taxpayers to give a UBI to anyone who chooses to move there?
  • Can rich countries accommodate millions of immigrants in a short period of time when free movement is put in place?
  • Is it true that many people would like to work less (and earn less) in a society of consumerism?
  • Is the fifteen hours workweek compulsory? If so, how to enforce it?

Quotes from “Utopia for Realists”

  • “If you can’t explain your ideal to a fairly intelligent twelve-year-old, after all, it’s probably your own fault. What we need is a narrative that speaks to millions of ordinary people.”
  • “Poverty is fundamentally about a lack of cash. It’s not about stupidity”
  • “A culture that encourages us to spend money we don’t have on stuff we don’t need, in order to impress people we can’t stand. Then we go and cry on a therapist shoulder. That’s the dystopia we live in today”
  • “Borders are the single biggest cause of discrimination in all of world history“
  • “In the twenty-first century, the real elite are those born not in the right family or the right class but in the right country.”
  • “But the real crisis of our times, of my generation, is not that we don’t have it good, or even that we might be worse off later on. No, the real crisis is that we can’t come up with anything better.”
  • “The idea that the GDP still serves as an accurate gauge of social welfare is one of the most widespread myths of our times. Even politicians who fight over everything else can always agree that the GDP must grow”

Waqf and Zakat: Missing opportunities in Maghreb countries

Despite the region’s economic potential, Maghreb countries have been struggling during the last decades with socio-economic issues including poverty, unemployment and raising inequalities. It seems clear that achieving sustainable goals with a “business as usual scenario” is very unlikely especially that COVID-19 pandemic worsened economic indicators and limited governments’ leeway for   economic recovery plans. Hence, the need to close the financing gap in order to address current social and economic issues, creates important opportunities for the Zakat and Waqf in the Maghreb region.

The Islamic Social Finance Report 2020 by the Islamic Research and Training Institute is a timely contribution as it sheds light on the potential of Islamic social finance instruments to mobilize funds to alleviate socio-economic challenges in the Maghreb region. In a nutshell, the main takeaway from the above-mentioned report is that instruments such as Waqf and Zakat have a huge potential to raise social funds. For instance, Zakat can mobilize, on average, 3% of the region’s GDP, which accounts to around US$10 billion annually! However, because of lack of supporting institutional environment and infrastructure, such much-needed resources are lost.

The good news is, there is a way out and here’s how:

  • First things first: A strong political will

In my opinion, this is definitely the more critical recommendations as all significant improvements depend on it. One example of the lack of political will is the absence of adequate supporting institutions and infrastructure for Waqf and Zakat sectors in most Maghreb countries. Furthermore, even when a dedicated legal and regulatory framework exists, as in the case of Waqf, the reality shows that these institutions are far for producing the expected impact.

  • Operational excellence and innovation

The existence of a dedicated of legal and regulatory framework is necessary but not sufficient. Implementing Islamic social finance instruments requires strong, independent and professional management organizations. Waqf and Zakat funds, for instance, should be at par with international best practices in terms of asset management, human resources management, marketing and technology. The case of Fintech illustrate this argument. Technologies such as crowdfunding, blockchain and mobile offer tremendous possibilities for the social sector. Yet, Waqf and Zakat institutions in Maghreb are still turning their back to these innovations. 

  • Restoring trust

Success of Zakat and Waqf institutions in Maghreb is contingent upon restoring confidence in such institutions. For instance, in countries with an official Zakat Fund (e.g. in Algeria, Libya, Mauritania), donors unfortunately distribute a large proportion of Zakat individually. In the social finance context, the importance of communication, transparency and accountability in alleviating trust-deficit vis-à-vis ordinary citizens can hardly be overemphasized.

  • Leveraging synergies with Islamic finance institutions

Both Waqf and Zakat institutions should foster synergies with Islamic financial institutions to develop innovative financial instruments. For example, Islamic financial institutions can, not only facilitate fund raising but also provide investment instruments and blended finance mechanisms. In addition, this synergy allows financial institutions to strengthen sustainable finance positioning.

This article was first published in Islamic Finance news Volume 17 Issue 28 dated the 15th July 2020.

Capital & Ideology (Thomas Picketty) : Book review

About the book :

French economist Thomas Piketty published Capital and Ideology in French (September 2019) and then in English (March 2020). The book is somewhat an updated and enriched version of Picketty’s great success, Capital in the Twenty-First Century (2013), which focused on wealth and income inequality only in Europe and the United States.

After exploring historical and contemporary justifications for inequality, Piketty outlines, in his new book, potential means of redistributing wealth.

Key insight #1 : Inequalities are never “natural”

Inequalities are never “natural”: any regime justifies them by an ideology and builds them by laws, taxation, organization of property, education system… The system of inequality that prevails in a given country is first of all the result of political and ideological choices

The central message of Picketty is that behind every inequality is a system of justification that ensures its perpetuation. However, there is no determinism: a bifurcation is possible, if the right political and ideological mobilization is there.

“Every human society must justify its inequalities: unless reasons for them are found, the whole political and social edifice stands in danger of collapse.” 

Key insight #2: Inequalities have been growing since the 1980s after entering in the post-communist and hyper-capitalist word

After the fall of the Soviet Union, the world has entered a new unequal regime, which the author describes as “neo-proprietarist”, reviving the sacralization of private property in force in the 19th century. This regime glorifies the “society of winners “and justifies the explosion of inequalities by the fact that the most talented people deserve to enrich themselves by reward for their exceptional productivity.

Interpretation. The share of the top decile (the 10% highest incomes) in total national income ranged between 26% and 34% in 1980 in the different parts of the world and from 34% and 56% in 2018. Inequality increased everywhere, but the size of the increase varies greatly from country to country, at all levels of development. For example it was greater in the United States than in Europe (enlarged EU, 540 millions inhabitants), and greater in India than in China.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. In 2018, the share of the top decile (the 10% highest incomes) in national income was 34% in Europe (EU+), 41% in China, 46% in Russia, 48% in the United States, 54% in Subsaharan Africa, 55% in India, 56% in Brasil and 64% in the Middle East.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The bottom 50% incomes of the world saw substantial growth in purchasing power between 1980 and 2018 (between +60% and +120%). the top 1% incomes saw even stronger growth (between +80% and +240%). Intermediate categories grew less. In sum, inequality decreased between the bottom and the middle of the global income distribution, and increased between the middle and the top.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The share of the top decile (the top 10% highest incomes) in total national income was about 50% in Western Europe in 1900-1910, before decreasing to about 30% in 1950-1980, then rising again to more than 35% in 2010-2020. Inequality grew much more strongly in the United States, where the top decile share approached 50% in 2010-2020, exceeding the level of 1900-1910. Japan was in an intermediate position.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The top marginal tax rate applied to the highest incomes averaged 23% in the United States from 1900 to 1932, 81% from 1932 to 1980, and 39% from 1980 to 2018. Over these same periods, the top rate was 30%, 89% and 46% in Britain, 18%, 58% and 50% in Germany, and 23%, 60% and 57% in France. Fiscal progressivity was at its highest level in the middle of the century, especially in the United States and in Britain.

Sources and series: see piketty.pse.ens.fr/ideology

Key insight #3 : Picketty’s recipe to tackle rising inequalities

  • Granting employees voting rights in (fairly large) companies with capping of large shareholders voting rights
  • Putting in place a progressive tax on income (all income), inheritance but especially on wealth (all wealth) so that capital circulates more
  • Creating a Capital endowment for any young person entering working life: A cash payout of two hundred and thirty-one thousand dollars—the equivalent of sixty per cent of the average adult’s net worth. (Piketty has called this system of capital endowment “inheritance for all.”)
  • Creating of a basic income and education capital for everyone, up to the education expenses of the privileged groups, to be used throughout life
  • Extending the carbon tax to all carbon emissions so that it takes into account the realities of climate change, with a great contribution from polluting companies
  • Renegotiating treaties and trade agreements, which force countries to compete with each other for who has the lowest taxes on wealth and income, starving national social systems and increasing financial inequality

Good Economics for Hard Times : Book review

The book was first published in November 12, 2019. The authors, Abhijit Banerjee and Esther Duflo, were jointly awarded the Nobel Prize in economics in 2019 (Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel).

In the book, Abhijit Banerjee and Esther Duflo address controversial topics such as immigration, trade, economic growth, technological disruption, universal basic and climate change. To do so, the authors rely on various experiments (randomized controlled trials) to test the effectiveness of specific policy interventions, in the same way clinical trials are performed in medicine (cf. figure below).

Thanks to its experimental focus, the book is written in an easy-to-understand style, which makes it accessible for readers who are not well versed in economics.

Some of the findings that caught my attention are as follows:

  • Increased immigration does not negatively affect local people wages
  • Ordinary people like to stay in their place. They don’t want to go to a different sector, to a different location and to a different life
  • Free trade boosts overall growth, but it also produces concentrated pockets of job losses
  • Tax cuts for the wealthy do not produce economic growth
  • Damages from climate change will be much more serious in poor countries
  • Because of distortions in the tax code (taxing humans more than capital) and industry concentration, most of automation today is more about deplacing workers than raising overall productivity
  • There is no evidence that cash transfers make people work less
  • Universal basic income is a good idea but it is very expensive. However, in the case of the US, it would require eliminating all existing welfare programs and raising the US tax level to the level of Denmark’s

Selected quotes from the book :

“Economics is too important to be left to the economists.”

“Economists are more like plumbers; we solve problems with a combination of intuition grounded in science, some guesswork aided by experience, and a bunch of pure trial and error”

“The focus on income alone is not just a convenient shortcut. It is a distorting lens that often has led the smartest economist down the wrong path, makers to the wrong decisions and too many of us to the wrong obsessions”

“We clearly don’t have all the solutions, and suspect that nobody else does either. We have much more to learn. But as long as we understand what the goal is, we can win”

“If the world warms by a degree centigrade or two, residents of North Dakota will mostly feel perfectly happy about it”

“The bulk of R&D resources these days are directed towards machine learning and big data methods designed to automate existing tasks rather than the invention of new products that would create (…) new jobs”