Piketty inequality, meta-market failures and the new role of the state

Abstract

We argue that the celebrated 2014 Piketty thesis that thriving markets in advanced economies generate an ever increasing income inequality restores policy relevance to the Second Fundamental Theorem of Welfare and restores the role of the state in economics which the First Fundamental Theorem of Welfare seems, and the neoconservatives claim, to have marginalized. The Piketty thesis disproves the Kuznets hypothesis which says that the equity-deficit of market allocation is a temporary inconvenience which will dissipate as per capita income grows, thus, making state intervention unnecessary. Policies that enhance per capita growth may then replace policies of direct redistribution in the pursuit of equity. Piketty insists that this phenomenon is not due to some garden variety market failure but is due to the very dynamic that drives market prosperity, viz., private ownership of and the free enterprise deployment of capital. It is thus a meta-market failure. In properly functioning capitalist markets henceforth, the state still needs to directly push back on this metamarket failure to save capitalism from its own excesses and democracy from becoming collateral damage.

JEL classification: D31, D33, D63, 04