The Conversation — Piketty’s big flaw? Capitalism isn’t the same the world over

Unlike Piketty, who focuses primarily on the distribution of wealth and income, we argue in our study that the proper role of an economy is to generate wealth equitably. Piketty ignores the wealth creation component of economic outcomes in his analysis. Due to understandable data constraints, he mainly focuses on four rich economies, so wealth generated was already given. But wealth generation aside, the institutional context matters if we want to fully understand an economy. Unfortunately, Piketty largely ignores institutional differences in the practice of capitalism.... 

The point here is that “capitalism” is an over generalisation. There is a variety of capitalisms in the world today – and some are rich and relatively equal, even if some of these successful models are very slowly getting somewhat less equal, such as Sweden. In our analysis, we found six different types of capitalism. Three were strongly associated with equitable wealth creation, three were strongly associated with poor economic outcomes, and other economies we looked at were somewhere in the middle between these six types.

Unlike Piketty, we accept that inequality will always be a feature of every economic system. The key issue, as we see it, is whether the gap between the rich and the poor is too large. Piketty believes that the gap between rich and poor is bound to perpetually increase in any capitalist system simply because the return on capital is often larger than overall economic growth.

In our analysis, though, we found that “types” of capitalism vary considerably in their ability to generate wealth equitably. As a result, our policy prescriptions vary depending on the institutional context....

There are many different types of capitalism in practice today and to assume that there is one type of capitalism that generalises to all economies is misleading. The role of an economy is to generate wealth and distribute that wealth equitably; to ignore the first part to the exclusion of the second part will not get us far. Policy makers need to focus on strengthening their institutions in order to produce wealth equitably.

The task is not easy, as policy makers and political and economic elites often reinforce dysfunctional institutions. But it is impossible without considering the varieties of capitalism in play today. The right institutional makeup can in fact increase equitable wealth creation, but to ignore institutional differences is akin to putting an ill-fitting adult suit on a growing teenager – they either wear the suit awkwardly or take the suit off as soon as the adult isn’t looking. It is much better to tailor the clothing to the person wearing it.

The Conversation
Piketty’s big flaw? Capitalism isn’t the same the world over
William Q Judge, EV Williams Professor of Strategic Leadership at Old Dominion University; J Lee Brown III, Assistant Professor of Management at Fayetteville State University and Stav Fainshmidt, Assistant Professor of International Business and Strategy at Florida International University