Basic Income as a Solution to Capitalism’s Structural Problems

Thomas Picketty’s seminal book Capital in the 21st Century outlined some of the underlining principles of capitalism. His main thesis is that if the return on capital is greater than economic growth, wealth inequality grows. The rich get richer because they can earn a greater return on their investments than the growth of wages. This ensures that those without capital cannot catch up to those with.

This is a critical and structural problem of our current capitalist system and if left uncorrected, it will lead us back to an aristocratic world with elites too powerful to touch. The gap between return on capital and economic growth must be closed to ensure a level playing field for all.

Capitalism is fantastic. It has brought tremendous material prosperity, advances in science and technology and a general security to the world. While it is a great system, it needs adjustments, like any machine might. One adjustment that could very well save it from its own destruction is the institution of a basic income. A basic income in and of itself is not the solution, it is rather the effect it will have on the economy and the change to society’s power structure.

A principal cause of the post-war economic prosperity identified by Picketty was the destruction of capital during the wars. During WW1 and WW2, capital to income ratios – that is the amount of capital in society to the income of society – went from 8 to 1 to 3 to 1. The subsequent growth and accumulation of wealth at the top of the ladder has led us back to a world where capital to income in society is back at the dangerous levels of 8 to 1. The last time this happened, we had demagogues, fascists and dictators take over the most prosperous countries in the world.

There are other ways to destroy capital: inflation, a tax on capital or through economic growth that is greater than return on capital. All three of these would reduce the relative weight of current capital in society and thus encourage individuals and corporations to invest in productive assets – factories and such. One interesting analysis of this situation was presented by Oliver Heydorn at the 2015 North American Basic Income Guarantee (NABIG) conference in New York city. He explained how the difference in accounting practices for capital expenditures and operational expenditures (where you can depreciate capital expenditures) leads to the same gap between the return on capital and wages that we see with Picketty. Oliver is a social creditist and their political theories merit a closer look. Social Creditists stipulate that due to certain accounting practices and monetary policy, we inevitably obtain a growing gap between the revenues from labour (salaries) and the return on capital investments. This leads to a labour force with less and less purchasing power as the costs of goods increase faster than their wages do. This loss in purchasing power leads to less consumption which compounds into less jobs and a stagnant economy. We are living in that world now.

Social Creditists promote the idea of a central authority that monitors prices and cost of living and wages and issues currency in concordance with the gaps. Specifically, they advocate that “The solution to these problems is to create and issue a sufficient volume of debt-free money in the form of the compensated price and the National Dividend to equate the rate of flow of final prices with the rate of flow of consumer purchasing power.”

A National Dividend could very well be seen as a basic income. It would provide more purchasing power to the average citizen and rebalance the relationship between capital and income, bringing us back to a better situation not unlike that of the 1950s, 1960s and early 70s.

Bibliography

http://www.socred.org/blogs/view/a-national-dividend-vs-a-basic-income-similarities-and-differences
http://www.peoplescapitalism.org/presentations/PeoplesCapitalismpaper3.pdf
http://www.ssc.wisc.edu/~wright/Published%20writing/paper%20for%20basic%20income%20studies.pdf
http://www.pieria.co.uk/articles/how_basic_income_will_save_capitalism