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Capital In The Twenty-First Century - What The 1% Don't Want Us To Know

"The world is not the way I saw it", said Paul Grugmen on a recent interview by Bill Moyers. They were discussing Thomas Piketty's new book, Capital in the Twenty-First Century.

Grugmen also discusses his initial impression of the book in the article Why We're in a New Gilded Age:

Piketty throws down the intellectual gauntlet right away, with his book's very title: Capital in the Twenty-First Century. Are economists still allowed to talk like that?

It's not just the obvious allusion to Marx that makes this title so startling. By invoking capital right from the beginning, Piketty breaks ranks with most modern discussions of inequality, and hearkens back to an older tradition.

Who can possibly write a book with the ability to create a eureka moment for Paul Grugmen, one of the nation's most pre-eminent economists? Thomas Piketty, professor at the Paris School of Economics, is a French economist that's changing the way economists view the world.

Piketty's main point in the book is that the rate of return on capital is higher than the rate of return on the economy. It is this one concept that is mind blowing for most economists. It's certainly not one of the financial assumptions learned in b-school. To be clear, the book is saying that the rate of return on capital is growing at 4-5%, while the rate of return on the economy (your labor) is growing at 3%. It may seem like a minor conclusion, but it has large implications for the world economy.

High R, Low G
What is this theory saying ultimately? It's saying that over time, if you have a large fortune, you can live very well for a long time and then pass that wealth on to future generations. Yea! Isn't that the American way? Well, because capital has a higher rate of return than labor it gives big dynastic fortunes a greater piece of the world's wealth and power every year -- without effort. There's nothing the "average Joe" can do to catch up.

Indeed, these teachings are starting to sound more like Illuminati conspiracy than economics, but the theory is supported by what economists are referring to as "beautiful math".

The formula presented in the book is:

High "r" (rate of return on capital) + Low "g" (growth rate of the economy) = An increase in dynastic fortunes over a given generation or period of time

This is perhaps the best argument out there for the notion that we are drifting toward plutocracy. Labor will be paid for out of the hands of an increasingly smaller group of people that go relatively unseen by the average person. "You're never going to meet these people", said Paul Krugman during the recent PBS interview entitled What the 1% Don't Want Us to Know.

Of course, being American I think about this from an American perspective. Wealth, capitalism and a free economy are as American as apple pie. That said, wealth predates nation states -- it is global. I see nothing wrong with capitalism, but this argument appears to be saying that capitalism is working to the detriment of itself on a global level unless we all own some amount of capital.

Let's take a look at one of America's most well known dynastic families, the Walton's, who's heirs are purported to have an inheritance that could fill a large swimming pool with solid gold. The Walton's are noted for bypassing a host of taxes intended to guard against the perpetuation of dynastic wealth.

Bloomberg published a fascinating article last September on the Walton's. Here's an except:

Estate and gift taxes raised only about $14 billion last year. That's about 1 percent of the $1.2 trillion passed down in America each year, mostly by the very rich, former Treasury Secretary Lawrence Summers estimated in a December blog post on The contrast suggests "our estate tax system is broken," he wrote.

Then there are the Jackie O. trusts which were originally designed to be charitable planning tools. According to the article the Jackie O. trusts set up by Helen Walton return about 14% a year.

That growth means the four Helen Walton trusts have been accumulating assets faster than they give them away. As of 2011, they held a combined $2 billion, up from $1.4 billion in 2007. Barring a stark reversal of fortune, at least that much money will probably pass to Helen Walton's heirs.

So, perhaps the answer is a global redistribution process or a global tax on wealth. This is one of the solutions Piketty puts forth in his book. It goes without saying that the 1% hold a great deal of power and influence, so a global tax may be a difficult thing to pull off. And, even if the tax was implemented, billionaires would only find loopholes, much like the Walton's have.

In answer to this obvious conclusion Piketty asserts that innovations like the Internet can be used to fight the power block. Indeed, there are a host of international movements aimed at economic innovation -- some are more progressive than others. Franz Hormann, an Austrian economist and associate professor at the Vienna University of Economics, has gained a following based on his views of individual collectivism. Michael Tellinger is gaining traction with a progressive movement referred to as the Ubuntu Party out of South Africa. His goal is to dismantle the central banking system of South Africa. He also hopes to use free energy to build 'contribution communities' all over the world. Who knows if these gentleman have the right answer, but they are 'thinking', which is the root of innovation. (click to enlarge)Le Penseur, Source: WikipediaClick to enlarge

This is not a political or ideological issue. People are the same all over the world -- we have jobs, we have homes, we have families to protect. We also have the same innate respect for freedom and when that freedom is tested we tend to go to war -- we revolt, we kill, and we redistribute that wealth.

History, most notably French history, has also shown us that an oligarchy is not as morally effective as a democracy or even a republic. If capital is worth more than labor it's not only bad for those of us that labor for a living, it's also bad for those of us investing our labor dollars in capital. It is certainly uninspiring for the entrepreneur or small business owner that pays for labor. At some point the pyramid falls and devolves us all.

"We shouldn't have a situation where gimmicks allow rich people to avoid estate taxation," says William Gates Sr., the author of a 2004 book that advocated for the estate tax. According to the Bloomberg article Gates believes that, "A value in our lives is having children who make their own way to some extent."

One thing is certain -- history has shown us that we possess a redemptive power which increases as income disparities become more pronounced and felt among us. It has also shown us that we can escape from oligarchy through two historical paths, through wars and depression or a progressive movement of philosophical readiness.

I look forward to any comments.