We don't need 19th century inequality to achieve 21st century growth

The Coalition government is currently rehearsing a well-honed rhetoric on “everyone having to do the heavy lifting” to justify Treasurer Joe Hockey’s slash and burn budget on social services and pension entitlements.

But perhaps he might pause a while to consider a new book making waves around the world, which provides two centuries of financial data from 20 countries directly confounding Hockey’s central assumptions on the sources of growth.

French economist Thomas Piketty’s book, Capital in the 21st Century has been generating an increasing amount of heated commentary with the argument that increasing inequality is undermining democracy and destroying the chances of equitable opportunity and sustainable growth.

Piketty argues - with the support of a massive amount of economic data - that the problem is not caused by the benefits paid to the poor, but the increasing wealth commanded by the rich (such as those happy to pay $500 a plate at Liberal fundraisers).

Hockey is an old-fashioned believer that state intervention crowds out entrepreneurial initiative, individual enterprise is checked by state benefits, and that public debt is a continuous drag on economic growth.

This week Hockey will publish the report of his hand-picked Commission of Audit to support his view that only dramatic cuts in benefits in the medium term can sustain growth. Piketty demonstrates that Hockey is looking at the problem through the wrong end of the telescope: the problem is the increasing concentration of wealth of the rich, not a lack of incentives for the enterprising.

It is amazing the Financial Times, Wall Street Journal, The Economist, Huffington Post and New Yorker magazine among many mainstream media are all earnestly debating Piketty’s devastating critique of increasing inequality. Any consideration of inequality has been out of fashion for decades. Reagan and Thatcher cauterised any sensitivity to the causes of inequality stone dead with their disinterment of a laissez-faire celebration of free enterprise. Yet Picketty’s book on inequality is now number 1 on Amazon’s top 20 books list.

And Piketty is an economist! With honourable exceptions such as A.B. Atkinson in the UK, and Paul Krugman, Joseph Stiglitz, Robert Reich and Emmanuel Saez in the US, with regard to the question of inequality, economists have been trapped in the fatal embrace of the efficient market hypothesis and studiously pursued quantitative modelling of increasingly obscure hypotheses.

Nobel prize winning economist Paul Krugman has said Piketty’s Capital inspires “a revolution in our understanding of long-term trends in inequality.”