Is Wealth and Income Inequality Inevitable in a Capitalist System?

Good question here from the forum today:

“Is wealth and income inequality inevitable in a capitalist system?”

I discuss this a bit in my new book, which, in my opinion, is a great primer for Thomas Piketty’s book on inequality.  If you want to understand Piketty my book lays the foundation for the entire discussion by helping you understand the macro framework in which he makes his argument.   But here’s my general view:

“Inevitable” is a bit of a generalization. “Highly probable” – yes. The thing is, capitalism runs on profits. And profits are optimized when they’re monopolized. A good capitalist will try to monopolize the means of production therefore maximizing profits.  And when profits are monopolized then you are very likely to get inequality because only a handful of people own the means of production. So capitalism has a natural tendency towards monopolization because capitalists naturally want to maximize profits.

Does it have to happen? No, it’s not certain, but my guess is that if you left a capitalist system entirely to its own devices there would be a handful of capitalists who monopolize everything. In fact, this almost happened in the late 1800′s and early 1900′s before the US government came in and started busting up some of the big companies.  We were well on our way to seeing a handful of people owning everything.

So, why is this potentially problematic?  Well, the economy isn’t like a poker game.  It doesn’t just end at some point where Warren Buffett gets to get up and walk away from the table with all the money.  The other players have to keep playing to keep on generating profits for the big stack players.  And if those big stack players just accumulate more and more chips then the other players have to rely on the incomes from their big stack employer, keep borrowing from the bank, relying on government redistribution to stay in the game OR compete with the big stack.  Of course, they could “pull themselves up by their bootstraps”, but that’s often easier said than done.  Especially when you’re competing against the big stack who has monopolized the means of production.  The endgame is a situation where the people who actually buy the goods and services that the big stack makes, don’t actually have the income or credit necessary to be able to go on participating and so you get a very stagnant economy.

Anyhow, this is a controversial and highly theoretical discussion, but it is my opinion that capitalism, if left entirely to its own devices, would tend towards monopoly which would tend towards inequality as fewer and fewer people own more and more of the means of the production.