Beneath their surface dynamism, Western-style free markets have also been marked by persistent dysfunctions. Certainly, living standards have been on a steep upward path in regions like East and SoutheastAsia, where developing economies continue to play catch up with the West. But free-market systems are experiencing growing levels of volatility which conventional market models find increasingly difficult to explain, let alone predict. The Global Financial Crisis (GFC) was the latest and biggest in a string of systemic financial collapses experienced by global free markets over the last twenty years.

It is into this context that Thomas Piketty’s Capital in the Twenty-first Century steps in. In one sense, it is a corollary to The End of History – an unlikely publishing success penned by an academic who also voices a leitmotif for the times. It is also an important bookend to Fukuyama’s work – one that speaks to a growing realisation in the West that history never ended.

Not only is ‘history’ repeating itself in places like Iraq and Afghanistan, where the West has tried vehemently but failed to imprint its world view; history has also recycled itself within the West in ways that are the antithesis of the promises it held for itself, and the world it had won, in the early 1990s.

Capital in the Twenty-first Century has turned the author, a French economist previously unknown outside his own country, into a global opinion leader. The reason for this success is straightforward. The book focuses on what is rapidly developing into the signature failing of Western political economies to deliver on their post-communist dream. This failure is burgeoning inequality and the implications that this has for the West’s cherished narratives of meritocracy and opportunity. In the process, Piketty turns on their head many of the assertions that unfettered markets make about themselves.

The free-market mantra has dominated economic and public policy debate in the West since the fall of the Berlin Wall in 1989. The sudden collapse of communism not only discredited the movement: it placed a serious question mark over any policy in the West, or anywhere else, that was seen to be relying excessively on state planning or intervention, and not enough on market forces. As a result, over the past twenty years free markets have had a relatively clear run ideologically and conceptually. The world of markets, as free-market theory sees it, is one of progressive and harmonious order. Conferred with all-seeing, self-correcting capabilities, they are largely incapable of creating serious distortions and systemic failures. If distortions do arise (largely the result of too much state activity), only more unfettered supply and demand will untangle them.

This view is carried over into how free marketeers view inequality. Rampant inequality occurs if economies resist markets, or if they stumble in the journey from emerging markets to mature market economies. But inequality should moderate as markets develop and deepen. This is because the more market activity, the more capacity markets have to cleanse away dysfunctions. The overall upshot of this thinking is that inequality has been effectively taken off the table as an economic and public policy issue for much of the past two decades.

Piketty’s book takes these conceptions apart on two levels. In the process, he makes a significant contribution to returning inequality to the centre stage of contemporary public debate. The first point of attack is at an empirical level. Coming in at nearly 700 pages and backed by a data set of wealth and economic statistics covering the past three centuries, the book takes a long-run view on the issue. This allows Piketty to uncover three critical trends.

Thomas Piketty (photograph by Emmanuelle Marchadour - Seuil)

First, what had been a significant narrowing of the rich–poor gap among core Western economies around the middle part of the twentieth century has been overtaken by its inexorable widening since the 1980s. Second, major wealth disparities are not just occurring in economies where market rules are weak and oligarchy strong. Deep inequality and the corrosive social, political, and economic problems it brings are occurring where market rules – and the political and policy institutions that support them – are allegedly the strongest.

Heading the worst offenders is the United States, where the gap between rich and poor is approaching cosmic proportions. Sixty per cent of the country’s increase in national income since the late 1970s has been accrued by the richest one per cent. The United Kingdom, France, Germany, and Italy are likewise characterised by increasing concentrations of hyper-wealth at the top of the ladder, while the bottom half own little or virtually nothing. Australia is also in the mix. Over the last three decades, the share of national income owned by the richest one per cent has nearly doubled.

Piketty’s third empirical finding is perhaps the ultimate perversity for those clinging to The End of History notion that Western systems in a post-communist world automatically equate to progress. Economic élites are dominating wealth accrual in Western economies to such an extent that we have exceeded, in rich–poor gap terms, the Gilded Age of the late nineteenth century. This is the era most associated with hyper-capitalists and robber barons, whose outrageous fortunes and conspicuous consumption symbolised absolute power at one end, and powerlessness and paucity of opportunity at the other.

Such a claim is perverse not just because it runs up against the dominance of laissez-faire market thinking and the belief that only markets can break dysfunctional economic cycles. It also runs seriously counter to the ideology of  ‘Internet as gamechanger’. The rapid roll-out of the World Wide Web from the mid-1990s has led to a plethora of commentators extolling today’s economic world as some shining new thing. In the digital world, upward mobility is seen as far more likely than ever because knowledge and information – so readily available and in unprecedented volumes for everyone with a smartphone or laptop – has replaced capital as the kingmaker.

Piketty’s analysis, however, reminds us that somewhere in our excitement about the digital age, we have confused informational flux with economic and social mobility. Instead of unlimited opportunity created by instant informational access and virtual networking, the world today remains one of élite enclaves presiding over growing opportunity gaps for many. Plus ça change, plus c’est la même chose.

Piketty’s second line of attack is conceptual. Essentially he focuses on capital – the lifeblood of markets – to answer how and why a return to deep wealth inequality coincided with the beginnings of free market ascendancy over thirty years ago. To understand this, he unpeels and discards the skin of market-oriented jargon – human capital and the like – that has accumulated around the concept.

In essence, capital, according to Piketty, is saleable financial assets such as stocks and bonds, together with property, that create returns such as rents, dividends, and interest. Returning the concept to first principles, then combining it with his vast data set, allows Piketty to unlock the book’s key argument. Returns on capital consistently grow at faster rates than normal economic outputs and income like workers’ wages. The upshot is that markets, left to their own devices, can never moderate inequality. Instead, the logic of capital – and of the free markets it lubricates – is such that it can only ever drive major disparities in wealth.

In today’s world, he argues, the inherent tendencies of free markets to stack the deck massively in favour of a small group of economic élites with privileged access to capital are compounded. This is because the rich–poor gap is not only driven in the ‘old’ way through inherited wealth. What makes the twenty-first century potentially worse than the Gilded Age is the rise of what Piketty identifies as a new class of what he terms ‘super-managers’ – otherwise known as corporate CEOs. Unregulated executive pay allows CEOs effectively to remunerate themselves and in the process to corral massive amounts of capital – shares, options, and the like. As a result, Piketty concludes, they have become a major driver of wealth inequality in the twenty-first century, particularly in Australia, the United Kingdom, and the United States.

The broader ramifications of the growing rich–poor gap do not stop at economic dysfunctions, the book argues. Extremes of economic privilege and poverty are cascading into our democratic systems. This is because the super-rich cycle their wealth into outsized political influence to further advance their interests, to the detriment of an increasingly voiceless public.

Thus free markets puncture not only their own claims of being the optimal economic system to produce and distribute scarce resources. They also put to the sword The End of History ideal of twenty-first century Western democracy being the optimal system to advance the broader public interest. Piketty sums up his thesis this way: ‘Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.’

‘So what?’ you might ask. Isn’t Piketty highlighting the sort of disconnects and dysfunctionalities identified with capitalist political economy by Marx et al. almost a century and a half ago? Yes and no. Certainly the aim of the book is to resurface some basic truths about systemic problems inherent in capital-based economies. But Piketty is not opposed to markets per se. He claims that terminal dysfunctions with central planning uncovered by the collapse of communism inoculated him against what he terms as the ‘lazy rhetoric of anticapitalism’. He also attacks Marx’s lack of methodology, accusing the nineteenth-century economic philosopher of making up the facts to suit a preconceived agenda.

Not surprisingly, however, Piketty’s book has pitted him against economic dries, who have attempted to unpick the credibility of his arguments. The Economist recently labelled Piketty the ‘new Marx’. A front-page story by The Financial Times accused Piketty of confecting parts of his data. Piketty stands by his evidence, and is supported by numerous experts and commentators who acknowledge the veracity of the book’s key assertions.

The other argument from the economic right is that inequality should not be a prime measurement of the performance of markets. Instead, we should be looking at improvements in meta-metrics like Gross Domestic Product (GDP) – in other words, markets’ overall performance.

Certainly, GDP continues to grow, albeit tentatively, in most economies post-GFC, picking up from strong overall growth trends prior to 2008. However, not only does GDP as a metric mask enormous wealth disparities within market economies; it assumes, as laissez-faire economics is hardwired to do, that increasing the whole economic pie will automatically mean that slices will be distributed in a relatively efficient and balanced way.

Flawed criticisms such as these highlight an ideology in denial. In disputing the minutiae of Piketty’s argument or simply trying to reframe the problem, free marketeers seem to expect that the empirical realities of raging wealth disparities will disappear, or will at least be downplayed. The reality is that they won’t. The issue will continue to burn as long as the statistical evidence and day-to-day experiences of growing numbers of market participants who struggle to stay ahead of poverty say otherwise. This is why the recent federal budget has been received so negatively; it is not simply because of the unfairness of its draconian measures, largely sprung upon a public tired of investing credibility in political leaders with hidden post-election agendas.

The bigger problem for Australia’s political and business élites is that the reaction speaks to a widening public disbelief in the market mantra that underlines it. The real punch behind Piketty’s book is the political and social implications of its underlying claim. Wealth disparities growing at the current rapid rates render illusory the claims of broad-based prosperity and inclusion that underpin the credibility of Western-style markets and democracy.

Elsewhere in the West, a realisation is growing that widening wealth and opportunity gaps in the wake of the GFC are creating the seeds of a credibility crisis for free markets. A recent Oxfam report gives a global context to the problem. The report highlighted that the global rich–poor gap is now so widely skewed that eighty-five of the world’s richest people own as much as the poorest 3.5 billion. As many still struggle to restore their losses, much of the wealth generated since the GFC has been concentrated in the hands of the same one per cent. In Australia, the wealth of the nine richest is equivalent to the net worth of those twenty per cent at the lower socio-economic end.

Oxfam’s own polling, as well as other reputable opinion monitors, shows hardening public perceptions across the globe about the current state of political and economic systems. This is because they are viewed as being increasingly geared to benefit the wealthy. Increasing public angst explains why global leaders including Barack Obama, Pope Francis, and the World Economic Forum have been waving red flags about the long-run social and political dangers of allowing this gap to widen unchecked. Even the International Monetary Fund has highlighted the dangers of inequality in curtailing sustainable economic growth – this from an organisation obsessed for most of the last two decades with cajoling nations to slash welfare spending to stimulate economic growth. As Piketty argues: ‘It is long since past the time when we should have put the question of inequality back at the centre of economic analysis and begun asking questions first raised in the nineteenth century.’

Australia, on the other hand, has become a sort of Piketty-land. This is a place where the economic, political, and social ills of increasing twenty-first century inequality are not only ignored but magnified. Here we have a government seeking to address a purported fiscal ‘emergency’  by framing its recent budget entirely around the assumption that if support to the poor is slashed while wealth is preserved and protected, all will be well.

The government in turn has been advised by the outsized policy voice of big business – aka Piketty’s super-managers – through the Commission of Audit. Both the tone and substance of the budget highlights an underlying view by big business leaders and the current government that it is individuals, rather than any failings of the market system, who have allowed themselves to become unequal. This in turn gives rise to labels such as ‘leaners’, which have been attached to welfare recipients as a means of defending the budget. I was the Director of Strategic Communications for the Business Council of Australia for five years in the 2000s. As such I was effectively the chief lobbying voice for the big end of town. From my perspective, the budget is a poorly thought out rerun of 1980s-style ‘trickle-down’ economics that assumes that more wealth at the top will mean more of it running down to the poor.

The reality, as many welfare groups at the coalface of inequality have pointed out, is that the budget risks entrenching a growing underclass in Australia. Defended vigorously by corporate CEOs whose super-salaries do the most to drive Australia’s rich–poor gap, the budget will also deepen public cynicism about markets. In turn, this will make more credible economic reform in the future increasingly difficult to achieve.

Our élites would be well-advised to read a history of the Gilded Age in order to understand what is at stake not just for ordinary Australians, but for their own authority. The political and economic excesses of that era not only resulted in a deep corrosion of trust in its élite: it was also a turning point in the path for Western political economies. Fed up with glaring wealth disparities between rich and poor and the political distortions this had created, many turned to demagogues and anti-rich ideologies. The end result was the beginning of social democracy, whereby Western liberal states were re-tooled to aggressively intervene and smooth away capitalism’s sharp edges, notably gross inequality.

Piketty’s book is an important narrative to remind us why we are once again at a crossroads in the West. We can continue to take The End of History route and believe, paradoxically, that by instituting more of the failed past we will at some point arrive at an optimal point in the future. Or we can take stock and acknowledge that trying to pursue an ideal of perfect markets in a post-GFC world that is increasingly resistant to it amounts, at best, to a profound lack of policy imagination.

Solutions to addressing deepening inequality are not easy or obvious. Piketty takes a stab at it, but even his notion of a global wealth tax falls short of a practical blueprint. Like every historical turning point, tackling persistent and destabilising social and economic problems involves recognising that current ways of organising society may no longer be fit-for-purpose. Curbing inequality will inevitably require a rethink of the role of the state and its relationship with market economies. It will also require more inclusive systems of input into important areas of policy, rather than an exaggerated reliance on corporate leaders, who often mistake private wealth for collective wisdom.

As Marx wrote, history repeats itself, first as tragedy, then as farce. The Gilded Age was a tragedy for many, not just in terms of the wasted opportunity and potential of those consigned to the bottom. It was also a tragedy in the sense that the mass social and political discontent it created segued directly into the tumultuous first decades of the twentieth century. The long-term implications of growing inequality for Australia – a country that identifies itself intimately with egalitarianism and a ‘fair go’ – have far more potential for social and economic tragedy than farce. This in a world which, thanks to the lessons of history, should know much better.