Thomas Piketty is a problem. If the best-selling French economist has got it right, much of what we thought we knew about economy and society—about how the world really works—is wrong. For instance:
- A rising tide doesn’t lift all boats.
- Inequality in wealth and income is the norm, not an aberration.
- A properly-run market economy is an engine for inequality and unfairness.
- It’s going to get worse, unless government does something about it.
This isn’t the economic theory that most of us learned in school, and that still dominates most academic thinking and government policy. No wonder the attacks have already begun on Piketty’s book, Capital in the Twenty-First Century. These attacks, too, will get worse. So far, Piketty seems to be weathering them well.
At 577 pages (plus 90 pages of notes), Capital is a doorstopper. But it’s a publishing sensation, the blockbuster of the year. Even Amazon ran out of copies for a couple of weeks while the book’s delighted but astonished publishers at Harvard fired up their presses.
There’s a reason. Piketty benefits from perfect timing. Whatever the academic economists say, many Americans sense that their society is becoming more unequal, that the 1 percent is profiting while the rest of society stagnates—in short, that there’s something seriously wrong. Piketty says they’re right, and he backs this with a mass of open-source data (here and here) that even the book’s critics acknowledge is ground-breaking and valuable.
(Links to reviews and articles on Capital, including criticism of his data, are at the end of this post.)
What Piketty and his colleagues have done is to use modern technology to amass an ocean of data, both on the current distributions of wealth in the US and some European nations, and then chart the same distribution over the past 300 years.
A key finding: in a normal capitalist economy, the rich do get richer.
There are two kinds of people, Piketty says—those with capital (which includes stocks, bonds, machinery, real estate, etc.) and those who rely on their labor for their income.
Until now, the received wisdom said that, as economies grew, the growth would be more or less evenly shared between capital and labor. Piketty says his research shows this isn’t true. As economies grow, he says, the return to labor—wages—grows at about the same rate (although even this growth has stalled in the United States in the past 40 years.) But the return to capital—the incomes from investments—grows faster than the economy, and so grows faster than wages.
The upshot is increasing inequality. Year after year, the gap widens. Capitalism has no built-in valve to turn this off. Outright redistributive measures such as taxes can redress the balance. Otherwise, the only time-tested remedy is revolution.
Piketty says a key force driving inequality now is the bloated salary levels for executives and financial moguls, which are soaring far beyond the growth of the economy. His critics say these members of the 1 percent earn their pay. Some do (Bill Gates, Jeff Bezos) by creating value. Most (too many CEOs, hedge fund managers) don’t.
Whatever, these fortunes eventually are passed down to heirs (the Koch brothers, for instance.) These heirs invest their inherited wealth in capital, such as oil fields (the Koch brothers), which makes them even wealthier, giving them the financial clout (the Koch brothers) to defeat any policies that might stop this process short of revolution.
Piketty’s data shows this has been going on for more than 200 years. From Jane Austen to Downton Abbey, this sort of inequality was taken for granted. It peaked during the Belle Époque, at the turn of the 20th century.
But then it broke. Two world wars destroyed much of Europe’s wealth and drove American taxes sky-high, to pay the war debts. In between, the Great Depression wiped out many fortunes. As a result, a new era of shrinking inequality dawned, culminating in the 30-year period between 1945 and 1975 in which capital and labor largely shared the postwar economic growth.
“The Glorious Thirty,” the French called it. But it was a blip. The growth, Piketty says, was largely catch-up from the wars and Depression. The Reagan-Thatcher revolution reversed the trend to equality. Now, 40 years later, we’re back to the upstairs-downstairs inequalities of the Belle Époque. Or so Piketty’s data tells us.
Just a blip, yes, but we took it seriously. Those of us who came of age in the Glorious Thirty assumed it was the norm. Simon Kuznets, a Nobel Prize winner, said that as developed societies grew, they became more equal. Kuznets’ thinking has pretty much dominated economic theory ever since, even as people sensed it wasn’t working.
Piketty is the anti-Kuznets. Global growth for the foreseeable future will be about 1 percent per year, he says. Return to capital will remain high. An ever-wealthier 1 percent will perpetuate itself, through inheritance.
In the end, “the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.”
In other words, capitalism is bad for democracy.
This means that, if Piketty is right, we have to rethink the relation between markets and society. Milton Friedman, the Chicago economist and one of the most influential economists of the postwar years, equated free markets with free societies.
“A society that put equality before freedom will get neither,” Friedman said. “A society that puts freedom before equality will get a high degree of both.”
Basically Piketty says Friedman is wrong—that you can have free markets or equality, but not both.
Piketty, incidentally, grew up in the waning years of the Soviet experiment, knows it was a bust, and, while a student of Karl Marx, has no nostalgia for Communism.
At some point, Piketty says, government must redress the balance. He recommends a global wealth tax, to be levied on fortunes around the world. As Piketty himself concedes, this is a totally impractical idea with zero chance of becoming fact. But it has given his critics a weapon: The Economist magazine, which has tried and failed to fault his analysis, has used this tax idea to flail him.
The analysis itself is powerful enough. Having posed the problem, Piketty is under no obligation to solve it, and probably wishes now he hadn’t tried.
Here are some positive reviews and analyses of Capital:
Why We’re in a New Gilded Age, Paul Krugman, The New York Review of Books
Forces of Divergence, John Cassidy, The New Yorker
The Return Of "Patrimonial Capitalism," Branko Milanović, World Bank
Some critical reviews and analyses:
Tyler Cowen in Foreign Affairs, Capital Punishment.