Review of “Capital in the 21st Century” by Thomas Piketty


For such a long book (800-odd pages), Thomas Piketty’s Capital in the 21st Century certainly does boil things down to basics.

There are two fundamental laws of capitalism, argues Piketty. One: the rate of return on capital investment (rents, interest, dividends, etc.) will always exceed the overall growth rate of the economy. Even briefer: r > g.

Two: Accumulated wealth is growing faster than annual incomes. This is an innocuous way of saying the rich are getting richer simply by breathing and not necessarily by working harder than everyone else.

capital pikettyThis second law is the really interesting part of the story. Spelled out in a little more detail, it says that the ratio of wealth to incomes is equal to the rate of savings over growth, or β=s/g. According to data Piketty amasses for nine rich countries, the rate of savings has remained relatively constant independent of the growth rate over the last several decades. This was hard to notice in, say, 1950s America, because the growth rate was so high that labor incomes were rising across the board (including, crucially, among the lower class then joining the middle class). Working stiffs didn’t really sit up and take notice of how much money the super-rich had in the banks, because their purchasing power was rising quite merrily and they were buying their own homes at record speed.

This era of high wages, job security, and increased home ownership is a golden age we look back on as a normal state of affairs we would like to regain. But here Piketty throws in a twist. The postwar boom was not normal.

Measured over the decades and centuries, what we are led to think of as low growth (below two percent) is actually normal growth. The boom years in all the world’s developed economies have been sparked by one of two things–a deliberate mobilization of production in response to a crisis (war or depression) or periods in which less-developed economies catch up to technology leaders (think Asian Tigers). The three to four percent growth of such tiger economies are the exception, not the rule. American politicians who say they can lead the country back to “permanent” three percent growth are, according to Piketty’s data, simply ignoring reality.

The problem, if you care about such things, is that, when growth slows to a normal rate, the rich “gain” a much larger share of a nation’s wealth simply by holding on to what they have. If, for example, growth in a country with a savings rate of 10 percent slows from three percent to one percent, the capital ratio (the value of stuff owned versus aggregate annual income) shifts from 333 percent to 1,000 percent! (That exclamation point is not a mathematical operator.)

The deeper problem is–I already implied this, but it bears repeating–low growth is the new normal. It is actually not low growth at all. Although some of Piketty’s data sets are patchy (and he admits this), the long-term numbers are convincing on this issue: most developed economies grow most of the time at about one and a half percent. We should stop calling it low growth.

And here’s the thing about “low” normal growth. When we go back to Piketty’s first law, we see how the inequality of wealth distribution would compound massively in an era of normal growth. Not only would the rich become richer just by sitting and owning a larger share of the nation’s wealth, but they would also continue to enjoy a rate of return on capital investment that outpaces overall growth. The economy might not be going like gangbusters, but capitalists  will still beat the growth rate unless they make a special effort to lose money. The result, which we see unfolding before our eyes, is that the rich will climb the y-axis of the β-chart assymptotically until they own very nearly everything.

The buzz around Piketty’s book when it came out in 2012 was that it revealed him as a “new socialist.” By Fox News standards, I suppose he may be: he does not seem to think we should taunt and slander the poor for their degeneracy. I would have thought, though, that any socialist worth his salt would have made more of the fact that the two laws of capitalism as Piketty draws them roundly refute the idea of trickle-down and the invisible hand. Quite the opposite, in fact; no matter how much the rich already have, or how fast the economy is growing, they do not sprinkle gold coins more freely on the poor; indeed they hold on at precisely the same rate as in lean times to their stores of riches. One of Piketty’s less remarked-upon points is that there is too much idle capital in the world. Although tycoons are credited axiomatically as “job creators,” they actually do much less than they could to vivify the job market.

I must admit I anticipated a long slog when I started to read Piketty, something like Stendahl with formulas. There are formulas, of course, but Piketty is wonderful at explaining them. The surprising thing is how fluidly the whole book reads. With only one exception, each chapter presents a digestible quantity of concepts, vlaues and data, with a clear overarching story to tell.

One of the recurring treats of the book is Piketty’s descriptions of “orders of magnitude,” or rough figures that give you the parameters of a curious phenomenon. One of the more memorable of these is how closely our pattern of wealth dsitribution today resembles what it was in England in the heyday of colonialism. In America, the richest 10 percent of the country owns 70 percent of the wealth. The “middle” 45 percent owns 25 percent, and the bottom 55 percent owns almost nothing. They have only the clothes they stand up in, as Orwell once put it. The Victorian English pulled off these numbers by extracting lots of wealth from other countries, in the form of oil, tea, rubber and so forth. Piketty leaves unspoken the observation that our American robber barons, lacking colonies, must have won their 70 percent pie by fleecing peasants and fracking  landscapes much closer to home.

Piketty is also keen to point out surprises or patterns that seem to contradict his main ideas. For example, it is only the super-rich who out-earn the rest of us by simply sitting back and letting the dividends roll in. What has become much more common–specially since the deregulation of financial markets in the 1980s and 90s–is for the moderately super rich (funds managers and CEOs most of them) to out-earn us mere mortals through labor income. If you are a skilled, assiduous technology worker you might be sitting pretty on $150,000 a year of labor income. Not bad, but you lag pathetically far behind a hedge fund manager earning a million dollars a year plus several more million more in bonuses. People, of course, notice this kind of thing. In a phrase I will long recall for its primness of understatement, Piketty muses whether there is indeed such a “discontinuity of marginal labor value” between workers as the income gap between tech worker and fund manager suggests. One wishes Upton Sinclair were alive today to appreciate this phrase.

What to do about the runaway concentration of capital wealth? Sit back and wait for global class warfare? It need not come to that. Most developed economies already have robust graduated tax schedules, which means the wealthy are taxed at higher rates than the poor, on their income. This is a good start, but it obviously has not solved the problem of the über-concentration of capital. What is needed, Piketty argues in the last chapter of Capital, is a graduated tax on capital itself. We already have this, of course, in the form of real estate property tax. The idea would be to expand this tax to cover all kinds of capital holdings. It would ipso facto redistribute some of that 70 percent that the owning-class owns to the toiling classes and–as a friend of mine pointed out–would potentially knock loose some of the super-riches’ idle capital for use in dynamic, job-creating investments–the invisible hand, forced to do its job.

Piketty is not naive, of course. He does not see a clear path to achieving the goal of a capital tax. If we were to take the first step, though, we would have to insist on the enforcement of wealth-reporting laws that today go mocked and ignored thanks to the existence of offshore tax havens. The super rich help themselves to the legal and regulatory protections of an advanced market economy but, in an act of breathtaking hubris and hypocrisy, move their winnings outside the reach of the system that fattened them in the first place. Where I come from, it is perfectly fine to play to win, but a game is not a game if it has no binding rules. Tax havens corrode capitalism at its foundation by saying the rules only apply when the super rish want them to. (And, it is worth bearing in mind that it is the hypocrisy of the ruling class, not necessarily their wealth, that sparks violent revolution.)

Another friend of mine pointed out that Piketty is too Cartesian to be entirely convincing: he plots his graphs and pronounces his clear and distinct ideas, not quite allowing for the empirical messiness of the real world. I think the most worrisome point in this area is Piketty’s idea for the tax on capital. It would be forgiveable for Piketty to have erred slightly somewhere in his analysis of historical phenomena. A curve, after all, is known to idealize an arcing cluster of messy data points. But to trust his recommendation of such a robust intervention as a capital tax might prove foolhardy. A tax on capital is indeed an elegant, Cartesian solution to the problem at hand, but “elegant” in mathematics usually means the formula ignores conflicting realities. To Piketty’s credit, though, throughout his book he marks off many of the potential hazards and weaknesses in his theories. Read him for a bracing, intellectually honest appraisal of who owns how much and what it all means. And even if you don’t turn the last page cheering viva la revolucion, surely we can agree to do something about those fucking tax havens.


One thought on “Review of “Capital in the 21st Century” by Thomas Piketty

  1. The model is wrong, because the equilibrium between GDP growth + plus inflation should be with capital income – minus bankruptcies.
    GDP+inflation= – bankruptcies.

    The reality is, that wages are price for work, while capital income is the price for accumulation of the capital in the past, plus entrepreneurship, plus innovation.
    If W=Ci then there is no change in distribution of the income.

    Price of any economic item is scarcity dependent. In times of big economic growth, that are times when new technologies and know how in different fields, discovered in previous era, or when there is a need for post war reconstruction, the demand for labour growth above the capacity to supply it.

    The marxist view would be that the reward for innovation and entrepreneurship is only other form of wages. But it is not. Definitely not in the modern era.

    Since the seventies, at first the top musicians and performers became immensely rich, then at eighties the new technology entrepreneurs like Bill Gates, then the internet barons, etc. Before and between the world wars the wealth was generated in the hands of entrepreneurs and inventors of different kinds, who exploited opportunities and/or were lucky, like adventurers as gold miners, oil explorers, inventors, but also management inventors as corporate businesses initiators, new marketing technique inventors, etc.  After they introduced their novelties to the public, others tried to copy them, and their inventions and novelties were institutionalised and teached in Universities. Other kind of wealth accumulation were done by business venturers, who exploited the opportunity of dramatic political-economic system change, as it happened with the collapse of the Soviet Empire.

    To make law, based on temporary situation, as it is locally in the Western world in the last few decades, is misleading.

    Even in the last fifty years of relatively calm economic development, there is quite a lot of mobility as to who accumulates the wealth. It’s enough to check who are the most wealthy people in the West now, and who they were at the seventies. Also in corporate level there was a big shift from car and oil producing companies to know how and high tech novelty based companies.


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