There’s been a lot of debate and political controversy around French economist Thomas Piketty’s new work “Capital in the Twenty-First Century,” so naturally I had to read it as soon as I possibly could. The book discusses economic inequality throughout the world (though primarily France, Britain and the United States), which has been a contentious issue for the last few years on both sides of the Atlantic. I finished it this last week, and my thoughts are as follows:
My political leanings aren’t much of a secret, but in reading “Capital” I wanted to put aside any preconceptions and just see what I could learn. That turned out to be pretty easy. “Capital” is much less prescriptive than one might assume. On top of that, there’s hell of a lot of data and history crammed into this 600-page thesis.
“Capital” isn’t for newcomers to macroeconomics. I’m not an econ PhD by any stretch of the imagination, but I have read a number of other texts on the subject, and without that base knowledge the book would have been borderline unreadable. If you’re looking for a more palatable entry point, I recommend Charles Wheelan’s “Naked Economics.”
For those familiar with the topics, “Capital” is not an ideological screed nor an exercise in scare tactics. Malthus was wrong, Piketty says – uncontrolled growth will not be humanity’s downfall. Marx, too, was wrong, as he underestimated the power of productivity growth, education and innovation as rising tides that lift all boats. However, Piketty argues, the prominent 20th century economists, who hailed capitalism as an ultimate solution to inequality and universal prosperity, were also wrong. To paraphrase Churchill, capitalism, like democracy, is the least worst option. As it turns out, capitalism itself inherently produces and perpetuates the types of wealth inequality we saw in the 19th century. It needs adjustment and correction, and does not inherently self regulate. The “invisible hand” is dealing much more to a select few.
Even if you don’t subscribe to these views, the breadth of data accumulated in the first two sections is staggering. Not being an economics expert, the history of capital, productivity and growth since the year 0 A.D. fascinated me in a way that academic texts rarely do.
In short, throughout human history, the rate of return on capital has nearly always been higher than the growth rate, meaning that those who own capital (land, buildings, machinery, rent, stock, bonds, etc.) could outpace everyone else simply by having what they have. That changed for a brief time in the 20th Century, thanks in large part to two world wars and a depression that upended the old social order (new taxes and the new phenomenon of inflation played a part, too).
The great growth the world saw in 20th century is a result of these shocks, not simply a triumph of capitalism, nor simply a result of the social welfare state. For a brief period, hard work and productivity were faster and surer paths to prosperity than simply owning stuff.
However, as the world recovers from the shocks slowly, conditions are reverting back to normal. Wealth accumulation hasn’t fully recovered to level of British aristocracy, in part because of taxation, inflation and the emergence of a middle class, but it’s getting closer and closer. Return on capital is slowly outpacing growth again, especially in Europe in America. This started in the 1970s, after the US peaked in its growth. Europe quickly caught up, which caused worry in US and Britain and ushered in Reagan/Thatcher. Today, Europe and the US are stagnating, while China, India and African nations are now accelerating their growth. This has little to do with our particular policies. We give presidents and prime ministers way too much credit/blame for the economic conditions of their time. Instead, it is in many ways simply a byproduct of the inherent structure of capitalism.
The central questions, then, are 1) Is inequality a problem? and 2) What do we do about it? To me, income inequality to an extent is healthy and preferable. Generally speaking, one can assume income inequality reflects the marginal productivity of an individual (some Wall Street execs and CEOs notwithstanding). Income, unlike wealth, ends at the end of one’s life. Wealth lives on and continues to accumulate, making it much more consequential for our societal and political structure. Capital gains on capital, creates unearned income, and slowly accumulates without any possible chance of ever being used in a productive way to spur growth (which is already projected to be low globally in the 21st century). This leads to an economy (and polity) largely dominated by the top decile or centile – an oligarchy.
So how to answer the second question? Well, Piketty suggests a couple of things, primarily establishing a global wealth tax. By his own admission this is utopian. By my own estimation this is laughable and never going to happen. Get all countries on the planet to share into one central bank or database who owns what capital and how much it’s worth, then tax the world at the same rates and distribute the revenue fairly and orderly? Good luck.
What could happen, however, is a more progressive tax system. Even in those nations that employ progressive taxation on incomes, overall taxes are often regressive because capital gains are taxed at lower rates, real estate is taxed at lower rates, and beyond that, those with the resources to hire top teams of analysts and accountants will dodge much of that tax burden anyway. Solving some of these loopholes and raising top marginal tax rates on income and wealth and the various forms of capital would help. This could help fund expansion of education, healthcare and social welfare, the proven innovations that drive global growth and prosperity for all, not just the fortunate.
One final note – a couple months after publication of “Capital,” an article in Financial Times purported to locate irregularities and inconsistencies in Piketty’s data that, when corrected, disproved his findings. Piketty responded at length here. You can read this for yourself. But even if Piketty is only partially right, aren’t the potential for inequality and the inherent unfettered externalities of capitalism an issue world leaders should be studying? Should we just ignore what we’re experiencing worldwide because we’re not 100% sure of the extant data? The dismissals of Piketty’s work seem more like attempts to ignore the issue rather than pursuits of ultimate truth and optimal policy prescriptions.
Link: Capital in the Twenty-First Century on Amazon.com.