Capital, by Thomas Piketty, review

Capital in the Twenty-first Century, by Thomas Piketty

I have heard it said this is a difficult book, and I disagree—I found it a pleasure to read. Piketty is a good writer and explains economic terms and concepts very clearly. The only thing required of a reader is the patience to read page after page of descriptions of wealth in various times. I have no training in economics, so if you want an economist’s review of this book, check out Paul Krugman’s review in the New York Review of Books. However, I have become more and more convinced of the importance of economics in politics and history, so I have attempted to educate myself. This then is the impression of Capital by a semi-educated layperson.

Piketty has analyzed an unprecedented amount of data on wealth and has come to the conclusion that there is a fundamental mathematical equation that not only explains income and wealth inequality, but also explains why it will always tend to increase and concentrate over time.

This equation is r > g, where r stands for rate of return on capital and g stands for growth of the overall economy. For most of the period for which there are statistics (beginning about 1800), r has been greater than g, and this means capital increases seemingly without limit during these periods.

Much of the 20^th century was an anomaly because of the two world wars and the Great Depression. First, these events destroyed vast amounts of wealth, particularly in Europe. Second, they also impacted the values of r and g. The US and Britain pioneered the concept of confiscatory taxes at the highest income levels—up to 90%, which reduced r, the rate of return on capital. In addition, there was a great deal of rebuilding to be done in Europe, an arms race in the US to finance, and an explosion of consumer products for the new middle-class to purchase (telephone, radio, washing machine, refrigerator, car, television, computer), which greatly inflated g, the growth rate. For a few decades after 1950 the basic equation of capitalism was reversed—g was greater than r. This automatically lowered income inequality, and created the false impression that capitalism had been tamed and wealth inequality was a relic of the past.

But Piketty’s research shows that this was a mirage; great wealth had suffered a setback but wasn’t knocked-out. As the West recovered from the effects of WWII, the growth rate of economies slowed and policy makers panicked. Instead of recognizing this was a natural return to ordinary growth, the leaders thought growth could stay high forever. So any slowdown meant the rising nations in the East, particularly Japan, were going to outpace the West. Particularly in the US and Britain, the conservative voices blaming the stagnation of the 1970s on high taxation won the day and Thatcher and Reagan triumphantly lowered taxes.

What this meant was the return on capital once again outpaced the rate of growth, and wealth inequality returned. In Piketty’s numerous graphs, it is clear that income and wealth inequality in both the US and Europe are currently at the levels reached just before WWI, and if nothing is done, are poised to keep increasing.

Framing the problem in the way he does, as the inevitable consequence of a mathematical relation, makes certain conclusions obvious. First, wealth is not the result of great talent or virtue. If you have capital, unless you do something incredibly stupid it will increase. The cards are stacked in your favor, and the more capital you start with the faster it will grow.

A second conclusion is that the solution is obvious: taxes work, because they bring down the value of r (they diminish your return on your capital). Piketty proposes a global tax on capital. I have seen this book criticized for not being specific enough in its proposals. I disagree with this. I think he was quite specific; he just recognized that his proposal is, in 2014, utopian. There are huge obstacles in the way of its implementation; so to go into specifics of how it would be accomplished would be absurd at this point. His great contribution is, for the first time, bringing the available historical data together into one coherent picture of wealth.

I am a fan of Jane Austen, and one unexpected pleasure was Piketty used both Austen’s and Honore de Balzac’s novels to substantiate some of his claims about wealth in the late 18^th century. In fact, his analysis answered some questions I have had about Austen’s novels, in particular the constant discussion of people’s incomes, and the fact that that income was all one needed to know about a person. At that time, when there was no inflation, a particular income was a very clear description of the type of lifestyle one was able to maintain.

Another aspect of the book that I found compelling was his conclusion that economics doesn’t work according to some natural law independent of humanity; instead it’s a reflection of our moral institutions.

Piketty makes it clear from the very start that he’s not questioning capitalism; he’s questioning the moral foundations of our choices. Because, he insists, we make the rules that define the capitalism of our time. He argues there is an “apparatus of justification” that makes different amounts of inequality acceptable at different times. There isn’t some inherent level of inequality dictated by capitalism itself; a particular society’s consensual reality sets the acceptable levels. For example, it was once acceptable for people to own other human beings. If we can say that human beings can no longer be counted as capital, what other elements of the natural world could we declare off limits?

The boundary between what private individuals can and cannot own has evolved considerably over time and around the world, as the extreme case of slavery indicates. The same is true of property in the atmosphere, the sea, mountains, historical monuments, and knowledge. Certain private interests would like to own these things, and sometimes they justify this desire on grounds of efficiency rather than mere self-interest. But there is no guarantee that this desire coincides with the general interest. Capital is not an immutable concept: it reflects the state of development and prevailing social relations of each society… 

The first [conclusion] is that one should be wary of any economic determinism in regard to inequalities of wealth and income. The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms. In particular, the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war. Similarly, the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance. The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result.

Some good news comes out of the book. A propertied middle class is a great advance from the inequality that existed in the 19^th century. It used to be that the bottom 90% owned almost nothing, and the top 10% owned everything. That is not currently the case. Also, although the United States is currently leading the world in inequality, it has been the source of some very progressive actions to reduce inequality in the past. The solution to income inequality is not a mystery; all that is required is the political will to take the action required.