IT IS the economics book taking the world by storm. "Capital in the Twenty-First Century", written by the French economist Thomas Piketty, was published in French last year and in English in March of this year. The English version quickly became an unlikely bestseller, and it has prompted a broad and energetic debate on the book’s subject: the outlook for global inequality. Some reckon it heralds or may itself cause a pronounced shift in the focus of economic policy, toward distributional questions. This newspaper has hailed Mr Piketty as "the modern Marx" (Karl, that is). But what’s it all about?
"Capital" is built on more than a decade of research by Mr Piketty and a handful of other economists, detailing historical changes in the concentration of income and wealth. This pile of data allows Mr Piketty to sketch out the evolution of inequality since the beginning of the industrial revolution. In the 18th and 19th centuries western European society was highly unequal. Private wealth dwarfed national income and was concentrated in the hands of the rich families who sat atop a relatively rigid class structure. This system persisted even as industrialisation slowly contributed to rising wages for workers. Only the chaos of the first and second world wars and the Depression disrupted this pattern. High taxes, inflation, bankruptcies, and the growth of sprawling welfare states caused wealth to shrink dramatically, and ushered in a period in which both income and wealth were distributed in relatively egalitarian fashion. But the shocks of the early 20th century have faded and wealth is now reasserting itself. On many measures, Mr Piketty reckons, the importance of wealth in modern economies is approaching levels last seen before the first world war.
From this history, Mr Piketty derives a grand theory of capital and inequality. As a general rule wealth grows faster than economic output, he explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate). Other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it (and demographic change that slows global growth will make capital more dominant). But there are no natural forces pushing against the steady concentration of wealth. Only a burst of rapid growth (from technological progress or rising population) or government intervention can be counted on to keep economies from returning to the “patrimonial capitalism” that worried Karl Marx. Mr Piketty closes the book by recommending that governments step in now, by adopting a global tax on wealth, to prevent soaring inequality contributing to economic or political instability down the road.
The book has unsurprisingly attracted plenty of criticism. Some wonder whether Mr Piketty is right to think the future will look like the past. Theory argues that it should become ever harder to earn a good return on wealth the more there is of it. And today’s super-rich mostly come by their wealth through work, rather than via inheritance. Others argue that Mr Piketty’s policy recommendations are more ideologically than economically driven and could do more harm than good. But many of the sceptics nonetheless have kind words for the book’s contributions, in terms of data and analysis. Whether or not Mr Piketty succeeds in changing policy, he will have influenced the way thousands of readers and plenty of economists think about these issues.
- See more at: http://www.economist.com/blogs/economist-explains/2014/05/economist-explains#sthash.vAqyIza8.dpuf++++
modern Marx
Thomas Piketty’s blockbuster book is a great piece of scholarship, but a poor guide to policy
WHEN the first volume of Karl Marx’s “Das Kapital” was published in 1867, it took five years to sell 1,000 copies in its original German. It was not translated into English for two decades, and this newspaper did not see fit to mention it until 1907. By comparison, Thomas Piketty’s “Capital in the Twenty-First Century” is an overnight sensation. Originally published in French (when we first reviewed it), Mr Piketty’s vast tome on income-and-wealth distribution has become a bestseller since the English translation appeared in March. In America it is the top-selling book on Amazon, fiction included.
The book’s success has a lot to do with being about the right subject at the right time. Inequality has suddenly become a fevered topic, especially in America. Having for years dismissed the gaps between the haves and have-nots as a European obsession, Americans, stung by the excesses of Wall Street, are suddenly talking about the rich and redistribution. Hence the attraction of a book which argues that growing wealth concentration is inherent to capitalism and recommends a global tax on wealth as the progressive solution.
“Capital” has duly enraptured the left, infuriated the right and spiced up the dismal science in the popular mind (see article). But if Mr Piketty does set the tone of debate on inequality, the world will be the poorer for it. For like its 19th-century namesake, “Capital” contains some marvellous scholarship, but as a guide to action, is deeply flawed.
“Capital” makes three big contributions in its 577 pages. First, Mr Piketty, a pioneer in using tax statistics to measure inequality, painstakingly documents the evolution of income and wealth over the past 300 years, particularly in Europe and America. In doing so, he shows that the period from about 1914 to the 1970s was an historical outlier in which both income inequality and the stock of wealth (relative to annual national income) fell dramatically. Since the 1970s both wealth and income gaps have been rising back towards their pre-20th-century norms. There are surely a few snafus in these statistics, but this work has transformed understanding of the history of wealth, with eye-popping results. Who knew, for instance, that the annual value of inheritances in France has tripled from less than 5% of GDP in the 1950s to about 15%, not all that far from the 19th-century peak of 25%? As a piece of empirical sleuthing, the book is indisputably brilliant.
Mr Piketty’s second contribution is to come up with a theory of capitalism that explains these facts and offers a prediction of where wealth distribution is heading. His central claim is that the free-market system has a natural tendency towards increasing the concentration of wealth, because the rate of return on property and investments has consistently been higher than the rate of economic growth. Two world wars, the Depression and high taxes pushed down the return on wealth in the 20th century, while rapid productivity and population rises pushed up growth. But without such countervailing factors, Mr Piketty argues, higher returns on capital will concentrate wealth—especially when, as now, an ageing population means that growth should slow.
Mr Piketty’s expectation of rising wealth concentration is not outlandish. However, it is a prediction based on extrapolating from the past, not an inherent model of capitalism. He assumes that the returns to capital will not fall substantially even as the stock of wealth rises. That may prove to be true, but the Piketty prediction is a hypothesis, not an iron law.
Nit-Piketty
That is where the problems start, because Mr Piketty’s third contribution is to offer policy proposals that assume this growing concentration of wealth is not only inevitable, but the thing that matters most. He prescribes a progressive global tax on capital (an annual levy that could start at 0.1% and hits a maximum of perhaps 10% on the greatest fortunes). He also suggests a punitive 80% tax rate on incomes above $500,000 or so.
Here “Capital” drifts to the left and loses credibility. Mr Piketty asserts rather than explains why tempering wealth concentration should be the priority (as opposed to, say, boosting growth). He barely acknowledges any trade-offs or costs to his redistributionist agenda. Most economists, common sense and a lot of French businesspeople would argue that higher taxes on income and wealth put off entrepreneurs and risk taking; he blithely dismisses that. And his to-do list is oddly blinkered in its focus on taxing the rich. He ignores ways to broaden the ownership of capital, from “baby bonds” to government top-ups of private saving accounts. Some capital taxes could sit nicely in a sensible 21st-century policy toolkit (inheritance taxes, in particular), but they are not the only, or even the main, way to ensure broad-based prosperity.
Mr Piketty’s focus on soaking the rich smacks of socialist ideology, not scholarship. That may explain why “Capital” is a bestseller. But it is a poor blueprint for action.
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ONE of the most arresting things about “Capital in the 21st Century”, the best-selling economics book by Thomas Piketty, is that it caused far less of a stir in his native France when it came out last year than it has in the English-speaking world. Its publication in English has turned Mr Piketty into what New York magazine calls a “rock star economist”. Writing in the New York Times, Paul Krugman has called Mr Piketty’s text “discourse-changing scholarship”. Martin Wolf, in the FT, described it as “an extraordinarily important book”. An enthusiastic review in The Economist can be read here and a detailed discussion is on our economics blog here. “Capital” has entered the New York Times best-seller list, an unusual achievement for a weighty economics text.
In France, however, where Mr Piketty is a professor of economics at the Paris School of Economics, it has drawn far less attention. Although amazon.fr now puts it at the top of its current best-selling books, it did not feature at all in the top 100 in 2013 and did not grab headlines when the 970-page French version came out in August last year. Across all outlets, the French version of “Capital” is currently in 192nd place, according to Edistat, the French book-publishers’ ranking.
The French seem almost bemused by the sudden international fame of their home-grown economist. “Thomas Piketty, une star américaine”, ran the headline of an article in La Tribune, a business newspaper. Le Monde ran a story pointing out that Mr Piketty was referred to “only five times” as French in a piece in the New Yorker, as if this were proof of his being taken seriously.
Why did the French version of “Capital” not make the same splash? One review last year, in the left-leaning Libération newspaper, suggested that the book was not left-wing enough. There is no discussion, lamented the author, of “social and cultural domination, violence, relegation, exploitation, alienation at work, class, struggle etc.”
A more serious explanation could be that Mr Piketty was too closely linked to a proposal by François Hollande, France’s Socialist president, during his 2012 election campaign to introduce a now-discredited 75% top income-tax rate. The 75% tax rate sent an important message, Mr Piketty said approvingly at the time, and “lots of other countries will inevitably follow this route”. In fact, the millionaire tax was denounced by one of Mr Hollande’s own advisers as “Cuba without the sun”, ruled unconstitutional by the French constitutional court, and was hastily watered down.
Perhaps the chief reason, though, is that questions about inequality, the centrepiece of Mr Piketty’s research, have long been central to the political debate in France, a country that already has an annual wealth tax on assets. This has been true for the right as much as for the left. Jacques Chirac, a Gaullist, was first elected president by campaigning to mend the country’s “social fracture”. Mr Hollande was at his most passionate on the campaign stump when denouncing the world of finance as his “chief adversary”, and the super-rich as “grasping and arrogant”. In short, drawing attention to resurgent inequality has a sense of novelty in America, but in France it is a political given.
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