How so few can own so much—and how so many can own so little—is a question that predates economics, puzzling thinkers from Plato to Austen to Dickens. Is it God? Is it hard work? Values? Virtues? Birth? Genes? Intelligence?
Thomas Piketty’s Capital in the Twenty-First Century should be your number-one summer read, as it sets in motion a whole new wave of thinking regarding inequality. Yet upon talking with Piketty he is far from an out-of-touch radical. Rather, he is a child and master of establishment empiricism, an ex-assistant professor at MIT, and a co-founder of the Paris School of Economics. He emphasizes his understanding of the connection between “the work of analyzing and evaluating the changes of capital” and “the work of, for example, the great sociologists and also of literature.” Piketty adds that “it is important for the social sciences to draw upon its collective knowledge.”
Indeed, in discussing the accumulation of capital and wealth over time, Piketty draws upon his literary knowledge to enlighten and deepen his economic findings:
It is clear to anyone reading Jane Austen that there is a fundamental difference in the way Austen treats the question of inflation. Inflation touches many parts of life beyond economics. For example, it is easier for those of Austen’s time to understand concepts of wealth across time, and therefore inheritance, than it is for us. In some respects, we have lost this. What a fortune was in just the 1970s has become lost to us, and as a result we have become less aware of the historical long-view of the accumulation of capital and wealth.
Regardless of his breadth of reference and the wonderful effect on his readers, Piketty is most in his element discussing the nuances of his lifetime’s work on wealth and income inequality. He really is the data nerd for the trendy coffee house.
As a European myself, it seems completely surreal that an unknown, relatively young French statistical economist of the Left, publishing a book with 100 pages of end-notes, would conquer so pervasively the minds and media of the United States. In the Washington, D.C., public library, Capital had a reserve waiting list of 173 people. Interviewing the surprisingly modest Piketty provides ample explanation for the waiting list: he provides a clear, lucid, and intuitive formula to answer our generation’s questions about inequality.
Inequality is a chief concern of millennials. The Harvard Public Opinion Project’s recently-published survey of young Americans showed that the majority of this generation believes that inequality is a major and growing problem. Piketty’s work addresses the issue in a way that Milton Friedman did for a different generation, but with a different focus and a very different conclusion. Asked whether his work is a game-changer in public or academic discourse regarding inequality and wealth, Piketty responds with characteristic modesty:
Only time will tell the actual reception of my book. It has certainly received a lot of attention across the world [which] I am very happy about. In regards to the question of whether my book is my magnum opus, or the work it will influence in future, or the future economists it will influence … I think the answer to all of those questions, and the answer to what the reputation of a work like this will be, can only be told in the longer term.
But the jury is no longer out among the commentariat, with even Lawrence Summers describing Piketty’s work as transformational to the discourse on wealth and inequality and worthy of a Nobel Prize. Indeed, Piketty’s work is noteworthy not just for its substantive focus on wealth and inequality, but also for its unique analysis of changes over the long sweep of history.
The historical inspirations for Capital are varied, tied together by an age-old intellectual radical tradition of long-termism. Piketty explains that he is “most inspired by the economists of the 18th and early 19th centuries, such as David Ricardo and Thomas Malthus, who thought primarily in the long run.” However, Piketty notes that he does “not … necessarily agree with their conclusions.”
Capital exemplifies this focus on long-range historical analysis. Yet it is difficult to pin down Piketty’s work in a comfortable economic-intellectual tradition. This is because, as he acknowledges, most of the thinkers of the past used outdated methods to reach conclusions with which he fundamentally disagrees.
He describes as “Apocalypse” thinkers those economists, such as Marx and Malthus, whose long-run conclusions are starkly terrifying. Marx’s economic determinism predicts the inevitable death of capitalism and capitalistic society as capital becomes more and more concentrated. Malthus, the famous population theorist, argued the inevitability of strife, with population growth necessarily outstripping growth in food production.
It appears that the slightly Marxist-sounding title of Capital is about as far as Piketty goes in this vein:
I am certainly not a Marxist. … As a trained economist of the 21st century, I have a different outlook and very different resources at my disposal than did Karl Marx and his followers. This is not least … [because] economics as a discipline has changed so much since he was writing. I also do not reject market forces out-of-hand. It is true though that Marx’s broad focus on history and the development of wealth and income are the kind of questions I appreciate, but Marxism’s answers have shown themselves to be incorrect through examples such as the USSR.
On the flip-side, Piketty is equally critical of the more modern “‘fairy tale economists of the twentieth century who attempted to justify capitalism using methods that we can be highly suspicious of.” He argues that “often the previous works that have influenced me have either been too historical and ignorant of economic theory, or too heavily drawing upon economics and misusing history.” Chief among the targets of Piketty’s criticism is Simon Kuznets—who won a Nobel Prize for his blistering, Cold War-era defense of equality and capitalism. A quantitiative economic historian, Kuznets employed methods similar to Piketty’s. However, he argued that the free market will eventually be an engine of equality—rather than the principal opponent of it.
When confronting the fluctuations in equality in the 20th century, it is clear that Piketty maintains a long-run focus. While we mostly read equality statistics on a year-to-year basis, Piketty’s long-range view allows him to understand time periods in their larger historical context. For example, he argues that the growing sense of equality between 1914 and 1945 and in the post-World War I era is an anomaly—a product of the extraordinary circumstances of the times:
There we experienced the massive destruction of wealth and capital, particularly of the wealthiest, caused by war and political problems, inflation, and public debt. The unusually high levels of inheritance and the existence of wealth taxation experienced in many, many countries across the world, as well as the existence of higher barriers to trade and capital … [were factors that] saw inequality squeezed as a direct result of the wars [and associated problems from 1919 to 1939].
Piketty’s study delves into a “number of mechanisms” for the creation of capital and income inequality through the study of 20 countries over the course of three centuries. Such a long-term view of wealth and inequality is “a return to the economics of the long run in the sense of the 18th and 19th centuries,” but this time it is paired with extensive data and quantitative analysis to add substance to his various claims.
The most prominent of these claims is that “over the long-term, the rate of growth of capital will always be higher than the rate of growth of the economy.” This insight, succinctly reduced to the formula “r>g,” means that despite individual occurrences and fluctuations in the economy, the rate of growth of capital—benefiting disproportionately the super-wealthy capital holders—will outstrip the rate of growth in the economy that benefits the masses. Piketty’s views almost transcend the modern economic conversation. Rather than focusing on increasing the efficiency of markets, which he describes as potentially only working to further generate growth in capital over economic growth, Piketty would have us find ways to close the divergence between the major capitalists and the rest of society.
His controversial and much-publicized answer is a progressive global tax on capital. Such a proposal has prompted gasps from every corner of the political spectrum. The proposal is described by its creator as being “utopian.” Yet to reject such a proposal outright—or to reject Piketty’s work outright—would be a terrible mistake. First, such a proposal on a regional level is not too far flung. The European Union’s proposed Financial Transactions Tax is not exactly what Piketty is proposing, but it is an example of potential multi-state cooperation over taxation. The best way to treat Piketty is the way he treats his long line of intellectual predecessors. One need not accept his answers to be inspired and respectful of the questions posed and, in this case, the vast fount of economic knowledge created.
And what for the future? Piketty’s own view is rather predictable: he states that further research in his own manner would revolve around the discovery “of more and more data and analysis regarding wealth.” For he really is the first to make use of data such as the World Top Incomes Database, historical estate taxation, and income taxation records in such a comprehensive and public way. Future Pikettyites ought to heed his advice that economics become “not more mathematic, but more quantitative. Economics has certainly seen a conflation of the two in recent years that has made it both less accessible and [less] insightful.” The difference between the two? “Mathematics involves the construction of ever more complex and abstract theorizing; quantitative work involves working with richer sets of data.” In the field of economic history, particularly regarding capital and income, vast stores of data lie ready for analysis by those inspired by Piketty’s work.
Whether or not you intend to get a Ph. D. in Economics, Capital is this summer’s mandatory read, for I doubt you will be able to look at an economics book in the same way again.
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