Review of Capital in the Twenty-First Century by Thomas Piketty
Despite his failings as a literary historian, economist, policy maker and author, Piketty cannot be ignored.
Gidean Rose, editor of Foreign Affairs, introduced the six-article topic of inequality (Jan-Feb, 2016) with a reference to “The Age of Piketty.”
It was shorthand for the angst most observers feel in dealing with the vexed question of how to solve the problem of wealth and income gaps.
Literary historians Underwood, Long and So (Slate, Dec 2014) succinctly enunciate Picketty’s thesis: “Novels by Balzac and Jane Austen matter for Piketty because they dramatize the immobility of a 19th-century world where inequality guaranteed more inequality … since returns on capital were reliable, especially for large fortunes, the best way to get ahead was to start out ahead; income from labor could never catch up.”
For Piketty, high degrees of inequality are the norm, born of the immobility he perceives in the nature of wealth and stability of the return on wealth.
Piketty purports to explain the concept of “gap” by resorting to a weird, little, non-verifiable formula that assumes “patrimonial capital” to have permanence and then asserts that this capital grows more rapidly than the growth in the economy since returns on wealth are reliably stable. Therefore the gap is normal and persistent.
Piketty ignores the demonstrable instability of large accumulations of wealth and those who hold that wealth. An example that should give him pause would be to consider the successors to Mr. Darcy, those English families with large estates that long ago became “land rich, cash poor” (Downton Abbey comes to mind) and survive by offering tour groups the opportunity to experience life in a “stately home.”
Statistically, there will always be a “one per cent” – achieved through various combinations of starting position, luck, cunning, exploitation, manipulation, foresight and chutzpa – but there is much less permanence than his graphs suggest.
In the last twenty years, the elite has become a very thin stratum of nouveaux riche – financial masters of the universe, technological entrepreneurs and corporate managers.
The other major instability Piketty chooses to ignore is the riotous variability and volatility of returns on assets. For example, the decrease in interest rates from 15 per cent in 1981 to zero has impoverished those previously wealthy on fixed incomes, and blessed those trafficking in financial instruments. Twenty-five years ago, the Japanese stock market was more than two times today’s level.
These instabilities are important since they are a mirror to economic creativity and dynamism, and the Schumpeterian reality of creative destruction (strongly resisted by the one per cent).
Despite its analytical failings, “The Age of Piketty” poses questions that demand answers: What explains the period of relatively low inequality that just ended? What, if anything, should be done? And what of the future?
Judging from the articles in Foreign Affairs, the conventional explanation is a political one. French historian Pierre Rosanvallon concludes that “Western governments managed to reduce inequality dramatically” during the third quarter of the last century, supported by a widely shared democratic conviction that all citizens enjoy equality of treatment and opportunity.
In order to redress the evident current breakdown, this political understanding emphasizes that governments must create a more robust vision of democratic equality.
With stereotypical Gallic shrug, Piketty offers the impossible global tax on accumulated wealth, freely acknowledging the challenges to implementation.
An economic historian would have a different understanding. In recent history, there have been two periods of relative equality, prior to each of which the supply of labour had declined precipitously, giving workers the opportunity to command higher wages.
The first followed the periods of the Black Death and religious wars, which reduced European populations by as much as two-thirds.
In the following two centuries, the lot of the common man was much improved.
The second period followed the carnage of the two World Wars and the Spanish Flu – creating a shortage of labour that lasted until the burgeoning populations of Asia, Eastern Europe and southern America were unleashed in the last quarter of the 20th century.
This glut of labour has depressed relative wages in the developed economies – the major contributor to the current angst.
Necessarily, the “data” Piketty invoked to substantiate his polemic needs to be interpreted cautiously.
Economists, statisticians, consistent concepts and so on did not exist through most of his period, hence the reliance on literary sources.
Unfortunately for him, his claims about the literary history of money also turn out to be self-serving. To quote Underwood, et al: “One thing we’ve learned is that he’s wrong to believe money ‘gradually dropped out of sight between 1914 and 1945.’”
What of the future? Rosenvallon writes: “Inequality is felt most acutely when citizens believe that the rules apply differently to different people. They resent double standards and those who manage to manipulate the game to their own advantage.”
It is clear that citizens have some kind of intuitive understanding of the manipulated game – even though no masters of the universe were criminally prosecuted, many are being diminished.
It is also clear that the ability of the elite to manipulate regulations to their advantage is declining, and that effective tax rates are rising, especially on the beneficiaries of the income gap. Even in Greece, no revolution is in prospect.
“Normal” is back. It discomforts 99.1 per cent of us, but there is a cyclical improvement underway.
Did Piketty have an influence?
Or did he simply get lucky with the timing – taking a “tide in the affairs of men?”
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