Finance and Economics
Capital in the Twenty-First Century
By Thomas Piketty. London, England.
Reviewed by Dave Gracey
This book has been hailed as the seminal economics text of the 21st century, comparable to Marx's Das Kapital of 1848 or Keynes' General Theory of 1936. That may be an exaggeration; it is overlong, repetitive, and sometimes tedious. (In fairness, though, these classics cited are not exactly page turners themselves.) Nevertheless, the book's message is profoundly important for our economic future.
Piketty's central argument is that inequality arises from the disparity between the returns to capital and the rate of economic growth. As capital accumulates, and ownership of capital becomes more concentrated, the capital-to-income ratio rises and inequality increases.
Piketty does not really explain why so much (35-40 per cent of GNP) should go to capital (interest, dividends, capital gains, rent, etc.), but he argues convincingly that the pattern is inherent to capitalism, and he has the statistics from the past 300 years—mostly from Britain and France—to prove it. There can be no doubt that during the past forty years we have seen dramatically rising returns to capital and a corresponding decrease, from 70 per cent to 60 per cent of GNP, in labour income. Piketty projects this trend into the 21st century. He expects that growth will continue to decline to about 1 per cent, and the capital income ratio will rise—a rather gloomy scenario.
Piketty believes in capitalism. He conflates capitalism with private property, the rule of law, and individual enterprise. In fact the essence of capitalism (as opposed to free enterprise) is the very law he has described—the very high rewards to capitalists, notably, as he shows, to those who inherit capital. He thinks the problem can be fixed by an internationally coordinated, progressive global tax on wealth. He postulates that this laudable goal can be achieved by a resurgence of democracy. I hope he is right, but there is scant evidence of this to date.
Particularly interesting is Piketty's discussion of the trente glorieux—the period from 1945 to 1975 when equality was rising dramatically. He insists we must look upon that period as the exception to the norm. In his view, the higher growth and rising labour income were simply a rebound from prior shocks—the world war and the Great Depression—and we cannot expect a recurrence. He gives little credit to policy initiatives of those years such as the New Deal, medicare, pensions, and labour unions. He seems to see these reforms more as a result of the higher growth than as causes of it.
Piketty does demolish the myth that greater inequality leads to higher growth by increasing incentives for the wealthy to invest. Unlike Keynes, Krugman, and Stiglitz*, however, he does not argue that inequality actually reduces growth by reducing aggregate demand. The poor cannot spend. He does expose the folly of absurd CEO compensation and understands the necessity of a progressive income tax. He also understands the ability of the super-rich to evade taxes, notably by means of tax havens and by using their wealth to influence tax policy. How they might be persuaded to accept his wealth tax is not explained.
Despite its failings, this is an important work because it clearly delineates the inner dynamic of capitalism, although it shrinks somewhat from the implications. We must recognize, as Piketty makes clear, that neither capitalism nor the market will reform itself. The wealthy 1 per cent hold all the cards. Change must come from the majority who are gradually losing ground, and this can only happen with the proper political leadership. At the moment there is little prospect of this, but at least Piketty has shown that the situation is grave and must be addressed.
* JE Stiglitz, The Price of Inequality (W.W. Norton & Company, 2012).