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Published on October 16th, 2014 | by Ross Arthur Griffith
Image © By Sue Gardner (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

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Thomas Piketty

Piketty’s “Capital”

Thomas Piketty, a French economist who teaches at the Paris School of Economics, published in the last year or so a major book that – allow me to indulge in a cliche – is kinda a big deal. Entitled Capital in the Twenty-First Century, Piketty’s tome explores the past one hundred years of reliable economic statistics from around the globe to make some very important statements about the present and the future.

This is not your typical economics book. And this is in part why Piketty’s book is so important. Including notes, Capital in the Twenty-First Century runs to 655 pages. This is partly due to the wealth of complied data and numerous graphs which he deploys to illustrate his points. But it is also due to his interest in history and social aspects of wealth and economics.

Let me explain. Most economists are closer to being mathematicians and stress the scientific aspects of their profession over the humanities or social sciences aspects. Thus, most works in economics are preformed in a clinically abstract universe where major assumptions are made in order to simplify economic models, for example, assuming “perfect competition” (where market demand perfectly equals market supply and all economic actors carry the same economic weight) or that we are all “homo economicus” (narrowly self-interested individuals who have the capacity to make totally rational decicions at all times).

This can be very valuable. But make no mistake: these are impossible situations which will never happen on Planet Earth. Thus the vast majority of economics work has little bearing on contemporary situations. If for no other reason, the complexity of human society defies mathematical models; economists have a notoriously poor track record.

Piketty directly comments on this tendency in the economics profession, and in contrast, actively cultivates a humanities and social sciences outlook. For example, he repeatedly cites Victorian novels (the usual suspects: Austin, Brontes, Hugo, etc) to illustrate economic phenomena in history and in everyday, social reality. Thus Capital in the Twenty-First Century is equal parts economic and social history, an economics textbook, a political broadside directed at neo-liberal economics, and an important economic work, filled with predictions for the (I know this is rather obvious) twenty-first century in its own right.

What Piketty has accomplished is to study all available economic data – tax records, tax laws, inheritance records, property transfers, etc over the past one hundred years or so- to look at the role of capital in generating and distributing wealth. As you might expect, reliable records start with England and France, but the list quickly expands to include Germany, Italy, the US, and Japan.

His thesis is r>g. All this means is that r (the rate of return on capital) in the long run will always be greater than g (the growth of the economy). I should define capital as things that are owned and rented out: property, roads, construction cranes, airplanes, ships, cars, etc. These physical things tend to have a lower rate of return then financial instruments like stocks. In the long run, the r has been around 5%, while economic growth realistically hovers around 1%.

Broadly speaking, Piketty identifies that pre-WWI Europe – the Europe identified in Victorian novels of hereditarily wealthy leisurely unemployed people living off of rents and accrued interest – was an era of “patrimonial capitalism”. And while this was swept away by the shocks of WWI, the Great Depression, WWII, and perhaps most politically relevant, the high level of taxes income taxes which persisted though the 1970s, this reality is trending on its way back to reality.

With the conservative Reagan/Thatcher ‘revolution’ of the ’80’s, the high level of income taxes on the ultra wealthy went away. The result is that inequality exploded, making today’s world (especially in the US) the most unequal society that has ever existed. There are important differences which Piketty recognises. The role of inherited wealth, while growing today, has not reached the levels seen in pre-WWI Europe. Thus, a major lesson to draw from Capital in the Twenty-First Century is that the idea of meritocracy (those who work hardest and get the most education and are most competent at their jobs become wealthy) is dying. Rich people today are increasingly those who where born rich. To quote from the book: “The past tends to consume the future”.

Because the income taxes on the ultra wealthy  have been effectively removed, the richest 1% of tax payers have “fiscally seceded” from society. This is due in large part, says Piketty, to the growth of “super managers”, or CEOs, who have managed to demand exceptionally high salaries for their work. One study that Piketty cites describes the incredible amounts that CEOs make as simply “pay for luck”. Traditional economic reasoning would argue that each persons wage or salary is a function of his or her “marginal productivity” (essentially how much more revenue or profit your work brings in to a given business).

Yet an individual’s “marginal productivity” is almost impossible to measure scientifically; in the abstract it makes sense, but in messy reality, the idea is a poor predictor of actual salaries and wages, and any estimation of “marginal productivity” will be  hopelessly mired in subjectivity and opinion. Simply put, there is no way that CEO’s actually deserve there astounding salaries and bonuses.

Even more conclusions can be drawn from his work. The prosperity of the three decades following WWII is thus a highly contingent outcome of historical context. The era of the welfare state was also the era of meritocracy. The neo-liberal revolution and dismantling of the welfare state has made societies less equal and reward talent, effort and education less.

So what does Piketty propose? What is the solution? The ideal, utopian solution would be a global tax on capital itself (which would be very low, along the lines of .5% per annum). Yet, if instituted, this would provide a huge windfall in terms of actual generation of revenue. It would also be highly democratic, meritocratic, and egalitarian, far more so than today’s tax system. It would directly limit the wealth and power of inherited wealth. He admits that this is unlikely in the near future, but remains hopeful that in the US, China, and in wider Europe, a regional tax on capital might be possible.

Capital in the Twenty-First Century is a best seller for good reason. Its influence on academics, students and economists is assured. One can only hope that our elected representative read this book and institute its suggestions.

This is a must read.

Please note that all blog posts do not represent the views of Catch21 but only of the individual writers. We also aim to be factually accurate and balanced across all content taken as a whole.

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About the Author

Originally from Olympia, Washington State, I am currently an intellectual history MA student at the University of Sussex. What interests me is 'big picture' questions: the area where psychology, economics, history, and politics deeply interact.



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