Some Ill-Informed, Unorganized Thoughts on Thomas Piketty

Capital in the 21st CenturyI just finished reading Capital in the Twenty-First Century by Thomas Piketty, the economics work du jour that has been called the most important book of the century. Rather than take the time to collect my thoughts and organize them into a coherent, sensible review, I decided I’d just dump my initial impressions in a scattered fashion and let you wade your way through. I’m not sure why anyone would even by interested in what I have to say about the issue (as opposed to people much more informed than I am), but this is the Internet and being unqualified never stopped anyone before!

 

—It seems to me that, in all the discussion of Piketty’s book, a lot of people are misconstruing the argument he’s really making. The summary you’ll see a lot is that Piketty is saying inequality has been getting worse for the last 30 years or so. And that is sort of what he’s saying, but that’s not the crux of his argument, and he’s very open about the lack the clarity on that issue. Indeed, he says, “It is by no means certain that inequalities of wealth are actually increasing at the global level.”

Still, inequality is the central theme of the book, and Piketty paints a harrowing portrait. But the full picture he creates is not just one of the present and recent past. He goes all the way back to the eighteenth and nineteenth century and illustrates a few key points. The first is that inequality decreased substantially throughout the twentieth century. This is kind of obvious, but his next point is crucial: This decrease was essentially a historical accident. It was the result of a global Depression and two world wars of unprecedented scale, which destroyed a ton of wealth* and, as Piketty puts it, “wiped the slate clean” for the generation after World War II.

*The way this happened was not as obvious as you might think. Some of it was just the physical destruction of the wars, sure, but it also came from nationalizations caused by the war, loss of European colonies, and the huge national debts and subsequent inflation that followed. Piketty explains it all better than I could.

In other words, the decrease in inequality wasn’t some natural result of the forces of capitalism, but the legacy of specific disasters we’re only now emerging from.

—A related point: This means the dustup about Piketty’s data—which was likely overblown to begin with—sort of misses the point of his argument. It’s not like Piketty just found a bunch of data about wealth over the last 30 years and decided to write a book about it. He’s looking more at endemic trends that go back much further than that, and the data from the recent past and present is there to illustrate that they break from the rest of the twentieth century.

 

—There are some pretty interesting features of the technical side of his argument. The key inequality in the book is r > g, where r represents the rate of return on capital and g represents growth. When r exceeds g, then inherited wealth will grow faster than income, which will lead to a growth in inequality. As Piketty puts it throughout the book: “The past devours the future.”

What’s weird is that, as Piketty tells it, r is almost ALWAYS greater than g. It wasn’t for much of the twentieth century, but only because r was unusually low (thanks to shocks caused by the Depression and wars) and g was unusually high.

It’s that last part that I found particularly interesting. In the modern climate, GDP growth of less than 2% is often considered a failure, which obscures the fact that, historically, such a growth rate would be exceptionally high.* As Piketty puts it, “[T]here is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.”

*The reason why it looks low to us is that the last century experienced unprecedented growth due to a population explosion (particularly in America) and historically high levels of productivity that appear to be leveling off globally.

A more pressing question, which Piketty thankfully does not ignore, is whether or not we should even want growth to move faster than that. As he explains, average growth of more than 1% leads to profound social change, often unrest and violence. Even more important, high growth rates seem to inevitably entail population growth, and the world’s natural resources simply cannot handle population growth beyond a certain point. The book doesn’t dedicate much time to the issue of climate change, but it seems impossible to ignore in discussions of economic growth.

But if high growth is not desirable, and low growth tends to exacerbate economic inequality, is there any way to ensure an egalitarian future?

 

—In all the discussion about growth and inequality and historical data, it’s easy to miss that Piketty’s book is actually quite funny—or at least not as dry as you might expect. I actually laughed at a couple points. More importantly, though, the prose is always clear (which is a testament to the translation of Arthur Goldhammer as well) and Piketty is always conscious of making his points tangible and relevant. He’s obviously not afraid to include data or a formula when he needs to—and insistent that one “must not flee in horror the minute a number rears its head”—but Piketty is more concerned with the real world context of those numbers.

This is important, because the book shouldn’t scare away readers without technical backgrounds. For a surprise bestseller this might seem like a silly concern, but it’s certainly worth wondering how many people buying Capital in the Twenty-First Century already have strong economics backgrounds, or are just buying it because it looks good a on a shelf. And yet Piketty takes great care to make the subject accessible, and he’s constantly aware that economics is irrelevant if it’s siloed away from the rest of reality.

 

—One reason the book is so accessible is how much Piketty makes use of sources from literature and popular culture. In fact, it’s almost disconcerting. At times it almost seems like he got his data by reading old French novels.

But it certainly helps make certain points more lucid. One thing Piketty brings up is how authors used to routinely invoke specific monetary figures when citing a character’s wealth or income. Characters in Austen or Balzac were often given financial backgrounds of almost actuarial detail. Of course, nowadays authors only do that at the risk of seriously dating their novels.

Of course, on its own this doesn’t really prove anything, but it illustrates a point in a way that data alone cannot: Inflation is a modern invention. An author in the eighteenth or nineteenth century could cite figures and be confident that a reader would understand the relative levels of wealth. Today you can’t make sense of a Mad Men episode without checking an inflation calculator.

At times, Piketty’s love of popular culture gets extreme—he cites everything from Titanic to Dirty Sexy Money—but it again reinforces the idea that economics is not hermetically sealed.

 

—Another literary trope Piketty returns to again and again is Vautrin’s lecture from Le Père Goriot, in which he tries to convince the protagonist that marrying rich is better than working hard. Sometimes Piketty’s preoccupation with inherited wealth seems uniquely European, but it’s certainly an interesting reference point. Obviously today’s 1% don’t come from the landed nobles of centuries past, but they’ve been replaced by what Piketty calls “supermanagers”—top executives whose income dwarfs that of the rest of the population.

And the differences really aren’t so great. There’s a tendency, in America especially (though supermanagers exist all over the world), to think that these supermanagers deserve, or at least earn through hard work, their pay, and so this inequality is not like the codified inequality of the past. Piketty puts the lie to this “meritocratic extremism,” as he calls it.

First, he tests whether there’s any evidence these executives add utility equal to or in excess of their pay. There isn’t: The pay of top executives tends to rise with “external” forces that an executive has no control over, like the state of the economy or price shocks. It turns out the reason top executives get paid so well is that they are uniquely positioned to set their own pay levels.

But more importantly, Piketty points out that “money tends to reproduce itself.” The reason wealthy people are so wealthy is that the rate of return on capital is so high, and even higher at really high levels thanks to the ability to afford specialized financial advisers. The fortunes of Bill Gates and a French cosmetics heiress grow at basically the same rate. Not because they both “deserve” wealth—but because they both have it.

One advantage of the book’s long historical perspective is it reveals this has always been true. Historically, wealth has always existed primarily to generate rents for its owners and nobody ever felt the need to pretend this wasn’t the case. Only recently has the idea of “merit” really entered into it.

 

—Unfortunately, Piketty is not as persuasive when it comes to his proposed solution: a global wealth tax. Such an idea makes sense on technical grounds, but seems utterly implausible on a political level.

Even if you could somehow get the kind of international cooperation such a tax would require, it hardly seems desirable to create such a global authority. Piketty actually suggests complete banking transparency, and automatic sharing of banking information, which seems terrifying. He dismisses the idea that governments will misuse the information, which, I mean, have you even SEEN the government?

 

—It occurs to me that Capital in the Twenty-First Century represents the beginning of an era in which the study of political economy is not dominated by a capitalist/communist schism. Indeed, Piketty invokes the work of Karl Marx often, and at times seems to consciously evoke him.

Compare Marx:

In communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.

And Piketty:

We are free to imagine an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goods of education, culture, and health for the benefit of herself and others. Everyone would be by turns teacher or student, writer or reader, actor or spectator, doctor or patient.

It is hard to imagine such similarities emerging in the Cold War. Yet while Piketty isn’t burdened with any ideological anxiety about Marx, he is by no means a Marxist. He retains a lot of faith in the ability of capitalist society to reform itself.

To me, this faith seems misplaced. Piketty never seems to fully consider the idea that the same twentieth century cataclysms that led to a brief interregnum in the forces for inequality are also caused other aspects of modern society that we seem to take for granted: universal education and literacy, government pensions, labor protections, etc. As inequality returns, who’s to say what will happen to those?

But Piketty remains hopeful: “If we are to regain control of capitalism, we must bet everything on democracy.” I don’t know. Neither one seems much worth saving to me…

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