By Dan Wilcock
Capital in the Twenty-First Century, Thomas Piketty (Belknap Press, 2014)
In my opinion, the worldwide success of Capital in the Twenty-First Century is something to cheer. Wealthy individuals, middle-class, poor, policymakers, bankers, and even artists can see themselves in these pages. They can trace their life trajectories set against the historic patterns of wealth (usually at least 100 years in scope, sometimes much longer). In a few words, the subject matter strikes a chord with most everyone these days.
Last month I bought one of the hastily printed subsequent editions (the initial print run woefully underestimated popular demand) of this 577-page tome and just finished reading it. The book has a lot to teach about the nature of capital and its place in different types of economies. Everything boils down to two very simple equations that a middle-school student could understand. Probably the most important, to which Piketty consistently refers is:
β = s/g
This is the “capital/income ratio,”the meaning of which Piketty is really good about reminding the reader every time he uses is. β is calculated by dividing savings (s) by growth (g). He shows that throughout history, savings (which reflects the total value of accumulated capital) in rich countries has usually been larger than the rate of growth (the increase in national income). In rich countries today β is often somewhere around 6, which means that total wealth owned (almost entirely in private hands) is worth around 6 years of a given country’s income.
The other equation measures the share of national income that goes to capital’s owners:
α = r×β
r is the rate of return on capital. So, in the case where capital is worth 6 years of national income (β=6), and the rate of return (r) is 5%, then the amount of national income going to capital holders if 30%.
When r is greater than g, wealth begins to accumulate. The rich get richer. R has almost always been greater than g, according to Piketty’s analysis, except for a period of time in the 20th century (when growth was high and capital was subject to a series of shocks related to WWI and WWII). Those days are over. I won’t bother to recap his results specific here, but suffice to say they are food for thought.
OK, enough with the equations. If you could read what I just wrote and get it somewhat (and not to worry, Piketty reintroduces the equations almost every time), then you won’t have any trouble reading his book.
That’s a good thing, because I get the sense that Picketty would like his book to be read and understood by those who have the least proportion of α and β—most likely the low wage earners and asset poor individuals who make up more than half of rich countries peoples but own virtually no capital whatsoever.
That’s what’s great about Piketty. He genuinely cares about human outcomes, and his book’s value lies in showing to everyone that human outcomes are diverging radically. The inequality he presents throughout the book is a reversion to an earlier historical norm, which he ingeniously evokes by quoting from the novels of Balzac and Jane Austen—works of art from an era when the nature of capital was better defined and more commonly understood.
He doesn’t only look at the big picture. He also takes along look at the even more disturbing (particularly in the US) pattern of individual inequality. He makes a compelling case for the amazing rise in top executive pay in America and the spectacular drop in top income tax rates during the 80s and 90s.
This points to some of his suggested solutions: Progressive income taxes topping out at around 80% (as seen in the 20th century) for the highest incomes, an annual progressive global tax on large fortunes (combined with intepol-like global cooperation to stamp out tax havens), or a one-time global tax topping out somewhere around 25% for the largest fortunes. Compared to readjusting the economic balance through inflation or controls on capital (as seen in China), Piketty argues that a return to confiscatory taxation on oligarch-level wealth is the most just and equitable course.
Try telling that to the wealthy who increasingly control politics. Just saying.
I think he makes a strong case, although if I were President I don’t think I’d go as far as he advocates. The wealthy he wants to tax would remain wealthy. The forces he describes would help that wealth to grow again. But then again I’m just above that “50%-and-owns-nothing” category.
What a marvel to have this book explaining the big picture of wealth, in clear prose and without too much math/theory. A highly recommended book.
Capital in the 21st Century by Piketty: a review on my #blog via @wordpressdotcom http://t.co/0weqYzuvpj
— Daniel C. Wilcock (@DanielCWilcock) May 26, 2014
Trails and Talismans 