Thomas Piketty’s book, Capital in the Twenty-First Century, has been getting quite a lot of attention – at least in the small circle of economic commentators, journalists, and public policy-makers. Nobel Prize winning economist and New York Times columnist Paul Krugman has said that the book “will be the most important economics book of the year – and maybe of the decade”, and has talked of how it’s caused conservatives to feel “Piketty panic”. Why are some people so excited about the book? And what are some of the broader ideas sparked by it?
A new politics
Capital in the Twenty-First Century provides a robust foundation for claims that inequality is on the rise in certain developed nations. Piketty’s focus is on the United States of America, the United Kingdom, France, Germany, and Japan, but he touches on other countries, especially Scandinavian nations, and Australia and New Zealand. Piketty shows that inequality has followed a U-curve. After a high point in the early twentieth century, inequality dipped for some years, because of the creation of progressive income taxes and the destruction caused by the world wars, amongst other factors. But since the 1970s and 1980s, it is increasing again, Piketty explains, because of mass privatizations, low growth, and a return of inheritance. Piketty’s basic message is that when the rate of return on capital (more on what this means in a moment) exceeds the rate of growth in economies – when r > g – inequality rises. And he explains, with methodical care, why this trend is returning.
More than giving credibility and evidence to debates about inequality, though, Piketty’s book invites a shift in thinking around progressive politics. At its heart, and as the title suggests, Piketty’s book is about capital: a concept that might be pretty fuzzy in the minds of most people (and was fuzzy in my mind when I started reading the book), but which Piketty defines crisply as essentially housing or real estate, and financial instruments. Piketty pleas, implicitly, for politics to turn its attention back to how wealth is accumulating today through capital: in other words, how people are getting rich through inherited wealth, housing, and financial investment. And he shows powerfully that initial endowments of capital often expand significantly over time without effort or additional work (think of large sums accruing interest in a bank account, or rent being acquired on a house) – an idea that is in part “an affront to common sense and that has in fact perturbed any number of civilizations”.
He doesn’t ignore incomes and wages. Indeed, a big part of his book is also about “supersalaries”, and how lower top rates of income tax have arguably led to managers being freer to press for higher salaries (in a context where it is difficult to measure managers’ actual productivity and where those setting compensation levels often ignore conflicts of interest to set salaries).
But where Piketty’s analysis is fresh and original is in highlighting how progressives need to think beyond incomes and salaries, to how wealth is stored and passed on in other ways. This is relevant to politics today in numerous nations: for example, it should give ammunition to those in New Zealand fighting for a capital gains tax. And Piketty is not shy of giving practical suggestions to countries wrestling with these issues: he calls for a progressive annual tax on capital (of between 0 and 10%), pushes for more regulation of tax havens, and suggests an 80% top income tax rate may be optimal, accepting that these might be politically unrealistic at present. Overall, Piketty encourages harder thinking about wealth more generally, highlighting that taxes can play a role in setting norms about acceptable levels of wealth and revealing information about the wealth held in a particular country. The analysis should prompt us to reflect further on other ways that wealth is passed on outside of the realm of salaries – for example, through social capital (for example, parental networks that provide internship opportunities), or majoritarian advantages that are conferred in societies still riven by prejudice of different forms.
A new economics
What is also powerful about this book is the categories of economic thinking that Piketty marks out as important. Piketty returns consistently to notions of capital (in its different forms, including public capital and natural capital), labour and income, growth, debt, inflation, and distribution. These are not radically new concepts. But Piketty examines them in new and creative ways, rejecting the market failure paradigm that explains away economic failings in terms of mere “market imperfections”. He also claims that it is futile to search for ironclad economic laws that will hold true across history (and he rejects explanations of inequality based on supply and demand), bringing to the force the importance of political institutions and policy choices. As well, and relatedly, he acknowledges that an economist cannot escape value judgements. “Everyone is political in his or her own way,” he says. In doing all of this, he offers us promise for novel economic thinking – which is more creative, more exploratory, and ultimately more insightful. This is a goal that we can surely all rally around.
Piketty calls for a humbler economics that is not superior in its view of other disciplines, as well – another important cry, given the fact that many people feel alienated from economic debates. Economists cannot define themselves in terms of their “supposedly scientific methods”, says Piketty, and should end the practice of relying on models that mask “the vacuity of the content”. They have to engage with public debate, “make choices and take stands”, and abandon the idea that “the scholar and the citizen live in separate moral universes”. Piketty himself tries to lead by example in engaging with other disciplines and popular culture. His book is rich in its analysis of history (drawing on several centuries’ worth of income and estate tax returns), frequently refers to historical literature (especially the novels of Jane Austen and Honore de Balzac from the end of the 18th and early 19th centuries), and is full of allusions to modern film and TV. Mad Men is scrutinised for what it says about wealth; even Django Unchained gets a mention. This makes the book a more entertaining and persuasive read, but also indicates the need for economists to engage with other disciplines.
Capital in the Twenty-First Century ends with a particularly powerful call for progressives not to turn their back on economics. Everyone, he says – across academia, the media, unions, politics, and elsewhere – “should take a serious interest in money, its measurement, the facts surrounding it, and its history”. But those who want to challenge power and care for the most disadvantaged may need economics most of all. Why? Because “[t]hose who have a lot of [money] never fail to defend their interests”. And “[r]efusing to deal with numbers rarely serves the interests of the least well-off.”
The path forward
There is much more that could be said about this book. It makes fascinating comments about the troubling rise of sovereign wealth funds (which may come to own much of the world and have a corresponding political influence), the fact that increasing public debt may actually serve the interests of the wealthy, and the imperative to address climate change. There also some criticisms that could be made of Capital in the Twenty-First Century, with more space: for example, while it spends some time considering China, it neglects thinking about how inequality trends might affect the developing world.
But it is no exaggeration to say that this book is worth the attention that it is getting – and more.
It paves the way for a new politics and a new economics. The next step is turning that paving into a path we can travel down to achieve meaningful political change – in our societies and in our lifetimes.