Synopsis-“Capital in the Twenty- First Century” by Thomas Piketty

Piketty defies left and right orthodoxy by arguing that worsening inequality is an inevitable outcome of free market capitalism. He argues that the degree of inequality is not just the product of economic forces, it is also the product of politics.

AuthorThomas Piketty

GenreNonfiction/ Political Economics

About the Author

Thomas Piketty is a French economist who works on wealth and income inequality. He is the director of studies at the Ecole des hautes etudes en sciences sociales (EHESS) and professor at the Paris School of Economics. He is the author of the best selling book Capital in the Twenty-First Century (2013), which emphasizes the themes of his work on wealth concentrations and distribution over the past 250 years. The book argues that the rate of capital return in developed countries is persistently greater than the rate of economic growth, and that this will cause wealth inequality to increase in the future. To address this problem, he proposes redistribution through a global tax on wealth.

Piketty was born on May 7, 1971, in the Parisian suburb of Clichy. He gained a C-stream (scientific) Baccalaureat, and after taking scientific preparatory classes, he entered the Ecole Normale Superieure (ENS) at the age of 18, where he studied mathematics and economics. At the age of 22, Piketty was awarded his Ph.D. for a thesis on wealth redistribution, which he wrote at the EHESS and the London School of Economics under Roger Guesnerie.

After earning his PhD, Piketty taught from 1993 to 1995 as an assistant professor in the Department of Economics at the Massachusetts Institute of Technology. In 1995, he joined the French National Centre for Scientific Research (CNRS) as a researcher, and in 2000 he became director of studies at EHESS.

Piketty won the 2002 prize for the best young economist in France, and according to a list dated November 11, 2003, he is a member of the scientific orientation board of the association “À gauche, en Europe”, founded by Michel Rocard and Dominique Strauss-Kahn.

In 2006 Piketty became the first head of the Paris School of Economics, which he helped set up. He left after a few months to serve as an economic advisor to Socialist Party candidate Ségolène Royal during the French presidential campaign. Piketty resumed teaching at the Paris School of Economics in 2007.

He is a columnist for the French newspaper Libération, and occasionally writes op-eds for Le Monde.

In April 2012, Piketty co-authored along with 42 colleagues an open letter in support of then-PS candidate for the French presidency François Hollande. Hollande won the contest against the incumbent Nicolas Sarkozy in May of that year.

In 2013, Piketty won the biennial Yrjo Jahnsson Award, for the economist under age 45 who has “made a contribution in theoretical and applied research that is significant to the study of economics in Europe.”

Piketty specializes in economic inequality, taking a historic and statistical approach. His work looks at the rate of capital accumulation in relation to economic growth over a two hundred year spread from the nineteenth century to the present. His novel use of tax records enabled him to gather data on the very top economic elite, who had previously been understudied, and to ascertain their rate of accumulation of wealth and how this is compared to the rest of society and economy. His most recent book, Capital in the Twenty-First Century, relies on economic data going back 250 years to show that an ever-rising concentration of wealth is not self-correcting. To address this problem, he proposes redistribution through a global tax on wealth.

( Goodreads author information: https://www.goodreads.com/author/show/795282.Thomas_Piketty)

Synopsis

Introduction

Piketty has used data covering three centuries and more than twenty countries with the help of theoretical framework and statistical studies. This book is accessible to all people , even those without technical training or an economics background. The basic reason for inequality according to Piketty is :

when the rate of return on capital exceeds the rate of growth of output and income as it did in the nineteenth century, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values in which democratic societies are based“.

He recommends that,

democracy can regain control over capitalism by ensuring that general interest takes precedence over private interests, preserving economic openness and avoiding protectionist and nationalist tendencies”.

Debate on Wealth Distribution

Intellectual and political debate on wealth distribuiton is prejudiced and facts are scarce. Novels by Jane Austen and Balzac, films etc exposes wealth distribution, hierarchy and its implications on men and society. The significance of inequality is it’s visibility and political conflict arises from the subjective perception and judgment of each class of people. Social scientific research systematically and methodically searches for facts, patterns, informs debate and scrutinize facts, even though it is tentative and imperfect. But for a long time this was based on a limited set of firmly established facts and a wide variety of theoretical speculations. Some of the previous thinkings are given below.

History

Though it seems that the old economic theories of the classical school are ridiculous in retrospect, the political, social and economic changes in the late 18 th and early 19 th centuries were huge and traumatic for the contemporary economists and observers to foresee doom for wealth distribution and class structure. And they were right too in several respects.

Thomas Malthus, (English economist and demographer, one of the most influencial members of the classical school of Economics, best known for his theory that population growth will always tend to outrun the food supply and that betterment of humankind is impossible without strict limits on reproduction) in his 1798 essay, ‘Essay on Principle of Population‘ attributes reasons for upheaval to overpopulation. His source was the diary of the traveller, English agronomist, Arthur Young who chronicled the poverty, overpopulation and French Revolution while travelling through France. The overpopulation of France in the 18 th century that led to decrease in wages and increase in land rents was one of the reasons of resentment towards the aristocracy and the political regime that led to thhe revolution in 1789. He was convinced that mass poverty would lead to political upheavel and worried about the inclusion of commoners to sit along with the aristocrats in the French Legislativve Assembly in 1790. Thus wealth distribution could be seen entangled with politics, class privileges and interests. Malthus borrowed these ideas and somewhat more radically and prejudicially argued to halt welfare assistance to the poor in England and to scrutinize reproduction by the poor, lest overpopulation would lead to a political upheaval in England too.

The two most influential economists of the 19 th century, David Ricardo and Karl Marx believed that a small social group- landowners for Ricardo and Industrial capitalists for Marx- would claim a steadily increasing share of output and income. There also were optimists, liberals like Adam Smith who dismissed that distribution of wealth would be unequal in the future and Jean Baptiste Say who believed in natural harmony. None of these people had any credible statistical data as empirical source to base their observations on.

Ricardo‘s “Scarcity Principle” was explained in his ‘Principles of Political Economy and Taxation‘ (1817). Population and output increase would lead to scarcity of land which inturn would lead to increase in land prices and rent, thus increasing the share of national income going to the landlords. Ricardo suggested a steadily increasing land rent tax to offset the resulting inequilibrium. Though, his prediction did not materialize in the long run as the share of agriculture in national income decreased during the industrial revolution. But his principle explains the effect of price system in destabilizing entire economies and societies. In the 21 st centuries, the principle holds true, we just need to replace the the land with booming real estate and oil prices. Two solutions to this supply and demand mechanisms are- one, if price increases due to reduced supply, switch over to alternate ways which inturn might decrease the price , two- increase the supply of the scarce good. But both these take a long time to achive the desirable results. Thus this interplay between supply and demand affects distribution of wealth linked to extreme changes in certain relative prices.

Karl Marx explained the theory of “Infinite Accumulation” in his work, ‘Capital‘ in 1867. Rise of industrial capitalism in the second half of the 19 th century caused the national economy to grow, but inspite of that and also due to the urban migration and population increase, the proletariat wage stagnated. The sordid reality of poverty and urban misery, child labor were caught in literature such as Oliver Twist, Les Miserables, Germinal and Engel‘s ‘Condition of Working Class in England’. The economy of France and England boomed, but in spite of or because of that worker’s wage stagnated( Historian Robert Allen calls this wage stagnation, “Engel’s Pause“”) from 1800’s to 1870’s. Wages caught up with the growth and economy slightly declined in the final third of nineteenth century, but inequality remained the same. From 1870 to 1914(WW 1), the inequality just stabilized at an extremely high level and wealth accumulation shot up. This inequality was reduced by the powerful economic and political shocks of WW1.

The first communist and socialist movements grew around 1840’s when the capital contnued to prosper while the labor incomes stagnated. After half a centruy of industrial growth from the 1800′ suntil 1840’s masses remained poor. All the politicians could do was only the prohibition of child labor. It was at this time(1848) that Marx published his Communist Manifesto on the eve of ‘ the spring of nations‘ (revolutions across Europe). Over the next two decades Marx proposed the first ever scientific analysis of capitalism and its collapse through his work Capital. Like Ricardo, Marx also explained the internal logical contradictions of the capitalist system. He explained the unlimited accumulation of capital in a few hands. Marx’s conclusion was that capitalism is doomed to an apocalyptic end either by reduced returns which inturn cause conflict among capitalists or inexorably flowing returns which cause the workers to revolt.

Marx’s prophecy was derailed in the last part of 19 th century until 1914, when wages increased, purchasing power increased, but inequlaity still worsened. Communist revolution took place only in the poorest part of Europe, Russia where industrial revolution had only scarcely begun. The richer parts of Europe introduced new social democratic changes benefiting the people. Like Ricardo, Marx was also mistaken and did not take into account the technological progress in future that could to some extent offset the accumulation of wealth sometimes. The probabale reasons are lack of proper research, and statistical data, hasty pronouncements due to political fervor etc…He did not give much thought to politicoeconomic, social situations when capital is abolished, a complex and tragic one as shown by the totalitarian governments abolishing capital.

In the 20 th century magical post war period( “Trente Glorueuses” in French- 30 glorious years from 1945 to 1975), economist Simon Kuznet proposed a theory(1955) directly antithetical to the apocalyptic theories of Marx and Ricardo , that income inequality would automatically decrease in advanced phases of capitalist development regardless of economic policies until it is stabilized at an acceptable level. The economist, Robert Solow(1956) also put forward a balanced growth path where all the variables of capitalism grow at an equal pace thus reducing inequality. These optimistic predictions mirrored the optimism of Adam Smith, Jean Baptiste Say and Proudhon of 19 th century.

Kuznet, an Ukranian -American economist, Harvard educated was the first one to postulate an inequality study based on statistics of income distribution in the US over aperiod of 1913 to 1948, . In 1953 he published his ‘Shares of Upper Income Groups In Income And Savings‘. It used two groups of data- US Federal Income Tax Returns(income tax was created in 1913 only) and Kuznet’s estimates of US National income ( two indispensible data for assessing inequality). Thus he became the first person to study the national accounts of US and the first to publish a historcal data on inequality. His optimistic theory was well received in the 1980 s and 1990 s and even today by some. The data on national income became available in many countries in the period between WW1 and WW2, when income tax was introduced to tax a certain segment of the population.

Kuznet noted a sharp reduction in income inequality between 1913 and 1948. With the data available, he calculated that the top 10% of income earners claimed 45 to 50% of the national income while the rest 90%( middle and low income earners) claimed 30 – 35% of the national income in the initial part of the time period. Calculations done in 1940 showed a drastic reduction in inequality with the top 10 % claiming 30 -35% of national income and the rest 90% claiming 65- 70 %. This decrease of 10% points in the top 10% earners amounted to half the income of the poorest 50% Americans. The reduction in inequality was objectively and empirically shown by Kuznet for the first time with the positive news that inequality in US was decreasing in the 1940′ s. While the 19 th century economics were just theoretically postulating hypotheses.

But Kuznet himself was aware that the reduction in income of the top 10% between 1913 and 1948 was due to the multiple shocks triggered by the Great Depression and WW1 and WW2 that reduced the fortune of the rich and not due to the mobility of wealth from top to bottom. Though he warned people not to generalize his interpretations in his 1953 book, he gave a much more optimistic explanation for reduction in inequality in a 1954 Detroit meet of American economists. He formulated a bell curve called ” Kuznet’s Curve” ( Inverted U- Curve) which shows that in the early stages of industrialization inequality increases and then in later stages it decreases. In a 1955 paper, he reminds readers to interpret data cautiously and note the importance of exogenous shocks in reducing inequality, he suggests that the economic development could also naturally follow this optimistic path without policy interventions or external shocks , not withstanding the speculative nature of the theory. The phenomenon was thought to be reproducible in underdeveloped and developing countries too, thus it became a powerful political weapon. Kuznet reminded the listeners in the meet the optimistic predictions were intended to maintain the underdeveloped countries within the orbit of the free world. Thus Kuznets Curve was a product of the Cold War, created for the wrong reasons. Since the 1970 s inequality has been increasing in the rich countries.

Rapid growth of China and some other poor and emerging countries have contributed to the reduction in inequality at a global level. The “balanced growth path” where all economic variables are supposed to grow at the same pace is disproved by the disequilibria in different economic sectors like oil, finance, real estate etc. Piketty has used an extensive set of historical data for understanding past and present trends, patiently establishing facts and patterns comparing different countries to get a clear idea for the future.

Sources used

One – sources of inequality and distribution of income.

Two- Sources of distribution of wealth and relation of wealth to income.

Piketty has challened Kuznet’s relation between economic development and distribution of wealth. As per himself, nobody has systematically pursued Kuznet’s work since the tax historical record statistics he had used falls in a no- man’s land, too historical for economists and too economistic for historians. Piketty maintains that income inequality can only be studied in a long- run perspective which is possible by making use of tax record. The household income and budget studies by the national statistical agencies rarely date before 1970 s and also tend to seriously underestimate the upper income groups’ income. But tax records tell more about high incomes and we are able to look at it at least a century back. Piketty has used the same method, sources and concepts as Kuznet to retrospectively analyse the tax records, national and average incomes and chart the patterns in France and all the rest of the 20 countries. The income tax returns allow us to study changes in income inequality and estate tax returns studies the changes in inequality of wealth. In some countrie studied, estate tax predates income tax and so wealth inequality data is much more than income inequality data. Picketty deals not only with the level of wealth and income inequality, but also the structure of inequality(their origin i.e, inherited wealth or savings) among social groups and the systems of economic, social, moral and political justification for defending or condemnng these inequalities.

One reason the book stands out from others is the long historical data to study the dynamics in retrospective, available to the author. Sometimes dating back to 18 th century as in the case of France and Britain. Some long term changes did not emerge clearly until data for the 21 st century became available due to the fact that certain shocks due to the world wars persisted for a very long time. Until the 70 s and 80 s such studies were done manually, but technological advances has made it possible to use a better and quick mode to study these.

Major Results of the Study

The first conclusion: To be wary of, i.e, economic determinism( a theory suggesting that economic forces determine, shape, and define all political, social, cultural, intellectual, and technological aspects of a civilization.). The history of inequality and wealth distribution had always been deeply political. Example: The reduction of inequality in developed countries between 1910 and 1950 was due to the policies adopted to cope up with the consequences of war. The resurgence of inequality after 1980 is due to the changes in taxation and finance, again political decisions. Thus inequality is the joint product of political, social and economic factors combined.

The second conclusion: The dynamics of wealth distribution reveal powerful mechanisms pushing alternatively towards convergence(reduction in inequality) and divergence(rise in inequality). There is no natural. spontaneous process to prevent the destabilising forces to prevail permanently.

Knowledge and skill diffusion is the key to overall productivity growth as well as reduction in inequality both within and between countries. By adopting the modes of productivity of rich countries and acquiring skills the less developed countries have increased their productivity and national incomes. eg. China.

From a theoretical standpoint, other forces can push towards greater equality. For example: requirement of greater skills of production will lead to more empowerment and income of skilled workers thus increasing the human capital over financial capital. A scientist or reasearcher or engineer who is highly skilled would make inequality meritocratic and static. Thus technological rationality leads to economic and democratic rationality.

No matter how potent the forces of skill and diffusion of knowledge is in promoting convergence between countries and within countries, powerful forces can thwart this. Eg: Educational policies, lack of investment in or access to training, availability to acquire skills and of instituitions in turn affect societal groups. Some groups benefit, while some others do not.

Deriving Picketty’s r>g as the fundamental equation of inequality

Taking two worrisome forces of divergence, Piketty tells us that the first one is less worrisome than the second. First, top earners suddenly separate from the rest by a wide margin, means they get into the top 10%. The reason according to Picketty is either the sudden increase in the skills and productivity leading them to be top earners or more plausibly that they acquire the power to set their own remuneration in some cases without limit or in many cases without clear relation to their individual productivity. This is seen mainly in the US. Second, the accumulation of wealth and capital returns when growth of economy is weak, which has the most potent destabilizing effect of the two.

To explain the divergence, Picketty has extended the Kuznets curve over a period from 1910 to 2010. Taking the income inequality of the US first, the top 10% earners claim 45 to 50% of the national income during 1910 – 1920, drops to 30 to 35% at the end of 1940, remains static from 1950 -1970, then a rapid rise in inequality after the 1980’s until the present. By 2010 it is 50% of the national income. After the Kuznet’s Bell curve, it leads directly to an U-shaped curve from the 1940 s to 2010. The rapid rise of inequality after 1980 s in the US is due to a veritable separation of the top managers to the top 10% from the rest of the labor force as mentioned before.

He plotted a second graph of the total value of the private wealth in Britain, France and Germany expressed as ratio of national income in years (capital: national income) from 1870 to 2010. In the late 19 th century, the private wealth is 6 to 7 years of national income, very high. It becomes 2 to 3 years of national income following the shocks of war during 1914 – 1945( inequality decreases). It rises after 1950 and in the twenty first century the private fortunes in al the three countries seem to be on the verge of 5 or 6 years of national income( inequality increases). We get the same U- shaped curve. The return of high capital to income ratio over the past two decades is due to slow growth of economy according to Picketty. Those already having wealth only needs a slight flow of savings to increase the stock of wealth steadily and substantially.

Thus if the rate of return on capital is significantly above the growth rate, which is more likely when growth rate is low, the risk of divergence in the distribution of wealth is high. This fundamental inequality which Picketty writes as r>g, where r stands for the average annual rate of return on capital including profits, dividend, interests, rent and other income from capital, expressed as percentage of the total value of capital and g stands for the rate of growth of the economy, i.e the annual increase in national income or output, sums up the overall logic of Picketty’s conclusions.

Returns on capital were higher than the growth rate in the 18 th centuries and early 19 th centuries and again after 1970’s. Inherited wealth is important since it logically follows that inherited wealth grows faster than the output or income. People with inherited wealth need to save only a portion of their income from the capital to see that capital grow more quickly than economy as a whole. Thus inherited wealth dominates wealth amassed by lifetime labor by a wide margin, capital accumulates, incompatible to the meritocratic values and social justice in a democracy. Also the savings rate increases with wealth. Means , the richer one is , the wealthier one gets. This destabilization factor leading to divergence worried Kuznet, who expressed this in his 1953 book, ‘ Shares of Upper Income Groups in Income and Savings‘. These forces for divergence was also central in James Mead‘s book, ‘Efficiency, Equality and the Ownership of Property‘ and also to Atkinson and Harrison in their ‘ Distribution of Personal Wealth in Britain‘.

To sum up, the process of wealth accumulation and distribution contain powerful forces pushing towards divergence. Though forces of convergence exist, the forces of divergence can attain an upper hand at any time, as is happening now at the beginning of 21 st century. The likely decrease in the growth of population and economy in the coming decades makes this trend all the more worrisome.

Picketty’s conclusions are less apocalyptic than those implied by Marx’s principle of infinite accumulation and perpetual divergence ( Marx’s theory implicitly relies on assumption of zero productivity growth in the long run). Picketty stresses that the main force of divergence in his theory of r>g has nothing to do with any market imperfection . Contrarily, the more perfect the capital market, the more likely r>g. He suggests instituitions and policies that would counter this by progressive global tax on capital . But, they need considerable international co ordination.

The book relies primarily on the historical experience of the leading developed countries- US, Japan, Germany and Britain. British and Frech data are significant, the data for these countries are available as far back as 18 th century. They were the leading colonial and financial powers in the 19 th and 20 th centuries. Their history is indispensable in studying what had been called the first globalization of finance and trade(1870-1914), which was prodigiously inegalitarian. He has given particular significance to the study of France since the French estate records dating back to the 18 th century are probably the richest in the world over the long run. The French Revolution did not create a just society. The population increase over the past 200 years, which was slow also makes it a good subject of study. US when compared to France has a 100 fold increase in population since the Declaration of Independence(France has only 2 fold increase in the last 200 years), less important inheritence factor compared to Europe, a vast change in geography due to the extensive westward expansion, all suggesting that US case is not generalizable.

Piketty critiques the orthodox system of economists churning out theoretical results without knowing what facts needed to be explained. He maintans that the discipline of economics need to get over the childish passion for abstract mathematical theorems and purely theoretical and highly ideological speculations and should focus on historical research and collaboration with other social sciences. Since Kuznet, there was no significant effort to collect the historical data on the dynamics of inequality, a void filled by Piketty with this work. He has presented the data in the book in such a way that anyone with an interest to dissect the question of inequality can easily understand the economics, history and politics of inequality. He uses some elementary mathematical equations , which can be explained in simple ways and understood without specialized technical knowledge. He condemns the preoccupation of economists with mathematics to acquire the appearance of scientificity without having to answer the complex problems posed by the world. He exhorts the economists to work alongside other social science disciplines and the social science practitioners to take interest in economics of wealth distribution and social class and to take a pragmatic approach to avail ourselves of the methods of historians, sociologists, political scientists and economists .

8 thoughts on “Synopsis-“Capital in the Twenty- First Century” by Thomas Piketty

  1. Sometimes I wonder all the solutions are out there but then evryone wants financial stability too and more importantly the power which comes from the money, even at the cost of others life. May be solution is water, which is abundant but salty which makes it undrinkable,

    Liked by 1 person

    1. Many economists including Piketty have been proposing corporate tax increase and wealth tax, which has proven to reduce inequality. We are witnessing how the corporates have amassed considerable wealth even during the pandemic, while the income of others stagnated or stopped.
      US president has now proposed a new bill to tax the corporates more and their domestic and foreign income. These billionaires have been stashing in tax-free havens with the help of tax loopholes in their countries increasing inequality and poverty and thwarting progress. Only strong political policies could force these moguls to pay their dues.

      It’s all the more worrisome in India now. Piketty’s book explains that whenever the private capital grows unlimited, the inequality widens, the rich become more richer, the poor more poorer.

      Liked by 1 person

      1. Moghul’s got a new meaning, hmm. Yup, that’s the case, but US president doesn’t have majority to pass all the bills he wishes too (if I am correct), like the one on you mentioned and also a bill which could make it compete with china, it’s about infra development and other fundamental developments, here my point is he won’t be able to pull all this alone as he lacks majority bicoz majority is with capitalist. I think capitalism is beneficial but this narrow version of it with high returns without economic growth is vicious for civilisation. And yes I found a new book, India’s power elite by Sanjaya Banu, may be you would like it, have a look,

        Liked by 1 person

      2. For US, without a majority in the House and Senate, it is doubtful if the bill would pass. In India, something like this wouldn’t be on the table even.
        Capitalism is beneficial given the wealth distribution does not create extreme inequality. Inequality as such, according to Piketty, is not something entirely avoidable, but extremes shouldn’t be the norm.
        Thanks for the book suggestion, shall check.

        Liked by 1 person

      3. Yup, you are right. I think India will change too, someday, we have this rich culture a d traditions, but good days are yet to come. I think someday India will be able to pass those bills, bills which are fundamental in nature and concerned with long term target. I hope for that.

        Liked by 1 person

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