Capital in the Twenty-First Century
By Thomas Piketty
Translated by Arthur Goldhammer
(Belknap/Harvard, 685 pages, $39.95)
Thomas Piketty doesn’t seem like a man at the vanguard of a revolution. A professor at the Paris School of Economics, he is unassuming and soft-spoken, a clean-cut forty-something who prefers an open collar to a stuffy tie. Yet for months now his name has been on the lips of seemingly every would-be reformer in America.
Piketty’s new book, Capital in the Twenty-First Century, is a dense, data-filled 700-page work of economic scholarship, yet it has climbed bestseller lists in both the U.S. and abroad, becoming a rallying point for those in favor of higher taxation. Paul Krugman calls it “magnificent.” The Washington Post’s Wonkblog suggests four ways to “stop the U.S. from becoming a Piketty-style oligarchy.” A Financial Times columnist is calling this mass of commentary a “Piketty bubble.” And the London Spectator helpfully offers tips for those who want to bluff their way to sounding smart about Piketty without actually reading him.
This success came somewhat as a surprise. “We’ve printed and printed and printed, and the market soaks up whatever we print,” the book’s editor at Harvard University Press said in April. “The American reception of the book has re-energized interest in France. Now the French edition is sold out.”
But the furor might have been expected. Liberals and progressives of all stripes have hailed Piketty’s book as the indictment of free-market capitalism they have been waiting decades to hear. The market revolutions of the last thirty years have placed them on defense in public debates over taxation, regulation, and inequality, and Piketty provides them with the intellectual ammunition with which to fight back. His book reinforces their belief that inequalities of income and wealth have grown rapidly in recent decades in the United States and across the industrial world, and it portrays our era as a new “gilded age” of concentrated wealth and out-of-control capitalism. It suggests that things are getting worse for nearly everyone, save a narrow slice of the population—the “one percent”—that lives off exploding returns to capital. It pointedly supports an agenda of redistributive taxation. It recycles the old progressive idea that two things America holds dear, markets and democracy, are fundamentally at odds such that governments must intervene on behalf of the majority to check the tendencies of capitalism to concentrate wealth and corrupt the political process.
Some have compared the book to Karl Marx’s Das Capital for its updated analysis of the historical dynamics of the capitalist system. Piketty, though not a socialist or a Marxist, shares Marx’s assumption that high returns on capital are the driving force of modern economies and lead inevitably to unsustainable concentrations of wealth. In this sense, rather like Marx, he advances a single-minded interpretation of the market system.
Piketty writes from a social democratic perspective, one that is suspicious of free markets and confident that central governments can manage economic affairs in the interests of all. His book, ably translated from French by Arthur Goldhammer, bears many features of that ideological perspective, particularly in its focus on the distribution rather than the creation of wealth and in its decidedly negative view of the stock market boom of recent decades. The popularity of his book is perhaps another sign that established ideas never really die but go in and out of fashion with changing circumstances. Liberals, progressives, and social democrats were shocked by the comeback of free-market solutions in the 1980s after they assumed those ideas had been buried once and for all by the Great Depression. In a similar vein, free-market and small-government advocates are now surprised by the return of social democratic doctrines that they assumed had been discredited by the stagflation of the 1970s and the success of low-tax policies in the 1980s and 1990s.
Piketty, to give him his due, has written an impressive book on the distribution of incomes and wealth in Europe and the United States over the past two centuries. He, along with Emanuel Saez, a colleague and research collaborator at the University of California, has produced tax records to supplement widely available census data on the subject. Piketty and his colleagues have tracked this information back to 1913 for the United States (when the income tax amendment was adopted) and well back into the nineteenth century for France and other countries where records are available on estates and land values. No one else has done this kind of careful historical work. Because the actual data on the nineteenth century are sparse, Piketty draws upon the novels of authors such as Jane Austen and Balzac to give the reader a flavor of what life was like under an economic regime in which capital threw off far larger returns than labor—and to suggest that we are rapidly returning to those bad old days. There is much in this book to digest and reflect upon, even for those who do not share the author’s point of view.
Piketty’s main point is that in capitalist economies left to their own devices, returns to capital inevitably grow more rapidly than the economy as a whole. This makes intuitive sense, and to a degree is something of a truism. The long-term returns on the stock market are said to be around 8 percent per year (minus inflation) while real growth in GDP in modern economies has averaged around 3 percent per year. In Great Britain in the nineteenth century, government bonds paid 5 percent annual interest, with near zero inflation under the gold standard, while the overall economy expanded at a lesser rate. When such a pattern accumulates over many decades or generations, wealth tends to accrue disproportionately to those who already have it. Financial assets, in addition, gradually claim larger shares of national wealth. According to Piketty, this is the central dynamic of capitalist systems—and it is one that re-asserts itself whenever governments relax economic controls or reduce taxes on capital, as they have done in recent decades.
There are two central chapters in the book in which Piketty traces the distribution of wealth and incomes in the United States and Western Europe from late in the nineteenth century to the present day. His analysis yields a series of “U-shaped” charts showing that the shares claimed by the top one percent of individuals or ten percent of households peaked between 1910 and 1930, then declined and stabilized during the middle decades of the century, and then began to rise again after 1980. In the United States in the decades before the Great Depression, the top one percent received around 18 percent of total income and owned about 45 percent of total wealth. Those figures fell to around 10 percent and 30 percent, respectively, in the five decades between 1930 and 1980, at which point they started to increase once more. As of 2010, the top one percent in the U.S. received nearly 18 percent of total incomes and owned about 35 percent of the total wealth. The patterns are similar in the other Anglo-Saxon countries—Great Britain, Canada, and Australia—but quite different in continental Europe where the wealthiest groups have not been able to reclaim the shares of income and wealth that they enjoyed before World War I.
There is little mystery as to the sources of the “U-Shaped” curves in income and wealth distribution. The two great wars of the first half of the century, combined with effects of the Great Depression, wiped out capital assets to an unprecedented degree, while progressive taxes enacted during and after World War II (as high as 91 percent in the U.S. during the 1940s and 1950s) made it difficult for the wealthiest groups to accumulate capital at earlier rates. Obviously, wars, depressions, and confiscatory taxes are not beneficial to owners of capital. Beginning in the 1980s, as tax rates were reduced on incomes and capital gains, especially in the United States and Great Britain, those old patterns began to re-appear.
Piketty’s estimates of wealth and income shares over the generations are probably as reliable and accurate as he or anyone else can make them, but even so they are estimates based upon imperfect and inexact data. His estimates of wealth, for example, do not take into account assets held by pension funds and retirement accounts, which in the United States today add up to close to $20 trillion, or around one-third of the total value of U.S. stocks and bonds (some of these funds are held in foreign assets). These funds are typically not owned by members of the “top one percent” but by middle-class workers. If we could throw that $20 trillion into the pool of total wealth, Piketty’s graph might look quite different.
Piketty’s great fear, and one that is largely overstated, is that the concentrated ownership of wealth will create a new form of “patrimonial” capitalism in which a small number of families control the wealth of the society and pass it along to their heirs. This idea conflicts with the known tendency of wealthy families to disburse their assets over generations and to be replaced at the top by new entrepreneurs and owners of recently created capital.
It also conflicts with the dramatic rise in salaries for “super-managers” since the 1980s, which Piketty discusses. These are, as he writes, “top executives of large firms who have managed to obtain extremely high and historically unprecedented compensation packages for their labor.” The “rich” today are increasingly salaried executives and managers rather than owners of stocks, bonds, and real estate, as was the case a century ago. Piketty doubts that the new “super-managers” earn these extravagant salaries on the basis of merit or contributions to business profits. He points instead to cozy and self-serving relationships they establish with their boards of directors. All that aside, the rise of “super-managers” should actually help alleviate intergenerational inequality, since people can pass on to heirs their wealth but not their high-paying jobs.
To remedy the inequality problem, Piketty advocates a return to the much higher marginal tax rates of old. He thinks that marginal rates could be increased to 80 percent (from 39.5 percent today) on the very rich and to 60 percent on those with incomes between $200,000 and $500,000 per year without reducing their incentive to work in any substantial way. This might address the challenge of the “super-managers” who earn incomes from high salaries but would not get at the owners of capital who take but a small fraction of their holdings in annual income. He thus advocates a global tax of between 2 and 5 percent on the “super-wealthy” levied against assets in stocks, bonds, and real estate. Such a tax, he thinks, would have to be global in nature to guard against capital flight and prevent the rich from hiding assets abroad. It would also require a new international banking regime under which major banks would be required to disclose account information to national treasuries. In the United States, he estimates that such a tax might today yield $200 or $300 billion annually, or enough to pay down a large share of the annual federal deficit.
This is a large argument, and it raises a basic question as to whether it is possible to return to the mid-century regime of high taxes and regulation in an era of globalization, capital mobility, and falling trade barriers. It is not an accident that countries began to change their tax regimes at precisely the time at which global competition was increasing and tariff barriers were falling. Nations—and even states and municipalities within nations—that raise taxes are likely to see businesses and capital flee to more friendly jurisdictions. Globalization is one reason why wages for workers are not growing as rapidly as they were in the 1950s, and also a factor in the booming stock market of recent decades. No one (including Piketty) wants to return to a regime of tariffs and protectionism. Yet in an era of free trade, his tax policies are likely to prove counterproductive for nations that enact them.
He makes his case largely on the basis of inequality and not on the grounds that governments can deploy new revenues in a more effective manner than the private sector. The reason why the old tax and regulatory regime collapsed in the 1970s is because voters lost confidence in the ability of governments to use resources wisely. As everyone saw, increases in government spending in the 1960s and 1970s went hand in hand with the decline of schools, rising crime, welfare dependency, the collapse and bankruptcies of cities, and runaway inflation. Prior to that time, most people entertained hopes that government could accomplish large objectives, but this is no longer the case. The more citizens learn about political life in Washington, D.C., or in the various state capitals, the more they become convinced that figures in both parties mainly spend their tax dollars to nurture friends, supporters, and loyal constituent groups. Everyone is now aware that the wealthiest counties in the United States (as measured by per capita income) surround the nation’s capital, and workers with the most lucrative pensions tend to be government employees.
There is also the question of whether Piketty’s central proposition is even true or comes close to capturing the reality of markets. He claims that the differential returns on capital versus labor are the driving forces of the system, but that is a partial and misleading view. The driving force of the capitalist system is relentless innovation that improves productivity and raises living standards. For millennia people lived pretty much as they always did—on farms and in local communities, growing their own food and making tools for local markets, and generally passing away before age fifty. Over a span of two and a half centuries, since roughly 1750, the traditional regime transformed itself through an accumulating process of technological innovation and widening circles of trade. Workers and consumers have benefited generation on generation from less burdensome forms of work and access to ever more inexpensive products that make life easier. Widely shared progress—not exploitation—is the story of the past two centuries.
From one point of view, the contemporary era has been a “gilded age” of regression and reaction due to rising inequality and increasing concentrations of wealth. But from another it can be seen as a “golden age” of capitalism marked by fabulous innovations, globalizing markets, the absence of major wars, rising living standards, low inflation and interest rates, and a thirty-year bull market in stocks, bonds, and real estate. The maligned “rich” are mostly people who work for a living, and the owners of large amounts of capital recycle it daily into new companies and innovative products. Nor are “the rich” of one mind about the great issues of our time. Indeed, many, like Warren Buffett, Bill Gates, and George Soros, might even agree with the diagnosis outlined in this book.
John Maynard Keynes once remarked that the challenge in such a situation is to keep the “boom” going, not to bring it to a premature end in the belief that those who have prospered must eventually be punished. It is probably inevitable that our golden age will end sooner or later—but much sooner if Professor Piketty and his friends have their way.
By Thomas Piketty
Translated by Arthur Goldhammer
(Belknap/Harvard, 685 pages, $39.95)
Thomas Piketty doesn’t seem like a man at the vanguard of a revolution. A professor at the Paris School of Economics, he is unassuming and soft-spoken, a clean-cut forty-something who prefers an open collar to a stuffy tie. Yet for months now his name has been on the lips of seemingly every would-be reformer in America.
Piketty’s new book, Capital in the Twenty-First Century, is a dense, data-filled 700-page work of economic scholarship, yet it has climbed bestseller lists in both the U.S. and abroad, becoming a rallying point for those in favor of higher taxation. Paul Krugman calls it “magnificent.” The Washington Post’s Wonkblog suggests four ways to “stop the U.S. from becoming a Piketty-style oligarchy.” A Financial Times columnist is calling this mass of commentary a “Piketty bubble.” And the London Spectator helpfully offers tips for those who want to bluff their way to sounding smart about Piketty without actually reading him.
This success came somewhat as a surprise. “We’ve printed and printed and printed, and the market soaks up whatever we print,” the book’s editor at Harvard University Press said in April. “The American reception of the book has re-energized interest in France. Now the French edition is sold out.”
But the furor might have been expected. Liberals and progressives of all stripes have hailed Piketty’s book as the indictment of free-market capitalism they have been waiting decades to hear. The market revolutions of the last thirty years have placed them on defense in public debates over taxation, regulation, and inequality, and Piketty provides them with the intellectual ammunition with which to fight back. His book reinforces their belief that inequalities of income and wealth have grown rapidly in recent decades in the United States and across the industrial world, and it portrays our era as a new “gilded age” of concentrated wealth and out-of-control capitalism. It suggests that things are getting worse for nearly everyone, save a narrow slice of the population—the “one percent”—that lives off exploding returns to capital. It pointedly supports an agenda of redistributive taxation. It recycles the old progressive idea that two things America holds dear, markets and democracy, are fundamentally at odds such that governments must intervene on behalf of the majority to check the tendencies of capitalism to concentrate wealth and corrupt the political process.
Some have compared the book to Karl Marx’s Das Capital for its updated analysis of the historical dynamics of the capitalist system. Piketty, though not a socialist or a Marxist, shares Marx’s assumption that high returns on capital are the driving force of modern economies and lead inevitably to unsustainable concentrations of wealth. In this sense, rather like Marx, he advances a single-minded interpretation of the market system.
Piketty writes from a social democratic perspective, one that is suspicious of free markets and confident that central governments can manage economic affairs in the interests of all. His book, ably translated from French by Arthur Goldhammer, bears many features of that ideological perspective, particularly in its focus on the distribution rather than the creation of wealth and in its decidedly negative view of the stock market boom of recent decades. The popularity of his book is perhaps another sign that established ideas never really die but go in and out of fashion with changing circumstances. Liberals, progressives, and social democrats were shocked by the comeback of free-market solutions in the 1980s after they assumed those ideas had been buried once and for all by the Great Depression. In a similar vein, free-market and small-government advocates are now surprised by the return of social democratic doctrines that they assumed had been discredited by the stagflation of the 1970s and the success of low-tax policies in the 1980s and 1990s.
Piketty, to give him his due, has written an impressive book on the distribution of incomes and wealth in Europe and the United States over the past two centuries. He, along with Emanuel Saez, a colleague and research collaborator at the University of California, has produced tax records to supplement widely available census data on the subject. Piketty and his colleagues have tracked this information back to 1913 for the United States (when the income tax amendment was adopted) and well back into the nineteenth century for France and other countries where records are available on estates and land values. No one else has done this kind of careful historical work. Because the actual data on the nineteenth century are sparse, Piketty draws upon the novels of authors such as Jane Austen and Balzac to give the reader a flavor of what life was like under an economic regime in which capital threw off far larger returns than labor—and to suggest that we are rapidly returning to those bad old days. There is much in this book to digest and reflect upon, even for those who do not share the author’s point of view.
Piketty’s main point is that in capitalist economies left to their own devices, returns to capital inevitably grow more rapidly than the economy as a whole. This makes intuitive sense, and to a degree is something of a truism. The long-term returns on the stock market are said to be around 8 percent per year (minus inflation) while real growth in GDP in modern economies has averaged around 3 percent per year. In Great Britain in the nineteenth century, government bonds paid 5 percent annual interest, with near zero inflation under the gold standard, while the overall economy expanded at a lesser rate. When such a pattern accumulates over many decades or generations, wealth tends to accrue disproportionately to those who already have it. Financial assets, in addition, gradually claim larger shares of national wealth. According to Piketty, this is the central dynamic of capitalist systems—and it is one that re-asserts itself whenever governments relax economic controls or reduce taxes on capital, as they have done in recent decades.
There are two central chapters in the book in which Piketty traces the distribution of wealth and incomes in the United States and Western Europe from late in the nineteenth century to the present day. His analysis yields a series of “U-shaped” charts showing that the shares claimed by the top one percent of individuals or ten percent of households peaked between 1910 and 1930, then declined and stabilized during the middle decades of the century, and then began to rise again after 1980. In the United States in the decades before the Great Depression, the top one percent received around 18 percent of total income and owned about 45 percent of total wealth. Those figures fell to around 10 percent and 30 percent, respectively, in the five decades between 1930 and 1980, at which point they started to increase once more. As of 2010, the top one percent in the U.S. received nearly 18 percent of total incomes and owned about 35 percent of the total wealth. The patterns are similar in the other Anglo-Saxon countries—Great Britain, Canada, and Australia—but quite different in continental Europe where the wealthiest groups have not been able to reclaim the shares of income and wealth that they enjoyed before World War I.
There is little mystery as to the sources of the “U-Shaped” curves in income and wealth distribution. The two great wars of the first half of the century, combined with effects of the Great Depression, wiped out capital assets to an unprecedented degree, while progressive taxes enacted during and after World War II (as high as 91 percent in the U.S. during the 1940s and 1950s) made it difficult for the wealthiest groups to accumulate capital at earlier rates. Obviously, wars, depressions, and confiscatory taxes are not beneficial to owners of capital. Beginning in the 1980s, as tax rates were reduced on incomes and capital gains, especially in the United States and Great Britain, those old patterns began to re-appear.
Piketty’s estimates of wealth and income shares over the generations are probably as reliable and accurate as he or anyone else can make them, but even so they are estimates based upon imperfect and inexact data. His estimates of wealth, for example, do not take into account assets held by pension funds and retirement accounts, which in the United States today add up to close to $20 trillion, or around one-third of the total value of U.S. stocks and bonds (some of these funds are held in foreign assets). These funds are typically not owned by members of the “top one percent” but by middle-class workers. If we could throw that $20 trillion into the pool of total wealth, Piketty’s graph might look quite different.
Piketty’s great fear, and one that is largely overstated, is that the concentrated ownership of wealth will create a new form of “patrimonial” capitalism in which a small number of families control the wealth of the society and pass it along to their heirs. This idea conflicts with the known tendency of wealthy families to disburse their assets over generations and to be replaced at the top by new entrepreneurs and owners of recently created capital.
It also conflicts with the dramatic rise in salaries for “super-managers” since the 1980s, which Piketty discusses. These are, as he writes, “top executives of large firms who have managed to obtain extremely high and historically unprecedented compensation packages for their labor.” The “rich” today are increasingly salaried executives and managers rather than owners of stocks, bonds, and real estate, as was the case a century ago. Piketty doubts that the new “super-managers” earn these extravagant salaries on the basis of merit or contributions to business profits. He points instead to cozy and self-serving relationships they establish with their boards of directors. All that aside, the rise of “super-managers” should actually help alleviate intergenerational inequality, since people can pass on to heirs their wealth but not their high-paying jobs.
To remedy the inequality problem, Piketty advocates a return to the much higher marginal tax rates of old. He thinks that marginal rates could be increased to 80 percent (from 39.5 percent today) on the very rich and to 60 percent on those with incomes between $200,000 and $500,000 per year without reducing their incentive to work in any substantial way. This might address the challenge of the “super-managers” who earn incomes from high salaries but would not get at the owners of capital who take but a small fraction of their holdings in annual income. He thus advocates a global tax of between 2 and 5 percent on the “super-wealthy” levied against assets in stocks, bonds, and real estate. Such a tax, he thinks, would have to be global in nature to guard against capital flight and prevent the rich from hiding assets abroad. It would also require a new international banking regime under which major banks would be required to disclose account information to national treasuries. In the United States, he estimates that such a tax might today yield $200 or $300 billion annually, or enough to pay down a large share of the annual federal deficit.
This is a large argument, and it raises a basic question as to whether it is possible to return to the mid-century regime of high taxes and regulation in an era of globalization, capital mobility, and falling trade barriers. It is not an accident that countries began to change their tax regimes at precisely the time at which global competition was increasing and tariff barriers were falling. Nations—and even states and municipalities within nations—that raise taxes are likely to see businesses and capital flee to more friendly jurisdictions. Globalization is one reason why wages for workers are not growing as rapidly as they were in the 1950s, and also a factor in the booming stock market of recent decades. No one (including Piketty) wants to return to a regime of tariffs and protectionism. Yet in an era of free trade, his tax policies are likely to prove counterproductive for nations that enact them.
He makes his case largely on the basis of inequality and not on the grounds that governments can deploy new revenues in a more effective manner than the private sector. The reason why the old tax and regulatory regime collapsed in the 1970s is because voters lost confidence in the ability of governments to use resources wisely. As everyone saw, increases in government spending in the 1960s and 1970s went hand in hand with the decline of schools, rising crime, welfare dependency, the collapse and bankruptcies of cities, and runaway inflation. Prior to that time, most people entertained hopes that government could accomplish large objectives, but this is no longer the case. The more citizens learn about political life in Washington, D.C., or in the various state capitals, the more they become convinced that figures in both parties mainly spend their tax dollars to nurture friends, supporters, and loyal constituent groups. Everyone is now aware that the wealthiest counties in the United States (as measured by per capita income) surround the nation’s capital, and workers with the most lucrative pensions tend to be government employees.
There is also the question of whether Piketty’s central proposition is even true or comes close to capturing the reality of markets. He claims that the differential returns on capital versus labor are the driving forces of the system, but that is a partial and misleading view. The driving force of the capitalist system is relentless innovation that improves productivity and raises living standards. For millennia people lived pretty much as they always did—on farms and in local communities, growing their own food and making tools for local markets, and generally passing away before age fifty. Over a span of two and a half centuries, since roughly 1750, the traditional regime transformed itself through an accumulating process of technological innovation and widening circles of trade. Workers and consumers have benefited generation on generation from less burdensome forms of work and access to ever more inexpensive products that make life easier. Widely shared progress—not exploitation—is the story of the past two centuries.
From one point of view, the contemporary era has been a “gilded age” of regression and reaction due to rising inequality and increasing concentrations of wealth. But from another it can be seen as a “golden age” of capitalism marked by fabulous innovations, globalizing markets, the absence of major wars, rising living standards, low inflation and interest rates, and a thirty-year bull market in stocks, bonds, and real estate. The maligned “rich” are mostly people who work for a living, and the owners of large amounts of capital recycle it daily into new companies and innovative products. Nor are “the rich” of one mind about the great issues of our time. Indeed, many, like Warren Buffett, Bill Gates, and George Soros, might even agree with the diagnosis outlined in this book.
John Maynard Keynes once remarked that the challenge in such a situation is to keep the “boom” going, not to bring it to a premature end in the belief that those who have prospered must eventually be punished. It is probably inevitable that our golden age will end sooner or later—but much sooner if Professor Piketty and his friends have their way.
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