Thomas Piketty

The main driver of inequality--returns on capital that exceed the rate of economic growth--is again threatening to generate extreme discontent and undermine democratic values. Thomas Piketty's findings in this ambitious, original, rigorous work will transform debate and set the agenda for the next generation of thought about wealth and inequality.

Capital in the Twenty-First Century

Gavin

Was very impressed by this first time round, but the subsequent scholarly pushback convinces me it's too flawed to endorse without including this list of corrections:

* Magness: Piketty's data don't account for bias in income tax reporting. This undermines his claim that inequality is now as bad as it was in the early 1900s: when tax codes change dramatically, as they did through the pre-war period and in 1986, the data become unrepresentative (without adjustment). After adjustment, it looks like inequality fell much less in the postwar boom and has risen much less, post-80s.
* Rognlie and Bonnet et al: Piketty calculated the increase in capital share wrong, it's a lot lower; price appreciation (benefiting the rich) is not general, instead driven by housing. This mostly benefits single-home-owners, who use their capital by living in it, and so aren't 'rentiers'; thus Piketty is mostly wrong about the rise of rentier capitalism. Also, housing shortages are often political rather than fundamental, which again undermines the big anti-capital policy implication. 
* Furman and Orszag: Piketty's explanation for extreme income disparities (: large increases in corporate-executive bargaining power) isn't right; instead only a small group of monopolistic tech firms ("superstars") display this. 
* Acemoglu and Robinson: The evidence is mostly strongly against his three fundamental laws of capitalism. Most importantly, the elasticity of substitution of capital for labour is less than one; therefore, Piketty's main mechanism for explaining inequality cannot be true.
* McCloskey: lots of errors.

Piketty's core claims:
1. the capital share of national income has risen (at the expense of labour share).
2. r > g; wealth generally grows faster than economic output.
3. whenever r > g, inequality will rise because capital gets concentrated in fewer hands. 
3b. r (the return to capital) won't change much in response to a decline in growth rate, because the elasticity of substitution between capital and labor is high.
4. The capital-output ratio will be worse in the future.
5. Therefore large wealth tax now, or both capitalism and democracy will die. 

The above research finds that the first is true in some places (in the UK, the US and Canada?), but each of the middle three is questionable. (4) could happen but we're not given much reason to think it inevitable. Summary: Piketty's data collection and descriptive work is mostly good, his analysis and modelling is flawed enough to undo his policy recommendations (5).

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The resentful econ undergrad in me thrilled to see Piketty saying this:
 
  To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in. There is one great advantage of being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.
 

 He's keen to emphasise his ideological hygiene, that he's a real-deal empiricist. Weighed down by overstatement of its own achievement (“the fundamental laws of capitalism”). 

With a few more diagrams and boxed definitions, this would make an excellent intro macro textbook, gentle and empirically obsessive as it is. Lot of redundancy - whoa-there steady-now summary paragraphs every few pages - but I suppose that's what you need to do if you aim to be understood by policymakers.

The main driver of inequality—returns on capital that exceed the rate of economic growth—is again threatening to generate extreme discontent and undermine democratic values. Thomas Piketty’s findings in this ambitious, original, rigorous work will transform debate and set the agenda for the next generation of thought about wealth and inequality.

Max Bodach

Long, technical, but very astute analysis of rising problems of inequality

Bryan Alexander

This book has extraordinary presence on the American scene today. Reviewing it is tricky, since there are so many competitors, along with so much bad discussion. 

Here, I won't summarize the tome, since others have already done so (Doug Henwood does the best job I've seen). Instead I'd like to note some key elements of content and style, which might be useful for other current or would-be readers.

(I already did this from a half-way point, so this post is really a revision taking into account the whole book.) 

I think the book's main impact is to drive public discussion about economics to pay more attention to capital, and not just to income. I'm not sure if this will take hold in American conversations for various reasons, starting with the stark horror of our tv "news", but such is the book's central charge.

Piketty's style is fascinating, and helps enliven what could otherwise be a dry study of statistics. He writes with humor, mocking his own profession:

[E]conomists like simple stories, even when they are only approximately correct (218)

[T]he discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation (32)

...particularly when one belongs to the upper centiles of the [wealth] distribution and tends to forget it, as is often the case with economists (267)

When we say that a distribution of wealth is a Pareto distribution, we have not really said anything at all. (368)

For far too long economists have sought to define themselves in terms of the supposedly scientific methods. In fact, those methods rely on an immoderate use of mathemetical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content. (574)


The prose is occasionally elegant, ambitious, and even poetic:

Capital is never quiet: it is always risk-oriented and entrepreneurial, at least at its inception, yet it is always tends to transform itself into rents as it accumulates in large enough amounts - that is its vocation, its logical destination (115-6)

Thoughout most of human history, the inescapable fact is that the rate of return on capital was always at least 10 to 20 times greater than the rate of growth of output (and income). Indeed, this fact is to a large extent the very foundation of society itself (353)

[In the 1970s] [f]or the first time in history... wealth accumulated in the lifetime of the living constituted the majority of all wealth (402)

Private wealth rests on public poverty (567)

Once constituted, capital reproduces itself faster than output increases. The past devours the future. (571)

Yet for all of its ambitious Piketty frequently undercuts himself, qualifying and hedging his arguments. Even his ultimate call for a global, progressive tax on capital appears as utopian, in his own words.

At times the book is mordant: "The top 10% [of a future America] could therefore use a small portion of their incomes to hire many of the bottom 50% as domestic servants" (257) Or
It may be excessive to accuse senior executives of having their "hands in the till", but the metaphor is probably more apt than Adam Smith's metaphor of the market's "invisible hand" (332).

In the United States the Supreme Court blocked several attempts to levy a federal income tax in the late nineteenth and early twentieth centuries and then blocked minimum wage legislation in the 1930s, while finding that slavery and, later, racial discrimination were perfectly compatible with basic Constitutional rights (653 n49)


Key terms resonate, like patrimonial capitalism (173), society of rentiers (264), or inheritance society (351). George Lakoff should be impressed. I'm not sure if rentier (defined 422) will enter English.

Capital is also meticulously organized, offering frequent organizational statements to locate the reader within its argument and materials. Its introduction neatly lays out the book's argument.

One way the book makes itself more accessible to those unaccustomed to living within data is its use of literary examples. Capital repeatedly turns to Balzac and Austen novels for examples of capital-driven life. It also dives into pop culture, most entertainingly through Disney's The Aristocrats (365-6).

The key image of the book is a U-shaped curve (starting on 23). It occurs through chart after chart, showing different aspects of the same story: economic inequality being high before WWI, dropping for the middle of the 20th century, then rising up after 1980. That curve is a kind of multimedia aid, heuristically helping readers through mountains of data. 

Re: data, Piketty stashes much of the book's research online. That's a very useful way to combine digital with analog scholarship. We should expect more of this in academic publishing.

There's an interesting politics to the book so far. Piketty clearly finds gross inequality abhorrent, and wants to address it. Its first words are a quote from the 1789 French revolutionary Declaration of the Rights of Man and Citizen. The first chapter starts with an account of an armed battle between miners and management (39). And yet Piketty constantly distances himself from leftist thought and, with respect, Marx (8, 10) ("Marxist economists liked to show that capital's share was always increasing... even if believing this sometimes required twisting the data" (219)) ("I was vaccinated for life against the conventional but lazy rhetoric of anticapitalism... much of which turned its back on the intellectual means necessary to push beyond [Communism]", 31). He smacks down the liberal Gini coefficient (243) ("it is impossible to summarize a multidimensional reality with a uni-dimensional index without unduly simplifying matters and mixing up things that should not be treated together", 266) ("statistical indices such as the Gini coefficient give an abstract and sterile view of inequality", 267). This nontraditional politics appears in the book's final statements:
The bipolar confrontations of the period 1917-1989 are now clearly behind us. The clash of communism and capitalism sterilized rather than stimulated research on capital and inequality by historians, economists, and even philosophers. It is long since time to move beyond these old controversies... (576)
 This isn't simply a left, liberal, or Marxist book, as some have charged. Perhaps it's a claim for a new politics based on data, an ideology for the world of 538.com.

One aspect of Piketty's politics that goes against today's grain is its stance towards technology. He sees tech as powerfully shaping capital's powers (212-213), but also as deeply unpredictable. He dismisses those who see technology as democratic, arguing that new inventions can empower capital as easily as those lacking capital (233-4). He also sees tech as ultimately *not* driving inequality. The evidence for this last point is found in a brace of countries each experiencing similar rates of technological transformation, yet also seeing wildly different levels of economic distribution (321).

One piece of the book's argument which hasn't won much attention is its emphasis on demographics. For all of Piketty's emphasis on two formulas about economic distribution, changes in the number of people in a nation matter deeply. "[A] stagnant or, worse, decreasing population increases the influence of capital accumulated in previous generations" (84) Demographic growth keeps American inequality from soaring to even higher levels (154). "[T]he return to a historica regime of low growth, and in particular zero or even negative demographic growth, leads logically to the return of capital" (233; emphasis mine)

Predicting the future: Piketty hedges on this with every opportunity, despite the book's putative ambitions. He qualifies his extrapolations, offering multiple options at each point.

[B]y 2100 the entire planet could look like Europe at the turn of the twentieth century, at last in terms of capital intensity. Obviously, this is just one possibility among others. (196)

The history of the past two centuries makes it highly unlikely that per capita output in the advanced countries will grow at a rate above 1.5% per year, but I am unable to predict whether the actual rate will be 0.5%, 1%, or 1.5% (95)


If the twenty-first century turns out to be a time of low (demographic and economic) growth and high return on capital (in a context of heightened international competition for capital resources), or at any rate in countries where these conditions hold true, inheritence will therefore probably again be as important as it was in the nineteenth century. (378)

Who are the 1%? Piketty is clear that this is mostly C-suite executives, or "supermanagers", especially in Britain and the United States. Athletic or cultural superstars barely count for 1/20th of that group, and financiers only 20%. (302-303)

Overall, Capital is very convincing. Piketty's meticulous attention to data, steady re-examination of his own argument, and engagement with alternative models are, together, persuasive.

There are flaws and unfortunate limitations.
First, the book largely focuses on three countries: France, the United Kingdom, and the United States. Early on Piketty admits this is a problem, largely driven by the fact that these nations have the best data for his purposes. But this should give the reader pause when he draws global conclusions. "In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations" (432) "[I]t is by no means certain that inequalities of wealth are actually increasing at the global level" (438) 
Second, while being very well organized, the books tends towards repetition. This has some good pedagogical effects, especially as policies, datapoints, and concepts pile up, but eventually the repetitions are too much.

Capital in the Twenty-First Century

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