Above is a half-hour-long video from The Real News Network of an interview our friend and TRNN producer Lynn Fries conducted with Thomas Piketty in Paris recently. Below is our book reviewer Steven Pressman's fourth post on Piketty, and part one of his "live-blogging" while actually reading the book (also in Paris--oh la la!). Find Steve's earlier posts on Piketty (the first three are reviews of the reviews) here, here, and here. --Chris Sturr
Capital in the Twenty-First Century: Part One
WOW!!
That one word best sums up my impression of this book so far. Piketty is absolutely charming and, whether or not you agree with everything he has to say, you cannot deny that he has something to say and that this message is important. But, of course, I am slightly biased since the book is about a topic that I have spent a good deal of my professional career studying— the inequality of income and wealth.
I made it through the Introduction and Part One (100 pages of around 600 pages of text, excluding notes and references) on my trip to Paris from New Jersey and I am very impressed. The book is beautifully written (as many reviewers have noted) and Piketty is very clever. He has a unique story to tell about the historical evolution of capitalism and he is aware that most economists as well as the majority of the general public are not going to like the story and are going to be resistant to hearing it. The writing style helps put readers at ease in the hope that they will get the main message.
Here are a few of my favorite lines from early in the book, just to provide an example what readers can expect to encounter.
Writing about arguments among economists concerning inequality (p. 3), Piketty notes that this is a “dialog of the deaf, in which each camp justifies its own intellectual laziness by pointing to the laziness of the other”. John Kenneth Galbraith couldn’t have said it any better!
One more really good line, poking fun at economists and again very Galbrathian (p. 32): “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”.
Besides the wonderful writing style, which feels as though Piketty is having a conversation with you, there is the great breadth of his knowledge. Many reviewers have remarked on the literary references to Balzac and Austin; but this actually understates things. There are many more literary references in the book; Austin and Balzac, however, seem to be Piketty’s favorites. Furthermore, unlike most economists, Piketty has read and understands the history of his discipline. He knows, makes reference to, and is clearly responding to the giants who came before him-- David Ricardo, Thomas Malthus, Karl Marx and, perhaps most important of all, Simon Kuznets. Piketty also knows his history, making frequent references to important historical events. I was impressed with his references to the South African government intervening in the Marikana platinum mine labor dispute in August 2012, to the Haymarket Square tragedy of May 1886, and with his attempts to relate these events.
Piketty starts by providing a short history of national income accounting and connecting his work to the pioneering work by Simon Kuznets. This is not the sort of thing that usually makes for fun reading. Usually it is regarded as a good cure for insomnia; but this historical background is absolutely necessary. Piketty does it well and makes it clear why national income accounting is so important. Overall, he takes great care in explaining the numbers that he will be talking about—where they come from, their limitations as well as what they tell us about the economic world. And he uses literature (here is where Austin and Balzac come in) as well as history to reinforce the story told by the numbers. In the long history of economics, William Petty, Simon Kuznets and Wasilly Leontief are the only other major figures I can think of who were as sensitive to data and empirics. Piketty needs to be thought of in this tradition. But none of these other major figures in economics reinforced their numbers with literature or with history. Without doubt, there needs to be much more of this in the economics profession.
Part I essentially lays out the key numbers and the key argument of the book. These have been summarized well in the vast majority of reviews of Capital. The important historical fact is that throughout most of modern history economic growth has lagged behind the rate of return on capital (or, in fancy mathematical terminology, g<r).
Piketty then explains the key implication of this—inequality will increase over time because the ownership of capital is not evenly distributed. Those who own more capital (here Piketty means forms of wealth that generate income, and so includes the ownership of land, government bonds, stocks, etc.) will see their incomes grow by more than those who live mainly or primarily on their labor income. Income inequality and wealthy inequality will therefore rise. And it will continue to rise unless or until something is done to bring it under control. These forces could be wars (which destroy wealth), government policy (which taxes capital) or social upheaval.
This is one place that Piketty does not drive home his point home quite as well or as clearly I wish he had, so I am going to take a stab at this here.
At many points in the book, Piketty relates economic ideas to a single individual—making his points more concrete as well as more personal. When it comes to g<r, however, he succumbs to the standard practice among the econ of just resorting to numbers and to averages. But this point can be made simply in individual terms.
Think about yourself. You have been left an inheritance (capital) of $100,000 by your parents and you make $100,000 a year. Potentially, you can consume both your current income and from the returns to your wealth. To keep things simple, suppose both numbers grow at the same rate— say 1% each year. Essentially, economic growth of 1% gives you more labor income each year and capital income also grows at 1% annually. If you just spend your current labor income, then both your capital and your labor income will grow in tandem over time.
But now imagine what happens if your capital income grows at a faster rate—say 5% per year. Then the story becomes very different. After 35 years, a typical working life, my labor income (or wages) would grow to around $140,000 but my capital would grow to well over half a million dollars. At a 5% rate of return on this money, I can consume these returns ($25,000) in addition to my income. This raises my standard of living nearly 20% and still leaves my wealth intact. Or, I can consumer only 4% and let my wealth grow at the same 1% rate that my income grows.
After several generations, or around 100 years, the divergence between my income and wealth is even greater. My great grandchild (assuming their labor income grows 1%) would be making $268,000 but have $12.5 million in capital assets. At a 5% rate of return, their $600,000+ capital income would dwarf their labor income. My grandchild probably wouldn’t need to work. Certainly, he or she would care a whole lot less about their labor income than I care about mine. After all, I need to try to survive on my labor income and preserve my capital. My grandchild has few such worries.
Piketty’s story is that what happens above for one person or one family is what happens to developed capitalist economies over time-- barring a few exceptions (like wartime, which destroys the value of capital). Over time, wealth or capital income (Piketty uses these terms interchangeably and I will also) has become a larger share of national income, and it will become more and more important in the future because of the fact that returns to capital exceed economic growth. One person does not have wealth income and labor income that are relatively equal. Rather, some very rich people have lots of wealth and their income is likely to grow at a faster rate than the rest of the population whose income from labor grows more slowly.
Another key point, and another key way that the aggregate story differs from the individual story, is that over time capital income grows for some people but not for others-- since the distribution of capital income is much more skewed than the distribution of labor or wage income. In the US, the bottom half of the wealth distribution effectively have no wealth. The little bit that they do have is sitting in checking and saving accounts for emergency purposes, and earns very little or nothing. The next 40% in the wealth distribution have small amounts of capital, and most of that capital consists of home ownership. The richest 10% have 80% of national wealth. Even in the top 10%, most wealth sits with the top 1% or really the top .1% or top .2%. There are very few haves and very many have-nots when it comes to wealth.
And this, Piketty thinks, is a matter of concern for many reasons. It hurts economic growth; it counters our notions of fairness; and it he worries about the political influence of those people with so much money. Is democracy at stake? Can capitalism and democracy survive together? These are surely big questions.
--Steven Pressman