History shows that growth alone won’t stop vast economic inequality.
Capital in the Twenty-first Century
by Thomas Piketty
translated by Arthur Goldhammer
Belknap Press, 696 pp.
In his annual address, the president of the American Economic Association, Irving Fisher, sounded the alarm about the issue he described as “the great peril today”—the “striking inequality of capital,” which, he argued, was “perverting” American democracy. It was “distressing,” he said, that wages were “actually decreasing while profits have been increasing.” “Something like two-thirds of our people have no capital,” said Fisher, while “the major part of our capital is owned by less than 2 percent of the population.” Moreover, “half of our national income is received by one-fourth of our population.”
In the year 2014, the theme of Irving Fisher’s address is resonant—which is why you may be surprised to learn that he gave it in 1919. Fisher, moreover, was a mainstream economist, very much in the neoclassical tradition. Milton Friedman called him “the greatest economist the United States has ever produced.” Today, the overriding concern of most mainstream American economists is what it has been for decades: economic efficiency. Questions of equity, on the other hand, have fallen by the wayside. But as Fisher’s address vividly demonstrates, concerns about distribution were once seen as vitally important.
In his important new book, Capital in the Twenty-first Century, French economist Thomas Piketty asserts that one of his chief goals is “putting the distributional question back at the heart of economic analysis.” As he notes, today the concentration of wealth has soared to levels that have not been seen in over a century. In recent years, the issue of economic inequality has moved out of the seminar rooms to become an issue of broad public concern. We’ve heard it in the rallying cry of the Occupy movement—“We are the 99 percent!”—and in Pope Francis’s thundering denunciations of capitalist excess and “trickle-down” economics. We’ve seen it in the surprising electoral success of economic populists like Elizabeth Warren and Bill de Blasio. Late last year, President Barack Obama gave a speech devoted to the subject, and the Democratic Party is pushing economic inequality as its major campaign theme for the 2014 midterm elections.
Inequality is on the political map, all right, and without question, the economist most responsible for putting it there is Thomas Piketty. Beginning in 2003, Piketty, along with his colleague and frequent coauthor Emmanuel Saez, published a series of ground-breaking studies documenting the dizzying rise of income inequality in the United States. Piketty’s innovation in this empirical work was his use of tax returns, rather than household surveys, to measure inequality. Tax returns give a more accurate picture of inequality than household surveys, which frequently fail to capture what is going on at the top of the income distribution. Partly this is because of nonresponse bias (rich people are far less likely to participate in such surveys) and partly it is due to the practice of “top-coding,” which caps the reported top incomes at a maximum value and thus prevents the exact amounts from being disclosed.
Piketty and Saez have demonstrated that while groups at the top of the income distribution have increasingly reaped disproportionately large economic rewards, in recent decades it is those with incomes at the very top—the top 1 percent and, even more, the top 0.1 percent—where the gains have been truly spectacular. And when Piketty and his colleagues examined inequality in other rich countries, the pattern held: since the 1970s, inequality has risen sharply in every developed economy, with the gains concentrated among the richest 1 percent. Saez’s most recent report found that in 2012, the top 1 percent of U.S. earners took in over a fifth of all income—among the highest levels ever recorded since the enactment of the income tax in 1913.
In Capital in the Twenty-first Century, Piketty sums up his research, tracing the history and pattern of economic inequality across a number of countries from the eighteenth century to the present, analyzing its causes, and evaluating some policy fixes. Spanning nearly 700 densely packed pages, it’s a big book in more than one sense of the word. Clearly written, ambitious in scope, rooted in economics but drawing on insights from related fields like history and sociology, Piketty’s Capital resembles nothing so much as an old-fashioned work of political economy by the likes of Adam Smith, David Ricardo, Karl Marx, or John Maynard Keynes. But what is particularly exciting about this book is that, due to advances in technology, Piketty is able to draw on data that not only spans a substantially longer historical time frame, but is also necessarily more complete and consistent than the records earlier theorists were forced to rely on. As a result, his analysis is significantly more comprehensive than those of his predecessors—and easily as persuasive.
Another of Piketty’s strengths is his enthusiastically interdisciplinary approach. One of the pleasures of this book is the way Piketty draws on sources as varied as the classic economic theorists, the great nineteenth-century social novelists like Jane Austen and Honoré de Balzac, recent research by historians and sociologists, and popular movies and TV shows like Titanic and Mad Men. He prefers the richness of these sources to the sterile mathematical models that are prevalent in contemporary academic work in economics. Indeed, he is scathing about much contemporary work in the economics field, condemning 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.”
Capital is a consistently engrossing read, encompassing topics including the stunning comeback that inherited wealth has made in today’s advanced economies, the dubiousness of the economic theory that a worker’s wage is equal to his or her marginal productivity, the moral insidiousness of meritocratic justifications of inequality, and more. But the book’s major strength lies in Piketty’s ability to see the big picture. His original and rigorously well-documented insights into the deep structures of capitalism show us how the dynamics of capital accumulation have played out historically over the past three centuries, and how they’re likely to develop in the century to come. From his analysis he’s derived several important lessons, none of them particularly comforting.
The first of these is that, contrary to widely held economic theories, there is no “natural” tendency of inequality to wane in advanced capitalist societies. In the 1950s, economist Simon Kuznets famously argued that in advanced economies, inequality looks like an inverted U curve, with inequality increasing during the early stages of industrialization, then decreasing as economic development spurs growth that benefits all. But as Piketty demonstrates, Kuznets’s inequality theory was based on fatally incomplete data—he only dealt with one country (the United States), from the years 1913 to 1948.
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