Capital in the Twenty-First Century

Thomas Piketty’s Capital in the Twenty-First Century has been on the Times Hardcover Best Seller list for the past 20 weeks and is currently ranked #15. The book is a dense, lengthy treatise on the distribution of income and wealth in more than twenty countries. Piketty attempts to explain its underlying mechanisms and future dimensions. Who would have believed that a rigorous economic analysis like this would be so popular?

I also wonder how many purchasers actually read the entire book, 577 pages plus another 177 pages of detailed notes. But Piketty, who has become something of a rock star, does provide a cogent Introduction that pretty well outlines his major points. A summary follows:

Discussion about economic inequality has been largely based on prejudice, opinions and very little on facts or research. Piketty calls it a “dialogue of the deaf.” At the same time he acknowledges that even research is always provisional and tentative.

His goal is to provide comprehensive and historically accurate data on income, inheritance and taxes in every country where it is available. It is also supplemented by historical data from other investigators.

Piketty’s findings point to a sharp rise in overall income taken by the top ten percent of households after the decade following the Great Depression. During World War II until 2007, the income of the top 10% and within that group the top 0.1 stayed relatively constant and then rose sharply to its steadily increasing level.

In addition to income, he believes it is essential to assess the distribution of wealth. Wealth is determined by the amount of unexpended income and inheritance that accrues to individuals and families on a year-to-year basis. Piketty believes wealth contributes far more to rising inequality than most people had realized. His analysis of wealth may be the most original contribution of his work.

People with inherited wealth and surplus income are able to save a fair amount of capital each year. Piketty then suggests that, “When the rate of return on capital significantly exceeds the growth rate of the economy then it logically follows that inherited wealth grows faster than output and income.”

This is the condition in the developed world today and the reason the income levels of the top 10% and higher is rising so rapidly. In a sense we have become a “patrimonial society,” of the sort that existed in the mid-19th and early 20th centuries when inherited wealth and family dynasties played such a dominant role in the economy.

It also suggests that great wealth brings with it considerable political power that only reinforces the increasing concentration of wealth at the higher brackets. This is also a feature of current political reality that, in my view bodes ill for breaking the cycle of the rising political power of the rich and very rich.

Then there are the rest of us--the not-so-very-rich, the middle class and the poor, whose economic conditions have stagnated and continued to decline in recent years.

Paul Krugman, Nobel Prize winning Economics professor at Princeton says Piketty “gives something we didn’t know we needed—a sweeping, elegant integration of growth theory…and the personal distribution of income and wealth.” He also confesses to a certain jealousy that he didn’t write the book that Piketty did.

I am left with the question when and how is economic inequality going to be reigned in and, thereby, making possible a more equitable distribution of the economic resources of this country. Piketty does suggest a worldwide wealth tax but implementing this idea is utterly fanciful in today’s political climate.

Piketty concludes on a modest tone: “Since history always invents its own pathways, the actual usefulness of these lessons from the past remains to be seen. I offer them to readers without presuming to know their full import.”