The intellectual world is buzzing over Thomas Piketty's book, Capital in the Twenty-First Century,, and I participated in this on-air discussion of it the other night. To date I have read about a quarter of it systematically, as well as some key passages later in the book. Since it is relatively fresh in my mind, I shall share some of my first impressions now, while promising to delve a good deal more deeply into it in subsequent posts.
Piketty certainly deserves congratulations for undertaking and completing this book, and French academia deserves credit for producing and rewarding him in the first place. Capital in the Twenty-First Century involves a very thorough survey of the economic development of the world's leading nations over the last three centuries. Britain and France receive the most attention, partly because they left behind the most historical data on the eighteenth and nineteenth century, but the US, Germany, and other countries get a good long look as well. Being one of the few historians who has attempted anything of comparable scope, I know how rare such people are, and they are even more rare among economists. In a rather striking passage in his introduction, Piketty explains that after earning his doctorate at a very early age, he worked for three years in an American economics department near Boston. (He is too discreet to identify it as MIT.) He abandoned that career track because his American colleagues were too obsessed with mathematics to the exclusion of all else--and not, in most cases, with numbers drawn from history either. Beginning at the beginning and going on to the end, he has managed to write an absorbing study of the rise and fall of capital and economic growth over the last three centuries, and in some respects for even longer, although it's a basic point of his that that there was extraordinarily little economic growth, or growth in per capita income at any rate, before the industrial revolution. He also repeatedly points out that about 2/3 of what we normally call economic growth is really just population growth--not growth in per capita income, which has averaged 1-2% in advanced countries for a long time. Unlike most economics, Piketty understands that history and politics matter--although as I hope to show in a later post, I personally think that they matter even more than he does.
Piketty's basic point, of course, is that inequality has been increasing rapidly in all advanced countries for the last 35 years or so. But the mechanism he focuses on is a fascinating one. The return on capital, he stresses from the start, has been growing more rapidly than the economy as a whole in all advanced nations. I have to confess that I was stunned the first time I read that, because I did not see how it could be true over the long run. But then, with the help of my wife, whose more traditional left wing views came in handy on this occasion, I realized that this was only another way of saying something we've all known for some time: that the richest few percent of our society has been soaking up all the economic gains that society as a whole has been making. Wages are essentially stagnant; the return on capital is not. And that, Piketty argues, is making our societies more and more like those of 19th century Britain and France, where a rentier class, repeatedly portrayed by Jane Austen and Honore de Balzac, dominated society and the economy, and when economic growth was very slow.
Pikety lays a great deal of stress on the concept of national wealth, the total of assets held by a given country. I well remember my section man in Economics 1 in 1965-6 telling us that national wealth "used to be thought of as very important," but that was the only mention it got. In those days macroeconomics focused relentlessly on GNP, now more commonly termed GNP, and its growth. That, I can see now, was because we were living at the end of the most egalitarian decades of the modern era, from the 1930s through the early 1960s. That, Piketty shows, is when the share of capital, relative to GDP, fell to its lowest level in modern recorded history, thanks in part to the losses suffered in the depression and the two world wars. Yet there was another reason, one that he has not yet treated at any length in the sections I have read. In that expansionist era--and particularly from the time of the Second World War onward--capital flowed relentlessly into industry, where it was transformed into economic growth. A good deal of it flowed into industry through governments, which financed arms, roads, bridges, dams, and much more. A growing population, especially in the United States, also insured a robust level of economic growth. Piketty makes clear that a decline in the role of capital within the economy went with it.
I shall save Piketty's policy prescriptions, which include both a tax on capital and 80% marginal tax rates, for later. Right now I shall simply pose another critical question. Do the holders of capital--megabanks, energy concerns, hedge fund managers, and all the rest--understand that higher levels of economic growth would work to their disadvantage? Is that why conservative economic interests want economic austerity, not expansion, despite our low-wage economy and high unemployment? In the radio discussion that I linked above,. Mark Blyth suggested that today's rich live in a privatized society featuring their own gated communities, private schools, and top-level colleges and universities, and therefore take no interest in how the rest of the population lives. It would be even more damaging if they used their economic power to ensure macroeconomic policies that favored them at the expense of the rest of us. I hope that this becomes part of the debate that Piketty has inspired.
Stay tuned for more analysis of an extremely important, although sometimes erratic, book.