Pricking the Piketty bubble
Capital in the Twenty-First Century is a thoroughly uninspiring, data-heavy dirge.
About a month ago, very few in the US and UK had heard of Thomas Piketty. Now you can’t escape him. Not only has his book on inequality, Capital in the Twenty-First Century, reached number one overall on Amazon (a rarity for non-fiction); he is also seemingly omnipresent in newspapers, TV and other media. On his US tour, this once-obscure French economist was invited to share his insights with the treasury secretary, Jack Lew, at the White House. It’s official: he is a phenomenon.
Oddly enough, the Piketty who is treated like a celebrity in America and Britain remains a minor figure in his home country. As Tyler Cowen and Veronique de Rugy pointed out, when his book was published in France last year, the response was muted, and ‘unlike Esquire magazine, no one declared it “the most important book of the century”.’ What’s perhaps even more puzzling is how the Yanks and Brits are lapping up a book from a Frenchman that sharply criticises the US and UK as the worst cases of inequality run riot, while praising his own France for avoiding such excesses.
I was somewhat familiar with Piketty’s work (with Emmanuel Saez) on income inequality before finally managing to get hold of a copy of his new book. I had assumed he was a humble technical specialist, slogging through historical data, who just happened to be plucked from obscurity to instant stardom. But I was surprised to discover how self-regarding he is. Time and again in the book he tells readers that he has surpassed previous writers: ‘The sources on which this book draws are more extensive than any previous author has assembled.’ I was also somewhat taken aback when Piketty claims that French academics are superior to their American counterparts. He tells of how, after spending a couple of years in Boston in his early twenties, he was compelled to return to France. In the 17 years since, he proudly announces, ‘I have not left Paris, except for a few brief trips’, presumably to avoid contamination from non-French influences.
While likening himself to the classical economists David Ricardo and Karl Marx, Piketty does not miss a chance to remind you that he is much better than them… because he has compiled more data than they did. Piketty’s prominent references to Marx are especially peculiar. His title echoes Marx’s Capital, and Marx is mentioned throughout the book. But he is dismissive of Marx’s work: ‘Marx usually adopted a fairly anecdotal and unsystematic approach to the available statistics’; ‘Marx totally neglected the possibility of durable technological progress’; and so on. Marx is Piketty’s strawman, who he continually knocks down to show his own superiority. Having studied Marx’s Capital in the past, I was scratching my head at ideas Piketty ascribes to Marx, like his supposed ‘theory of infinite accumulation’. But my confusion began to make sense when Piketty admitted in an interview with the New Republic that he has not read Marx’s major work (‘I never managed really to read it… Das Kapital is, I think, very difficult to read and for me it was not very influential’).
Piketty’s approach – heavy on data, light on theory and explanation – in fact highlights his distance from classical economists like Marx. Capital in the Twenty-First Century reveals Piketty to be more accountant than economist: the bulk of his 685-page book consists of statistics he has gathered on wealth and income since the eighteenth century. When Piketty pronounces his ‘first fundamental law of capitalism’ (which concerns capital’s portion of total national income), he notes that it is ‘a pure accounting identity’ and ‘tautological’. Contrast that to Marx, who aimed to ‘lay bare the economic law of motion [my emphasis] of modern society’ – in other words, to explain the underlying dynamics, not just count the beans.
Distinctively, Piketty measures not only inequality of incomes, but also inequality of wealth (which for him is synonymous with capital). For example, incomes would include salaries and bonuses paid annually, while wealth would include the sum of retirement savings and the value of a house and any other financial assets. Wealth tends to be more concentrated at the top than income, and thus the inequalities are more pronounced. Piketty charts the extent of inequality over time in France, the US and other major countries, focusing mainly on the share taken by the top one per cent versus the rest (yes, the outlook of Occupy Wall Street). He generally finds that both incomes and wealth inequality widened during the nineteenth century up until the First World War, then narrowed during the 1914-to-1970 period, before widening again up to the present.
It’s not Piketty’s finding that inequality has grown in recent years that has led him to stand out among a crowded field of commentators, but his prediction that it will worsen in the future. He claims that the return on capital, or r (for example, the interest rate on savings or the gain from holding company shares), has historically outpaced the rate of economic growth or g (like GDP growth), which leads to greater gains by those who hold most of the wealth. An exception was the mid-twentieth century, due to the destruction of capital during the wars (both physically and in value terms) and high growth during the postwar boom. When those special circumstances ended by 1970, Western economies saw inequality widen again, and Piketty predicts this will continue. He now fears that the future for the US, UK and other major countries will resemble nineteenth-century Europe, with those at the top of society getting there through inheritance rather than work. He calls for higher taxes on the rich – an 80 per cent top income-tax rate, plus a separate tax on wealth – to try to reduce the gap between the rich and the rest.
Piketty’s exclusive focus on inequality leads to difficulties in understanding the distribution of incomes and wealth in a broader economic context. In recent decades, a lack of investment in productive industry and general stagnation in economic growth have led to a shift to capital taking more unproductive, frothy expressions, such as housing and stock-market bubbles. In such an economy, where stock prices are rising faster than the economy generally, it is not surprising that those owning shares will do better than others, but that’s not a sign of a healthy economy. Piketty rightly recognises that, in general, low growth will tend to increase inequalities in wealth. Logically, if low growth exacerbates inequality, that should mean we should focus on ways to expand growth. But instead, Piketty pessimistically assumes significant growth in the future is not possible, and his call for higher taxes is just a way to share out the misery more fairly.
Piketty’s single-minded concern with lessening income and wealth inequalities is myopic. It leads him virtually to celebrate the wartime years of 1914 to 1945, because that period reduced the gap between rich and poor. What really matters are significant increases in absolute living standards for the masses, which includes leisure time as well as pay, and can come from both individual advancement as well as improvements in social conditions. Yet, for all his reams of statistics, Piketty has remarkably little to say about those on middle or lower incomes. Instead, he asks us to examine forensically the wealth of the one per cent, which, in the absence of any higher purpose, begins to feel like vicariously watching reality TV shows about celebrities in mansions.
The over-hyped reaction to Piketty in the US and UK has little to do with the merits of the book itself, and much more to do with the current preoccupations of the Anglo-American elite. In particular, it reflects their overblown anxieties about the social disorder that might result from increasing inequality.
In the past, discussions of inequality stressed raising up those at the bottom; today, it’s all about bringing down those at the top. A truly forward-looking discussion would examine how to grow a productive economy, create jobs and raise living standards for all. In contrast, a Piketty-style debate over ‘who is getting the biggest share’ of a stagnant economy is a navel-gazing distraction with zero progressive content.