19/4/2014 ‘Capital in the Twenty-first Century’ by Thomas Piketty - The Washington Post

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‘Capital in the Twenty-first Century’ by ThomasPikettyBy Stev en Pearlstein, Published: March 29 E-mail the writer

Just when you thought Karl Marx had finally lost all political and economic relevance, a

brilliant French economist has come along to pick up where the German philosopher left off

— correcting for many of Marx’s mistakes, updating his analysis in light of subsequent

experience and unearthing a bounty of modern economic data to support a theory about

capitalism’s inherent and self-destructive contradictions.

The economist is Thomas Piketty, a professor at the Paris School of Economics, who with

Emmanuel Saez of the University of California at Berkeley has recently turbocharged the

debate about income inequality. Piketty and Saez gathered data from tax returns that

confirm the story of stagnant middle-class incomes over the past 30 years while revealing

how much the super-rich have pulled away from everyone else.

In its magisterial sweep and ambition,

Piketty’s latest work, “Capital in the Twenty-

first Century,” is clearly modeled after

Marx’s “Das Kapital.” But where Marx’s

research was spotty, Piketty’s is prodigious.

And where Marx foresaw capitalism’s

collapse leading to a utopian proletariat

paradise, Piketty sees a future of slow

growth and Gilded Age disparities in which

the wealthy — owners of capital — capture a

steadily larger share of global wealth and

income.

“The clash of communism and capitalism

sterilized rather than stimulated research on

capital and inequality by historians,

economists, and even philosophers,” writes

Piketty.

The quest for a unifying theory on the

nature of capitalism began with the earliest

political economists. The Rev. Thomas

Malthus theorized that population growth

would keep the bulk of mankind trapped in

misery and poverty, as was indeed the case

for much of human history. David Ricardo

theorized that the landed gentry would

become ever more wealthy as the value of a

fixed amount of land rose relative to the

expanding supply of other goods. And Marx

predicted that ruinous competition among

workers and investors would inevitably

drive wages to subsistence levels and

investment returns to zero, concentrating

wealth in fewer and fewer hands.

(Belknap) - ’Capital in the Twenty-First Century’ byThomas Piketty and Arthur Goldhammer

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19/4/2014 ‘Capital in the Twenty-first Century’ by Thomas Piketty - The Washington Post

http://www.washingtonpost.com/opinions/capital-in-the-twenty-first-century-by-thomas-piketty/2014/03/28/ea75727a-a87a-11e3-8599-ce7295b6851c_story.html 2/6

10

We now know that what each of these

determinist theories failed to anticipate was

an explosion of productivity driven by new

technology that allowed society to escape

from the dystopic futures they imagined.

But Piketty, marshaling an impressive array of data going back centuries, argues that the

underlying mechanisms of capitalism are likely to reassert themselves, once again

generating “arbitrary and unsustainable inequalities that radically undermine the

meritocratic values on which democratic societies are based.”

In Piketty’s telling, it was only the unique circumstances between 1930 and 1975 that

allowed capitalism’s natural drift toward inequality to be reversed. These circumstances

included two world wars, a global depression and an outbreak of debt-fueled recession, all of

which conspired to destroy vast amounts of wealth. Those years also ushered in

government economic policies that consciously set out to redistribute income and economic

power while spreading the latest technology to developing countries. Rapid growth in

economic output in much of the world reduced the importance of inherited wealth and

created a vast new global middle class with wealth of its own.

It was at the height of that “golden era” that economist Simon Kuznets — the father of GDP

accounting — put forward the notion that as countries moved through various stages of

development, household incomes would eventually become more equal. But Piketty lays out

the case that the “Kuznets curve” was merely a fairy tale told by Americans and Europeans

to bring developing countries in the capitalist fold. And once inflation and population

growth began to slow in the industrialized world in the 1970s, and economic growth

returned to more normal levels, capitalism’s natural tendency toward inequality of wealth

and income began to reassert itself.

Piketty’s prediction of a 21st century of slow growth and extreme inequality is based on

historic data and a simple equation. The data, which he assembled with various

collaborators in several countries, show that over long periods of time, output per person —

productivity — tends to grow at an average of 1 to 1.5 percent. The data also show that

average return on investment over long periods of time ranges between 4 and 5 percent.

The problem with these two historic trends, Piketty explains, is that whenever the return on

financial capital (investment) is higher than the return on human capital (productivity) for

an extended period, it is a matter of simple arithmetic that growing inequality will result.

The reason: Those with the highest incomes will save and invest, generating capital income

that will allow them to pull away from those relying solely on wages and salaries. It takes

only a few generations before this accumulating and accumulated wealth becomes a

dominant factor in the economy and the social and political structure.

Indeed, Piketty says, the data show that it has already happened in the United States, where

inequality in the distribution of both wealth and income surpasses that of class-bound

Europe of 1900.

Part of that American story, Piketty writes, reflects the surge in pay for corporate executives

and Wall Sreet financiers who make up a large part of the top 1 percent of income earners.

As Piketty sees it, their soaring compensation cannot be adequately explained simply by

superior education or performance, but also reflects imperfectly competitive labor and

product markets that allow the top 1 percent to extract way more than their real economic

contribution.

The wealthy, Piketty says, are also in a position to take more risks with their savings while

having access to the best investment and hedge fund managers, allowing them to earn a

higher return than middle-class savers. And unlike middle-class savers, they are likely to

reinvest their investment income each year rather than spend it. Combine those higher-

than-average returns with the magic of compounding, and you begin to understand how a

rigid class structure can start to take hold.

Indeed, one of the more delightful touches that Piketty brings to his task is how he draws on

the novels of Honoré de Balzac, Jane Austen and Henry James to illustrate the economics

of a rigidly stratified society built on a foundation of accumulated capital. But even these

literary forays are buttressed by incredibly detailed data on the size and flow of inheritances

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19/4/2014 ‘Capital in the Twenty-first Century’ by Thomas Piketty - The Washington Post

http://www.washingtonpost.com/opinions/capital-in-the-twenty-first-century-by-thomas-piketty/2014/03/28/ea75727a-a87a-11e3-8599-ce7295b6851c_story.html 3/6

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in France and England over the past two centuries. The creative use that Piketty makes of

this historical information is as impressive as the painstaking work he did in collecting it.

Although Piketty’s prose is clear and compelling and translated artrfully into plain English

by Arthur Goldhammer, this is a book aimed more at other economists than general

readers. At 577 pages of text and 75 pages of footnotes, it is annoyingly repetitious at times.

Long discourses on topics such as inflation and the current euro crisis add little to his central

thesis, while Piketty spends way too much time on tedious explanations of minor cross-

country differences in economic history. Like Marx, he would have benefited from an editor

with a sharper pencil.

In the end, Piketty’s analysis of the past is more impressive than his predictions for the

future are convincing. He fails to adequately explain how the accumulation of so much

capital looking for good investment opportunities won’t eventually drive down returns, as

economic theory would suggest. And like the grand theorists before him, he too easily

dismisses the possibility of a burst in technology-induced productivity that could usher in

another extended period of above-average growth in output and average incomes. “If one

truly wishes to found a more just and rational social order,” he warns, “it is not enough to

count on the caprices of technology.”

Moreover, unlike the 19th century, when real estate and government bonds were the

primary form of capital, it is riskier assets that generate most of the wealth in the modern

global economy — assets that can more quickly lose value as a result of changes in

technology or global competition.

Nor is it clear, as Piketty asserts, that the only way to avoid a future of slow growth and

extreme inequality is through confiscatory taxation. His prescription is an annual global

wealth tax of up to 2 percent combined with progressive income tax rates as high as 80

percent. Yet as he acknowledges, the “golden years” were golden because of a complex

interplay among laws, regulations, taxes and other restraints on corporate power. If

confronted with unacceptable levels of inequality, why would democratic societies in the

future be unable or unwilling to formulate a similar set of institutional restraints on

capitalism?

For all its faults, however, Piketty’s “Capital in the Twenty-First Century” is an intellectual

tour de force, a triumph of economic history over the theoretical, mathematical modeling

that has come to dominate the economics profession in recent years. Piketty offers a timely

and well-reasoned reminder that there is nothing inevitable about the dominance of human

capital over financial capital, and that there is inherent in the dynamics of capitalism a

natural and destabilizing tendency toward inequality of income, wealth and opportunity.

Steven Pearlstein is a Washington Post business and economics columnist and the

Robinson professor of public and international affairs at George Mason University.

CAPITAL IN THE TWENTY-FIRST CENTURY

By Thomas Piketty

Translated from the French by Arthur Goldhammer

Belknap/Harvard. 685 pp. $39.95

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19/4/2014 ‘Capital in the Twenty-first Century’ by Thomas Piketty - The Washington Post

http://www.washingtonpost.com/opinions/capital-in-the-twenty-first-century-by-thomas-piketty/2014/03/28/ea75727a-a87a-11e3-8599-ce7295b6851c_story.html 4/6

10 Comments Discussion Policy

3/29/2014 9:37 AM GMT+0700

ericcallenking w r ote:

No, we are not destined for eternal growing inequality. What is missing from the analysis by the economist is

that inequality grows in times of rapid change then settles down after the disruptive change has been

absorbed into society. Times of rapid change, as we are going through now, represent times of opportunity

for individuals. Huge wealth is amassed asymetrically as the first to capitalize on the new opportunities rush

in.

We see this again and again, whether it is railroad barons or steel magnates or owners of industrial mills in

Dickens' time or software or internet billionaires today the pattern is the same. The good news is that as a

society matures the great inequalities are often lessened as opportunity spreads and the rewards for being

first are no longer as big.

Think of it this way, how many rich cattle barons do you know of? In the old days outfits like the King Ranch

controlled spreads as big as some states, the result of rapid growth by those first in, the monopoly of being

first that never lasts.

The good news is that the disruption caused by the internet and the computer age will level out and with it

inequality, of course another disruptive event is on the horizon, the rise of solar energy as the dominant

energy source on the planet-the good news there is that solar energy may benefit everyone. It;s the energy

source of the 99% as fossil fuels are of the world's 1%.

So the brilliant economist is wrong because he missed a key ingredient in his analysis, progress leads to

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19/4/2014 ‘Capital in the Twenty-first Century’ by Thomas Piketty - The Washington Post

http://www.washingtonpost.com/opinions/capital-in-the-twenty-first-century-by-thomas-piketty/2014/03/28/ea75727a-a87a-11e3-8599-ce7295b6851c_story.html 5/6

4/1/2014 4:01 AM GMT+0700

3/30/2014 1:16 AM GMT+0700

disruptive change, the wave theory of inequality, each new wave levels out as does inequality till the next wave

hits.

t idelandermdva r espon ds:

Piketty explicitly refutes your contention, which sounds like the Kuznet Curve -- see quote below.

Joseph Schumpeter claimed that innovations led to a long wave of growth that continued until the

innovation had worked its way through the economy. At that point, when demand for the innovations

was saturated, growth slowed, resulting in decaling prices and income and depression. This is

contrary to your contention that the wave of innovation exhausting itself leads to equality.

Pearlstein: "It was at the height of that “golden era” that economist Simon Kuznets — the father of

GDP accounting — put forward the notion that as countries moved through various stages of

development, household incomes would eventually become more equal. But Piketty lays out the

case that the “Kuznets curve” was merely a fairy tale told by Americans and Europeans to bring

developing countries in the capitalist fold. And once inflation and population growth began to slow

in the industrialized world in the 1970s, and economic growth returned to more normal levels,

capitalism’s natural tendency toward inequality of wealth and income began to reassert itself."

Looking_in w r ote:

Functionalists, sheesh! All those swirls and ebbs of financial fortune always produce a logical outcome that's

just about the best we can hope for. No human actors, just the magic of free markets. So, of course, rich or

poor, we deserve our current circumstances.

The best Pearlstein can muster to explain the reality of growing inequality is "imperfectly competitive labor

and product markets that allow the top 1 percent to extract way more than their real economic contribution."

Any human beings involved in creating those "imperfectly competitive markets"? No lobbying, campaign

contributions, attack ads, propaganda, etc., by those intent on benefiting from "imperfections"?

Is it just a coincidence that the "Golden Era" of growth and prosperity, much more equally shared than before

or after, began with the mass organization of working people into a political force, and began to crumble with

the mass organization of capital to fund and direct all the "think tanks" and "foundations" behind the undoing

of the new deal?

Markets? How about the Powell Memo? http://billmoyers.com/content/the-powell-memo-a-call-to-arms-for-

corporations/

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