When a product sells phenomenally well, as Thomas Piketty's new book is currently doing, popular economic theory says that means one of two things: either it’s filling a substantial unmet demand, or the product is exceptionally well executed. In the case of "Capital in the Twenty-First Century," both statements are true.
We are told that “Capital” is now at the top of the Amazon sales charts, outselling even mass-market novels with movie tie-ins like “Divergent.” That kind of meritocratic success story is, as Piketty’s work demonstrates, increasingly rare.
Piketty has given us a superior product. He has brilliantly and eloquently analyzed the crisis of inequality that threatens the global economy. The question now is, what do we do about it?
There's a certain irony in the fact that this book, rooted in historical economic principles and concerned with the threat of oligopoly wealth, is putting a few more dollars in the pocket of Jeff Bezos, Amazon's owner. But these surprising sales figures tell us something very important: People are yearning for an explanation of the dire economic straits in which they find themselves. Piketty’s highly readable style, innovative mind, and breadth of knowledge have made him the ideal candidate to meet this need.
As Piketty himself points out, the Occupy Wall Street movement showed that even seemingly abstruse mathematical concepts like “the top centile” can galvanize large numbers of people when they are translated into simpler language like “the 1 percent.” And, in fact, the phrase “we are the 99 percent” is derived from years of research by Piketty and his co-authors.
Much has already been written about this brilliant book. Paul Krugman has been both generous and gracious in his praise. Krugman called it “truly superb” and a “magnificent, sweeping meditation on inequality” in the New York Review of Books, and spent a half-hour explaining its importance in an informative interview with Bill Moyers.
The praise is certainly warranted. Piketty shows a command of both the economic data and its historical context. (Piketty is a firm believer that the distinction between economics and other social sciences is wrong-headed and calls for more works of “serial history.”)
Piketty also engages the reader with an eclectic perspective that leads him to investigate both the likely income needs of a Balzac hero and the probable population of the planet at the time of Christ’s birth.
Economists and policy analysts concerned with wealth inequality have long depended on the research of Piketty and his collaborators. This book has turned that research into what Krugman calls a “Eureka” moment. Adds Krugman: “We’ll never talk about wealth and inequality the same way …”
Agreed. But then what? What do we do once we’ve read “Capital”?
Perhaps it’s best to start by acknowledging that, however bad you think inequality has become, it’s worse than that. Piketty paints the picture of global wealth collapsing in upon itself – and the small percentage of the population that holds most of it – as if it were the fabric of the universe collapsing into a black hole.
It’s impossible to summarize a 600-page book. But some of its key insights, including the now-famous formula r > g, lead the reader to conclude that, unless something changes, the wealthy will keep wealthier at an accelerating (and, to Piketty, “terrifying”) rate.
Piketty addresses wage inequality as well as capital imbalance. But he argues that the debate has focused too much on salary (because that information is readily accessible in tax data) and has therefore overlooked the accumulation of capital – a trend which, among other things, is creating a global oligarchical overclass with wealth and influence on an almost unimaginable scale.
A Pointed Critique
Piketty is cultured and high-minded in his prose style, but that doesn’t prevent him from writing paragraphs like the one in which he describes the United States as “on the one hand … A country of egalitarian promise, a land of opportunity for millions of immigrants of modest background; (and) on the other … a land of extremely brutal inequality, especially in relation to race, whose effects are still quite visible.”
He is also capable of displaying an extremely dry wit, as when he points out that US academic economists are upper-income earners, “many of whom believe that the economy of the United States is working fairly well and … That it rewards talent and merit accurately and precisely.”
“This,” Piketty adds wryly, “is a very comprehensible human reaction.”
With so much of our policy debate dominated by such economists, Piketty’s pointed observations can be an extremely useful tool for shifting the terms of debate. He is generous towards economists of earlier generations like Simon Kuznets, who he suggests may have overstated (even if subconsciously) the egalitarian merits of capitalism out of anti-Communist fervor during the Cold War.
But Piketty rightly targets his professions obsession with abstract theorems, noting that his colleagues’ methods “rely on an immoderate use of mathematical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content.”
As the young people reportedly say: Snap!
These preoccupations, Piketty suggests, have led to the rise of executive “supersalaries,” tolerated by shareholders and board members who wrongly believe they reflect executives’ genuine market value. They have also led policymakers to wrongly conclude that the extremely wealthy, even those who are wealthy through inheritance, can only be described as “deserving.”
Presumably the economics profession’s tendency towards mathematical abstraction, combined with the “enlightened self-interest” of some of its members, has led it to participate in crafting the ideological justification for increasingly extreme wealth inequality. In addition, as Piketty points out, “the way one tries to measure inequality is never neutral.”
Nor are his concerns strictly methodological. He is especially concerned by those who, whether economists are not, argue against the evidence that wealth in present-day capitalism is based on merit. He characterizes this as “meritocratic extremism,” of which he says:
“This kind of argument could well laid the groundwork for greater and more violent inequality in the future. The world to come may well combine the worst of two past worlds: both very large inequality of inherited wealth and very high wage inequalities justified in terms of merit and productivity (claims with very little factual basis …).”
Concludes Piketty: “Meritocratic extremism can thus lead to a race between super managers and rentiers, to the detriment of those who are neither.”
And “detriment” is putting it mildly.
What Is To Be Done?
Piketty doesn’t just analyze the problem of global capitalism. He also prescribes solutions, and he does so with a scrupulous aversion toward ideological assumptions of any kind. That approach undoubtedly helped him come up with creative solutions for the inequality problem, the most noted of which has been the “global wealth tax.”
That is, as Piketty concedes, a “utopian idea.” The fact that it’s utopian doesn’t make it any less important, and the concept gives us a new way to look at the national and global economy. If nothing else, it’s an important thought experiment. Throughout the book, Piketty is enthusiastic about taxation as a source of valuable data. For that reason alone, even a modest global wealth tax would create the most informative map of the world’s wealth in history.
As Piketty also notes, a wealth tax – which he proposes to impose only on the very wealthy – could also be used to solve the problem of public debt. As an example, he writes that “a flat tax of 15 percent on private wealth would yield nearly a year’s worth of national income and thus allow for immediate reimbursement of all outstanding public debt.”
While that idea is not likely to be adopted either, its inclusion in the policy debate would likely have the laudable effect of discouraging hedge fund billionaire Pete Peterson and the Wall Street CEOs behind Fix the Debt from ever talking about government deficits again.
Piketty also points out that “according to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.” And yet, he doesn’t give this thought the same emphasis that he offers to the global wealth tax, even though it is probably less “utopian” and easier to imagine being enacted.
While the global wealth tax is a fascinating mental exercise, Piketty overemphasizes this idea to the detriment of other, more workable solutions. Polling in the United States shows, for example, that most Americans support some additional taxes on the wealthy. So why give such relatively short shrift to progressive taxation? (To be fair, Piketty does describe progressive taxation as “a crucial component of the social state.” But while he characterizes it as facing “serious threat,” he never offers it a forceful defense.)
Piketty also misstates the actuarial conditions under which today’s pension plans operate, arguing that “in a world where people die between 80 and 90, it is difficult to maintain parameters that were chosen when the life expectancy was between 60 and 70.” In fact, most of that change in life expectancy is due to lower infant mortality, a shift that does not affect the financing of pension programs.
You’ve Read Piketty. Now What?
American economist Dean Baker has written an important reaction to Piketty’s book entitled “Economic Policy in a Post-Piketty World.” Baker describes the “full bag of policy tools” that are available today. These include a robust financial transactions tax; an end to government-sanctioned monopolies in drug patents; a higher minimum wage; a carbon tax; and an end to monopoly rents in a variety of industries.
“If this post-Piketty agenda sounds a great deal like the pre-Piketty agenda,” Baker writes, “it's because the book probably did not change the way most progressives think about the world.”
That’s true. But Piketty’s masterful work provides the populist movement with a new vocabulary, along with a powerful data resource with which to make its arguments.
“Capital” offers activists, analysts and lawmakers a new pair of glasses with which to view our economic landscape. If some of that landscape already looks familiar, that’s to be expected. And even when we choose to plot a slightly different course than the one Piketty recommends, he has provided a valuable service.
Thomas Piketty navigates his terrain with three stars to guide him: economics, history and a deep grasp of Enlightenment ethics. That has brought him, and us, to a deeper understanding of inequality’s genuinely “terrifying” implications.
Where we go from here is up to us.