When Karl Marx wrote his magnum opus, Das Kapital, he was responding to a radical change in the nature of economic relations. Industrialization was uprooting the peasantry and concentrating it in urban slums, eradicating traditional privileges and driving traditional crafts into obsolescence, and enabling the owners of capital to amass extraordinary fortunes on the backs of a labor force that appeared to have less and less control over its own destiny.
These changes demanded a response—and response required an adequate understanding of the dynamics of the changes he and others observed. Though Marx had quipped in his youth that “the philosophers have only interpreted the world, in various ways; the point is to change it,” Das Kapital was fundamentally a work of interpretation—it was, paradigmatically, a work of theory.
Marx’s political and economic program has been deservedly out of fashion for a third of a century but, as if to declare a generational swing of the pendulum, this year’s most talked-about big economic book consciously echoes its 19th-century antecedent, right from the title. Capital in the Twenty-First Century, by French economist Thomas Piketty, appears to update Marx’s analysis for our own era and to put the question of the distribution of wealth back in the center of economic and political analysis. But Piketty’s doorstop book is very different from the one Marx wrote, almost its opposite both methodologically and in its implicit politics.
Piketty’s book is anchored in a series of very simple ideas. First is the equation r > g, where r is the rate of return on capital and g is the growth rate of the overall economy. It is not hard to demonstrate that if r is substantially greater than g, then capital will capture an ever greater share of the national income. Why? Because if the return on capital (net of depreciation and taxes and so forth) is greater than the overall growth rate, then that return should be sufficient for some of it to be saved and reinvested, adding to the stock of capital. And if the capital stock grows, and returns to capital do not degrade—an important and contestable assumption—then by definition the share of income claimed by capital must grow.
Moreover, it isn’t hard to demonstrate that r must always be at least modestly greater than g. Why? Because if it were lower than g, no one would ever invest in capital stock. One would be better off relying on the growth of income generally to provide for the future and consume all one’s current income rather than saving any of it.
Piketty’s second idea is even simpler: namely, that β = s/g, or the ratio of capital to national income is equal to (or approaches over time) the ratio of the long-term savings rate to the long-term growth rate. Again, this should be intuitive: if a certain country grows slowly and saves a lot, then its capital stock should steadily increase in value, until it is many multiples of the national income; another country with rapidly growing income but little savings should see its capital stock grow slowly relative to the size of the national income.
From these very simple, largely unassailable ideas, Piketty derives an alarming conclusion: that, absent political intervention, wealth will compound more rapidly than income grows, swelling to a larger and larger multiple of national income and claiming an ever larger percentage of the national income itself, to the point where inherited wealth comes to matter more than earned income. At which point we will have returned to the very patrimonial world that preceded capitalism.
This is the first irony of Piketty’s analysis. Although his book is titled to recall Marx’s, Marx told a story about how capitalism changed economic relations, tearing apart old hierarchies in a ruthless quest for efficiency. Piketty tells a story about how capitalism did not change economic relations. Heredity mattered a lot in Balzac’s Paris, but it surely mattered even more in Louis XIV’s—and Piketty argues that it matters more now than it did in 1950 and will matter in the future as much as it did in 1850. Piketty’s book could have been titled The Capitalist Road Back To Serfdom.
Which is why Piketty’s politics also differ dramatically from Marx’s. Marx was an apocalyptic optimist. He saw the horror wrought by industrialization, but he also saw the extraordinary power industrialization unleashed, and he imagined a way that the power would ultimately make it possible—inevitable, actually—for the horror to be overthrown.
Piketty is a pessimistic meliorist. He sees the growth of wealth and its concentration as the natural results of very simple and universal laws, as applicable in a precapitalist context as in the modern world of unshackled finance. But he finds a meliorist solution in a powerful redistributive state such as historically existed, and continues to exist, in his native France—albeit now under threat from the tax and regulatory competition between states that characterizes our new, globalized world.
The obvious conservative answer to this pessimistic view, and statist solution, is to argue that the solution is the cause of the disease. Questions of distribution naturally predominate when productivity growth is low or nil: the history of republican Rome as Livy recounts it is one of perpetual class strife between debtor and land-owner, strife that was never resolved by constitutional design but only by the conquest and enslavement of the rest of Italy, then the rest of the Mediterranean world. Unleash capitalistic dynamism, though, and g will rise faster than r. The rich will get richer, yes, but we’ll all get richer faster, and inheritance will be a negligible factor in social dynamics.
A left-wing rejoinder would be that distribution questions also predominate in a hypothetical society of unlimited resources—something like the “Star Trek” universe or the industrialized paradise that Marx envisioned. If all our goods come to be produced by robots, the question of just distribution cannot be resolved by reference to one’s labor contribution to the national product, much less by reference to property rights with respect to the robot laborers.
But Piketty is not predicting an end to scarcity. Neither is he predicting an end to economic dynamism. Indeed, he makes a point, repeatedly, of saying that his own assumptions for future productivity growth exceed those of many economists. So why is he predicting a widening of the gap between r and g and a consequent return to patrimonial capitalism? Why doesn’t he think that dynamism, properly husbanded, will lead us back to the sunny uplands of the 1950s, when growth was rapid and wealth distributed broadly?
One key answer, mentioned repeatedly in Piketty’s book but never given pride of place, is demographic decline. The largest component of g during the period when the gap between r and g narrowed most dramatically was the growth of the human population. Even if wages stagnate, a rapidly growing labor force means that a larger and larger share of national income will go to wages rather than capital. This is a key part of Piketty’s explanation for why America’s capital/income ratio remained so much lower than Europe’s for so long: because America experienced a much more rapid rate of population growth. (The other major reason is that America’s sheer size meant that land, a key component to both agricultural and housing wealth, was functionally infinite and consequently low in price.) In a world of stagnant or declining populations, it is very hard to imagine real growth rates approaching the traditional rates of return on capital—around 4 percent per year net of depreciation.
But by the same token, it is difficult to see why, in a world of stagnant or declining population, returns to capital should remain as high as they have been over the past two centuries, and that assumption is central to Piketty’s predictions. If r falls along with g, then society will change in various ways, but we won’t see inherited wealth capturing more and more of the national income.
In a world where future homebuyers are expected to be fewer in number than the current home-owning population, and future customers to be fewer in number than the current consumer population, how could additions to the capital stock not rapidly degrade returns thereto? In such a world, it’s possible that durability—reducing the drag of depreciation—may come to matter more than the ability to generate return.
Which wouldn’t necessarily be a bad thing. There is a lot of nostalgia for the growth rates and sense of broadly shared prosperity of the 1950s, but less for the disposable nature of objects from that era. Meanwhile, observers of Japan have worried for some time whether its failure to return to solid and stable growth is more a consequence of the changing shape of the demographic pyramid rather than the overhang of bad debts or other economic factors—but James Fallows, among others, has noted that after a generation of “stagnation” Japan feels more broadly prosperous and comfortable than it did at the peak of its last boom.
We are now in the realm of speculation, however, and that is a world in which Piketty, notwithstanding his headline-grabbing predictions, is uncomfortable. That is the novel strength of Capital in the Twenty-First Century. Although his book is theoretically thin and concludes with a political program that is simultaneously overfamiliar and quite unlikely to be enacted, Piketty has done an enormous service simply by compiling the amount of data that he has about how the predominance of wealth has varied over time in different countries and by laying down a marker for how economists should properly investigate the world. In his view, they should spend less time with sophisticated models or game-theory experiments and more time compiling, cleaning, and analyzing data, then interacting with other social scientists to explore the possible implications of the facts uncovered. I’m inclined to agree. Indeed, a substantial research program could be developed merely out of data that Piketty has compiled that don’t particularly serve the larger thesis of his book.
For one example, Piketty notes that the capital/income ratio has risen much higher and more rapidly in Italy than it has in America. The reason for this may be substantially demographic, but there may also be a vicious circle at work, where the increased importance of inherited wealth in Italian society makes family formation more expensive and thereby further entrenches demographic trends. That’s a question worth investigating.
Another example: Piketty notes that in America inequality has largely been driven by extraordinary increases in pay at the top of the corporate ladder, for executives he calls “super-managers.” Piketty doesn’t delve deeply into possible reasons for that increase other than to suggest—correctly, in my view—that it is largely unrelated to any outsized contribution to the enterprises in question. (I suspect this income escalator is driven secondarily by self-dealing, but primarily by competition for talent with a fantastically remunerative financial sector.) But the consequences are also interesting: might this half-meritocratic, half-lottery-ticket system that drops great fortunes in the laps of executives who manage to climb to the top be one of the forces inhibiting the entrenchment of inheritance as the primary route to wealth in America?
To pick yet another example, Piketty notes that although inequality is growing especially rapidly at the top, there is also a great deal more wealth in the hands of more people than ever before. But not in all hands. Housing wealth is very broadly distributed through the upper half, and particularly the upper decile, of society, and this wealth is becoming more and more important to determining economic outcomes like the affordability of a college education or the ability of children to start their own families in homes of their own. A society of petit rentiers is far better than a society of pauperized proletarians—but it may be a very different society, in terms of relations between the generations and the principal function of the social state, among other things, than the one that obtained at midcentury in Europe or America.
Finally, and most centrally to Piketty’s thesis, more work needs to be done on the question of differential returns to capital and its effect on concentration of wealth in ever fewer hands. Piketty makes a strong argument that both inflation and efforts by monetary authorities to combat the effects of the financial crisis not only do not reliably reduce inequality but facilitate greater concentration, precisely because the wealthiest are most able to achieve higher returns under all market conditions, while ordinary savers may see the value of their savings stagnate (due to low interest rates) or erode (due to inflation). But it’s not clear why passive wealthy individuals should be more likely to achieve high returns than passive institutions (like university endowments) or passive pools of capital representing large groups of investors (like Fidelity’s mutual funds or the California teachers’ pension funds).
Collaboration with other social sciences would benefit Piketty’s proposed political program as well. That program could be described as an effort on a global scale to reinstate the dominance of the state over private wealth that obtained in midcentury France, with its centerpiece a new global tax on wealth. Such a tax would need to be global, or at least continental in scale, because otherwise competition with tax havens would make it prohibitively costly for any single state to enact. This program has been criticized widely for being utopian, but I don’t find this fair. Wealth is an entirely reasonable object of taxation, and if even a European-scale tax reform aimed at reining in tax havens is not conceivable, that says more about the design of European institutions than it does about the radicalism of the proposed reform.
I do think Piketty would benefit from deeper analysis of why the state was able to achieve such dominance at that one period in history. He cites the two World Wars as being decisive, but continental America, Australia, and Sweden were largely untouched, and yet they experienced a similar decline in β. Moreover, the Napoleonic Wars, which brought the British national debt to its highest level ever relative to GDP, had no similar leveling effect—quite the opposite. Piketty would also benefit from openness to a wider variety of utopias. France’s politically centralist model is not the only possible response to rising concentration of wealth, particularly inasmuch as it might just trade one leviathan for another.
In Latin America, where patrimonial capitalism has long been the norm, among the most potent historical challenges to existing hierarchies was the call for land reform—that is, to redistribute the predominant form of wealth itself, and not merely its income. If Europe and America are indeed returning to an era of patrimonial capitalism, albeit with financial instruments supplanting real property as the primary form of wealth, then the most potent challenge to our own emerging hierarchy may also be some variety of distributism.
Alternatively, if the heart of our emerging problem is financialization, which enables the secession of the top of the income hierarchy from the society generally, the most potent response might be a broader application of the Rhenish model of capitalism. Germany does not hold to the Anglo-Saxon view that corporations exist solely to serve the interests of shareholders and frequently gives workers an explicit role in corporate governance. That this results in persistently lower market valuations for German relative to comparable British corporations is a feature rather than a bug if the goal is reducing the dominance of global finance over the structure of the domestic economy. Emerging economies, meanwhile, where returns to capital are likely to be higher than in the developed world, may have the most leverage to succeed with protectionist strategies that limit the mobility of capital and compel investors to assist them in climbing the value ladder, thereby dramatically lowering inequality on a global scale.
Thomas Piketty is to be commended for putting the question of distribution at the center of discussion about our economic future, rather than, as is more common in the dominant neoliberal framework, treating it as important only inasmuch as it bears on questions of mobility and growth. He is to be commended as well for demanding a humbler empiricism from the community of economists. But if we are to proceed from analysis to action, we still need a more robust theory of what is actually causing the problem that we observe. And while there is a certain French elegance to single, universal solutions, it may be that a diversity of attacks, tailored to the economic situations of different countries and regions, is not only more plausible than a new, global tax regime but more optimal as well.
Senior editor Noah Millman blogs at TheAmericanConservative.com/Millman.