Capital in the Twenty-First Century: Summary and Review
Controversies over inequality have long influenced the political economy, ranging from the works of Karl Marx to the American and French Revolutions. However, many theses and analyses of economic inequality lacked data to support its conclusions in part because the data did not exist.
Thomas Piketty’s international bestseller Capital in the Twenty-First Century is his attempt at a near-definitive analysis of inequality, unprecedented in both scale and accuracy: no other author has studied inequality stretching back to 18th century France, or has done so with the accuracy that Piketty achieves through detailed tax returns. In the book, Piketty paints a pessimistic view of inequality, calling for confiscatory and wealth taxes and greater international cooperation to deal with inequality. In essence, Piketty’s work may be the intellectual basis for today’s “New Left’s” economic agenda pushed by politicians such as Elizabeth Warren, Bernie Sanders, and AOC.
Piketty argues that the fundamental force for inequality is the equation r > g, where the return rate on capital, r, is greater than economic growth, g. Under these conditions, inherited wealth inevitably dominates income from labor; in other words, capital beats labor. To explain this argument, we can break down r > g into two parts: why does it mean higher inequality, and what is the trend of r and g ?
First, what does r > g have to do with inequality? Consider a society with r = 5% and g = 1%, such that one’s wealth can grow at 5% per year, and the productivity of society grows at only 1%. Then, wealth grows faster than overall productivity, meaning that the wealthy have incomes and wealth that grows faster than the overall economy, which seems by definition to imply that inequality increases.
More concretely, we can think of several more-realistic economies where inequality falls or flourishes.
For instance, 19th century America had high growth: there were technological changes, and more importantly, massive increases in population. As such, there were significantly more workers and each worker was more efficient, leading to a higher growth rate, g. If someone was very wealthy at the beginning of the 19th century and earned $1 million per year off their income, then by the end of the 19th century, that $1 million would be a much smaller proportion of overall income due to the growth in the economy.
On the other hand, France did not have as significant technological advancements or population growth (there was much less immigration) during the 19th century. Someone with significant wealth as a proportion of overall wealth at the beginning of the century would likely still have a significant proportion of wealth at the century, likely more because their wealth had grown at ~5% per year and the economy only at ~1%, and the vast majority of poor French people had no wealth in the first place to generate returns on.
Unfortunately, the history of capitalism suggests that r is usually greater than g (prior to tax, it has consistently been higher since at least 0 AD). Pretax, it has been a near historical certainty that the return on capital has ranged from 4 to 5.5%.
Economic growth has varied more. From 0 AD to 1700, the average worldwide growth was around 0.1%, rising to 1.5% for 1820–1913 and to 3.0% from 1913–2012. At first, this suggests reasons for optimism, but Piketty cautions against that. For one, roughly half of recent economic growth can be attributed to population growth, which has slowed down in recent years and is unlikely to accelerate again (rich people don’t have too many babies). In fact, recent economic growth in Western Europe, Japan, and North America, is broadly around 1.5 percent or lower. Moreover, productivity growth has slowed (perhaps we have already found the low-hanging fruit), leading most economists to believe that economic growth in the twenty-first century will be in the range of 1 to 2 percent.
To be sure, there are exceptions. Countries behind the technological curve have significant growth gains to make, China being a recent example. Moreover, countries in Africa and Latin America have much higher demographic growth than Europe and North America, which is another factor that helps increase growth and reduce inequality. Within these countries, higher inequality may be less of a certainty in the medium-term.
Moreover, growth being perpetually lower than r is not a certainty, though according to past and current evidence and expert opinions, it seems likely for the foreseeable future. One could imagine a society with rapid growth that exceeds the returns on capital, leading to a society less reliant on inherited wealth and more on lifetime labor productivity. Still, this would be a significant exception to history and current trends.
Alongside the central equation of r > g, Piketty explores the vicissitudes in inequality caused by decades of Depression, wars, and changes in tax policy.
First, despite r’s consistent advantage over g, inequality actually peaked a century ago, just prior to World War 1. This is because the World Wars and Depression in between destroyed significant amounts of capital, which disproportionately harmed owners of capital, namely the rich. This destruction occurred in several ways: wartime destruction of property, extreme inflation which reduced countries’ debt loads, and significant redistribution through taxes and stimulus. As such, European inequality fell dramatically, even below that of the United States (which, as mentioned before, was a country of lower inequality due to a higher g).
Still, American inequality was not significantly higher than that of Europe until the late 20th century. According to Piketty, this is due to the American embrace of “free markets” and “small government” during the late 1970s, which led to lower taxes and fewer regulations.
In fact, while the United States pioneered many of today’s progressive tax policies — such as a confiscatory tax on excessively high incomes — it now has a far lower income tax on high incomes. This led to the emergence of “supermanagers,” who are executives at top corporations and are paid in the many millions per year, placing them easily into the top 1%. Piketty argues that these wages are unjustified, showing that higher executive pay is not correlated with better executive performance.
At the same time, the global movement towards free trade and financialization has led to a broad increase inequality — still less unequal than the the U.S., but still a significant increase. As countries compete for corporations and capital, they lowered taxes and reduced regulations, leading to a “resurgence” of capital. Hence, inequality of capital has grown to extremes near the peaks of the late 19th century.
Piketty proposes several solutions to today’s inequality, many of which can be seen in today’s progressive agendas. He argues for significant tax hikes on top income levels in order to disincentivize extreme executive pay (picture 90% tax rates on incomes above $10 million) and a global wealth tax of 1 to 2 percent on extremely wealthy individuals. The effect of the wealth tax is to reduce r and thus inequality (or at least slow its growth) and to fund a more robust social state.
The discussion of solutions is somewhat idealistic, however, which Piketty concedes. For instance, a wealth tax is difficult to implement unilaterally, and a global wealth tax is near impossible. Still, while critics argue that Piketty’s solutions are unrealistic, his work has shifted the Overton Window, and today, many politicians have embraced his policies. Piketty’s policies may be unrealistic today, but they have made the years in which they are realistic come much sooner.
Ultimately, the true achievement in Piketty’s Capital in the Twenty-First Century is the scope and accuracy of his work. There is far more to his discussion than what I have written above. He explores the history of inheritance and how it influences wealth today (it is a huge percentage of current wealth), how low inflation has played a central role in 18th and 18th century wealth accumulation, and much more. His intertwining of Jane Austen and Honoré de Balzac’s works with his theses illuminates the culture and morality that justifies and results in such inequality. The only issue with the book’s length is its occasional repetitiveness and my gen-Z attention span.
Though I try my best to summarize the book’s central argument, no summary can do this book justice.
