Capital in the Twenty-First Century (2014)
Thomas Piketty (1971)
Translated from the French by Arthur Goldhammer
793 pages
The dramatic economic growth experienced globally since the end of World War II has lifted millions out of poverty and spawned a dizzying array of new technologies. The past decade, however, has seen a growing pushback in wealthy Western liberal democracies against the new economic order of globalization and free trade. A sense has developed among the working poor and middle class of having been left behind economically, and that their prospects for the future – and perhaps more critically those for their children – look increasingly bleak.
French economist Thomas Piketty seeks to bring some clarity to this impasse in his monumental work Capital in the Twenty-First Century. Arguing that growing wealth inequality represents a dire threat to continued economic and political stability, he rejects the idea that capitalism and free markets, whatever benefits they have, naturally lead to stable outcomes:
There is no fundamental reason why we should believe that [economic] growth is automatically balanced. It is long since past the time when we should have put the question of inequality back at the center of economic analysis and begun asking questions first raised in the nineteenth century. For far too long, economists have neglected the distribution of wealth. (20)
And so, in pursuit of a deeper understanding of the distribution of wealth, its origins and consequences as well as policy solutions to address it, he proposes a structured, data-driven approach:
If the question of inequality is again to become central, we must begin by gathering as extensive as possible a set of historical data for the purpose of understanding past and present trends. For it is by patiently establishing facts and patterns and then comparing different countries that we can hope to identify the mechanisms at work and gain a clearer idea of the future. (20)
Piketty makes clear from the outset that his goal is not to completely overthrow the current economic system.
“I have no interest in denouncing inequality or capitalism per se … [but rather] in contributing … to the debate about the best way to organize society and the most appropriate institutions and policies to achieve a just social order … [based on] democratic debate.” (40) In measured tones, then, and with repeated acknowledgement of the limits both of the historical data at his disposal and the ability of models to provide precise policy prescriptions, he proceeds to lay out a remarkably clear and trenchant analysis of the historical evolution of capital, what it portends for the future, and what can be done to stabilize it. Setting a hopeful tone early on, he states
Democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions. The policy recommendations I propose … are based on lessons derived from historical experience, of which what follows is essentially a narrative. (2)
Given the topic, and the 700+ page count, one might be tempted to imagine that Piketty’s tome is one only an economist could love, but nothing could be further from the truth. Certainly, the ongoing series of plots demonstrating the evolution of capital, income and other values over the past few centuries, and the accompanying discussion describing their implications, can be a bit technical at times for the uninitiated, but Piketty brings an extraordinary liveliness to his narrative, with sparkling prose that engages even as it informs.
As just one example, he repeatedly references French and English literary works from the 18th and 19th centuries. These sources support his arguments and reinforce his data, but also animate his telling. And, though offering his interpretations, opinions and proposals where appropriate, Piketty is careful to stick close to the data, to what it can tell us – and what it cannot – while making clear the quality of the data, and how this quality varies from country to country and over time.
More generally, he acknowledges the limitations of economic analysis, arguing that it must needs be complemented by the work of other social sciences, such as history, sociology, anthropology and political science. In particular, he rejects the term economic science, for its implication that economic decisions can be made purely from dry calculation. Always he falls back on the need for democratic debate to decide our policy future.
After a helpful Introduction that briefly but efficiently lays out the history of economic analysis since the late 1700’s, Piketty sets about defining the terms and quantities that play a fundamental role in his discussion, including among others: income versus capital, labor income versus return on capital, and the capital/income ratio, which defines the amount of capital as a number of equivalent years of nations income, a value he tracks as an indication of the importance of capital in a society.
Having established these preliminaries, he then turns to the historical economic data he has gathered, which reveal a crucial theme that will run throughout his narrative: in the context of the past several hundred years, the 20th century represented an aberration in the evolution of capitalism.
As an example of this, he charts the economic growth rate, which is a combination of per capita output and demographics. After spiking in the late 20th century, with growth rates for both per capita output and population peaking at over 10 times their long-term average, it has more recently begun to decline. And, looking forward over the course of the 21st century, both of these metrics are projected to return to their long-term averages, with the consequence, Piketty declares, that the economic environment of the past half century, supported by high growth rates, will not persist.
Similarly, tracking the capital/income ratio as an indicator of the relative importance of capital, he shows that high levels of capital, and capital concentration, had been reached by the late 19th century, a period variously known as the Belle Epoque in France and the Gilded Age in the US. They then dropped precipitously from 1915 to 1950, with the destructive shocks of the World Wars and the institution of progressive taxation to both support the wars and create social programs aimed at reducing extreme inequality. More recently, however, they have begun to climb again, as conservative governments lowered tax rates on high incomes since 1980, and the economic growth rate has dropped off.
A dangerous consequence of the anomalous period of extremely high growth rates and extreme shocks to the global economy in the 20th century is that it has, according to Piketty, come to inform present-day intuitive understandings of and assumptions about the evolution of capitalism. In particular, it has instilled an erroneous belief that capitalism somehow righted itself in the 20th century, and that left to the dynamics of the free market a stable long-term economic trajectory can be achieved.
On the contrary, he argues, the historical evidence predicts that, with the projected downward trend in the economic growth rate over the course of the 21st century, the capital/income ratio will return again to the high levels seen in the late 1800’s.
And this rise in the amount of capital, he warns, will make visible again that “capitalism is undermined by its internal contradictions,” as first recognized in the late 19th century. The danger for capitalists in such a regime is that as the amount of capital increases the return on it eventually declines. Although this relationship, notes Piketty, can be countered “(to a certain extent) [by] permanent growth of productivity and population,” in an environment of declining productivity and population,
capitalists do indeed dig their own grave: either they tear each other apart in a desperate attempt to combat the falling rate of profit … or they force labor to accept a smaller and smaller share of national income, which ultimately leads to a proletarian revolution and general expropriation. (287)
Although this reckoning was held off in the 20th century, with the return in recent decades to regressive taxation and in a projected low growth environment, these ameliorating conditions are absent, and so capital growth has returned, along with its internal contradictions. And compounding these challenges, notes Piketty, is the historical evidence that as the amount of capital grows, its importance in national income relative to labor increases, along with its concentration among an elite few.
One bright spot that Piketty finds to have arisen out of the 20th century disruptions is that current-day capital ownership among the top 10% in the US (and similarly in Europe), although again high and rising, actually represents a reduction from levels of 80-90% at the beginning of the 19th century. During the disruptions of the mid-20th century a small but significant shift in capital ownership occurred to those in the middle class (defined here as 50-90% of the wealth distribution), leading to the emergence of what Piketty refers to as the Patrimonial Middle Class. (At the same time, he points out, the bottom half of the population saw no benefit from this shift, their share of capital ownership remaining at or below 5%.)
Piketty describes the development of the Patrimonial Middle Class as “a major transformation, which deeply altered the social landscape and political structure of society and helped redefine the terms of the distributive conflict.” (328). Nonetheless, despite this
important, if fragile, historical innovation … wealth is still extremely concentrated today…. [T]he historical reduction of inequalities of wealth is less substantial than many people believe. Furthermore, there is no guarantee that the limited compression of inequality that we have seen is irreversible. (327)
And countering this shift in some capital wealth to the middle class has been a phenomenon, mostly in the US and other anlgo-saxon countries, that Piketty refers to as “the rise of the Supermanager” or, alternatively, Supersalaries. This can be seen in that the share of labor income for the top 10% has increased by 10% since 1970, with the share for the top 1% alone increasing by roughly 7%. Piketty points out that is overwhelmingly the result of increases for top managers, not athletes, actors, artists or “super entrepreneurs” (such as Bill Gates).
He notes that these supersalaries are not a question of technology level (as continental Europe has not seen such wage increases), or supply and demand of talent. Rather, the data provide
convincing proof of the failure of corporate governance and of the absence of a rational productivity justification for extremely high executive pay …. This is particularly clear in the case of US corporations: Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.” (422)Equally troubling, he points out, is that the decline in top tax rates since 1980, in the US and Britain, has created an
amplifying mechanism [that] can give rise to another force for divergence that is more political in nature: the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the changes in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks. (423)
Examining the concept of using marginal productivity increase as a method of understanding the appropriateness of higher wages for particular jobs, he finds no evidence to support the idea that it can explain the high wage levels of these Supermanagers. He also notes that such an approach encourages
a far too instrumental and utilitarian view of training. The main purpose of the health sector is not to provide other sectors with workers in good health. By the same token, the main purpose of the educational sector is not to prepare students to take up an occupation in some other sector of the economy. In all human societies, health and education have an intrinsic value: the ability to enjoy years of good health, like the ability to acquire knowledge and culture, is one of the fundamental purposes of civilization. (386-7)
Certainly, in a US context in which education already from elementary school on is too often seen as one long race to maximize an eventual paychecks, his sentiment seems almost quaint – a disturbing commentary in itself on the current state of our civilization. And beyond health care and education, Piketty’s comments are echoed in science write Colin Tudge’s conclusion in The Time Before History that the merciless logic of capitalism has created the fundamental reality that “the agricultural systems of the [modern] world are not actually designed to feed people.”
One way that the wealthy in the US have promoted their success, according to Piketty, is through the particularly American belief in the gospel of meritocracy, a concept he dismisses with malice:
The conventional wisdom that modern economic growth is a marvelous instrument for revealing individual talents and aptitudes … has all too often been used to justify inequalities of all sorts, no matter how great their magnitude and no matter what their real causes may be, while at the same time gracing the winners in the new industrial economy with every imaginable virtue. (107)
He argues that this view has been “largely created by the United States over the past few decades.” (331), as the gilded age inequality based on inherited wealth has been replaced by
a very high level of total income inequality [which] can be the result of a ‘hypermeritocratic society’ (or at any rate a society that the people at the top like to describe as hypermeritocratic) … a very inegalitarian society, but one in which the peak of the income hierarchy is dominated by very high incomes from labor rather than by inherited wealth …. It is hardly surprising that the winners in such a society would wish to describe the social hierarchy in this way, and sometimes they succeed in convincing some of the losers. (331)
And these “winners” extend their meritocratic justification beyond just increasing their out-size salaries. As journalist Anand Giridharadas writes in his trenchant and disturbing book Winners Take All, these
elites put themselves in the vanguard of social change…. How can there be anything wrong with trying to do good? The answer may be: when the good is an accomplice to even greater, if more invisible, harm. In our era that harm is the concentration of money and power among a small few, who reap from that concentration a near monopoly on the benefits of change. And do-gooding pursued by elites tends not only to leave this concentration untouched, but actually to shore it up.” (8, Winners Take All; my review at right)
It is the increasing concentration of capital, however, that Piketty returns to as most concerning, globally.
He notes that historically capital has always been more unequally distributed than labor. In the US in 2010, for example, the upper 10% of the labor income distribution took in about 35% of the total labor income, while the bottom half took in about 25%. In terms of capital ownership, however, the numbers are more extreme: the top 10% own some 70% of the wealth, while the bottom half own only 5%. And Piketty argues that these numbers can only be expected to worsen: “It is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved.” (475) And aggravating this tendency to concentration is that the rate of return on capital is generally higher the more wealth one has, due in part, he argues, to the wealthier being able to be more patient in their investments, but also able to employee more and better financial advisors.
One notable social consequence of the increasing concentration of wealth in rich countries has been fears of foreign ownership of domestic capital. But Piketty argues – again with data – that “currently prevalent fears of growing Chinese ownership are a pure fantasy.” More generally, “this feeling of dispossession … is partly irrational, [arising] no doubt [from] the universal tendency to look elsewhere for the source of domestic difficulties.” The real threat, he argues, is “an oligarchic type of divergence, that is, a process in which the rich countries would come to be owned by their own billionaires.” (588-9)
In the final part of the book, Piketty explores potential approaches to reversing the current trends toward concentration of wealth in an economic environment projected to have continued low growth rates.
He first charts the growth of taxation and the social state over the course of the 20th century, from tax rates of about 10% in the early 1900’s that only supported what he refers to as regalian functions – police, justice, military, and general administration – to present day tax rates of 30-50% that support a variety of social programs – health care, education, transfer payments to the unemployed and poor, and public pensions.
The mid-century support for the social state, he notes, came amid a time of strong productivity and demographic growth, with rising incomes predisposing citizens to accept paying higher tax rates. And the stability in tax rates since the 1980’s indicates a general consensus about maintaining the social state, if at different levels in different countries.
But the challenge going forward, into a period of expected low growth rate (economic plus demographic), is whether societies will choose to find ways to continue supporting these programs. Though Piketty discusses this challenge for countries globally, his analysis of the situation in the US over the past century is particularly enlightening.
As elsewhere, tax rates in the US up to WWI were less than 10%, including for the highest incomes. However, Piketty argues, the excesses of the Gilded Age created a climate for change in the US.
[The] fear of growing to resemble Europe was part of the reason why the United States in 1910-1920 pioneered a very progressive estate tax on large fortunes, which were deemed to be incompatible with US values, as well as a progressive income tax on incomes thought to be excessive. (440)
Then, a decade later, “the Great Depression of the 1930s struck the United States with extreme force, and many people blamed the economic and financial elites for having enriched themselves while leading the country to ruin.” (650) Consequently, income tax rates and inheritance tax rates rose to well over 50% for those in the highest income bracket between 1910 and 1980, as a strong social support network was created.
However, he writes, “perceptions of inequality, redistribution, and national identity changed a great deal over the course of the twentieth century, to put it mildly.” (440) And so, starting around 1980, the pendulum began to swing back again. Piketty notes that, supporting this turn against the social state, “US prejudices in regard to the poor … seem to be more extreme than European prejudices, perhaps because they are reinforced by racial prejudices.” (608n17) And that, more generally
In the United States there is less of a consensus [than in Europe]. Certain substantial minority factions radically challenge the legitimacy of all federal programs or indeed of social programs of any kind. Once again racial prejudice seems to have something to do with this. (612n24)
These changing perceptions led, starting around 1980, conservative administrations to lower tax rates on the highest earners, eventually shifting from a progressive to a regressive tax structure, with opponents of high taxation among the wealthy often using hypocritical, misleading or specious arguments against it. (Countering, for example, the argument that high tax rates on the highest incomes stifle growth, Piketty notes that the US saw its highest growth rates in the 1950’s, at a time of extremely high, and progressive, taxation.)
And, with the current tax structure heavily weighted toward taxation of only income, and not capital or wealth, this shift toward a regressive tax structure has put significant strain on the ability to continue supporting social programs in the US, as well as elsewhere.
But Piketty proceeds from the assumption that the consensus on the need for social programs will continue, if not rise. And so, to fund such programs in an environment of projected low economic growth and increasing capital and capital concentration, he recommends instituting progressive taxation of income, estates and capital, noting that “these three progressive taxes play distinct and complementary roles [with] each … an essential pillar of an ideal tax system.” (675)
In support of taxing those with significant amounts of capital (particularly in a world of increasing capital concentration), Piketty describes both a contributive justification – that the extremely wealthy tend to have a significant amount of their income not from taxable wage income – and an incentive justification – that taxing capital will encourage investing it as opposed to simply sitting on low yield investments, leading to more benefit to society. In response to those arguing that such a taxation scheme would undermine capitalism and the free market, he counters that
A tax on capital would be a less violent and more efficient response to the eternal problem of private capital and its return. A progressive levy on individual wealth would reassert control over capitalism in the name of the general interest while relying on the forces of private property and competition. (687)
Based on historical evidence he argues that the alternatives, such as protectionism and capital controls, will never work as efficiently as progressive taxation.
The principal technical challenges to the taxation of wealth, according to Piketty, are the need to develop and implement rules of global transparency in capital so that the wealthy cannot hide their wealth, and global, or at least regional, agreement to impose this kind of taxation so that the wealthy cannot shift their wealth to places with lower taxes, encouraging a destructive race to the bottom.
Issues of taxation and support for the social state have also played a key role in arguments around public debt, which Piketty explores toward the end of the book. He argues that concern over debt levels has more to do with disagreement about what level of support should be provided to improve society, rather than any type of true economic argument about them per se.
[In Europe] net public wealth is virtually zero, given the size of the public debt, but net private wealth is so high that the sum of the two is as great as it has been in a century. Hence the idea that we are about to bequeath a shameful burden of debt to our children and grandchildren and that we ought to wear sackcloth and ashes and beg for forgiveness simply makes no sense. The nations of Europe have never been so rich. What is true and shameful, on the other hand, is that this vast national wealth is very unequally distributed. Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education. (740)
Here again, an example of a myth propagated by the wealthy to promote a reduction in their contribution to social support.
One consequence of the wealthy owning the conversation around support for the social state is reflected in Piketty’s expression of concern regarding underinvestment in education, as he mentions in the above quote and repeatedly throughout the book. As described earlier, in a 21st century already witnessing declining demographic growth, and with per capita output growth also projected to decline as the rest of the world expected to catch up by mid-century with the technological frontier established by the wealthiest countries, overall economic growth will decline. The principal way to lessen the decline in per capita growth, and so economic growth, he argues, is through improved education; but this requires funding government investments in education.
The challenge posed to humankind in the twenty-first century by infotech and biotech is arguably much bigger than the challenge posed in the previous era by steam engines, railroads, and electricity. And given the immense destructive power of our civilization, we just cannot afford more failed models, world wars, and bloody revolutions [as were experience in the 20th century in pursuit of solutions to those earlier challenges]. This time around, the failed models might result in nuclear wars, genetically engineered monstrosities, and a complete breakdown of the biosphere. We have to do better than we did in confronting the Industrial Revolution. (34, 21 Lessons for the 21st Century)
Nonetheless, Piketty offers a hopeful vision for “an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goals of education, culture, and health.” He notes that “we are to some extent already on this path [given] the considerable share of both output and employment devoted to education, culture, and medicine.” (387) These comments have parallels to philosopher Martin Hägglund’s concept of spiritual freedom, which Hägglund describes in This Life (my review at right) as the ability “to ask ourselves what we ought to do with our time [in this life].” (12)
Despite the similarities in their visions for an ideal society, the two authors remain far apart in their proposals for our economic future. However challenging it may be to realize Piketty’s prescriptions for the dangerous levels of inequality his analysis of the data portend, he does not propose a move away from capitalism. He notes that even “the progressive tax is … a relatively liberal method for reducing inequality, in the sense that free competition and private property are respected.” (648) Rather, he seeks democratically discussed and selected policies to balance out capitalism’s natural tendency to increase wealth concentration, without eliminating what he finds to be its benefits:
if democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again. (745)
Hägglund, like Piketty, finds the problems with capitalism to be immanent in the system itself. However, he differs from Piketty in that he is convinced that these problems will inevitably overwhelm any attempts to reform capitalism that keep its core principles in place. Thus, for example, Hägglund argues that instituting redistributive policies (such as progressive taxation) just requires more of the bad aspect of capitalism to provide the funds to redistribute, and so doesn’t solve the fundamental issue.
The attempt to achieve social justice through the redistribution of capital wealth is inherently contradictory. The more welfare policies and state regulations that prevent the exploitation of living labor, the more restricted are the possibilities of extracting the surplus value, and the less “wealth” is available to distribute in the economy. To take a striking example, when health care, education, and other public services are run by the welfare state, they are not sold as commodities that generate a profit that is reinvested as capital, which means that they do not contribute to the “growth” of our social wealth as measured under capitalism. Inversely, when these public services are privatized and commodified – transformed into a matter of buying and selling for profit – they contribute to the growth of capital wealth. This is the economic rationale for the neoliberal dismantling of the welfare state and deregulation of the job market. As long as we accept the capitalist measure of wealth, social democratic reforms will tend to reduce the wealth that they aim to distribute more equally. (283, This Life)
And in a comment that echoes Piketty’s concern that a marginal productivity approach to explaining salaries “instrumentalizes” basic human goals, Hägglund notes that
as a capitalist society, we are not collectively committed to producing for the sake of consumption. Rather, we are committed to providing for the sake of extracting surplus value [profit] that can be converted into the growth of capital. (297, This Life)
Thus, the very point of the capitalist system is its own furtherance, not the well-being of society, and this inescapable logic leads Hägglund to view capitalism as unsustainable, and to argue for the pursuit of an alternative. (And, to be clear, arguing that capitalism is unsustainable into the future, does not dismiss nor negate the past benefits that the capitalist economy has provided in dramatically transforming lives over the past several centuries, as argued perhaps most passionately by Steven Pinker.)
Like Piketty, Hägglund argues for the centrality of democratic processes in rectifying the fundamental inequalities arising out of unfettered capitalism, though calling for a much broader transformation. Hägglund defines the term “democratic socialism” as a system that he characterizes as placing democracy and the democratic process at the heart of developing a post-capitalism future.
To subordinate the state to society is to transform the state into an actual democracy. … While the commitment to serve the interests of society as a whole will always be challenging and contestable, it is in principle impossible to sustain such a commitment under capitalism. Because of the social form of wage labor, democratic politics and democratic states necessarily serve as organs for representing class interests that are competing for control. We cannot actually deliberate on how best to serve the interests of society as a whole, since we must prioritize the private interests of capitalists. This prioritization is not optional, since under capitalism there can be no production of social wealth without the profits of privately owned enterprises. (268, This Life)
One can argue that Piketty, the renowned economist, is a better source for understanding the possibilities for capitalism in a democratic state going forward, than Hägglund, a philosopher. And Hägglund freely admits that he does not have a precise prescription of how to arrive at democratic socialism from our present state; his point is to define the necessity of such a transformation.
But, interestingly, the prescriptions of both authors suffer from the same apparent predicament, one that each touches on without quite resolving, and that has been clearly identified by Yuval Noah Harari, as described above: that the capitalist system as it exists today has created an increasingly wealthy and powerful elite that has come to have inordinate control over the levers of government and so policy.
Thus, the question for Hägglund becomes, how could such an elite ever be convinced to fundamentally re-structure a system in a way that would surely diminish their power and wealth?
And, similarly for Piketty, though perhaps more directly: is it realistic to believe that democracy can rein in capitalism over the long run, given the immanent tendency of capitalism to lead to concentration of wealth, that concentration of wealth to concentration of power, and that power to policies that sustain this relationship. Piketty argues that to not do so will lead eventually to “revolution,” but does that not simply mean in practice that if we do not fundamentally transform our economic system, we will remain trapped in a cycle in which it takes wars and revolutions to tame capitalism, only to see it rise again?
I, for one, would enjoy a debate on these points between the two of them. Not with the goal of determining a winner and loser, but rather to achieve a deeper understanding on these critical questions.
In his engagingly written and eminently readable Capital in the Twenty-First Century, Piketty demonstrates that levels of wealth inequality, while having changed in structure, have returned to almost the same levels as seen during the Belle Époque in France, and the Gilded Age in the US. He argues persuasively that this inequality can be expected to continue to rise over the course of the 21st century if nothing is done to counteract it, threatening the social state that has been built in Western democracies, and likely leading to extreme social disruption.
Based on his analysis of what has been seen historically, he argues for a progressive taxation of all wealth – income, capital, and inheritance – to rein in the dangerous levels of inequality naturally generated by an unfettered capitalist system. But he makes clear it will not be easy, and emphasizes the need for democratic deliberation for settling on appropriate economic goals, including the level of the social state and approaches to taxation, noting that these must be political policy decisions based on citizen engagement: “there is no mathematical formula for answering this question, which is a matter for democratic deliberation.” (683)
Other notes and information:
More quotes from this book
Have you read this book, others by this author, or even similar ones by other authors? I’d enjoy hearing your thoughts.
Other of my book reviews: FICTION Bookshelf and NON-FICTION Bookshelf
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