Thomas Piketty
Capital in the Twenty-First Century1
Cambridge (USA), Harvard University Press, 2014
The book, which people are presently discussing about all over the world, deals with inequality in incomes (from labor, from capital and as a whole) and the growing concentration of wealth. It also suggests a remedy, a progressive tax on patrimony, in order to stop and possibly reverse the current trend, before it will completely subject our democracies to the oligarchs of global capital. In about a thousand pages, the reader runs to-and-fro from the French Revolution to the present day, from the 1929 crisis to the one of 2008, from wealth concentration during the Belle Epoque to that reached once more after Reagan’s “revolution” – revolution between quotes, because before the capital deprived the left of even its lexical terms, it would have been defined a reaction, in its deepest sense; in the same way, when one speaks of “reforms” one must read counter-reforms. Piketty – as far as I know – has already got the approval of three Nobel laureates (Paul Krugman, Amartya Sen and Joseph Stiglitz) and had to endure the disapproval (sometimes the blame) of most of the main-stream Anglo-Saxon economists. As such an extensive work cannot be summarized, I will try to illustrate some of its peculiar features with the aim to stimulate someone to read it: 1) the abundance of its historical and statistical documentation; 2) the clarity of its analytical approach; 3) the dramatic power of the results obtained; 4) the radical nature of its fiscal proposals and their ensuing political implications. This last point requires more in-depth analyses, which probably are already noted down in the work-agenda of our untiring professor. Meanwhile, I am adding him, with admiration, to my list of “practical visionaries”2.
The book, although massive and very rich in historical and statistical documentation, can be considered as just an entry portal3 through which you can get to the boundless mine of data that Piketty and the working group led by him have collected, examined, compared, updated and corrected before presenting them to us with all the caution they deserve. Twenty-one countries have been scrutinized for a time-period ranging from the U.S. Constitution and the French Revolution up to the three decades following the Reaganite and Thatcherite economic turn, with the objective to bring the distributive question back to the center of economic analysis. The book is based on two great types of sources: 1) those regarding incomes and the inequality in their distribution; 2) those regarding patrimonies, their distribution and the patrimonies/incomes ratio. As to the distribution of production and income among countries, the research could adopt a worldwide viewpoint thanks to the national accounts pieced together by Angus Maddison, which consisted to a great extent in extending in space and time the pioneering work carried out by Simon Kuznets in measuring the evolution of income inequalities in the United States from 1913 to 1948. The Author tried to adopt coherent sources, methods and concepts, assuring their temporal and spatial homogeneity. The deciles and centiles beneficiaries of the highest incomes have been identified on the basis of income-tax forms; national and per-capita incomes on the basis of national accounts. The result of the work of about thirty researchers all over the world constitutes the widest databank of historical data available today on the evolution of income inequalities, the World Top Incomes Database (WTID)4.
Since aggregate incomes are the sum of labor and capital incomes, the WTID already allows us to come to a first estimate of patrimonies by applying to the latter appropriate capitalization rates. Piketty, however, goes much farther, completing such first observation with three sources directly concerning patrimonies: inheritance tax forms, patrimony surveys and total value of the national patrimony stock, obtained by expanding in space and time Raymond Goldsmith's work. In order to verify and add color to his statistical data, Piketty searched even in literature for references to labor incomes and rents (hence patrimonies) able to allow for certain living standards. In particular, Jane Austen and Honoré de Balzac described a world, that of the first half of the 1800s, in which, despite the considerable difference between a high labor-income achievable in liberal professions, and the average income of the population, it was suggested to an ambitious young man to marry an inheritress rather than to study. Similar suggestions have become once again preferable today, since now, as we will see, inequalities have regained their old summits.
To give an interpretation to the research results, Piketty makes use of a very simple analytical technique, thus making a choice that is explicitly scoffing at those mathematical models that, despite their complexity and formal elegance, could not foresee the crisis. To Queen Elisabeth's famous question, the mainstream economists are unable to answer because in their system crises are impossible. They hate Piketty's work. Instead of sticking their nose out of the academy to see how the world really is, they recommend to the Princes to change the world so that it conforms with their representations, based on inexistent premises (perfect competition, rational expectations, information symmetry, etc.). It should be noted in the first place that the Author does not use, as a measure of inequality, the traditional Gini's index, too crude for the research objectives, but seeks out wealth and inequality in each decile and centile. The second warning is that Piketty expresses all values in yearly (or shorter periods) amounts of national income, thus avoiding significant methodological obstacles in comparing data, like price levels and exchanges, in time and space.
Two are the equations that the mountain of data determines, and which in turn allow us to climb it. The variables are represented by the usual symbols in economics: r is the yield rate on capital, s the income part saved, and g the growth rate of the economy. The basic ratios that constitute Piketty's system are two: the percentage of national income destined to remunerate the capital, α, and the ratio of capital stock to national revenue, β. The two “fundamental laws of capitalism” are:
1. α = r•β
2. β = s⁄g (in the long term)
Hence we have:
3. α = r•s⁄g (as above)
Let us make a numerical example. Take 4% to be capital yield, 14% the income part saved, and 2% the growth rate. The ratio capital/income, in the long term, will equal (14/2)=7. That is, the capital stock will amount to 7 years of national revenue (β = 7). The percentage of income destined to remunerate capital will be (4•7)=28%. In this case, the remaining 72% will go to labor. We know enough now to be in a position to present the mother of all inequalities, which has an impact on incomes, inheritances and patrimonies along Piketty's whole analysis:
4. r > g. The capital yield rate is higher than the growth rate of the economy.
The results of the research regard many factors that determine income inequalities and the concentration of wealth, among which: the capital/labor ratio; the greater or smaller amplitude of the range of incomes; the emerging of a society of intermediate managers and super intermediate – managers; the formation of a patrimonial middle class; the role of public debt in the privatization of wealth and in the impoverishment of States; the inequality in the property of capital and the debate merit/heritage; the difference in yield between big capitals (a typical example are the American University Foundations) and the small patrimonies (the “savings of a life of work”); the greater propensity to save of rich people compared to poor people; the growing identification of the earners of the highest labor incomes with the holders of the biggest patrimonies. The Author himself sums them up in two fundamental conclusions.
First conclusion. The history of the distribution of wealth is always deeply political and cannot be explained by purely economic mechanisms. It depends on the representations that the economic, political and social actors make in their minds about what is rightful and what is not, on the force relations among those actors, and on the collective choices that follow. For example, a sterilized democracy, managed from a distance by a restricted financial oligarchy, does not adopt redistributive measures.
Second conclusion. The dynamics of wealth redistribution sets in motion powerful mechanisms that drive towards either convergence or divergence, and there is no spontaneous process that prevents the destabilizing forces driving to higher inequality from prevailing permanently. The main converging force is the spreading of knowledge and the investment in education and qualifications. Inadequate school policies may prevent entire social groups from taking advantage of growth, and condemn entire countries to be surpassed by new competitors. The fundamental diverging force (which prevails in the absence of political corrective measures) is, as we have already seen, r > g.
In the three centuries of history that go until 2010, examined under various lenses and passed through many filters, the capital remuneration rate was higher than the growth rate of the economy – resulting in turn from the sum of demographic increment and productivity increase –, thus producing an exponential concentration of wealth – due to the compound-interest law. This is true independently of the form the capital has had: land-based initially, industrial and colonial later, financial today. The long-term viewpoint today allows us to see the “Glorious Thirty” years of the second post-war period not as the start of a new era, full of hopes for the achievement of a more equitable and more efficient distribution, but as an accident of history, due to the concomitant occurrence of two exceptional events connected to the world wars and to the policies adopted as a consequence of them towards the Soviet Union (because of the competition, both military and involving the economic and social systems): 1) the destruction of physical capital, with the ensuing decrease of its weight relative to the national income (β) until the stock was completely restored; 2) the increase in growth rate (g) due to both the demographic boom and the extraordinary productivity increase.
In the years from 1980 to 2010, inequality in labor incomes has reached again the levels of the Belle Epoque in the Anglo-Saxon countries. The share owned by the higher decile of the total of labor incomes increased to 42% in the UK (47% in the period 1900/20) and to 48% in the USA (41% in the years 1900/20), after they touched minimums of respectively 28% and 33% in 1970. Europe, instead, reached the maximum of 45% in the years 1920/30 and the minimum of 30% in the years 1970/80, but followed then, at a much slower pace, the Anglo-Saxon trend to inequality, reaching again 35% in 2010. Even more staggering is the patrimonial inequality, even more so considering the present trend to identifying the owners of patrimonial rents with the earners of the highest labor incomes. In Europe, the share of patrimonies owned by the higher decile rose to 80% in 1810, to 90% in 1910, decreased to 60% in 1970, and then rose again by 2-3 points in the decades until 2010. The United States, instead, has more “egalitarian” origins, everything is relative, with about 60% of wealth in the hands of the first decile in 1810, it overtook the European inequality in the 1960s, and got over their initial levels reaching 70% in 2010.
In addition, half of the wealth of the first decile is owned by the first centile, and our surprise would be bigger if we would start looking into the capital of the first thousandth of the population. Another significant consideration, which confirms the thesis of the post-Keynesian economists, is that the two peaks in inequality have been reached on the eve of the crises of 1929 and 2008. For those who have a particular interest in this matter, I add, although I cannot provide explanations here, that statistical evidence allows Piketty to prove wrong both Pareto's law and Modigliani's savings life-cycle. Piketty's concerns may be understood. He tries to give forecasts by extrapolating the current trends until 2030, 2050 and the end of the century, adopting the UN intermediate scenario for the demographic increment, and a prudent estimate of productivity increments, which together produce a growth rate (g) not higher than 1.5%, lower than the forecast capital yield rate. The extremes that inequality may reach are frightening, also in the light of other lines of thought. I think of Amartya Sen, who rates liberty on the basis of the opportunities “effectively”5 accessible to the individual, and of Bordieu’ researches, which prove that social mobility is reduced when inequality increases. I mention also the post-Fordist and post-Keynesian arguments by Paul Krugman and Joseph Stiglitz, who point to excessive income inequality and to wealth concentration as causes for the weakening of effective demand in the face of an increasing productive capacity, hence powerful factors of crisis. The current trends, more evident in the Anglo-Saxon capitalism, but also present in the European one, have no “natural” economic correctives. A political intervention is necessary, like the two world wars were, too – in their tragic kind. Let us take it for granted that war among great countries or regional federations is made impossible today by the inhibiting power of both the nuclear deterrent and the economic advantages of globalization – without forgetting, however, that peace is a plant whose life is only guaranteed in the greenhouse of federal institutions. Once war is put aside, what is left to us is only the adoption of forceful fiscal correctives. Piketty proposes a progressive tax on patrimonies, which should be applied by a World Federation, endowed with the necessary and sufficient powers to govern global emergencies, among which the excess of inequality must be certainly included. In the absence of a UN reform, he suggests that at least the European Union should resolutely take that road, if it really wants to preserve its “social market economy”, as stated once more in the Lisbon Treaty. The opposite road, the one taken by the Anglo-Saxon capitalism after pushing aside the New Deal and Keynes, ignores the lessons of history and runs towards self-destruction. There is not another Roosevelt in sight – this time for the whole world! – who is going to rescue capitalism from itself. I will stop here with two observations, the ones, as I said in the beginning, that may certainly be at the center of Piketty's concerns and maybe of future developments of his thought. First of all, it seems quite questionable to me that Europe could adopt the proposed policy alone. In this sense, we should recall the Russian experience of socialism in one country. A strong international cooperation is indispensable for putting in practice the good intentions so many times proclaimed to make the exchange of bank and tax information among countries transparent and to make the tax havens (among which there is to include nowadays also London) inoffensive. Having levied, by eleven countries belonging to the euro zone, the Tax on Financial Transactions constitutes, however, a sign of Europe's will to retake a minimum of control over the financial capital. It is important not only for its revenue, especially if it will be earmarked to finance a common budget, but also for the registrations it will make necessary, which will constitute a precious data-base on capital movements. Secondly, I think that it should be provided that the owners of great fortunes could pay the progressive tax on patrimony in kind, by conferring a percentage of their patrimony to a world (or European, in the limited assumption) Fund, whose returns can allow for the distribution of a “dividend” to every human being (or to every resident in Europe), according to James Meade's6 vision and Alfonso Iozzo’s7 more recent proposals. We could thus avoid the perturbations in the financial market that will occur if all the rich people would sell assets to pay the patrimony tax, and the Fund management would start working according to a sound capitalization criterion.
Translated by Lionello Casalegno
1 First edition: Le capital au XXIe siècle, Paris, Éditions du Seuil, 2013
2 The expression “practical visionary” is due to Robert Skidelsky and denotes the protagonist of his monumental biography of Keynes. In other articles I wrote on this Review, it seemed to me to be not excessive to apply it to some living economists, like Joe Stiglitz and Jacques Attali
3 See http://piketty.pse.ens.fr/capital21c
4 See http://topincomes.parisschoolofeconomics.eu
5 As Keynes’ effective demand is that supported by the capacity to buy, likewise Sen’s opportunities are those that may be effectively chosen by the individual, giving him a substantial, and not only formal, liberty
6 James E. Meade, Agathotopia: the Economics of Partnership, Aberdeen University Press, 1989
7 Alfonso Iozzo, “Meade’s Social Dividend: from Debt to Public Patrimony”, in The Federalist Debate, Year XXIV, Number 3, 2011