Capital in the Twenty-First Century by Thomas Piketty

Summary and takeaways from the book.

This book is a study in "historical dynamics of wealth and income".

The central premise of the book is that "When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based".

ISBN: 978-0674979857
Published: August 14, 2017
Pages: 816
Available on: amazon

Thomas Piketty is Professor at the Paris School of Economics and Co-director, World Inequality Lab & World Inequality Database.

Piketty won the 2002 prize for the best young economist in France.

Piketty became the first head of the Paris School of Economics, which he helped set up.

In 2015, Piketty was also elected an international member of the American Philosophical Society.

He joined the London School of Economics (LSE) in 2015 as the distinguished Centennial Professor.

In January 2015, he rejected the French Legion of Honour order, stating that he refused the nomination because he did not think it was the government's role to decide who is honourable.
This book is a study in "historical dynamics of wealth and income".

"What public policies and institutions bring us closer to an ideal society?"

The target audience is economists and people interested in economics. It is not for the average person.

The author has a related book 'Capital and Ideology' for the average person who does not want to dive deep into economics, equations, and charts.
The central premise of the book is that "When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based".
In other words, if the return on investing capital is higher than overall growth, it will lead to greater inequality, and undermine our social structures.

This is what we see now in our world today.

Debate without Data

"Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact".

The author agrees "intuitive knowledge" cannot be underestimated "even in the absence of any theoretical framework or statistical analysis".

"Indeed, the distribution of wealth is too important an issue to be left to economists, sociologists, historians, and philosophers".

"Democracy will never be supplanted by a republic of experts—and that is a very good thing".

"Nevertheless, the distribution question also deserves to be studied in a systematic and methodical fashion. Without precisely defined sources, methods, and concepts, it is possible to see everything and its opposite".

"Given this dialogue of the deaf, in which each camp justifies its own intellectual laziness by pointing to the laziness of the other, there is a role for research that is at least systematic and methodical if not fully scientific".

Results of the study

No single root cause: "The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms".

"resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance. The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result. It is the joint product of all relevant actors combined".

Powerful opposing forces: "dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently".

Knowledge and skills important for equality and wealth: "Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills".

"It is obvious that lack of adequate investment in training can exclude entire social groups from the benefits of economic growth".

Inherited wealth now more powerful force: "inherited wealth comes close to being as decisive at the beginning of the twenty-first century as it was in the age of Balzac’s Père Goriot".

There are opposing forces at play and it is not easy to predict who wins.

"The crucial fact is that no matter how potent a force the diffusion of knowledge and skills may be, especially in promoting convergence between countries, it can nevertheless be thwarted and overwhelmed by powerful forces pushing in the opposite direction, toward greater inequality".

Dangerous long term trend: "there is a set of forces of divergence associated with the process of accumulation and concentration of wealth when growth is weak and the return on capital is high. This second process is potentially more destabilizing than the first, and it no doubt represents the principal threat to an equal distribution of wealth over the long run".

"When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels— levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies".

Those with higher income tend to see their income rise faster.

Return from investing capital is higher than rate of growth. This comes at expense of lower return for those that work.

The author has made raw data and charts available to researchers here:

Views on economists

"I did not find the work of US economists entirely convincing. To be sure, they were all very intelligent, and I still have many friends from that period of my life. But something strange happened: I was only too aware of the fact that I knew nothing at all about the world’s economic problems. My thesis consisted of several relatively abstract mathematical theorems. Yet the profession liked my work. I quickly realized that there had been no significant effort to collect historical data on the dynamics of inequality since Kuznets, yet the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained. And it expected me to do the same. When I returned to France, I set out to collect the missing data".

"To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.

Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in. There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything

Fix for inequality

"The right solution is a progressive annual tax on capital".

"For example, I earlier discussed the possibility of a capital tax schedule with rates of 0.1 or 0.5 percent on fortunes under 1 million euros, 1 percent on fortunes between 1 and 5 million euros, 2 percent between 5 and 10 million euros, and as high as 5 or 10 percent for fortunes of several hundred million or several billion euros. This would contain the unlimited growth of global inequality of wealth, which is currently increasing at a rate that cannot be sustained in the long run and that ought to worry even the most fervent champions of the self-regulated market. Historical experience shows, moreover, that such immense inequalities of wealth have little to do with the entrepreneurial spirit and are of no use in promoting growth.

The difficulty is that this solution, the progressive tax on capital, requires a high level of international cooperation and regional political integration.”

...national withdrawal can only lead to even worse frustration and disappointment than currently exists with the European Union
"Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues".

Politicians all over the world depend on oligarchs and large corporations for funding.

They are unlikely to ever introduce or support bills to bring in progressive income taxes.

"At the heart of every major political upheaval lies a fiscal revolution".

"American Revolution was born when subjects of the British colonies decided to take their destiny in hand and set their own taxes. ('No taxation without representation')".

Governments are likely to use taxes inefficiently. The outcome will be big dysfunctional government.

A libertarian approach to reducing inequality is preferable. We need less government intervention, lower taxes, and more economic freedom so the less well off have more opportunities. Simply taking from the rich to pay the poor does not create long term prosperity or reduce inequality over the long term.

Criticism of the book

The book 'Capital in the Twenty-First Century' by Thomas Piketty has been criticised.

"it looks like Piketty’s data work is quite sloppy. In 2015, Magness and Murphy pointed to a wide range of flaws or mistakes in the book writing that they found “evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favorable patterns from ambiguous data. Additional evidence suggests that Piketty used a highly distortive data assumption from the Soviet Union to accentuate one of his main historical claims about global “capitalism” in the twentieth century.” According to Magness and Murphy, Piketty bases his measure of 150 years of the world economy on a sample size of just six individual years and just extrapolates the rest of the data! Yikes!"

"In 2018, a report from the left-wing Urban Institute came out that showed that work by Piketty which showed extreme increases in economic inequality was an outlier in the field with other studies, even some by other left-wing economists, showing much smaller effects."

Thomas Piketty's solution for progressive taxes is also not a good solution.

The book must be taken in this context - criticism of cherry picking data, and flawed solution. However the book remains popular and influential. It also makes an important point that:
"When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based".

Interview with NY Times

Author's interview with NYTimes here.

Long term trend seen over last 100 years is towards greater equality and more prosperity and wealth for all.

"We have become much more equal societies in terms of political equality, economic equality, social equality, as compared with 100 years ago, 200 years ago.

Of course there are structural factors that make it difficult: the system of political finance, the structure of media finance, the basic democratic institutions are less democratic than they should be
"it takes major political mobilization to keep moving in the direction of equality".

Good and bad can happen anywhere. "Look at history! There’s no deterministic reason why a given country should be this or that".

"billionaires in the U.S.? They pay almost zero federal income tax as compared with their wealth. If you pay no tax, it’s easier to accumulate more wealth, and that’s what continues".

"The key reason the U.S. economy was so productive historically in the middle of the 20th century was because of a huge educational advance over Europe. In the 1950s, you have 90 percent of the young generation going to high school in the U.S. At the same time, it’s 20 to 30 percent in Germany, France, Britain, Japan. The story that Reagan tried to tell the country in the ’80s, which is basically forget about equality, the key to prosperity is to let the top become richer and richer — it doesn’t work".
"U.S. economic leadership came from mass education, not from a small elite of billionaires. They have never been the source of U.S. prosperity, and they will never be".

* * *

"The overall conclusion of this study is that a market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based".

"The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction".

"Once constituted, capital reproduces itself faster than output increases. The past devours the future".

"The problem is enormous, and there is no simple solution".

"Growth can of course be encouraged by investing in education, knowledge, and nonpolluting technologies. But none of these will raise the growth rate to 4 or 5 percent a year.

History shows that only countries that are catching up with more advanced economies—such as Europe during the three decades after World War II or China and other emerging countries today—can grow at such rates. For countries at the world technological frontier—and thus ultimately for the planet as a whole—there is ample reason to believe that the growth rate will not exceed 1–1.5 percent in the long run, no matter what economic policies are adopted

"it is therefore likely that r > g will again become the norm in the twenty-first century, as it had been throughout history until the eve of World War I.

In the twentieth century, it took two world wars to wipe away the past and significantly reduce the return on capital...
" and reduce inequality and bring prosperity.

It tool 2 World Wars to reduce inequality.

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