In 1994 I was a student in Thomas Piketty’s first theory class at MIT. He was a young hotshot professor and I was a not so young student (in fact about 4 years older than Piketty). I still vividly remember the horror that was the first exam in this class. Piketty had vastly overestimated how well we understood the material and the English in his questions was ever so slightly off. There was groaning all around the room, myself included, and I was pretty sure I had failed the test (I didn’t – but not one of my finer hours).
Piketty didn’t stay in the US for long and once he returned to France he started to turn away from highly mathematical economic theory towards gathering and analyzing data about income and wealth distribution around the world. Together with other researchers he has compiled more data on this subject than anyone before, including the fascinating World Top Incomes Database.
In the introduction to Capital in the 21st Century, Piketty talks about why he has been committed to this project
Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact.
No matter what one’s own beliefs on the subject one should want a debate based on facts and Capital in the 21st Century and the data available online delivers a strong start to just that.
It is difficult to really appreciate the cumulative effect of all the data without actually reading the book. Piketty is superbly systematic in tracing the history of wealth and income from as far back as the 1700s to today across different continental European countries, Great Britain and the US. Even if you have methodological quibbles with any one particular piece of data, the combined picture is very compelling.
What is inescapable from the data is a robust pattern as follows: a high ratio of wealth to national income combined with large inequalities existed at the beginning of the 20th century; this was disrupted by two world wars which opened an opportunity for the emergence of a middle class; but since the 1980s we are re-approaching and in some cases beginning to exceed the earlier wealth accumulation and inequalities.
Along the way Piketty not only points out the similarities but also the differences between the various national experiences. In doing so he draws extensively on the politics and history of the respective societies as well as the economic research of the time and even expressions of wealth found in literature. These connections make what might otherwise have been a dry exercise in data presentation come alive.
Piketty carefully connects the historical evidence to a relatively simple analytical framework that relates wealth to national income. The central finding is that in periods when r (the return on capital) exceeds g (the rate of growth of the economy) wealth tends to accumulate and inequality rises. Again people may bring up methodological complaints but the totality of the evidence presented makes this very compelling (including a fascinating analysis of the returns on university endowments and one on the relationship between tax rates and managerial compensation).
Capital in the 21st Century is a hugely important book for compiling and analyzing this data alone. But beyond that Piketty also dares to openly ask a question that has to be a legitimate subject for discourse: what is the social value of large and potentially self proliferating fortunes? He gives the example of Liliane Bettencourt, heiress to the L'Oreal fortune, whose wealth has grown from 2.5 billion to over 30 billion dollars. He also points out that the US historically was suspect of such fortunes and had tax policies that reduced the likelihood of their accumulation and inheritance.
Where the book is weakest is in extrapolating the present trends to the future and making policy recommendations. First, despite the observed disruption in the past caused by the world wars, Piketty does not talk at all about the potential for disruptions going forward based on technological changes (for instance the word “automation” doesn’t appear at all). That is of course the area that I have been spending a lot of my time thinking and writing about.
Second, Piketty does not sufficiently separate the ideas of redistribution from the role of government. In particular, he suggests taxing wealth as a way to curtail its accumulation. He seems to lean towards having government use those funds to pay down debt and increase services, whereas personally I am more intrigued by reducing the size of government and empowering individual action through a guaranteed basic income.
Nonetheless, Piketty has done a huge service to society with his work and I hope this effort continues. In that regard I agree entirely with one of Piketty’s recommendations: governments (and the people) need much better realtime and detailed data on wealth and income. We now have the technological capabilities to collect it and we should avail ourselves of those.
Beyond more data we also need an active debate about what is likely to happen in the future and what (if any) corrections to that path we should want as society. If you want a strong grounding for that debate and/or have any level of interest in politics, history or economics I highly recommend reading Capital in the 21st Century.
