“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.”
This is a longer review than I normally write, so I thought I’d summarize takeaways first (who has the time to read long reviews with all those cat videos?)
- Overall very good: lots of interesting information on wealth and income inequality.
- Before world wars, inequality was from wealth inequality; now, it comes from income inequality. Rise of the supermanager.
- Policy analysis weak – hasn’t really considered other options or read the literature. Still, capital tax may be good idea: can replace the common and unfair real estate tax. WIsh he had discussed a consumption tax.
- Long run, the only cure to inequality is better education.
- No big surprises: basically just fleshes out ideas that most people would have believed true intuitively, if without data.
Piketty’s work has been ridiculously popular: for a 600 page economics treatise to outsell fiction on Amazon.com is amazing to me, particularly given that it wasn’t very popular in France, where it was first published. Still, any book that can manage that is worth a read.
Piketty argues that because the interest on capital (r) is larger than the growth rate of the economy (g), capital ends up growing faster than the economy. Over time, therefore, capital owners own a larger and larger share of the whole pie, which leads to inequality. Though there are compensating factors, like the diffusion of knowledge and skills, without comprehensive educational policies and redistributive taxation, this inequality can grow to extreme levels. He uses income tax and estate tax information to study wealth and income inequalities over the past 200 years, finding high inequality pre world wars, low inequality after world wars, and increasing inequality today, though unlike before the wars, it is largely due to income inequality, not wealth inequality (managers with high salaries, not landowners).
His fundamental insight, as anyone who has read a review will know, is the fact that r > g. I think that’s true, and it does have the effects he describes, but speaking as an economist it’s also not surprising. Interest rates on capital are relatively high partly because people are impatient and aren’t good at saving, at least judging by their ability to save for retirement. If society lowers the return on capital, people will save less, and I’m not sure that’s a good thing either, something Piketty doesn’t consider. Still, he’s right that increasing inequality can be a source of stress for society, and it’s definitely an important subject for study.
The book is divided into a section analyzing the data, a section predicting future trends, and a section discussing policy. The first section is excellent; the Financial Times has raised some problems with his data work, but by and large I think it’s well done and the results are unchallenged. Lots of interesting information. The second section has the bad habit of making a prediction then immediately disavowing it as a guess, which is common but I think a bit disingenuous.
The third section I found very weak. The policies he supports may well be good ones, and I think there are good arguments for a capital tax, since most countries have a property tax and that’s basically just a capital tax that’s very unfair to the middle class. It’s clear this is not an area Piketty has thought about much, though, and his discussion of education policy is pretty shallow. Dismissing a consumption tax based on total spending, which is often a popular policy, he rejects it in a single line as never having been done, before advocating a global capital tax that has also never been done before. Long run, as he points out, it appears the only cure to inequality is better education and better skills transfer, and I think almost everyone, left or right, would support that.
Whether when you think of capital you think of landed aristocracy, as the French Piketty does, or of Bill Gates, as I suspect a lot of North Americans do, may play a role in how you feel about the book. In the end, I think the power of Marx’s original Capital is that it provides a new way of thinking about the world. I didn’t find Piketty managed the same: perhaps it’s because I’m an economist, but most of what he said I would have assumed to be true. I also find anyone that introduces mathematical identities (like 2+2=4, things that are defined to be true) as “fundamental laws of capitalism” to be a little pretentious for my taste, but that definitely doesn’t relate to the overall quality of the book. It’s well worth a read, and thinking about inequality and its solutions is definitely an important issue.
You can see the Amazon reviews here.