This has been the book of the year, topping US bestseller lists (for non-fiction at least). Having read it you have to hope that it doesn’t turn out to be a 21st Century version of A Brief History of Time, which famously was bought and sat unread on people’s shelves. Although quite readable for most of its 600 page length, the topics are as weighty as the book and you have to fear that it will be too much for some. Which would be a shame as there is much to commend it, even for those who disagree with some of the conclusions.
What’s in it?
The heart of the book is extensive data on wealth, incomes and capital stretching back as far as it can through human history. For the France and the UK that effectively means the end of the 18th or early 19th centuries, though some data sets go back further. Data for other countries is not as extensive, but Piketty’s team has still pulled together the most comprehensive data set available.
So what does this data show? There are too many things to give a comprehensive list here, but the ones that stuck in my mind were as follows. You can check the figures in his online Appendix.
- Figs 3.1 & 3.2: national wealth in the UK & France stayed largely constant (relative to national income) during the 19th century, roughly halved during the conflicts of the first half of the 20th Century and has been recovering since. The US pattern is very different.
- Fig 6.3 & 6.4: Over the long run the real return on capital has been surprisingly stable at 4-6%, with the exception of post war recovery periods when capital was scarce.
- Fig 8.5: US income inequality is as high as it has ever been, with the top decile getting around 50% of all earnings (from labour, rather than capital).
- Figs 10.1-10.6: at the turn of the 20th Century apporoximately 90% of European wealth was held by only 10% of the population. The figure is roughly 60% now (& rising).
- Table 12.2: The largest US university endowments consistently achieve better returns than smaller funds.
- Fig 12.6: Roughly 8% of wealth in developed countries is unaccounted for i.e. probably hidden in tax-havens.
So what does this mean?
Piketty brings two very strong theories to the book to explain the dynamics of capital ownership. The most important is if the (real) return on capital is greater than economic growth then the owners of capital become progressively richer than the rest of society. The data shows that historically this has been true, and with lower growth expected in the future, particularly in Europe, this is likely to continue to be true.
The second is that the larger the capital pool the better the return on that capital. This has long known to be a problem at the poorer end of the spectrum, where the need to have some accessible capital forces people to use bank accounts with low or negative real returns, whereas as wealthier people can spare capital for risk assets. Piketty provides evidence that this applies all the way up to the top end of the spectrum. Admittedly this evidence is weaker than I’d like, but it matters as this mechanism exaggerates and accelerates the trend mentioned in the preceding paragraph.
How bad a thing is this?
This brings me to my first criticism of the book. To Piketty this is clearly a very bad thing. He does make something of a case as to why this is bad, but I feel he should have done a better job of this. Some arguments are made well, such as the ability of the wealthy to undermine democracy. Arguments such as equality of opportunity and social stability are referred to, but not really expanded on. The counter arguments, such as growth benefitting all and the technology dividend being poorly reflected in economic statistics, are not addressed at all. I come down more on Piketty’s side on this, but he should have made the case better.
His suggested remedy is a progressive global wealth tax, with rates up to 2% for very large fortunes (€100m plus). While he correctly observes the rate cannot exceed the expected (nominal) return, it should be noted that this does not necessarily correct the underlying issue. If the tax rate is less than the amount by which the return on capital exceeeds economic growth then it does not stop the mechanism described above, merely slows the rate at which capital accumulates in the hands of the wealthy. His suggested figures fall into this scenario.
That does not mean that his idea is necessarily bad, despite its somewhat (by his own admission) utopian nature. The idea of globally sharing information on wealth looks like an idea who’s time has pretty much come, whether for individuals or corporates, and we have already seen moves in that direction. His ideas for restating the principles behind progressive taxation are well worth considering too – the flat tax idea is far from dead and the ability of the wealthy to avoid paying taxes are two targets that should be in his sights.
Utlimately I am left wondering if more emphasis on an inheritance tax might be appropriate – it would seem right that someone who earns their wealth should enjoy the fruits of their efforts in their own lifetime, but their children should endure more equality of opportunity.
And there is more…
Attempting to summarise this tome in a single article is a tough ask, so I’m not going to attempt to do so – all I have done is addressed the principle argument. Inevitably such an ambitious work has weaknesses as well as strengths, and the further it moves from data the move this is evident. He presents compelling data on the rise of the “supermanager” with huge paypackets, gives some explanation as to why this has happened (lower taxes motivating more aggressive bargaining) but doesn’t follow through on what to do about it.
But that should not detract from the immensity of this work. It has been suggested that the data gathering alone deserves a Nobel prize and to coherently present a clear exposition of such a complicated, and controversial topic, deserves the many accolades that he has received. I particularly appreciated the little forays into literature that demonstrate the differences between the 19th century and now. And it is presented with a humility that the data is not complete, Piketty does not have all the answers and ultimately decisions in a democracy should not be made by elitist economists. This really is a book for starting a discussion, and it has done so.
The final section is a little guilty of bringing in too much work that is in the area, but not quite directly related to his main topic. But it does suggest that he should be thinking about a sequel. Income in the Twenty-First Century anyone? I’d look forward to it!