This link has been bookmarked by 142 people . It was first bookmarked on 10 Apr 2014, by Pranesh Prakash.
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28 Aug 15
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10 Jun 15
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“one percent
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The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties
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1980. Before then, families at all levels saw their incomes grow more or less in tandem with the growth of the economy as a whole. After 1980, however, the lion’s share of gains went to the top end of the income distribution, with families in the bottom half lagging far behind
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European nations in general have highly unequal incomes from market activity, just like the United States, although possibly not to the same extent. But they do far more redistribution through taxes and transfers than America does, leading to much less inequality in disposable income
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in the past—during Europe’s Belle Époque and, to a lesser extent, America’s Gilded Age—unequal ownership of assets, not unequal pay, was the prime driver of income disparities. And he argues that we’re on our way back to that kind of society
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corporate profits have soared since the financial crisis began, while wages—including the wages of the highly educated—have stagnated.
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the great bulk of wealth, around 90 percent, was inherited rather than saved out of earned income
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Piketty shows, the inherited share of total wealth dropped sharply during the era of wars and postwar fast growth; circa 1970 it was less than 50 percent. But it’s now back up to 70 percent, and rising. Correspondingly, there has been a fall and then a rise in the importance of inheritance in conferring elite statu
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once again it’s generally more valuable to have the right parents (or to marry into having the right in-laws) than to have the right job
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what we have seen in America and are starting to see elsewhere is something “radically new”—the rise of “supersalaries.
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Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percen
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modern communications technology, by extending the reach of talented individuals, was creating winner-take-all markets in which a handful of exceptional individuals reap huge rewards, even if they’re only modestly better at what they do than far less well paid riva
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what Piketty calls “a drift toward oligarchy” can be halted and even reversed if the body politic s
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the US economic elite owes its status mainly to wages rather than capital income. Nonetheless, conservative economic rhetoric already emphasizes and celebrates capital rather than labor—“job creators,” not worke
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call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited weal
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20 Apr 15
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07 Nov 14
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inequality
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06 Nov 14
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27 Aug 14
LIZETTE SANTIAGOThomas Piketty isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. This is a book that will change both the way we think about society and the way we do economics.
economics inequality capital wealth Piketty history krugman books
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24 Aug 14
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09 Aug 14
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Before World War I the one percent received around a fifth of total income in both Britain and the United States. By 1950 that share had been cut by more than half. But since 1980 the one percent has seen its income share surge again—and in the United States it’s back to what it was a century ago.
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patrimonial capitalism
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being in the top one percent of nineteenth-century heirs and simply living off your inherited wealth gave you around two and a half times the standard of living you could achieve by clawing your way into the top one percent of paid workers
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Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent.
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falling tax rates for the rich have in effect emboldened the earnings elite
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great wealth purchased great influence—not just over policies, but over public discourse
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04 Jun 14
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01 Jun 14
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It therefore came as a revelation when Piketty and his colleagues showed that incomes of the now famous “one percent,” and of even narrower groups, are actually the big story in rising inequality
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The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.
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Enter Piketty and his colleagues, who have turned to an entirely different source of information: tax records. This isn’t a new idea. Indeed, early analyses of income distribution relied on tax data because they had little else to go on. Piketty et al. have, however, found ways to merge tax data with other sources to produce information that crucially complements survey evidence
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Piketty shows, however, that even today income from capital, not earnings, predominates at the top of the income distribution
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Why? It’s all about r versus g—the rate of return on capital versus the rate of economic growth.
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But Piketty asserts that r will fall less than g. This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines—if, to use the technical jargon, the elasticity of substitution between capital and labor is greater than one—slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen.
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If he’s right, one immediate consequence will be a redistribution of income away from labor and toward holders of capital.
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In fact, however, both capital income and inherited wealth, though less important than they were in the Belle Époque, are still powerful drivers of inequality—and their importance is growing.
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Given this picture, why does inherited wealth play as small a part in today’s public discourse as it does? Piketty suggests that the very size of inherited fortunes in a way makes them invisible: “Wealth is so concentrated that a large segment of society is virtually unaware of its
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And yet there is one thing that slightly detracts from the achievement—a sort of intellectual sleight of hand, albeit one that doesn’t actually involve any deception or malfeasance on Piketty’s part. Still, here it is: the main reason there has been a hankering for a book like this is the rise, not just of the one percent, but specifically of the American one percent. Yet that rise, it turns out, has happened for reasons that lie beyond the scope of Piketty’s grand thesis.
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US inequality in 2010,” he declares, “is quantitatively as extreme as in old Europe in the first decade of the twentieth century, but the structure of that inequality is rather clearly different.” Indeed, what we have seen in America and are starting to see elsewhere is something “radically new”—the rise of “supersalaries.”
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What explains this dramatic rise in earnings inequality, with the lion’s share of the gains going to people at the very top? Some US economists suggest that it’s driven by changes in technology.
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In effect, Piketty argues, high-level executives set their own pay, constrained by social norms rather than any sort of market discipline.
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In reality, however, Capital in the Twenty-First Century makes it clear that public policy can make an enormous difference, that even if the underlying economic conditions point toward extreme inequality, what Piketty calls “a drift toward oligarchy” can be halted and even reversed if the body politic so chooses.
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Nonetheless, conservative economic rhetoric already emphasizes and celebrates capital rather than labor—“job creators,” not workers.
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Piketty ends Capital in the Twenty-First Century with a call to arms—a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth.
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25 May 14
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19 May 14
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commonplace to say that we are living in a second Gilded Age—or, as Piketty likes to put it, a second Belle Époque—defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work. In particular, he and a few colleagues (notably Anthony Atkinson at Oxford
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15 May 14
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Who determines what a corporate CEO is worth? Well, there’s normally a compensation committee, appointed by the CEO himself. In effect, Piketty argues, high-level executives set their own pay, constrained by social norms rather than any sort of market discipline. And he attributes skyrocketing pay at the top to an erosion of these norms. In effect, he attributes soaring wage incomes at the top to social and political rather than strictly economic forces.
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12 May 14
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09 May 14
Mr MaherIs the best way to teach the past to link it to the present? or is the best way to learn about the present looking into the past? This article would be challenging for 10th grade students, but the content isn't. It may be the most important thing we teach students
AP European History Gilded Age US I Unit 8 Becoming Industrial Society wealth distribution US II Unit 10: Modern America
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07 May 14
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06 May 14
Mike Gwaltney"Why We’re in a New Gilded Age" by @NYTimeskrugman on "Capital in the 21st Century" http://t.co/Zod5o6EWrX #Economics #APGOV #sschat #APUSH
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03 May 14
Eoin O'DellRT @ProfRisch: Krugman reviewing Piketty is worth a read http://t.co/cuqLceptfi
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30 Apr 14
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29 Apr 14
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28 Apr 14
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Piketty throws down the intellectual gauntlet right away, with his book’s very title: Capital in the Twenty-First Century. Are economists still allowed to talk like that?
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Piketty shows, however, that even today income from capital, not earnings, predominates at the top of the income distribution. He also shows that in the past—during Europe’s Belle Époque and, to a lesser extent, America’s Gilded Age—unequal ownership of assets, not unequal pay, was the prime driver of income disparities.
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Basically, Piketty sees economic history as the story of a race between capital accumulation and other factors driving growth, mainly population growth and technological progress.
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johanna koPaul Krugman's review of Piketty's "Capital in the 21rst Century"
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26 Apr 14
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Thomas Piketty
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magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century
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he and a few colleagues (notably Anthony Atkinson at Oxford and Emmanuel Saez at Berkeley) have pioneered statistical techniques that make it possible to track the concentration of income and wealth deep into the past—back to the early twentieth century for America and Britain, and all the way to the late eighteenth century for France.
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For all that Capital in the Twenty-First Century is a work of principled empiricism, it is very much driven by a theoretical frame that attempts to unify discussion of economic growth and the distribution of both income and wealth. Basically, Piketty sees economic history as the story of a race between capital accumulation and other factors driving growth, mainly population growth and technological progress.
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onsider how this worked in Belle Époque Europe. At the time, owners of capital could expect to earn 4–5 percent on their investments, with minimal taxation; meanwhile economic growth was only around one percent. So wealthy individuals could easily reinvest enough of their income to ensure that their wealth and hence their incomes were growing faster than the economy, reinforcing their economic dominance, even while skimming enough off to live lives of great luxury.
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At times, Piketty almost seems to offer a deterministic view of history, in which everything flows from the rates of population growth and technological progress. In reality, however, Capital in the Twenty-First Century makes it clear that public policy can make an enormous difference, that even if the underlying economic conditions point toward extreme inequality, what Piketty calls “a drift toward oligarchy” can be halted and even reversed if the body politic so chooses.
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It’s true that during much of the twentieth century strongly progressive taxation did indeed help reduce the concentration of income and wealth, and you might imagine that high taxation at the top is the natural political outcome when democracy confronts high inequality. Piketty, however, rejects this conclusion; the triumph of progressive taxation during the twentieth century, he contends, was “an ephemeral product of chaos.” Absent the wars and upheavals of Europe’s modern Thirty Years’ War, he suggests, nothing of the kind would have happened.
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Why didn’t the universally enfranchised citizens of France vote in politicians who would take on the rentier class? Well, then as now great wealth purchased great influence—not just over policies, but over public discourse. Upton Sinclair famously declared that “it is difficult to get a man to understand something when his salary depends on his not understanding it.” Piketty, looking at his own nation’s history, arrives at a similar observation: “The experience of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interest.”
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Sometimes it seems as if a substantial part of our political class is actively working to restore Piketty’s patrimonial capitalism. And if you look at the sources of political donations, many of which come from wealthy families, this possibility is a lot less outlandish than it might seem.
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25 Apr 14
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23 Apr 14
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is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,
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nd the way we do economic
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unequal ownership of assets, not unequal pay,
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Why? It’s all about r versus g—the rate of return on capital versus the rate of economic growth.
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what the historical record shows will happen.
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21 Apr 14
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20 Apr 14
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19 Apr 14
Micah BalesThomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his ...
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Enrique MerinoThomas Piketty isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. This is a book that will change both the way we think about society and the way we do economics.
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18 Apr 14
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17 Apr 14
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16 Apr 14
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15 Apr 14
Dante-Gabryell Monson"The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties."
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Michel Bauwens"Capital still matters; at the very highest reaches of society, income from capital still exceeds income from wages, salaries, and bonuses. Piketty estimates that the increased inequality of capital income accounts for about a third of the overall rise in US inequality. But wage income at the top has also surged. Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent. If Rastignac were alive today, Vautrin might concede that he could in fact do as well by becoming a hedge fund manager as he could by marrying wealth."
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14 Apr 14
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13 Apr 14
Charles van der Haegen"Why We’re in a New Gilded Age
Paul Krugman
May 8, 2014 Issue
Capital in the Twenty-First Century
by Thomas Piketty, translated from the French by Arthur Goldhammer
Belknap Press/Harvard University Press, 685 pp., $39.95" -
12 Apr 14
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long-term trends in inequality
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alexei guevaraI know a lot of my followers find his conclusions offensive, but all of us should grapple seriously with these facts: http://t.co/2jJDWMrCED
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But even those willing to discuss inequality generally focused on the gap between the poor or the working class and the merely well-off, not the truly rich
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of the now famous “one percent,” and of even narrower groups, are actually the big story in rising inequality.
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“patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.
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Before then, families at all levels saw their incomes grow more or less in tandem with the growth of the economy as a whole.
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started around 1980
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After 1980,
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much of this difference in outcomes can be attributed directly to government action.
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European nations in general
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But they do far more redistribution through taxes and transfers than America does, leading to much less inequality in disposable incomes.
-
tax records
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merge tax data with other sources to produce information that crucially complements survey evidence.
-
Piketty shows, however, that even today income from capital, not earnings, predominates at the top of the income distribution.
-
unequal ownership of assets, not unequal pay, was the prime driver of income
-
disparities.
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Piketty sees economic history as the story of a race between capital accumulation and other factors driving growth, mainly population growth and technological progress.
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over the very long run, the stock of capital and total income must grow at roughly the same rate.
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Capital accumulation resumed after World War II,
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so the ratio of capital to income remained low
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r versus g
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shares of capital and labor
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ociety inexorably tends toward dominance by inherited wealth.
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Money passed on to the next generation accounted for 20 to 25 percent of annual income; the great bulk of wealth, around 90 percent, was inherited rather than saved out of earned income. And this inherited wealth was concentrated in the hands of a very small minority:
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capital income and inherited wealth, though less important than they were in the Belle Époque, are still powerful drivers of inequality—and their importance is growing.
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era of wars and postwar fast growth; circa 1970 it was less than 50 percent. But it’s now back up to 70 percent, and rising.
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Given this picture, why does inherited wealth play as small a part in today’s public discourse as it does?
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rise of the very rich one percent in the Anglo-Saxon world, especially the United States—doesn’t have all that much to do with capital accumulation, at least so far. It has more to do with remarkably high compensation and incomes.
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unified field theory of inequality
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slightly detracts from the achievement—
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Yet that rise, it turns out, has happened for reasons that lie beyond the scope of Piketty’s grand thesis.
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the rise of “supersalaries.”
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Piketty estimates that the increased inequality of capital income accounts for about a third of the overall rise in US inequality.
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But wage income at the top has also surged
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but wages for the top one percent of
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65 percent, and wages for the top 0.1 percent have risen 362 percent.
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earners have risen
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changes in technology
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Piketty is unconvinced
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conservative economists love to talk about the high pay of performers
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What one finds instead is mainly executives of one sort or another—people whose performance is, in fact, quite hard to assess or give a monetary value to.
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Piketty argues, high-level executives set their own pay,
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more and more of the supersalaried flout the norms,
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hough his failure to include deregulation is a significant disappointment.
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11 Apr 14
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Matthew LungerhausenThomas Piketty "Capital in the Twenty-first Century"
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10 Apr 14
gthaberlachPaul Krugman
Piketty ends Capital in the Twenty-First Century with a call to arms—a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth. It’s easy to be cynical about the prospects for anything of the kind. But surely Piketty’s masterly diagnosis of where we are and where we’re heading makes such a thing considerably more likely. So Capital in the Twenty-First Century is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to. -
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Samir PrakashCapital in the Twenty-First Century, by Thomas Piketty
inequality wealth income inheritance salary capitalism ThomasPiketty Krugman Marx economics research bookreview history finance WallStreet regulation deregulation rent-seeking policy publicpolicy
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Jelmer EversWhy we're in a new guilded age — Paul Krugman reviews Piketty in NYRB — http://t.co/x85NSDbV6r http://t.co/s2jERDTLWx
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we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties
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we now know both that the United States has a much more unequal distribution of income than other advanced countries and that much of this difference in outcomes can be attributed directly to government action.
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unequal ownership of assets, not unequal pay, was the prime driver of income disparities.
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the rate of return on capital versus the rate of economic growth.
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society inexorably tends toward dominance by inherited wealth.
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high-level executives set their own pay, constrained by social norms rather than any sort of market discipline.
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what matters is the after-tax return on wealth. So progressive taxation—in particular taxation of wealth and inheritance—can be a powerful force limiting inequality
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“it is difficult to get a man to understand something when his salary depends on his not understanding it.”
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US economic elite owes its status mainly to wages rather than capital income.
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the party identifies itself with capital to the virtual exclusion of labor.
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The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.
-
Piketty shows, however, that even today income from capital, not earnings, predominates at the top of the income distribution
-
He also shows that in the past—during Europe’s Belle Époque and, to a lesser extent, America’s Gilded Age—unequal ownership of assets, not unequal pay, was the prime driver of income disparities. And he argues that we’re on our way back to that kind of society
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The conventional wisdom has long been that we needn’t worry about that happening, that the shares of capital and labor respectively in total income are highly stable over time. Over the very long run, however, this hasn’t been true.
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A rising share of capital, in turn, directly increases inequality, because ownership of capital is always much more unequally distributed than labor income
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when the rate of return on capital greatly exceeds the rate of economic growth, “the past tends to devour the future”: society inexorably tends toward dominance by inherited wealth
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in 1910 the richest one percent controlled 60 percent of the wealth in France; in Britain, 70 percent
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once again it’s generally more valuable to have the right parents (or to marry into having the right in-laws) than to have the right job.
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why does inherited wealth play as small a part in today’s public discourse as it does? Piketty suggests that the very size of inherited fortunes in a way makes them invisible: “Wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities.”
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This is a very good point. But it’s surely not the whole explanation. For the fact is that the most conspicuous example of soaring inequality in today’s world—the rise of the very rich one percent in the Anglo-Saxon world, especially the United States—doesn’t have all that much to do with capital accumulation, at least so far. It has more to do with remarkably high compensation and incomes.
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And yet there is one thing that slightly detracts from the achievement—a sort of intellectual sleight of hand, albeit one that doesn’t actually involve any deception or malfeasance on Piketty’s part. Still, here it is: the main reason there has been a hankering for a book like this is the rise, not just of the one percent, but specifically of the American one percent. Yet that rise, it turns out, has happened for reasons that lie beyond the scope of Piketty’s grand thesis
-
what we have seen in America and are starting to see elsewhere is something “radically new”—the rise of “supersalaries.”
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wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent
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I don’t think Capital in the Twenty-First Century adequately answers the most telling criticism of the executive power hypothesis: the concentration of very high incomes in finance, where performance actually can, after a fashion, be evaluated.
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Overall, I’m more or less persuaded by Piketty’s explanation of the surge in wage inequality, though his failure to include deregulation is a significant disappointment. But as I said, his analysis here lacks the rigor of his capital analysis, not to mention its sheer, exhilarating intellectual elegance.
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The current generation of the very rich in America may consist largely of executives rather than rentiers, people who live off accumulated capital, but these executives have heirs. And America two decades from now could be a rentier-dominated society even more unequal than Belle Époque Europe.
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progressive taxation—in particular taxation of wealth and inheritance—can be a powerful force limiting inequality. Indeed, Piketty concludes his masterwork with a plea for just such a form of taxation. Unfortunately, the history covered in his own book does not encourage optimism.
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Piketty, looking at his own nation’s history, arrives at a similar observation: “The experience of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interest.”
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As we’ve seen, at this point the US economic elite owes its status mainly to wages rather than capital income
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Why We’re in a New Gilded Age
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Capital in the Twenty-First Century
by Thomas Piketty -
Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his influence runs deep.
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It has become a commonplace to say that we are living in a second Gilded Age—or, as Piketty likes to put it, a second Belle Époque—defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work. In particular, he and a few colleagues (notably Anthony Atkinson at Oxford and Emmanuel Saez at Berkeley) have pioneered statistical techniques that make it possible to track the concentration of income and wealth deep into the past—back to the early twentieth century for America and Britain, and all the way to the late eighteenth century for France.
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The result has been a revolution in our understanding of long-term trends in inequality. Before this revolution, most discussions of economic disparity more or less ignored the very rich.
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Some economists (not to mention politicians) tried to shout down any mention of inequality at all: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution,” declared Robert Lucas Jr. of the University of Chicago, the most influential macroeconomist of his generation, in 2004.
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But even those willing to discuss inequality generally focused on the gap between the poor or the working class and the merely well-off, not the truly rich
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It therefore came as a revelation when Piketty and his colleagues showed that incomes of the now famous “one percent,” and of even narrower groups, are actually the big story in rising inequality. And this discovery came with a second revelation: talk of a second Gilded Age, which might have seemed like hyperbole, was nothing of the kind. In America in particular the share of national income going to the top one percent has followed a great U-shaped arc. Before World War I the one percent received around a fifth of total income in both Britain and the United States. By 1950 that share had been cut by more than half. But since 1980 the one percent has seen its income share surge again—and in the United States it’s back to what it was a century ago.
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The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.
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Piketty has written a truly superb book. It’s a work that melds grand historical sweep—when was the last time you heard an economist invoke Jane Austen and Balzac?—with painstaking data analysis.
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This is a book that will change both the way we think about society and the way we do economics.
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dramatic shift in the process of US economic growth, one that started around 1980. Before then, families at all levels saw their incomes grow more or less in tandem with the growth of the economy as a whole. After 1980, however, the lion’s share of gains went to the top end of the income distribution, with families in the bottom half lagging far behind.
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we now know both that the United States has a much more unequal distribution of income than other advanced countries and that much of this difference in outcomes can be attributed directly to government action. European nations in general have highly unequal incomes from market activity, just like the United States, although possibly not to the same extent. But they do far more redistribution through taxes and transfers than America does, leading to much less inequality in disposable incomes.
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tax data tell us a great deal about the elite. And tax-based estimates can reach much further into the past: the United States has had an income tax since 1913, Britain since 1909. France, thanks to elaborate estate tax collection and record-keeping, has wealth data reaching back to the late eighteenth century.
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Exploiting these data isn’t simple. But by using all the tricks of the trade, plus some educated guesswork, Piketty is able to produce a summary of the fall and rise of extreme inequality over the course of the past century. It looks like Table 1 on this page.
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By invoking capital right from the beginning, Piketty breaks ranks with most modern discussions of inequality, and hearkens back to an older tradition.
The general presumption of most inequality researchers has been that earned income, usually salaries, is where all the action is, and that income from capital is neither important nor interesting. Piketty shows, however, that even today income from capital, not earnings, predominates at the top of the income distribution. He also shows that in the past—during Europe’s Belle Époque and, to a lesser extent, America’s Gilded Age—unequal ownership of assets, not unequal pay, was the prime driver of income disparities. And he argues that we’re on our way back to that kind of society.
-
Basically, Piketty sees economic history as the story of a race between capital accumulation and other factors driving growth, mainly population growth and technological progress.
To be sure, this is a race that can have no permanent victor: over the very long run, the stock of capital and total income must grow at roughly the same rate. But one side or the other can pull ahead for decades at a time.
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On the eve of World War I, Europe had accumulated capital worth six or seven times national income. Over the next four decades, however, a combination of physical destruction and the diversion of savings into war efforts cut that ratio in half. Capital accumulation resumed after World War II, but this was a period of spectacular economic growth—the Trente Glorieuses, or “Glorious Thirty” years; so the ratio of capital to income remained low. Since the 1970s, however, slowing growth has meant a rising capital ratio, so capital and wealth have been trending steadily back toward Belle Époque levels. And this accumulation of capital, says Piketty, will eventually recreate Belle Époque–style inequality unless opposed by progressive taxation.
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Why? It’s all about r versus g—the rate of return on capital versus the rate of economic growth.
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Just about all economic models tell us that if g falls—which it has since 1970, a decline that is likely to continue due to slower growth in the working-age population and slower technological progress—r will fall too. But Piketty asserts that r will fall less than g. This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines—if, to use the technical jargon, the elasticity of substitution between capital and labor is greater than one—slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen.
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If he’s right, one immediate consequence will be a redistribution of income away from labor and toward holders of capital. The conventional wisdom has long been that we needn’t worry about that happening, that the shares of capital and labor respectively in total income are highly stable over time. Over the very long run, however, this hasn’t been true.
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The historical arc is less clear-cut in the United States, but here, too, there is a redistribution in favor of capital underway. Notably, corporate profits have soared since the financial crisis began, while wages—including the wages of the highly educated—have stagnated.
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A rising share of capital, in turn, directly increases inequality, because ownership of capital is always much more unequally distributed than labor income. But the effects don’t stop there, because when the rate of return on capital greatly exceeds the rate of economic growth, “the past tends to devour the future”: society inexorably tends toward dominance by inherited wealth.
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Consider how this worked in Belle Époque Europe. At the time, owners of capital could expect to earn 4–5 percent on their investments, with minimal taxation; meanwhile economic growth was only around one percent. So wealthy individuals could easily reinvest enough of their income to ensure that their wealth and hence their incomes were growing faster than the economy, reinforcing their economic dominance, even while skimming enough off to live lives of great luxury.
And what happened when these wealthy individuals died? They passed their wealth on—again, with minimal taxation—to their heirs. Money passed on to the next generation accounted for 20 to 25 percent of annual income; the great bulk of wealth, around 90 percent, was inherited rather than saved out of earned income. And this inherited wealth was concentrated in the hands of a very small minority: in 1910 the richest one percent controlled 60 percent of the wealth in France; in Britain, 70 percent.
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No wonder, then, that nineteenth-century novelists were obsessed with inheritance.
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both capital income and inherited wealth, though less important than they were in the Belle Époque, are still powerful drivers of inequality—and their importance is growing. In France, Piketty shows, the inherited share of total wealth dropped sharply during the era of wars and postwar fast growth; circa 1970 it was less than 50 percent. But it’s now back up to 70 percent, and rising. Correspondingly, there has been a fall and then a rise in the importance of inheritance in conferring elite status
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it’s generally more valuable to have the right parents (or to marry into having the right in-laws) than to have the right job.
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Given this picture, why does inherited wealth play as small a part in today’s public discourse as it does? Piketty suggests that the very size of inherited fortunes in a way makes them invisible: “Wealth is so concentrated that a large segment of society is virtually unaware of its existence
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This is a very good point. But it’s surely not the whole explanation. For the fact is that the most conspicuous example of soaring inequality in today’s world—the rise of the very rich one percent in the Anglo-Saxon world, especially the United States—doesn’t have all that much to do with capital accumulation, at least so far. It has more to do with remarkably high compensation and incomes.
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yet there is one thing that slightly detracts from the achievement—a sort of intellectual sleight of hand, albeit one that doesn’t actually involve any deception or malfeasance on Piketty’s part. Still, here it is: the main reason there has been a hankering for a book like this is the rise, not just of the one percent, but specifically of the American one percent. Yet that rise, it turns out, has happened for reasons that lie beyond the scope of Piketty’s grand thesis.
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Piketty is, of course, too good and too honest an economist to try to gloss over inconvenient facts. “US inequality in 2010,” he declares, “is quantitatively as extreme as in old Europe in the first decade of the twentieth century, but the structure of that inequality is rather clearly different.” Indeed, what we have seen in America and are starting to see elsewhere is something “radically new”—the rise of “supersalaries.”
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Capital still matters; at the very highest reaches of society, income from capital still exceeds income from wages, salaries, and bonuses. Piketty estimates that the increased inequality of capital income accounts for about a third of the overall rise in US inequality. But wage income at the top has also surged. Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent.
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What explains this dramatic rise in earnings inequality, with the lion’s share of the gains going to people at the very top? Some US economists suggest that it’s driven by changes in technology. In a famous 1981 paper titled “The Economics of Superstars,” the Chicago economist Sherwin Rosen argued that modern communications technology, by extending the reach of talented individuals, was creating winner-take-all markets in which a handful of exceptional individuals reap huge rewards, even if they’re only modestly better at what they do than far less well paid rivals.
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Piketty is unconvinced. As he notes, conservative economists love to talk about the high pay of performers of one kind or another, such as movie and sports stars, as a way of suggesting that high incomes really are deserved. But such people actually make up only a tiny fraction of the earnings elite. What one finds instead is mainly executives of one sort or another—people whose performance is, in fact, quite hard to assess or give a monetary value to.
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Piketty argues, high-level executives set their own pay, constrained by social norms rather than any sort of market discipline. And he attributes skyrocketing pay at the top to an erosion of these norms. In effect, he attributes soaring wage incomes at the top to social and political rather than strictly economic forces.
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he then advances a possible economic analysis of changing norms, arguing that falling tax rates for the rich have in effect emboldened the earnings elite. When a top manager could expect to keep only a small fraction of the income he might get by flouting social norms and extracting a very large salary, he might have decided that the opprobrium wasn’t worth it. Cut his marginal tax rate drastically, and he may behave differently. And as more and more of the supersalaried flout the norms, the norms themselves will change.
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There’s a lot to be said for this diagnosis, but it clearly lacks the rigor and universality of Piketty’s analysis of the distribution of and returns to wealth. Also, I don’t think Capital in the Twenty-First Century adequately answers the most telling criticism of the executive power hypothesis: the concentration of very high incomes in finance, where performance actually can, after a fashion, be evaluated. I didn’t mention hedge fund managers idly: such people are paid based on their ability to attract clients and achieve investment returns. You can question the social value of modern finance, but the Gordon Gekkos out there are clearly good at something, and their rise can’t be attributed solely to power relations
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Overall, I’m more or less persuaded by Piketty’s explanation of the surge in wage inequality, though his failure to include deregulation is a significant disappointment. But as I said, his analysis here lacks the rigor of his capital analysis, not to mention its sheer, exhilarating intellectual elegance.
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Even if the surge in US inequality to date has been driven mainly by wage income, capital has nonetheless been significant too. And in any case, the story looking forward is likely to be quite different. The current generation of the very rich in America may consist largely of executives rather
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than rentiers, people who live off accumulated capital, but these executives have heirs. A
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nd America two decades from now could be a rentier-dominated society even more unequal than Belle Époque Europe.
But this doesn’t have to happen.
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Capital in the Twenty-First Century makes it clear that public policy can make an enormous difference, that even if the underlying economic conditions point toward extreme inequality, what Piketty calls “a drift toward oligarchy” can be halted and even reversed if the body politic so chooses.
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The key point is that when we make the crucial comparison between the rate of return on wealth and the rate of economic growth, what matters is the after-tax return on wealth. So progressive taxation—in particular taxation of wealth and inheritance—can be a powerful force limiting inequality. Indeed, Piketty concludes his masterwork with a plea for just such a form of taxation. Unfortunately, the history covered in his own book does not encourage optimism.
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It’s true that during much of the twentieth century strongly progressive taxation did indeed help reduce the concentration of income and wealth
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Piketty, however, rejects this conclusion; the triumph of progressive taxation during the twentieth century, he contends, was “an ephemeral product of chaos.” Absent the wars and upheavals of Europe’s modern Thirty Years’ War, he suggests, nothing of the kind would have happened.
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then as now great wealth purchased great influence—not just over policies, but over public discourse. Upton Sinclair famously declared that “it is difficult to get a man to understand something when his salary depends on his not understanding it.” Piketty, looking at his own nation’s history, arrives at a similar observation: “The experience of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interest.”
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Tax burdens on high-income Americans have fallen across the board since the 1970s, but the biggest reductions have come on capital income—including a sharp fall in corporate taxes, which indirectly benefits stockholders—and inheritance. Sometimes it seems as if a substantial part of our political class is actively working to restore Piketty’s patrimonial capitalism. And if you look at the sources of political donations, many of which come from wealthy families, this possibility is a lot less outlandish than it might seem.
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Piketty ends Capital in the Twenty-First Century with a call to arms—a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth. It’s easy to be cynical about the prospects for anything of the kind. But surely Piketty’s masterly diagnosis of where we are and where we’re heading makes such a thing considerably more likely. So Capital in the Twenty-First Century is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to.
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Pranesh PrakashWhy We’re in a New Gilded Age: Paul Krugman reviews Thomas Piketty’s Capital in the 21st Century http://t.co/2wh1zlDogl
– NY Review of Books (nybooks) http://twitter.com/nybooks/status/454041953693605888
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