A Review of Capital in the Twenty-First Century

Capital in the Twenty-first Century by Thomas Picketty, translated by Arthur Goldhammer. 685 pages. Cambridge, MA and London: The Belknap Press of Harvard University, 2014. (Original: Le capital au XXI siècle, Paris: Éditions du Seuil, 2013.)

Capital in the Twenty-first Century is probably the most important book published in 2014 from the perspective of the 99 percent; it explains better than any previous work just how the 1 percent has acquired its power and ability to extort resources from the 99 percent and continue to do so, essentially unchallenged. For nearly a century and a half, the standard point of reference analyzing the dynamics of capital and its accumulation has been Karl Marx’s three-volume Capìtal (Das Kapital in the original German), complemented by Rosa Luxemburg’s The Accumulation of Capital in 1913, Vladimir Lenin’s Imperialism: the Highest Stage of Capitalism in 1917, and Paul Baran’s Monopoly Capital in 1966. Now we have a highly readable, updated and innovative magnum opus on the subject that includes extensive historical data to substantiate and reinterpret the processes involved.

Thomas Picketty is a 43-year-old professor of economics at the Paris School of
Economics (École d’Economie de Paris) and the School of Advance Studies in the Social Sciences (École des Hautes Études en Sciences Sociales) also in Paris. He grew up in Clichy, a working class district of Paris in a Trotskyist family, but he rejected the Marxist perspective to espouse the importance of private property and market institutions and to adopt the distributional methodology of Vilfredo Pareto. He was a key economic adviser to the Socialist Party candidate for the Presidency of France in 2007, Ségolène Royale, although he is publicly critical of the current French president, François Hollande, also of the Socialist Party.

This book presents data collected over 15 years by Picketty, his graduate students, and a large team of researchers around the world, whom he credits in his Acknowledgments (pp. vii-viii). It reflects extraordinary number crunching and analysis and provides us with a clear explanation of how income has been obtained and capital amassed around the world since the eighteenth century in a manner that continues to increase inequality both in national and global contexts. Almost certainly, there has never before been such an extensive array of statistics organized to support the conclusions of a treatise of this kind.

Picketty recognizes the contributions of Thomas Malthus (pp. 3-5), David Ricardo (pp. 5-7), and Karl Marx (pp. 7-11), who, although lacking in statistical data, understood the importance of demographics (Malthus), land ownership (Ricardo) and industrial capital (Marx) in the steady increase in the share of income and wealth in the hands of small elites. He explains the limitations of each, and, like Marx, calls this process the infinite accumulation of capital.

Picketty considers Marx’s approach largely anecdotal, unsystematic, and lacking in statistics (p.10). This is a surprising and unfair statement, given the extensive use by Marx of accounting data from British industrial capitalist firms provided to him by his collaborator, Friedrich Engels, his exhaustive review of British parliamentary records and his vast bibliography. Clearly Picketty does not understand Marx’s dialectical system and adopts a linear, statistical approach. Picketty takes particular issue (pp. 227-230) with Marx’s law of the falling rate of profit, by which the bourgeoisie “dig their own graves” through overproduction, resulting in a progressive decline in profits, something that has not happened historically, even though nearly a century and a half have gone by since Volume 1 of Capital was first published in 1867.

Picketty is also critical of Harvard Nobel economist Simon Kuznet’s projection that income inequality will automatically decrease in advanced phases of capitalist development and reach acceptable levels in both developed and developing countries as technology-–and, by extension, information—reach an expanded sector of each country’s population, which is then capable of attaining more acceptable compensation for its labor and enjoying more of the fruits of economic growth. That also has not happened, and there is no sign that it will any time soon.

Picketty’s data are derived from tax and probate records and myriad other official sources from some two dozen countries, as well as numerous analyses of income and wealth inequality in specific national and also global contexts and changes in those conditions. The principal contemporary database used is the World Top Incomes Data Base (WTID). To income inequality data, Picketty adds data on assets to provide a more comprehensive picture of wealth accumulation and distribution around the world. All sources are properly cited, but because of their volume, they are listed only in a technical appendix to the online edition, along with statistical methods and mathematical models, accessible at: http://picketty.pse.ens.fr/capital21c.

The strength of the book is in its long view of economic history and the data assembled.  In spite of the limited availability of data from early periods and some lack of reliability in contemporary data, Picketty effectively develops his analysis using data from the most reliable available official and historical sources from England, France, Germany, Sweden, Italy, the United States, Canada, Australia, and Japan. He fleshes out the picture for eighteenth and early nineteenth century France and England with the literary descriptions of socio-economic conditions by Honoré de Balzac (Père Goriot and César Birotteau) and Victor Hugo (Les Misérables) for France and Charles Dickens (Oliver Twist) and Jane Austen (Sense and Sensibility, Mansfield Park, and Persuasion) for England.

Picketty completes this somewhat Eurocentric interpretation with data drawn from sources in Russia, China, India, and several Latin American and African countries to validate his analysis globally. Thus, he explains in exceptionally clear terms the pattern of increased income and wealth inequality, as well as the political interventions that have constrained or exacerbated this process around the world over more than two centuries.

Unlike Marx’s class distinction between the bourgeoisie, owners of the means of production, and those who live from their labor, i. e. the working class, Picketty uses statistical analyses. He sees the distribution of income and wealth among upper, middle, and lower classes. Picketty’s upper class is the upper 10 percent, which he disaggregates into the one percent and even one thousandth and the 2-10 percent subgroups. He then describes a twentieth century development, the patrimonial middle class, which has attained more or less satisfactory living standards and basic family wealth like home and automobile ownership and pension plans. The lower class is the 50 percent that owns virtually nothing and lives as best it can from its labor and subsidies from the social safety nets, where they exist.  This difference is significant.

For Marx social stratification is defined in terms of the relations of production, not mere statistics. Even so, today’s audiences can relate more easily to distribution statistics than it can to the complexities of Marx’s Capital. When I was reading Capital with fellow graduate students at the New School, we distinguished the dialectical materialist approach of Marx from the “vulgar” mechanical materialist approach of most contemporary analysts. Picketty belongs in the second category.

In another difference with Marx, Picketty equates capital, defined as “the sum total of non-human assets that can be owned and exchanged on some market” with wealth (pp. 46-47).  It includes land and even owner-occupied real estate, since a house has use value and provides “income” to its owners who acquire equity in the property even though this income is not used directly as means of production.

Picketty focuses on the ratio between capital and income in any given country (β). If a country’s total capital stock is equal to six years of its national income, β is 6:1, expressed as β=6. This ratio is common in the developed countries today. He then (p. 52) looks at the rate of return on capital (r), a concept that is broader than “rate of profit” and “interest rate” and incorporates both regardless of the legal form (profits, rents, dividends, interest, royalties, capital gains, etc.) to arrive at his First Fundamental Law of Capitalism, that national wealth (α) is equal to the rate of return on capital (r) times the capital/income ratio (β), or α=r×β, (pp. 52-55). Picketty’s Second Fundamental Law of Capitalism is that in the long run the capital/income ratio (β) is tied to rates of savings (s) and growth (g), expressed as β=s/g (pp. 166-170).

Divergence in wealth inequality in any national context occurs when the return on capital (r) remains significantly higher than the national growth rate (g), that is, r >g over an extended period of time. Thus, r–g is the value of capital or accumulated wealth over time. The principal mechanism for convergence, or movement toward greater equality is the dissemination of knowledge, so that the poor begin to catch up with the rich when they attain comparable levels of technological knowhow, skill, and education. Thus Picketty reflects a key element of Kuznet’s presumptions. Of course, as Picketty recognizes, the rich possess the financial means and the political power to block social programs and ensure that they receive the benefits, so that convergence does not happen and inequality increases. Picketty’s interest is in economic science, understanding how these processes work, not in advocacy for the interests of those less well off.

Worldwide, from antiquity to the present, the return on capital has been consistently more than four percent, reaching 5¼ percent in 1950, following the crises of the two world wars and the great depression, while growth rates have fluctuated at rates consistently below one percent until the nineteenth century and rising to nearly four percent by 1950, from which point they have been declining steadily to little over three percent in 2012 with projections of significantly greater declines in the twenty first century. Picketty converts the monetary values of all other currencies to euros to facilitate comparisons.

In eighteenth century Europe, wealth was concentrated in the hands of a landed aristocracy. The French Revolution sought to address this inequality with the redistribution of agricultural land and cancellation of public debt, and with the 1791 estate tax, the inheritance law and the Civil Code that abolished primogeniture and granted all offspring equal rights as heirs. These measures had little impact on the magnitude of private wealth and its inequality, which continued to increase throughout the nineteenth century.

In eighteenth and early nineteenth century United States a major factor in capital accumulation was slavery, which allowed plantation owners in the American South to produce cotton and place it competitively on the global market to coincide with the rise of the textile industry in Europe and the northern United States. In Europe the industrial revolution arose and its labor force was created when peasants were forced off the land and made to work in the industrial centers, much as Marx describes the process.

Moreover, in eighteenth and early nineteenth century France and England, private wealth increased when public debt accrued and landowners and capitalists acquired that debt, becoming rentiers. By the end of the nineteenth century, income from capital had increasingly outstripped income from labor, and the magnitude of both income and wealth reached their peak.

The twentieth century, particularly between 1914 and 1950, was an anomaly with regard to previous centuries and post 1980 patterns in Europe and the United States.  This anomaly is attributed to the shocks of two world wars and the Great Depression, which massively destroyed wealth and led to policy measures to address inequality: progressive income taxes, estate taxes, pay-as-you-go pension plans, and social safety nets, as well as decolonization.

Since 1980, and following the thirty glorious post World War II years, however, that pattern has been reversed with tax reductions, tightened social state benefits, increased fiscal austerity, and a lack of proportional increase in most labor income, reflecting policies of the Thatcher, Reagan, and subsequent administrations. Somewhat lesser rates of inequality are seen in recent decades in Germany as a result of the Rhenish model of stakeholder ownership of firms, which allows workers to sit on the boards of directors and participate in decision-making (pp. 140-146). Also, in France the May 1968 protests led to policy decisions that briefly favored workers over capital.

Picketty finds synthetic measures of income inequality like the Gini coefficient mix income from labor and capital and, thus, are of little use in distinguishing the multiple dimensions of inequality at work (pp. 266-267). He also questions the Forbes wealth rankings as biased and methodologically deficient (pp. 432-434). His analysis reveals important changes in the composition of financial elites worldwide, particularly in the United States and Europe. For example, in the nineteenth and early twentieth centuries, industrial capitalists replaced the landed aristocracy, not the French Revolution.

With the shocks of the early twentieth century, much private wealth was lost and a managerial elite emerged, now displacing the other owners of capital. This process began with superstars who earned enormous incomes; it evolved into a managerial elite, especially in the financial sector. What we have now is a class of super managers whose incomes, and ultimately wealth, are rapidly replacing those of industry moguls like the Rockefellers, and similar early twentieth century industrial capitalists. These super managers are tied to financial capital and wield enormous political clout. They are the new one percent.

Picketty projects increasingly slower growth rates in the twentieth century as China, India, Brazil, and other developing countries catch up with Europe, the United States, and Japan. Their economies can no longer emulate the major industrial powers, but instead must grow in accordance with their own dynamics and relative trade advantages.  As growth rates decline, the rates of return on capital will increase and lead to increasingly greater wealth inequality.

In this regard, from my perspective, Picketty gives inadequate attention to the developing countries of Africa, Asia, and Latin America, no doubt the result of a lack of reliable data. Growth rates in those countries are likely to change in the twenty-first century, and that will affect global patterns. We may see more corporate inversions and relocations to those countries to avoid taxes in the more developed countries and to take advantage of lower labor costs. That situation calls for better and more democratic coordination among the world’s nations, and not just so-called free trade agreements that favor commodities over people, products over labor.

Picketty does mention the impact of climate change on global growth rates, with references to the Stern report projection of possibly dozens of points of global GDP lost (pp. 267-269). I consider this reference inadequate to the task, and believe that concerted cross-border initiatives to address climate change could and should incorporate income and wealth inequality into international development planning initiatives.  An important recent book that addresses this problem and its implications is Naomi Klein’s This Changes Everything, reviewed on this site by Alice Whittenburg on November 26, 2014.

To address global inequality, Picketty finds progressive income taxes–which are declining anyway–inadequate, since much of capital growth is not realized formally as income. Moreover, the movement of financial capital across national borders and the new competition among industrialized countries for lower corporate income taxes limits the scope and effectiveness of progressive income taxes. Picketty calls for increases in both progressive income taxes and estate taxes, complemented by a progressive global tax on capital and for financial transparency that will make information on wealth more evident and allow for such taxation.

The global tax on capital, if annual, could be zero on assets of a million euros or less, and increase one to two percent on the next nine million, reaching as much as ten percent on billionaire assets.  An alternative could be a decennial tax at higher rates. France has a wealth tax (impôt de solidarité sur la fortune or ISF), introduced in the 1980s in a period of inflation, but wealthy people avoid it through exemptions and self-declared valuations (p. 533).

Picketty also recommends–although he understates their importance–policy measures including tighter regulation of banks and financial transactions and their documentation via financial cadasters and tax records similar to the 1099 forms for non-salaried income in the United States. His global tax on capital would essentially be an expansion of property taxes, now usually limited to real estate, to include all forms of wealth accumulation globally.

Picketty understands the political difficulties of getting the 200 plus countries of the world to reach agreement on such measures, but he considers progressive moves beginning on national and regional levels, like Europe, important to move the process forward. It would require standardization among countries of definitions, procedures, and tax rates.

For the United States, Columbia University Nobel economist Joseph Stiglitz has provided a similar analysis of increasing income and wealth inequality in The Price of Inequality (New York: W. W. Norton & Company, 2012). Stiglitz shows how incomes at the top one percent have increased to obscene levels, while the purchasing power of most of the labor force has stagnated and declined. He understands that this problem is political, more than economic. However, Stiglitz’s proposals are more nationally focused, related to policies within the United States; they do not address global implementation.

No doubt a variety of more progressive measures will be necessary on national levels, adapted to conditions in each country, before they can be adopted worldwide.  Picketty sees the urgency of the problem and is not optimistic. He found the May 1968 demonstrations in Paris responsible for moderately more effective policies in France in subsequent years and believes that popular protests in Europe by the indignados and in the United States by the Occupy Wall Street movement, if they increase in scope and importance, could eventually foster the necessary policy changes.

Capital in the Twenty-first Century has been acclaimed by mainstream economists and reviewers, as well as those on the left. These reviewers include World Bank economist Branko Milanović, New York Times columnist and Princeton Nobel economist Paul Krugman, Stiglitz, and Harvard’s Lawrence Summers. Financial Times economist Chris Giles attacks Picketty’s selection and use of statistics and attempts to undermine his message with different calculations.  The most useful Marxist critique of the book that I have seen so far is that of Michael Roberts, writing in the British Workers’ Weekly.

With all this attention, one hopes that some of the data and proposals that have come out of this publication will be ultimately translated into policy decisions. Further informed discussion of the book and its policy proposals will be critically important to address the problem of income and wealth inequality everywhere.

In spite of its limitations, Capital in the Twenty-first Century is destined to become a classic. Its author deserves the Nobel prize in economic sciences. He recently turned down France’s Legion d’Honneur award on grounds that the State should not determine who is honorable. Would he accept the Nobel? His rejection of the Legion d’Honneur probably reflects his disdain for President Hollande. The Nobel is selected by an autonomous committee of the Royal Swedish Academy of Sciences, not the Swedish government.

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