Thomas Piketty’s Capital in the Twenty-First Century (2014) has been a runaway best seller to the surprise of many. Over three million copies were sold as of 2022 and the curve is rising. Not since John Maynard Keynes’s General Theory of Employment, Interest and Money has a book on economics sold so many copies worldwide. It has stimulated, even provoked, historical, sociological and political science discussions despite being a book on economics. The sequel to the Piketty’s book, A Brief History of Equality (2021) heightened the interest on the main theme of the earlier book viz. inequality.
The reception to the book, Capital in the Twenty-First Century, differed between the practitioners and academicians of economics and those outside of economics when the book first appeared. The first reason for the lukewarm interest shown to the book by the former is the European credentials of the author. Economic discipline having been the dominion of British and American economists for long. The second reason is the general impression among economists that a book written on empirical evidence lacks the rigour and elegance of one with theoretical underpinning. In respect of the first, nothing more than built-in bias among the majority of practitioners of economics can be cited as an intellectual lapse or wilful neglect. But the second, the lack of theoretical origin or grounding in Piketty’s analysis has been debunked by economists like Paul Kruggman who, in After Piketty (2019), wrote: “Piketty does not just offer invaluable documentation of what is happening, with unmatched historical depth. He also offers what amounts to a unified field theory of inequality, one that integrates economic growth, the distribution of income between capital and labour and the distribution of wealth and income among individuals into a single frame.”
Robert Sollow, an elder statesman in economics of growth and a theoretician per excellence, thinks Piketty’s main point that as long as the rate of return on capital exceeds the rate of growth, the income and wealth of the rich will grow faster than the typical income from work, is a new and powerful ‘theoretical contribution to an old topic. ( in After Piketty, 2019).
Leaving aside the issue of the pedagogical nature of Piketty’s best seller, his main findings may be revisited to find out the policy implications of his monumental work (both in timeline and physical volume). The title of the book will be abbreviated into Capital in the following sections.
Findings of the book: Based on 15 years of research, Capital is devoted essentially to an understanding of the historical dynamics of wealth and income in France, Germany, England and America, since eighteenth century to the present. The sources on which the book has drawn are more extensive than any previous book on the subject.
Piketty, after reviewing the growth trends and distributional patterns in industrially developed countries of global north concludes that the post-World War Social Democratic Age (1945-1980) were distinctly egalitarian places. In these countries, relative income differences were moderated as a result of which long- standing gaps in wealth, income, and employment were narrowed. This was accompanied by wide dispersal of political power in their populations. The claims of wealth to drive political directions and shape economic structures were kept within bounds, though not neutralised. But Piketty finds the Social Democratic Age as an unstable historical anomaly. He saw the rise of social welfare state as the consequence of declining power of the plutocratic elite. He traces declining post-tax inequality to the wars and the introduction of progressive taxation. This was not the same as the social insurance, labour productivity rise and welfare measures introduced in the late nineteenth and early twentieth centuries, because capital destroying wars, as well as periods of low inequality, were historical aberrations. He further observes that the Social Democratic Age was preceded by the First Gilded Age in Europe and America. In that preceding epoch the claims of wealth, especially inherited wealth, to drive political directions and economic structures were dominant. In that age, differentials in relative income and relative wealth were at extreme values. Piketty then proceeds to argue that the twenty first century is in an era of transition. While wealth concentration has just returned to its early twentieth century peak, it remains the case that for the top one per cent, the majority of income derives from earnings from labour, not from capital. On the other hand, inequality in capital income has been rising rapidly since 2000, whereas inequality in labour income has stayed relatively constant since then. Piketty observes sardonically that ‘’it has not yet transpired that ‘the past, devours the future’ but we are getting there’’.
Piketty’s final conclusion is that due to the powerful forces generated by the underlying dynamics of wealth, it is most likely that the economies of the industrially developed countries are being driven to a Second Gilded Age in which once again the claims of wealth, especially inherited wealth, to drive political directions and shape political structures will be dominant, and in which differences in relative incomes, and even more, in relative wealth will once again be at extreme values.
Piketty’s arguments: The central argument for the above conclusions or observations can be analysed in several steps.
(1) A society’s wealth-to-annual income ratio will grow or shrink, to a level equal to its net savings and accumulation rate divided by its growth rate.
(2) Time and chance inevitably lead to the concentration of wealth in the hands of a relatively small group— ‘the rich’. A society with a high wealth-to-annual-income ratio will be a society with an extremely unequal distribution of income.
(3) A society with an extremely unequal distribution of wealth will also have an extremely unequal distribution of income, for the wealthy will manipulate political economy in such a way as to keep rates of profit in substantial levels and so avoid what Keynes called ‘the euthanasia of the rentier’ arguments.
(4) Society with an extremely unequal distribution of wealth and income will be one in which, over time, control over wealth falls to heirs and heiresses – an ‘heirostocracy’.
(5) A society in which wealth, especially inherited wealth, is economically salient will be one in which the rich will have a high degree of economic, political and socio-cultural influence.
(6) The twentieth century (a) saw a uniquely high degree of economic growth due to growth forces of the Second Industrial Revolution and due to successful convergence of the global north to the economic prosperity landscape marked by America; (b) the twentieth century saw wars, revolutions, and socialising and progressive tax-imposing political movements generating uniquely strong forces pushing down the rate of saving and accumulation; (c) this trend got underway in twenty-first century in which all of these forces are now ebbing away.
(7) Although the global north is far from the limit yet – the process of (1) to (5) above is still at work, it is substantially more likely than not to work itself to completion. It will deliver societies unequal in a number of ways in a half-century or so.
Critique of Piketty’s arguments: According to some critics, it is debatable whether the rise in wealth- to- annual income ratios is driven by the forces Piketty highlights in Capital. And much more debatable is whether the rise in income inequality is being driven by a rise in wealth inequality that is itself a consequence of the rise in economy-wide wealth-to-annual income ratios. These points are contestable and are being contested.
Some critics seek to cast doubt on Piketty’s argument regarding accumulation of wealth leading to a rising wealth-to-annual income ratio taking up Keynes’s argument that points to a rate of profit falling faster than the wealth-to annual income ratio, (‘euthanasia of rentier’), creating a society with a high degree of wealth but a low degree of income inequality.
Another group of critics have argued that creative destruction, a la Schumpeter, will break up or at least limit the power of cross-generational dynastic accumulations. They further argue, echoing Frederich von Hayek, that the ‘idle rich’ are a valuable cultural resource precisely because they are not bound by the cycle of earning, getting and spending on necessities, and so can take the long view of things.
Still others hope for a new industrial revolution to create more low hanging fruit and faster growth, accompanied by another wave of creative destruction that will short circuit the concentration of wealth in the hands of the few.
Finally, as Robert Solow has shown, Piketty defines capital in the narrow sense of wealth, ignoring its role as a factor of production. In the latter sense of the term, capital leads to a rise in income that benefits all factors of production, including labour, undermining the force of Piketty’s argument on the inherent power of capital.
Is Piketty right: The moot point is, are the arguments of Capital regarding built-in bias of capital towards accumulation of wealth in the hands of the few (the one per cent) right or at least, the scenario essayed by Piketty is plausible enough to worry about?
The answer, according to many economists, sociologists, political scientists and historians (all engaged with the issue of inequality in their respective disciplines), is ‘yes’. The consensus is that Piketty is spot on in maintaining that in the industrialised economies of global north, as far back as one can look, ownership of private wealth, with its power to influence political economy, has historically been highly concentrated. He is right about a typical country in global north having the ratio of total private wealth to total income at about six around 150 years ago; he is also right in maintaining that in the Age of Social Democracy, fifty years ago, its capital-income ratio was about three. And his argument leading to the forecast that on the basis of the rising wealth-to-annual income ratio, income inequality of similar, if not higher, magnitude is likely to prevail during next fifty years ( from 2016, the date of publication of Capital).
Economists who think one should not worry about concentration of wealth and income inequality are not few. According to them inequality is, if anything, good. It is an engine of faster economic growth, incentivising both investors and labour. Economists like Piketty are barking at the wrong tree, they contend. What problem a country going through growth experiences is not inequality but poverty, it is pointed out. Having identified the problem thus, this group of economists observes that industrially developed countries are now much richer than six generations ago. Back then, during the First Gilded Age, levels of inequality caused not just poverty but dire poverty. Inequality was a serious problem then. Now, because the global north is much richer, the degree of inequality that caused dire poverty then does not cause dire poverty now.
This is an old argument which can be traced back to Adam Smith. He argued in his Wealth of Nations (1776) that the average working class Briton in eighteenth century lived better than his predecessors. In a later book, he observed that the consumption of the rich was limited and thus most of what they spent was in fact a contribution to the welfare of the poor. There is no dearth of economists taking the opposite stand and expressing a different view. Granting that economic growth above bare Malthusian subsistence in eighteenth century Britain was impressive and making allowance for the fact that economic growth since then has been impressive, too, they will not fail to point out that there are important reasons to care not just about historical standard of poverty but about inequality and what is called poverty today. It is not hard to prove the causality between inequality to health and other social welfare indicators. Robust data have been compiled and collated by Nobel Laureate Angus Deaton and Anne Cash (Rising Morbidity and Mortality among Americans, 2015) in their research on the daily struggles and misery of those left out of America’s economic growth benefits. Similar research findings document that once, narrowing gaps in employment, health, and overall well-being have stopped closing, and in some cases have reopened. It has been argued by economists who decry inequality that it is significantly likely that higher inequality will slow growth by depriving the economically disadvantaged of resources to invest in themselves and their children. The most trenchant criticism against inequality is that a polity in which plutocrats deploy their resources to have a loud voice will be a society in which government sets about solving problems of plutocrats and not the majority.
It is no coincidence that the Occupy Wall Street movement in America and the wave of populist movements surging in countries of global north occurred just before and after the publication of Piketty’s Capital. Similar conclusion can be drawn from the recent decision by OECD countries to impose a minimum 15 per cent tax on corporate income to prevent multi- national corporations from enjoying tax-free status in safe havens or preferential treatment by host countries. These are powerful evidence that the book has caught the zeitgeist and struck a very loud and resonant chord in contemporary minds. The change in popular attitudes and aspirations will influence, if it has not already done so, the course of mainstream economics to re-set priorities, shifting emphasis from growth to alleviation of inequality. Or at least equal emphasis on both. For this change, Piketty’s monumental work, Capital, can take some credit.
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