One of my main functions within Oxfam seems to be to review books to spare everyone else the effort. Last week, I was on Piketty duty. Batches of campaigns and policy types sat in suitable veneration around a copy of the giant tome, and I talked them through this two page ‘Pocket Piketty’.
The Potted Piketty (longer summary here)
‘The distribution of wealth is one of today’s most widely discussed and controversial issues. But what do we really know about its evolution over the long term? Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes, as Simon Kuznets thought in the twentieth century? What lessons can we derive from that knowledge for the century now under way?
These are the questions I attempt to answer in this book. Modern economic growth and the diffusion of knowledge have made it possible to avoid the Marxist apocalypse but have not modified the deep structures of capital and inequality—or in any case not as much as one might have imagined in the optimistic decades following World War II. When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions……’
‘It has become a commonplace to say that we are living in a second Gilded Age, defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work.
It 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.
Still, today’s economic elite is very different from that of the nineteenth century, isn’t it? Back then, great wealth tended to be inherited; aren’t today’s economic elite people who earned their position? Well, Piketty tells us that this isn’t as true as you think, and that in any case this state of affairs may prove no more durable than the middle-class society that flourished for a generation after World War II. 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.’
Other Key Points:
Data: Traditionally, discussions on inequality have been based on surveys of random households, but these tend to miss the handful of households at the very top, and only started relatively recently (e.g. 1947 in US). Piketty et al turned to a different source of information – tax records, which are more reliable on the top 1% and go back much further. These are almost all from developed northern economies – developing countries yet to figure much in Piketty debate.
r > g: Piketty’s big claim is that over the long haul, the rate of return on capital (r) exceeds the rate of economic growth (g), except for historical anomalies such as the interwar period of the 20th C, and that we are now reverting to that norm. If he’s right, one immediate consequence will be a redistribution of income away from labour and toward holders of capital.
Inequality and inherited wealth: Krugman: ‘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.’
Wealth Tax: Piketty ends with a call for wealth taxes, global or at least EU-wide if possible.
The FT’s economics editor Chris Giles: claimed he had discovered crucial errors in the data, which were sufficient to invalidate Piketty’s core arguments. The Economistimmediately disagreed with the FT, arguing that its findings did not invalidate the book. Piketty belatedly responded with a full (10 suitably unintelligible pages) rebuttal.
James Galbraith: argues that Piketty mixes up apples and pears by lumping together real capital (eg factories and machines), and financial capital, which fluctuates wildly with market bubbles. And that his proposed wealth tax is less likely to work than an increase in the minimum wage (loopholes, clever accountants, offshoring etc)
Paul Krugman: in an otherwise rave review, criticizes ‘intellectual sleight of hand’ in arguing that capital concentration is returning to an inheritance-driven (rather than income-driven) model, when US is still firmly in the income concentration stage.
I’m sure there’s a terribly pun in there somewhere about having your pocket pikettied…. Anyway, that is my last attempt to summarize Piketty, promise. At least until he gets onto doing more work on inequality in developing countries (as he has promised).