Monday, November 17, 2014

One year later: a few reflections on Thomas Piketty’s “Capital in the 21st century”

A friend who recently started a new English-language magazine "Horizons" in Belgrade asked me if I would agree to publish in the magazine either a revised version of my Piketty's review from the June issue of  the "Journal of Economic Literature" (an almost identical version can be found here) or to write an entirely new review. I choose the latter option. Here is the text.

It has been more than a year since Thomas  Piketty’s “Capital in the 21st  century” was published in French. The world  of economics and economic commentators has, thanks to this book, been transformed.  It was perhaps the greatest success of an economics books since Keynes’ “General Theory” some 80 years ago. Of course, a question can legitimately be asked: will it remain so in ten or twenty years? I will try to answer that question below. My re-review of the book, which is also a review of what we have learned  in a year since the book was published, will be organized around three topics: why was “Capital…” so popular, what are the potential issues or critiques one could make, and how should we think about “Capital’s” recommendations.

Why was the book so popular? As always, in such judgments,  one has to distinguish  “objective” from “subjective” factors. Only the first, in principle, ensure the long-run sustainability and influence  of a book. But to have a huge short-run success that “Capital” certainly had, one needs the confluence of the two. On the objective side, the book was written by a well-known economist who has already distinguished himself by 15 years of first-rate papers and books. Then, the book provides a relatively simple, yet powerful, model that “unifies” economics of growth, of functional income distribution (labor vs. capital), and personal income distribution (inequality among individuals). This was bound to appeal to those among the economists that love the great syntheses. And indeed, very few people before Piketty, in the recent history of economics,  were able or brave enough to put things together on such a grand scale. Economists have lost the habit of “system-related’ thought (that is, of looking at capitalism as a “system”). Driven by the general “parcelization” of the field, they have preferred to focus on rather small issues (does the minimum wage reduce the number of jobs, do tariffs harm output, how do subsidies distort incentives…).

Moreover, this broad systemic thinking offered by Piketty was based on a huge and detailed historical database. Thus, the model plus the underlying data made it very difficult  for Piketty’s detractors to have a go at him. They could possibly disagree with his model and its implications but they could not overturn his data. Or, they could nitpick about this or that data point, but they could not propose an alternative worldview. Finally, among the “objective” reasons, I would  like to mention that the book is very well written. It can be read basically as a history book. It does not shy away from taking strong positions or from criticizing famous economists. It was written with conviction and no fear. Readers can sense that.

On the “subjective” side, I think that one can list the timing. With the recession that had  by then lasted six years, unhappiness about the real wage stagnation in both the United States and Europe, run-away income inequality driven by huge income gains on the top, any book that would seriously claim to explain these phenomena was guaranteed a good reception. So much more, an excellent book, steeped in history and written by one of the top economists.  Yes, had “Capital…” been published in 2006, I have little doubt that it would be successful among the economists, but there would be no chance of it becoming a “New York Times” bestseller.  

Among the subjective factors, one can, strangely, list that the book was originally published in French. Normally, this would be a minus since the global market of idea is essentially monopolized by the English language publications. (This is why your read this review in English.) But here, Piketty was lucky. The fame of his book spread to the United States (despite its rather lukewarm first reception in France) very quickly. The fact that the book was not available in English for six months, made the waiting and anticipation excruciating and all the more keen: the final, ultimate answer to all our problems  has been discovered, and it is only the language barrier that prevents us from finding it right now!  I half expected (and I think in some cases this indeed happened) that student  study circles would form to simultaneously learn French and read Piketty. It reminded me of the story of Russian students in Europe who got together in 1867 to learn German in order to read Marx’s “Capital”.  This anticipation made the publication of the book in English, marvelously  translated by Arthur Goldhammer (a premier American translator of French non-fiction) a real explosion in the worlds of science, punditry and popular culture.

 Leaving it for the end, I cannot just ignore the fact that several people thought that Piketty’s good looks, straight-talking, French accent and general American “engouement” with French thinkers were helpful too in wooing the American public.  And once you had the American public on your side, the world was yours.

So, this is why the book became a hit.

Will it have a lasting influence and what are its possible shortcomings? But being a yearly hit is not sufficient for a book to have a long-lasting influence. Piketty “Capital…”, I will argue, will be with us for a very long time. (On some optimistic days, I even think this Piketty might have made a mistake by putting “21st century” so clearly in his title. The book’s importance might outlast this century, and people in the 22nd century might be reluctant to read something whose validity appears  time-bound.  Perhaps “Capital now and in the future”, or  “The rise of patrimonial capitalism” might have been more durable titles.)

The influence of the book will remain for all the “objective” reasons that have made it a hit and because the basic  conflict between income that is earned from ownership (and which does not require working) and income that is earned through labor, will remain for the foreseeable future. In effect, capitalist societies are structured in such a way that this is a central conflict, however hard apologists try to mask it. Moreover, this conflict, in an ironic twist, will be, as Piketty shows, the sharper the richer the society. For being a rich society essentially means having more capital. Thus, richer societies’ capital/income ratios (by now the famous Piketty’s beta) are  greater which means that relatively more income is generated from ownership (compared to labor) than in poorer societies. Since ownership of capital has always been, and is likely to remain, very concentrated, the issue of having a significant percentage of the population both rich and not working either for the entirety of their income (rentiers) or for a large chunk of it (“working capitalists”)  will remain a problem of first importance, politically and ethically. This is why the messages from this book will not go away.

But does the book have problems, which, one year after the publication, literally hundreds of reviews have uncovered? Indeed, it does, and I would like to point to a couple.  A technical one is Piketty’s use of capital and wealth as if it were the same thing. In French, it is “patrimoine”, “richesse” and “capital” and, as Piketty writes, they are all used interchangeably. Now, it is perfectly logical to focus on wealth and to consider as wealth everything that is bringing an explicit or implicit income over a period of time, from stocks and shares to own housing and patent rights. This is what Piketty does when he defines the share of wealth-related income in current total income (his alpha). The problem arises  when that wealth is, as it were, introduced in the neo-classical production function  (and Piketty needs this in order to combine his theory of income distribution with the theory of growth) where it really takes the place of the productive capital (the K from economics). In other words, W has been conflated with (or treated as the same as) K. The results obtained regarding the rate of growth of output or the role of technological progress are derived from the world where K stands for the productive capital, but applied to the world where “non-earned” income is obtained from wealth (W), a concept much broader than K.  Thus, for example,  the crucial condition that ensures that the rate of return on capital r does not decline a lot as the K/Y ratio rises (so that r  can be treated as more or less fixed), namely, that the elasticity of substitution between capital and labor is greater than 1, is derived from the K world. But it  is applied to the W world.  This problem could become similar to the Marxian “transformation problem”: not in substance, but in questioning the logical foundations of the analysis.  It is already debated and it will be, I am sure, debated even more.

The second main issue is the  exclusive focus on the rich world. In the era of globalization we need books that deal with the world as a whole.  Indeed, it could be argued that we focus on the rich world because its developments are the developments through which the poor (or emerging) economics will have to go though as they develop. This is a linear conception of economic history which however may not be true.  In addition,  the income gaps between countries like China and the rich world are rapidly closing. Does Piketty’s book have much to say about China? It seems not, and it is a major omission. Consider simply the following fact, couched entirely within the Pikettian framework.  If globalization means free movement of capital, then we can expect a worldwide equalization of r.  In the rich world where economic growth (g) will be low, r>g relationship will, as per Piketty, imply growing income inequality. But, in China, a much higher growth rate will overturn this relation, and r<g should lead to decreasing inequality.  Thus, the world of the future may be characterized by one part (rich countries) where inequality increases and another part (emerging economies) where it decreases, with its growth, like in the post-War Western Europe, driven by the convergence economics. Moreover, in the emerging or poor world, Piketty’s famous policy recommendation of capital taxation may not make much sense. We move to that next.

              What to make of the global tax on capital?  This proposal has manifestly attracted most attention, even from those who have never read a single page of the book. Piketty calls for a global tax on capital of 1% on wealth in excess of 1 million euro, and 2% on private wealth in excess of 5 million euro.  The proposal is fully consistent with his main message. If run-away growth of capital and its high concentration in a relatively few hands are the main causes of inequality, then taxing capital and reducing  r is a way to deal with inequality. But that recommendation hardly applies to China, India and other emerging economies.  First, the growth rate of the economy there may be, as we just saw, higher than r,  and second, the capital/output ratios are low, and if indeed r<g, they will be decreasing further.  The K/Y ratios, calculated from the Global Wealth Report 2013, are about 5 for the rich countries like the United States and Switzerland, but only 2.7 for China, 2 for India, and even less, 1.5 for South Africa and Brazil.  Thus, the “inequality threat” from capital is much less in these countries: inequality may increase there but if it does, it would be driven by other factors than private ownership of capital. Piketty’s recommendations hardly seem relevant for the emerging world. But it gets worse.  For Piketty’s tax to make sense, one needs international coordination, and if that international coordination is not be forthcoming from China, India, South Africa and Brazil, a global tax on capital is doomed.  Even if OECD agrees to impose it, capital might flee to the emerging world.  And that very fact will be sufficient for the rich world not to impose the tax.

But will such a tax be as onerous as some people argue? In reality not: it will not affect that many people but it will indeed cover a lot of capital. According to the Global Wealth Report for 2013, there are 32 million adults in the world with net assets of over $1 million and they collectively own almost $100 trillion of wealth.  We can assume (back-of- the-envelope) that the average tax rate will be about 1.6-1.7%  (to simplify the matters, I take it that $1=€1) since  the distribution of wealth among the very rich is extremely skewed: there are many fewer people than 32 million with net assets above $5 million, but many of them are extraordinarily rich and would be assessed at the higher rate of 2%.  Total receipts from the tax may be thus estimated at $1.5 trillion which is about 2% of global GDP.  Or otherwise, even if the number of people who are subject to the tax is small (less than 1% of world adult population),  its yield would be huge. This is not surprising  because it simply reflects today’s immense differences in wealth between the top of the pyramid and practically everybody else. Just as a reminder,  even in the richest countries of the world, like the United States (Wolff, 2010, p. 43) or Germany (Grabka and Westermeier,  2014, Table 2, p. 9) respectively 20 and 30 percent of the households have zero or negative net wealth. But the fact that relatively few people would be subject to the tax seems to suggest, at first sight, that the tax may be politically feasible.  This however is not the full story. The reason why the tax is unlikely to be imposed is because it would not be appealing at all to the emerging market economies and because those who would be subject to taxation are politically sufficiently powerful to block  it. So, the tax would fail on other political grounds.

What to conclude? One year is a sufficiently long period to have some idea about the reception, and perhaps even about  the longer term impact of a book. For Piketty’s book like many others, we have to distinguish between its analytics, its recommendations, and its forecasts. One can agree with analytics without agreeing with the recommendations, or the reverse.  In my opinion, the analytics proposed in the book, by themselves, because they fit quite well the likely evolution of the rich world in the decades to come, will be influential for many years. Teaching economics without a mention of “Capital…” will be difficult to imagine. It will affect not only how we think of income distribution and capitalism of the future but also how we think about economic history, from Ancient Rome to the pre-revolutionary France. (We can already see some of these developments).  It will drive our economic thinking in the directions that were not even envisaged in the book. For example, if concentration of capital is the main culprit for increasing inequality, then much more widely-spread ownership of capital (in the form of worker ownership) may be a solution.  

But when it comes to the recommendations and policies, I do not think that the book will have an impact equal to that of Keynes’s “General Theory.”  The two books were written with different objectives  in mind.  Keynes’ was in reality the last great “cameralist”  treatise destined to convince policy-makers what to do (as well as the first book in macroeconomics); Piketty’s “Capital…”  is much more in the tradition of classical political economy:  description and analysis of the capitalist system. And as long as that system is with us, I do not think that Piketty book would  be forgotten.


Credit Suisse (2013), Global Wealth Report 2012, authored by Jim Davies, Anthony Shorrocks and Rodrigo Lluberasis, October. 

Markus M. Grabka and Christian Westermeier (2014), “Persistently High Wealth Inequality in Germany”,  DIW Economic Bulletin 6/2014. Available at (accessed 16 November 2014).

Thomas Piketty (2014), Capital in the Twenty-First Century (translated by Arthur Goldhammer), Harvard University Press.

Ed Wolff (2010), “Recent trends in household wealth in the United States: rising debt and middle-class squeeze: an update to 2007”, Levy Economics Institute Working paper No. 589. 

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