Capital in the 21st Century – Thomas Piketty

Capital in the 21st Century is a well researched and documented macroeconomic analysis about the trend toward greater concentration of wealth in fewer and fewer hands. The author’s projections are based on compelling trends rooted in centuries if data, mostly from Western Europe and the US. His overtly political perspective diminishes some of his analyses at the micro level, but generally speaking, many of the trends, including the concentration of wealth, appear solid. Solutions however, are more elusive.

The central thesis is that when the rate of return on capital r exceeds the national growth of capital g, the fundamental force for divergence, or when r > g as it usually does, more and more wealth will accrue to a smaller and smaller proportion of citizens, ultimately resulting in extreme inequality, creating social upheaval that democracies perhaps cannot withstand. Where economics and sociology converge.

Early in the book (p 69) he argues that the convergence of wealth - where rich countries invest in poor countries for the higher marginal productivity until marginal productivity equalizes - fails in this sense: while the marginal productivity may increase, marginal wages do not. He does admit however, that the diffusion of knowledge has helped less developed countries develop at a faster pace than without such access to knowledge. Further along on the book (307) he concurs that wage growth is dependent upon education and technology, a topic we all shared.

Piketty concludes that income disparity will continue its course until virtually all wealth will be concentrated in the hands of a plutocratic few. Piketty has particular disdain for inherited wealth, and recognizes that today's 'super managers' earn so much capital, that they cannot spend or consume the capital they've accumulated, leaving this capital to heirs. We spent some time discussing the high compensation paid to the top managers of large companies, including the ratio of highest paid to lowest paid. Many argued that CEOs are overpaid, but Chuck and Geoff argued that shareholders and compensation boards are sensitive to these costs, and that the pool of talent is thin enough at the very top that supply and demand cause high wages more than any other forces. Piketty prefers steeply progressive taxes on income, as well as progressive taxes on wealth as a solution. More on that toward the end of the book.

Thomas Piketty's openly progressive political perspective gets in his way on occasion. He writes In his conclusion to the second part of the book, "if one truly wished to found a more just and rational social order based on common utility..." Stop. Many Americans don't. He comes from a homogeneous European perspective where social order is primary. But the world is not as neat and tidy as that, particularly in America and in many developing countries, where individualism and personal expression and freedom define us. Other snippets include: (522) "It is not right for individuals to grow wealthy from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft." What he does not recognize of capitalism is that commerce does not occur unless willing buyers and sellers both benefit. Commerce is theft? Another comment, in discussing post-war Europe he writes, "People felt that capitalism had been overcome in that inequality and class society had been relegated to the past. It also explains why Europeans had a hard time accepting that this seemingly ineluctable social progress ground to a halt after 1980 and why they are still wondering when the evil genie of capitalism will be put back in its bottle." His disdain for capitalism seems so at odds with an otherwise well organized book, readers must ask if it's all just agenda.

Pikkety asserts that a fundamental tendency within capitalism is that more wealth concentrated in the hands of very few has no self correcting mechanism, concluding that state confiscation - a progressive wealth tax - is the best solution to the problem. Yet there is extensive governmental redistribution of wealth. We agreed there are many problems here, not least of which are the effects on political influence and government leakage, but more insidiously, at the micro level, the effect on economic incentives. This is in contradiction to the Laffer Curve which most of us understand and subscribe to personally. He cites a study on page 511 that higher marginal tax rates did not affect productivity in the US, But that analysis was far from exhaustive, and hard to square with our own experiences. As with other academic analyses, the author's lack of real world private sector experience undermines some of his assumptions and thus many of his conclusions.

We discussed that part of the problem of redistributing wealth to the poor is in the details. And he spends little time discussing the current state of the poor in developed countries. This failure to account for existing transfer programs is evident early in the book. Growth is defined as GDP less depreciation and adjusted for national balance of payments, but does NOT include any transfer payments from government. So he isn't addressing the income - and its wealth equivalent - from transfer payments to the poor. If one equates the value of housing benefits, food stamps, educational services, EBT cards and other transfer benefits to an income stream generated by wealth, one must wonder, why would those on the bottom 50% ever save and invest? Only to lose those benefits? The Laffer curve again appears, relevant not just for taxpayers, but for benefits consumers. Not only are the problems he projects not accounted for, the existing system of transfer payments today locks too many into poverty. This appears to be a greater problem today than the future social ills suggested in his analysis.

Doug pointed out that the latest collective bargaining agreements within the NFL and MLB do spread wages more evenly across players than in the past, and pay-for-performance is mixed with more predictability for new players. Interesting as a microcosm, but probably not an effective model for international capitalism.

While his analysis of ancien regime lifestyles is interesting in an academic sense, governments back then weren't in the business of providing social benefits that 20th Century progressive income taxation has enabled. Thus, the social strife caused by great wealth concentration that resulted in the French revolution and other major disruptions has been addressed by the broad social services offered in most developed countries today.

In the United States now, studies on the current effect of subsidies on housing, health care, and food show how steep the disincentives are for increasing earnings. The effective marginal tax rate (when converting from free services to paid services) as one makes his or her way up the income ladder is well known. Who hasn't heard, ‘if I work too many hours, I lose my rent / health insurance / food stamps.’? When it becomes too expensive to work, work loses its allure. And yet good work defines our lives, creates connections and a meaning for achieving shared success. Consider the Tsarnaev brothers: free housing, free education, new hockey equipment, but no future, no prospect for integration into American culture. No wonder they were unhappy in the US. We know from the social strife in the Arab world that large majorities with no prospects for the future creates a volatile social order. Piketty argues that it is the income disparity which causes such social strife; many in our group agreed that the prospect of no improved future is more destructive.

Piketty does not adequately factor in human behavior and reliance on individual incentives, though he does acknowledge the elasticity of tax increases. In promoting a capital tax, he argues that a tax on wealth is an incentive to seek the highest returns. People don't do that already? We also rejected the argument that people with wealth get better returns on their money than those with less money. One benefit of capitalism today is the access to low cost diversified investment accounts by all. It is not perfect, but access to highly qualified money managers is accessible with an internet connection.

Piketty's solution for the convergence of wealth is an annual tax on wealth. Achieving this requires international financial transparency, international cooperation, and a political will to take money from those with the most political influence. While this may provide support for progressive political class to argue for a tax on wealth, we suspect that tax havens will continue to accommodate those who would rather keep the money than hand it over to other governments. This is human.

In conclusion, we were all glad to have read this book, if only to wade deeply into the details of economic analysis, for the first time in decades for most of us. But Mal’s suggestion to take up Fluid Thermodynamics for our next book was roundly defeated.