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The hosannas for Thomas Piketty’s new book, “Capital in the Twenty-First Century”, have started to roll in. Published in French last year and out in English this month, Piketty’s book, Buttonwood says, “might turn out to be one of the most significant economics books that have been produced since 2000”. The World Bank’s Branko Milanovic goes further, saying it might be “one of the watershed books in economic thinking”.
In the first of a series of posts on the book, Ryan Avent says, “like Marx, Mr Piketty aims to provide a political economy theory of everything.” That theory in a very basic nutshell: economic inequality is a feature, not a bug of modern capitalism. Piketty’s work, Kathleen Geier writes, takes on Simon Kuznets’s notion of a natural curve of inequality that declines as economies mature: “As Piketty demonstrates, Kuznets’s inequality theory was based on fatally incomplete data—he only dealt with one country (the United States), from the years 1913 to 1948.” Piketty’s data is broader and is cross-country; you can see much of it at his World Top Incomes Database.
The key to Piketty’s analysis, Geier writes, is the relationship between the rate of return on capital and economic growth. History has shown that the rate of of return on capital has consistently been higher than economic growth — check out Piketty’s chart here. When this happens, inequality naturally begins to build on itself through what Milanovic calls “positive feedback loops”. In short, the rich get richer, aided by their own richness. This, the argument goes, is what’s been happening in many economies for the last 30 years or so.
The six-decade period between 1914 and 1973, Thomas Edsall writes, was a historical exception: economic growth rates exceeded the return on capital. But Piketty chalks this up to the impact of two world wars and the Great Depression.
Jacob Hacker and Paul Pierson think the book is a kind of reverse de Tocqueville: where the 19th century French scribe found widespread social equality in America, Piketty, also a Frenchman, finds “a new patrimonial elite”.
Dean Baker writes that “capitalism is far more dynamic and flexible than the way Piketty presents it in this book”. Much of today’s record corporate profit “hinges on rules and regulations that could in principle be altered.” Piketty, it’s worth noting, suggests that things like a “progressive wealth tax at the global scale” can help slow the growth of income inequality. MIT’s Daron Acemoglu wonders if technology and globalization might have been driving inequality of late, rather than it being an inherent quality of capitalism.
If things don’t change, Geier writes, Europe and America could see “rates of inequality and wealth concentration that will not only match but exceed their nineteenth-century peaks”. – Ryan McCarthy
On to today’s links:
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