Thomas Piketty (2014)
Capital in the Twenty-First Century has rapidly become famous, not least through sparking controversial responses from the likes of The Financial Times and The Economist (the latter, believe it or not, actually in response to the FT’s attack on Piketty’s book).
It is a work of true scholarship: painstakingly researched, coherently formulated. In an age where Theory threatens to reign supreme, just the empirical components of Piketty’s contribution – quite outside from the radical conclusions he draws from the data he has compiled – already deserve our admiration and gratitude.
Don’t jump to conclusions on the basis of the book’s title – although Piketty, unlike many modern economists, does not dogmatically dismiss Marx out of hand, he is certainly no Marxist. Indeed, much of the book’s discourse sits comfortably within orthodox economics. Piketty’s story is a simple one, and unless you’re an economist, there really is little reason to work your way through its 600 pages – smoothly and unpretentiously written as they are. The case can be summarised in a few paragraphs.
To begin with, Piketty makes a distinction between two types of income that he believes is crucial. Studies into inequality generally make use of either wealth (assets) or income (flux of wealth). Unlike Piketty, those in the latter camp lump income from various sources together. Piketty, on the other hand (and like Marx), strongly distinguishes between income from labour and income from assets (which he calls capital: think returns from shares, bonds, factories but also land).
There are two major fronts that economists are likely to open. The first (e.g., this article) concerns Piketty’s rather grandiose ‘Second Law of Capitalism’. In a nutshell, his law states that k/y will, in the long run, equal s/g; where k is the capital stock, y is (national) income, s is the savings rate in the economy and g is the sum of the growth rates of the population and the economy. The second (e.g., this article) is his claim that real returns to capital (often denoted ‘r‘) trend towards 4%, irrespective of what k, y, s and g are doing.
If one accepts these two macroeconomic claims, economies at equilibrium tend naturally to diverge towards increasing inequality, ultimately and irrevocably leading to social instability.