Review of Thomas Piketty’s Capital in the Twenty-First Century

Book Review of Thomas Piketty, Capital in the Twenty-First Century

Translated by Arthur Goldhammer (Belknap / Harvard University Press 2014)

by Christopher Nowlin    2014©Nowlin

Thomas Piketty’s Capital in the Twenty-First Century (“Capital”) is the talk of the global town, certainly among economists and talk show hosts, but also among laypersons like myself who have a general interest in economics and who are plainly intrigued by the fact that a nearly 600-page book (before endnotes) on money could be so widely captivating.   Piketty insisted in his television interview with Charlie Rose that his cause célèbre of a tome is “readable,” which it is in the sense that a layperson can tend to follow it.  It avoids the jargon of economists and seems to take pains to welcome neophytes into its fold.   Piketty does not believe that matters of such importance as the very unequal distribution of wealth throughout the world should be restricted to a roundtable of financial specialists.

That said, Capital is unduly lengthy.   To use a sports analogy, it is akin to watching the open water marathon swim in the summer Olympics – one can have a couple of drinks during the race, then take a very long nap, wake up, and still have plenty of time for the remaining hour of the competition.   (When the reader is tiring by page 385, does she really need to know about “Mortality over the long run”?  By page 447, does she really need to know about “The Pure Return on University Endowments”?)   One could easily imagine the book having 100 pages edited from it.  The important points would remain, as would the supporting data.   Publishers are typically mindful of a book’s page length because paper and ink cost money, but as Piketty reveals, Harvard’s endowment is about $30 billion dollars.  One can safely assume that as far as Harvard University Press was concerned, therefore, the cost of printing the inordinate data in Piketty’ book was a trifle.

The promise of the book, to me, was established at the outset when Piketty delivered a left hook to his profession at large.  He chided the “discipline of economics” for its “childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with other social sciences.”   Coming from a trustworthy economist, this frank comment is courageous and welcome, and Piketty thankfully reiterates it in his Conclusion.    Late in his book Piketty also questions the objectivity of “some economists” who have “an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest.”

I am glad that Piketty wrote Capital because it is refreshing and important for an eminent economist – an insider – to take aim at the follies and dangers of a very influential profession.    Piketty’s intellectual sobriety as an economist will remind some or many of John Kenneth Galbraith.   Piketty’s Capital shows a genuine concern for the plight of the planet’s poor, and for the environment, as did some of Galbraith’s writings such as The Culture of Contentment.   One doesn’t typically find such humanity or long-term ecological concern from highly-paid economists.   Even so, while reading Capital I longed for the dark wit and incisiveness of Galbraith, and I wished that Piketty would have been less abstract  and general at times in his analyses.  Whereas Galbraith colourfully skewered America’s middle class in his 1958 runaway bestseller, The Affluent Society, Piketty’s attention to the “patrimonial” or propertied middle class is largely mathematical.

Piketty notes that in Europe this largely 20^th century demographic managed to acquire a “few crumbs” of wealth from the richest citizens when the fortunes of the latter fell in the early 1900s.   Now Europe’s medium earners and owners have about one quarter to one third of national wealth in Europe.  When Piketty later explains that there is a limit to how much taxation is necessary or desirable for social services, he notes that “the citizens of wealthy countries…have a legitimate need for enough income to purchase all sorts of goods and services produced by the private sector” – including “the latest tablet”.   One could imagine Galbraith having fun with such an observation.

The most sobering revelation of Piketty’s graphs, by my estimation, is that real disparity or inequity of wealth is the historical norm for developed countries.    The global Occupy movement should take note.  If numbers don’t lie and Piketty has presented a generally accurate historical picture of the movement of capital within nations and between them since the 1800s, Piketty is hard pressed to explain why the situation should ever be much different well into the future.  He insists that the historical curves are not pre-ordained, that they are malleable, and that by and large they have been shaped by politics.   He goes a step further at one point – after briefly addressing the American response to the 1991 Iraqi invasion of Kuwait – to note simply that the “dynamics of the global distribution of capital are at once economic, political and military.”   Such a cryptic observation as this should suffice to deter those readers hoping to find tales of political-economic intrigue in Piketty’s book.   Indeed, Piketty takes it as an uninteresting matter of fact that colonial European powers in the late 19^th century and early 20^th century consciously acquired foreign assets in order to make other countries indebted to themselves over the long run.   He recognizes that this revelation “may seem shocking” to some, and in this one swoop he makes John Perkins’ Confessions of an Economic Hitman seem remarkably innocent or naïve.

However, because Piketty does not address with any great political-economic specificity or depth the “dynamics of the global distribution of capital”– except for explaining how a “concatenation of circumstances” beginning with World War I (“wartime destruction, progressive tax policies made possible by the shocks of 1914-1945, and exceptional growth” from the 1940s through the 1960s) dramatically redistributed global wealth temporarily – Piketty will leave some readers dissatisfied.   The nagging question he raises is this:  If the dominant historical trend across the globe has been real disparity of wealth, but politics, not some immutable law of commercial exchange is to blame, then why have politics historically tended to favor great disparities of wealth?  And, if domestic politics have tended to run in this non-egalitarian way for centuries, what does it matter whether one views the long-term tendency Piketty has observed as natural or political?   The difference between words seems to make no difference in reality.

Piketty writes a number of prescriptions for bridging the dangerous disparities in wealth nationally and globally, such as a progressive income tax, a global tax on capital, and even inflation (as a last resort).   The first-mentioned suggestion, of course, is not new.   Piketty surmises that a progressive income tax with bite could curb the nascent tendency of ’super managers’ to demand exorbitant salaries.   He is also clear that austerity is not the answer to Europe’s debt.  Indeed, government debt is not necessarily the problem.   As Piketty points out, “The nations of Europe have never been so rich.  What is true and shameful…is that this vast national wealth is very unequally distributed.  Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education.”   Here Piketty shows that he is prepared to wag a finger at governments with troublesome priorities.  He seems discontent with how little public funding goes to education in developed countries, relative to other expenditures.

Piketty rejects the argument that a free market is self-correcting.   For him, education and technical know-how, not market mechanisms, enable wealth disparities to converge.     Even so, he is adamant that “the diffusion and sharing of knowledge” cannot in themselves serve to reduce the troublesome wealth disparities of today.   Fiscal reform and progressive income taxation are necessary.  He also calls for national and international transparency of banking information, so that governments and citizens can have informed discussions in the areas of fiscal policy and financial planning.

The prevalent thread of Piketty’s book is a moral dilemma Honoré de Balzac posed in Père Goriot: Should Eugène de Rastignac obtain prosperity by studying to become a lawyer or should he marry Mademoiselle Victorine, an unattractive young woman who holds out the potential for Rastignac to become very wealthy through inheritance?  For Piketty, this literary dilemma (“Vautrin’s Lesson”) reflected reality in 19^th century France and England and has contemporary relevance.    Inheritance among the aristocracy and nobility in 19^th century France and England recirculated riches.   Professional aptitude – in a word, merit – could only put one in the upper-middle class at best.   Piketty shows that this reality was reversed in the mid-20^th century, but it has returned.  Doctors and lawyers and engineers today cannot hope to obtain the same level of wealth that children of the wealthiest ten percent of Europeans and Americans can obtain simply by birthright.  This is ultimately the great political-moral issue Piketty’s book addresses: how to bridge the growing divergence between the great wealth of the rarified financial elite of developed societies and the stagnant or relatively diminutive holdings of the middle- and lower-classes.   Piketty is portentous in this regard.   Whether he wishes to provoke or not he notes more than once that revolution and even war have done a violent job of redistributing wealth, but without an enduring effect.

The fact that Piketty draws heavily from Père Goriot is interesting.    In 1900 the American author Theodore Dreiser had his novel, Sister Carrie, published.  As Balzac’s Père Goriot did for early 19^th century France, Dreiser’s Sister Carrie painted a colourful picture of socio-financial life in late 19^th century America.   Dreiser’s novel depicts the allure of wealth across every social class in Chicago and New York – how everyone is drawn to money and status like moths to a flame – except for an outlier named Ames, a successful, unmarried engineer.   Carrie is attracted to Ames, who tells her to read Père Goriot and all of Balzac’s books.  Ames tells Carrie that these “will do you good,” but he is critical of Balzac for making too much of “love and fortune” and for believing that “happiness lies in wealth and position.”  Ames disagrees, preferring knowledge over vast wealth.   He might still represent a minority attitude to this day.  In any case Piketty correctly presumes that a great many people are interested in the distribution of wealth across their own societies and across the world in general.

In concluding I wish to say a word about Piketty’s penchant for the social sciences, given his real interest in literature and history.   (He considers history a social science.  I do not, but I do not want to quibble about words.)  My concern is that social science research techniques and conclusions tend to dominate policy-making, yet often the conclusions drawn are misleading for any number of reasons.   (Think of electoral polling, as a ready example).  In attempting to explain why astronomical salaries and bonuses for super-managers in America and Britain are a comparatively new phenomena, Piketty suggests that a dissuasive income tax in less recent years curbed the personal demand for bulging incomes.  This would appear to be the “best explanation of the observed facts,” he writes, even though he concedes it is likely that “social norms” regarding executive pay, not “tax rates,” directly determine levels of executive compensation.   For Piketty, such uncertainty reflects “the beauty of the social sciences.”  I’m not sure why.  I am inclined simply to find real uncertainty a matter of comparative ignorance, and would urge policy-makers to be very careful when faced with it.

In the past I have criticized social science methods and conclusions for failing to incorporate historical experience and the insights of great literature.  In Capital Piketty iterates this concern, yet his numerous graphs in Capital will impress influential readers far more than his knowledge of Balzac and Jane Austen novels will do.   The graphs might well be robust.  They might stand the test of time and of further research, yet Piketty is clear that further research will be helpful and enlightening.  By urging economists and policy-makers not to be narrow-minded about the movement of money across countries and populations, Piketty has made an important contribution to a pressing global problem.