Thomas Piketty’s Capital in the Twenty-First Century is the surprise publishing hit of the year. This dense economics tome, clocking in at 577 pages (not counting the scholarly apparatus), has reached number one on The New York Times nonfiction best-seller list.
Piketty’s thesis is clear: Capitalism tends toward income and wealth inequality because assets (capital) such as real estate and stocks, which are disproportionately held by the wealthy, rise faster than the rate of economic growth. The result: The rich get richer while the rest of society stagnates. This has been the trend in Europe and the United States since the late eighteenth century, which is when the data for measuring income distribution first became available.
The exception to the trend of rising inequality occurred during the period of the two world wars and the Great Depression in the first half of the last century. Governmental policies adopted to pay for the wars and to cope with the economic downturn created huge public debt, forcing inflationary spirals which flattened wealth differentials. But, Piketty argues, governmental policies in recent decades have had the opposite effect, leading to income and wealth inequality reminiscent of what Americans call the Gilded Age and Piketty refers to as the Belle Époque.
It’s not just that the wealthy are getting wealthier while the rest of society competes for a shrinking share of income and wealth, which is Piketty’s overall thesis. He also shows that Europe and the United States are returning to a “patrimonial capitalism” marked by an economy controlled not just by the wealthy and the talented but by family dynasties built on inherited wealth.
Piketty has plumbed tax data and other records for many countries, particularly the United States, Britain, Germany, and France. The French data are particularly good since one of the consequences of the French Revolution was a sophisticated system for recording and taxing wealth. For other countries, Piketty’s data come from income taxes, which were first levied in the late nineteenth and early twentieth centuries.
Capital is a learned book, frequently invoking novelists Jane Austen and Honoré de Balzac, writers “acquainted with the hierarchy of wealth… [They] depicted the effects of inequality with a verisimilitude and evocative power that no statistical or theoretical analysis can match.”
Piketty’s convincing case is built on his work and the work of colleagues in pioneering statistical techniques tracking the concentration of wealth and income. What Piketty has done for France, Emmanuel Saez does for the United States, gathering data showing that in 2012, for example, the top 10 percent of wage earners took home more that half of the total income, the highest percentage since the government began collecting income data in 1917.
Piketty has his critics. According to Paul Krugman, who is a big fan, “Inequality denial persists, for pretty much the same reasons that climate change denial persists: There are powerful groups with a strong interest in rejecting the facts, or at least creating a fog of doubt. Indeed, you can be sure that the claim ‘The Piketty numbers are all wrong’ will be endlessly repeated even though that claim quickly collapsed under scrutiny.”
Krugman cites an article in the Financial Times in which Chris Giles claims Piketty’s data “contain a series of errors that skew his findings…. [and] there is little evidence in Prof. Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.” Giles focused on the data from Britain, which Piketty concedes is imperfect, but which he argues is the best available. He cites other research that buttresses his claim of rising inequality in Britain.
On the key point of income inequality, Piketty’s evidence is overwhelming: The gap between the rich, especially the superrich, and the rest of society has risen astronomically in the last few decades in the United States and Europe. Data on the concentration of wealth are less reliable, but there seems little doubt that it too is becoming more concentrated in the top one percent.
His prescription: A global tax on wealth.
That may not happen, but Capital in the Twenty-First Century deserves its lofty perch at number one in the best-seller lists for its penetrating analysis of income and wealth distribution.