Capitalism in the 21st Century by Thomas Piketty

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★★★★★ Highly recommended for anyone with any appetite at all for non-technical macroeconomics

An illuminating treatise on the nature of wealth and inequality in the 19th, 20th, and 21st centuries.

Piketty has two major contributions to offer. First, he (and colleagues) have spent years piecing together a more extensive set of sources than ever previously assembled to paint an incredibly thorough picture of income, capital, and economic growth over the past 300 years. While I have no expertise in this field, my sense, from the book and discussion of it, is that this has been done painstakingly and with much attention to detail, and is a genuinely novel contribution to the field. As a layperson, it’s the first time I’ve ever encountered such a broad view of macroeconomics, both over such long time periods and across countries.

The data, by itself, I found extremely enlightening. It’s invaluable to have a framework like Piketty provides for thinking about how changes to various economic parameters will affect growth and the distribution of wealth and income. Taking such a broad view, historically and across countries, helps us step outside our national political debates and recognize the fundamental forces at work, rather than policies that often operate on the margins. It’s worth reading the book for this perspective alone. For example, taking a view that stretches back to the 18th century across the US, England, and France makes it clear what massive shocks to wealth and income the two World Wars were and how much of the midcentury trends in economic growth and distribution were aftereffects of the wars. In effect, the period from 1914 to 1970 was a historical outlier. Without this view, it would be easy to look at, say, the 1960s and mistakenly draw narrow conclusions from specific US policies, ignoring critical context.

The other major contribution is the exploration of inequality, and in particular, the relationship between the accumulation of wealth (capital) and economic output growth. Piketty focuses on what he calls the major force for divergence in capitalism: for almost all of history, r > g. That is, the rate of return on capital (r), generally 4–5%, is greater than economic growth (g), which never exceeded 1.5% prior to WWI and is projected to return to <2% going forward. When capital generates income faster than economic output (and income from labor) grows, fortunes built in the past tend to dominate, and will pull away from newly accumulated income. The rich get richer.

The inequality discussion is also very interesting simply for the historical data and the framework offered for making sense of it, but it goes significantly beyond that and is intertwined with policy prescriptions. The primary and most famous of these is a global, progressive tax on capital, with an aim of directly restraining the growth of inequality. While the specific suggestions Piketty has are explicitly noted as utopian and are probably unworkable in practice, I think they’re useful contributions to the conversation as idealistic starting points.

While the material is pretty dry, the writing is generally excellent — structured, easy to follow, human and relatable.

The charts themselves are worth spending 30 minutes on, even if you don’t read the whole book.

A few qualms:

1. I think a global, progressive tax on capital is a reasonable utopian solution, and I think it’s a sound approach for Piketty, as an economist, to offer it as a starting point, explore some of the challenges with it, and leave it there as the beginning of a broader discussion. While he has a clear agenda, he is very transparent about it and it appears not to muddle his presentation of objective data. But it would be nice to have some more discussion of alternatives that address the same core issues practically, even if they’re less economically efficient.

2. Somewhat more problematic is the lack of discussion of the possible downsides of Piketty’s policy proposals, other than implementation challenges. I’ve never seen a policy that didn’t at least have some tradeoffs, so it seems unrealistic on the face of it to imagine that none exist here. Policies don’t need to be cost-free to be the best path, but anyone who says there is no cost to their policy proposals deserves a good dose of skepticism. While I trust the core economic data presented here is dealt with fairly, I am less convinced by the one-sided treatment of policy.

3. The section on executive pay is not very convincing. Piketty says the model he tried to build was not able to predict executive pay on the basis of outcomes, but that is not the same as proving that executive pay is entirely determined by some combination of (a) cultural norms (b) cronyism / self-set pay (c) irrationality. Though these are no doubt all factors, I think we’re missing something when we assume it’s simply irrational or corrupt for companies to pay managers what they are paid. At the very least, it’s clear that there is a competitive market for talent at a sub-CEO level, with rapidly increasing incomes (which isn’t self-determined), so one must explain why companies think managers are worth what they’re paid. Until we have that, we won’t be coming up with compelling recommendations.

4. I think there’s an unresolved tension between (a) the core thesis that there a group of massively wealthy rentiers built on historical fortunes pulling away from the rest of society due to r > g, and (b) the fact that growing inequality over the past 40 years is driven by growth in labor income inequality. This doesn’t mean that there isn’t an inequality issue, but it isn’t currently the result of the returns to capital, and when focusing on the top 0.1%, inheritances seem to pale compared to income from labor. So there may be a concern that in the future, all of today’s self-made millionaires and billionaires will create fortunes that continually grow in importance. But the fact that one can propel oneself into the top 1% through entrepreneurial work is very different than pre-WWI France or England.

5. I think it’s kind of crazy that Piketty refuses to even acknowledge that Gates/Buffet/Zuckerberg level philanthropy (i.e. giving away 99% of one’s fortune to charitable causes) is not a true public good because it’s done through foundations they control. I don’t see how that is justifiable on any non-prejudicial grounds.

Appendix: Interesting Data Points

Some notes I took on striking data points. Just browse the charts though for a more visual version of this.

GDP & Economic Growth

• Europe’s share of world output has been falling since WWI, from 47% to 25%. Asia accounts for all the growth, with 42% of world GDP today.
• Europe’s share of world population has fallen in this time from a high of 26% to 10% now
• Average global annual income is about $12,000. (US is about $50,000.)
• World output grew by negligible amounts (~0.1% annually) for almost all of history, up to the 18th century. It was about 1.5% in the 19th century, then post-WWI has been about 3.0%. Half of this is population growth, half is per capita output growth. Population growth is projected to fall from 1.4% to 0.7% from now through 2050, then 0.2% to 2100. So per capita output accounts for most growth, expected to be around 1.5%.
• A 1% difference in growth rates is huge. Going from 1.5% to 2.5% is like multiplying by 2.1x instead of 1.6x every generation (30y).
• Western Europe grew at 4.1% per capita 1950–1970 while catching up from the shocks of the wars, North America at 2.3%. Since 1970 they’ve grown at the same levels (2.2% 1970–1990, 1.5% 1990–2012).
• World per capita GDP growth is projected to be 2.5% to 2050 then drop to 1.5% for 2050–2070. Thanks to population growth rate declines, world GDP growth is projected to drop even more steeply (3.5% to 1.7%).
• There’s no way to achieve a sustainable 4–5% growth rate. Only countries “catching up” (Europe after WWII, China today) see such high growth rates. For countries at the “world economic frontier,” there is reason to believe that growth rates will not exceed 1–1.5% in the long run, regardless of economic policy.
• 2/3 of people were employed in agriculture in 1800 (US, France), down to 1/50 in 2012. 1/7 were in services, up to 4/5 now.
• Agricultural land accounted for around 55–65% of wealth in Western Europe and the US in 1700. It’s now near 0%, with housing having eaten that share.

Wealth & Capital/Income Ratio

• Public assets and debt generally cancel each other out in Western countries and public capital is ~0 (~all wealth is privately owned)
• DE, FR, UK achieved 600–700% capital/income ratios on the eve of to WWI, and have not yet gotten back to that point
• WWI, WWII, and the Great Depression destroyed wealth. Wars brought physical destruction of capital, nationalization, taxation, and inflation, while the Depression destroyed fortunes through capital losses and bankruptcy.
• 1913–2012 is the only period in world history where the rate of return on capital after taxes and capital losses (due to wars and downstream effects) was lower than the economic growth rate.
• Starting in the 1970s, the ratio of wealth to income has grown along with income inequality. Levels of wealth concentration are approaching those of the pre-war era.
• Private capital is projected to grow to near 700% of world income by 2100, from a low of close to 250% in the wake of WWII and about 450% today (close to the 500% of 1910). Global wealth is accumulating.
• Capital generated close to 45% of income in Britain & France in 1910, down to about 25% in the mid-20th century
• Pure rate of return on capital in Britain & France has held pretty steady around 4–5% since the end of the 18th century

Inequality

• Income inequality in the US took a sudden nose dive during WWII and stayed locked at low levels until the 80s, achieving pre-WWII levels in the 2000s (and now going beyond)
• Share of top 10% by labor income varies from 20% (e.g. Scandinavia 1980) to 35% (e.g. US 2010). The top 1% takes 5–12% of this.
• Share of top 10% by capital varies from 50% (e.g. Scandinavia 1980) to 70% (e.g. US 2010) to 90% (e.g. Europe 1910). The top 1% takes 20–35–50% of this. The bottom 50% typically own 5% of total wealth.
• You have to go to the top .01% before capital income outstrips labor income in France
• While the share of total income in the top 90–99th pctile in the US has crept upwards since a low of 23% after WWII to 28% today, the share of the top 1% went from 10% (and lower in the high-tax 70s) to over 20%. The top 10% takes almost half of total income (vs 1/3 in the mid-20th century US or Europe today).
• Share of capital income exceeds labor income only in top 0.1%, one tenth the proportion of the population as in 1929
• Top 1% take almost 2x the share of total income in US/UK as in FR/DE.
• Top 1% had 60% of the wealth in France in 1910, now 25% (thanks to wars, inflation, taxation, etc.). Britain 70% to 28%. Sweden 60% to 20%. US 45% to 32%.
• The annual value of inheritances in France has tripled from less than 5% of GDP in the 1950s to about 15%, not all that far from the 19th-century peak of 25%.
• Inheritance made about 25% of the resources of 19th century cohorts, down to less than 10% for cohorts born in 1910–1920 (who should have inherited in 1950–1960)… but back up over 20% for those born in 1970+.