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Book Review: Capital in the Twenty-First Century by Thomas Piketty, translated by Arthur Goldhammer

November 21, 2014

Capital in the Twenty-First CenturyCapital in the Twenty-First Century by Thomas Piketty

My rating: 5 of 5 stars

The right-wingers have come out in force to denounce this book as Marxism, which could not be further from the truth. When Piketty mentions Marx, he almost invariably mentions the shortcomings of Marx’s research, such as Marx having drawn generalizations from the books of one factory (anecdotal evidence) rather than a dozen factories (229), and that he “missed entirely the work on national accounting that was developing around him” (230). His aim is hardly Marxist. It is simply demonstrating that since the eighteenth century, Edmund Phelps’s “golden rule” of r=g (r being the return on capital and g being growth of national income) is at all periods of history false, and that the ratio that reflects all of human history is r>g, which unchecked, causes a widening gap between rich and poor, which, at their greatest peaks, 1929 and 2007, caused the biggest global economic crashes in history (297). The fact that he acknowledges the time an investor spends on his investments as work (205) does not sound at all like a Marxist position to me. Indeed, he is not even a Keynesian leftist, calling Keynes’s claims of the stability of the capital-labor split “hasty to say the least, since Keynes was essentially relying on data from British manufacturing industry in the 1920s, which were insufficient to establish a universal regularity” (220).

His primary solution for democratizing the gap is an end to tax havens through a global progressive tax on wealth to replace property taxes. Seeing globalization, an enemy of true progressives, as inevitable, he sees this admittedly Utopian solution as the only one that will completely alleviate the problem, following his discussion with the shortcomings of such solutions as protectionism and inflation. He amusingly sums up the problem as Earth owing a debt to Mars, because global debt is higher than known global wealth as a result of these tax havens. He proposes that it be begun in Europe, and then expanded. This would tax the wealthy in a fairer manner, eliminate public debt, which is far exceeded by private wealth, and generally make the playing field better. He gives a wide range as to go about doing this, because it needs to be done in a democratic fashion, rather than the in the non-representative republican fashion we have in the United States. He notes that wealth taxes have previously failed historically as a direct result of excessive exemptions and tax havens. It all comes down to morals. “It is not right for individuals to grow wealth from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft” (522).

The book is not at all arid (to use Goldhammer’s word, at least). He draws heavily on comparing literary and cinematic sources to history, in particular the works of Jane Austen and Honoré de Balzac, but also Quentin Tarantino’s Django Unchained and Wolfgang Reitherman’s The Aristocats, to name a few cinematic examples of art reflecting life in a particular period of history. Père Goriot and Sense and Sensibility are his primary go-tos for artistic representations of economic issues.

One section of the book that is particularly impactful for me is his exploration of the delusion of meritocracy. As someone who was raised middle class, with my first four years of higher education paid for by a mutual fund that my grandmother started for me when I was small, to earning a bachelor’s degree with a double major in 1999, to earning a master’s degree in 2005, to becoming a resident of the New York City homeless shelter system in 2012 due primarily to lack of interviews for jobs at a livable wage. Piketty disagrees with the point of view that economic growth shows the true talents of individuals in society. “The plain fact is that this argument is often used to justify extreme inequalities and to defend the privileges of the winners without much consideration for the losers, much less for the facts, and without any real effort to verify whether this very convenient principle can actually explain the changes we observe” (85). Barbara Ehrenreich titled one of her chapters in Bait and Switch: The (Futile) Pursuit of the American Dream “Downward Mobility,” and this seems to be a universal truth for the majority in our time. Piketty goes into this reality on page 229-30. “[I]n the US case, government data allow us to measure the evolution of wage inequality with mobility taken into account: we can compute average wages at the individual level over long periods of time… And what we find is that the increase in wage inequality is identical in all cases, no matter what reference period we use. In other words, workers at McDonald’s in in Detroit’s auto plants do not spend a year of their lives as top managers in US firms, any more than professors at the University of Chicago or middle managers from California do. One may have felt this intuitively, but it is always better to measure systematically wherever possible.” He also goes into what I know from experience to be true: that education does not explain the wealth gap at all. The increase in the numbers of people with higher education has had “limited impact on the explosion of topmost incomes in the United States since 1980” (315). He notes that Raghuram G. Rajan‘s Fault Lines: How Hidden Fractures Still Threaten the World Economy is incorrect in stating that college has increased income inequality more than the explosion of the 1%. “The reason for this is probably that the data normally used by labor and education economists do not give the full measure of the overperformance of the top centile (one needs tax data to see what is happening)” (609). Throughout, he notes that little empirical analysis has been done to analyze incomes above the 90th centile.

The fact that income inequality in the United States in 2000-2010 attained a level higher than that observed in the poor and emerging countries at various times in the past–for example, higher than India or South Africa in 1920-1930, 1960-1970, and 2000-2010–also casts doubt on any explanation based solely on objective inequalities of productivity. Is it really the case that inequality of individual skills and productivities is greater in the United States today than in the half-illiterate India of the recent past (or even today) or in apartheid (or postapartheid) South Africa? If that were the case, it would be bad news for US educational institutions, which surely need to be improved and made more accessible but probably do not deserve such extravagant blame (330).

On page 332, he correctly notes that the “invisible hand” of Adam Smith is a myth, as is “pure and perfect” competition, but identifies that top executives very often have their “hand in the till” by setting their own salaries or having it set by a committee of others with like pay. He considers this terminology excessive but closer to the truth than those other expressions. He goes on to note research by Marianne Bertrand and Sendhil Mullianathan, Lucian Bebchuk and Jesse Fried (335), and by himself, Emmanuel Saez, and Stefanie Stantcheva indicating that top executives are paid primarily for luck (512): “In practice, the return on capital does not depend solely on the talent and effort supplied by the capitalist.” It’s both disheartening and reassuring to know that research backs up what we have intuitively known: that hard work and effort more often than not go unrewarded, while luck runs away with the bulk of the spoils, trouncing those with true talent.

That inequality is very unstable is denied by “Pareto’s law.” Vilfredo Pareto was a fascist who “hailed Mussolini’s accession to power…clearly had no evidence to support his theory of stability…above all wary of socialists and what he took to be their redistributive illusions,” and his information showed “a slight trend toward higher inequality, which Pareto intentionally sought to hide” (367). Any right-wing use of said “law” is clearly dishonest and full of fascist bias.

I’m not sure that this statement is true: “In North America, there is no nostalgia for the postwar period, quite simply because the Trente Glorieuses never existed there: per capita output grew at roughly the same rate of 1.5-2 percent per year throughout the period 1820-2012” (97). Assuming the last part is true, it seems like there is heavy nostalgia for the 1950s and early 1960s, particularly on the right of the spectrum. He later notes liberal Paul Krugman‘s nostalgia for this period. In Capitalism: A Love Story, Michael Moore noted that top marginal tax rates in the “good old days” were above 90%. Piketty notes that “[T]he reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to supply-side theory) or at any rate did not stimulate productivity enough to statistically detectable at the macro level” because per capita GDP in the United States and Britain have not grown faster than in Germany, France, Japan, Denmark, or Sweden, where top executive salaries have not taken off at the rate they have in the US and UK (510).

Most people who are below the middle class pay rent (unless they can’t afford rent and end up in the shelter system). On pp. 422-4, he details the way the term “rent” acquired a pejorative meaning, and not in the way I expected, which would be to stigmatize those who pay rent rather than own their homes. He describes rent as “the enemy of modern rationality.” “There is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working. There is something in this notion that is an affront to common sense and that has, in fact, perturbed any number of civilizations…” Linda Tirado in Hand to Mouth: Living in Bootstrap America excoriates those who oppose a tax on capital gains on the grounds that it has previously been taxed–so has payroll tax and unemployment insurance, but “fiscal conservatives” are never heard calling for a repeal of those taxes. As Piketty says, “Is it useful and just for the owners of capital to receive this marginal product as a payment for their ownership of property (whether their own past work or that of their ancestors) even if they contribute no new work? This is a crucial question, but not the one I am asking here” (215). Says Piketty, “I should also point out that these international positions are in substantial part the result of fictitious financial flows associated not with the needs of the real economy but rather with tax optimization strategies and regulatory arbitrage (using screen corporations set up with countries where the tax structure and/or regulatory environment is particularly attractive)” (194). Piketty describes life in the era of Jane Austen, who was herself a victim of primogeniture laws whose repeal eliminated some inequality, how the lack of refrigeration and heating and so forth made it such that only a small number of wealthy people (100,000 or so in Britain) could sustain the culture, and that this is the reason the inequalities were accepted, but the sense of entitlement among the wealthy that they externalize onto the educated poor he believes to have been largely absent and recognized for the arbitrariness and anti-meritocratic system that it was. It does seem laughable when he discusses “the latest tablet” as a “legitimate need” for wealthy people today (482). (I was given a tablet recently, and it’s so slow and hard to type on that it’s largely a toy, although I can see my e-mail if I’ve timed off the library computers for the day and am still in the building.) While inheritances were largely lost in the two world wars, he argued, inherited wealth is returning to the position it had in the eighteenth and nineteenth centuries. The fact that the average Harvard student is in the richest 2% is one example he cites that reflects this. Private wealth causes public harm. “In all the rich countries, public dissaving and the consequent decrease in public wealth accounted for a significant portion of the increase in private wealth (between one-tenth and one-quarter, depending on the country). This was not the primary reason for the increase in private wealth, but should not be neglected” (185).

These meritocratic myths perpetuate in the health care crisis, which Piketty touches on: “[I]f a private health insurance system costs more than a public system but does not yield truly superior (as comparison of the United States with Europe suggests), then GDP will be artificially overvalued in companies that rely mainly on private insurance” (92). The reasoning seems to be that those with money have earned the right to better health care. Towards the end of the book, he also touches on climate change. He covers welfare briefly on 478-9, and comments on the ire its recipients also receive, in spite of it taking up less than 1% of national income (I myself get about $500 a year in government welfare (about $0.0000001 per taxpayer), Wal-Mart gets $9 billion a year in government subsidies (about $27 per taxpayer), but the right-wingers choose to complain about me and not Wal-Mart), preferring that I take a menial job that my doctors say I shouldn’t be doing and that cannot be lived on. It’s not as though the wealthy are, as Mitt Romney put it, “job creators.” “[I]f the number of workers is one too many for the available capital stock, the extra worker cannot be put to use in any productive way” (217). The Bureau of Labor Statistics is still showing that there are currently 2.5 job seekers for every available job, about 4 million job openings and 9 million job seekers. One right-wing friend said that private charity eliminates the need for public welfare. He needs to see Josiah Wedgwood‘s The Economics of Inheritance. “He showed that charitable giving was of little consequence. His analysis led him to the conclusion that only a tax could achieve the equilibrium desired” (638). “Real democracy and social justice,” Piketty states, “require specific institutions of their own, not just those of the market, and not just parliaments and other formal democratic institutions” (424).

“In terms of the theoretical model, as well as in the historical data, an increase in the tax on capital income from 0 to 30 percent (reducing the net return on capital from 5 to 35 percent) may well leave the total stock of capital unchanged over the log run for the simple reason that the decrease in the upper centile’s share of the wealth is compensated by the rise of the middle class. This is precisely what happened in the twentieth century–although the lesson is sometimes forgotten today” (374). This is why it angers me so much that the non-rich vote in conservative politicians that support legislation that has the effect of eroding the middle class, which The New York Times reports is steadily happening. The Republicans won the 2014 midterm elections because people enjoy being lied to by Fox News, and are coached to support policies that are to their detriment. When you don’t properly tax the rich, the middle class falls into poverty. In his conclusion, he says that ultimately all of the social sciences, not just the economists, need to deal with these issues because they revolve around concepts of good and evil (he puts it that bluntly) that all citizens understand. He also encourages people not to be intimidated when numbers, which were never my strong suit (and some say this is good reason for me to be homeless, while I know plenty of people who are not great with numbers who have good jobs), become involved. Piketty establishes in his introduction that he is striving for narrative, but it is mostly one of group characters and an occasional politician or economist, or characters from literary classics (hence I didn’t add a character list as I typically do on Goodreads), such that the concepts, and formulae when he includes them, are accessible to the general reader (and he goes over them enough that the concepts eventually get easy to follow).

As a professional proofreader (or former one, if you think the skill and identity goes when the position does), I did notice many typos of the sort a spell checker cannot possibly find, such as a then/than gaffe at the top of page 564, although I failed to make a written note of most of them. The book also uses “wealth countries” and “wealthy countries” seemingly interchangeably. The former seems to connote a definitive characteristic of said country, while the latter seems to be establishing the characteristic we are discussing, without implication of overall intrinsic importance of the characteristic versus that characteristic’s salience to the discussion.  Since the Paris School of Economics presumably has no history department, Piketty’s repeated references to a fictitious “year zero” can be forgiven… sort of.

“[T]he force for divergence at the top of the wealth hierarchy would win out over the global forces of catch-up and convergence, so that the shares of the top decile and centile would increase significantly with a large upward redistribution from the middle and upper-middle classes to the very rich. Such an impoverishment of the middle class would very likely trigger a violent political reaction… only a progressive tax on capital can effectively impede such a dynamic” (439). One can only hope one of these two possibilities comes soon, and preferably the non-violent one.

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