Capital in the Twenty-First Century

Capital in the Twenty-First Century, a book by Thomas Piketty Intelligenthq

To the less attentive ones, there is a name out there causing a swirl of mental turmoil and debate, particularly concerning the controversial topics of economics and inequality: Thomas Piketty.

Thomas Piketty is a French economist that was born in 1971. His parents were students when the French revolution of 1968 occurred, who became disillusioned  by the failure of near-revolution of May ’68, and led an alternative lifestyle. Piketty studied abroad, and lived for a short period of time in the United States. Currently he is the director of studies at École Des Hautes études En Sciences Sociales (EHESS) and professor at Paris School of Economics.

Thomas Piketty skyrocketed to the status of “economics star” due to his latest book: “Capital in the Twenty-First Century” published last year in France, and recently translated and published in English. The book, seen as a kind of remake of Karl Marx´s The Capital, led newspaper “The Economist” to entitle Piketty as being “a modern Marx” and triggered a broad and energetic debate on the book’s main quest: the reason behind the rising inequality still haunting our highly developed technological society.

The book was an immense success, having sold more than 200 000 copies, becoming an economics blockbuster and a “must read” to the young progressive intelligentsia: it reached number one on The New York Times bestselling hardcover nonfiction list in May 18, 2014, gaining so much attention from the press and public opinion, that some analysis of the book, done by important newspapers proclaimed that this important piece of scholarship will originate a shift in the focus of economic policy, toward distributional solutions.

In “Capital in the Twenty-First Century” Piketty analyses an immense quantity of data coming from 250 years, as a way to trace the evolution of inequality since the Industrial revolution. His conclusions resulted from a decade of research done collaboratively, and were drawn thorough statistical and historical analysis. According to a writer in The Economist Piketty’s work revisits 200 years of economic thinking on inequality offering us an alternative take on inequality and capitalism.

Until now, generally, the main reasoning concerning inequality, relied on a tradition pioneered by Karl Marx, who believed that capitalism would perish, dissolving itself due to its inherent contradictions. A possibility for this dissolution was capitalism endless pursuit of diminishing profit returns.Various scholars have supported this theory through varied points of view, such as Jeremy Rifkin, that recently published his book The Zero Marginal Cost Society. Another radically different stance on the same issue, was the one put forward by the work of Nobel prize winner Simon Kuznets, who supported in his research the scenario that the inequality gap would inevitably shrink, as economies develop and become sophisticated.

In an interview for The Guardian Piketty tells us how his analysis of a great deal of historical data led him to sketch a different picture: “I saw a pattern beginning to emerge, which is that capital, and the money that it produces, accumulates faster than growth in capital societies. And this pattern, which we last saw in the 19th century, has become even more predominant since the 1980s when controls on capital were lifted in many rich countries.”

Quote by Thomas Piketty Intelligenthq

Just before the industrial revolution western European society was obviously unequal. Society was structured by a rigid pyramidal class structure, on top of which sat the rich families. Then, Industrialization resulted in some slow social innovation and the beginning of some alteration to a millennial hierarchical system that had reproduced until then, inequality. Measures such as the raising of the wages of workers, paid holidays, and raising social awareness slowly originated more equality in society. With the turmoil and chaos brought by the two great wars and the great depression, new and profound alterations would soon happen afterwards in society: the welfare state started to flourish and spread throughout Europe and inequality faded slightly, as both income and wealth became distributed in a more egalitarian way. But according to Piketty´s narrative, analysis of subsequent historical data reveals that such beneficial trend, would soon be reversed. Now, wealth and inequality are rising once again, to unexpected levels.

And why is that ?What he proposes in his book, is a major theory that states that wealth keeps growing faster than economic output. This is defined by him as in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate). Another way to put it is that if all other factors are equal, when there is faster economic growth in society, less importance is given to wealth. On the other hand, slower economic growth will increase wealth, which results more from from “r” than from labour. Therein this wealth will tend to accumulate more among the top decile and centile, increasing inequality. Ultimately, the central thesis of the book is that inequality is not an accident, but rather a feature of capitalism that can only be corrected through state interventionism.

The following animated video, explains in three minutes Piketty central argument:

The conclusion is that capital, he argues, is blind. If the state doesn’t intervene, wealth will just climb to unimaginable levels, while inequality will continue to grow. A statistical look at income explains as well his argument very well: Inequality of wealth in Europe and US is broadly twice the inequality of income – the top 10% have between 60% and 70% of all wealth but merely 25% to 35% of all income. As Piketty explains in the mentioned interview published in the Newspaper The Guardian “income is a flow – it moves and can grow and change according to output. Capital is a stock – its wealth comes from what has been accumulated in all prior years combined.

Mr Piketty is brave to propose solutions: In his opinion, governments need to be more proactive, and a global tax on wealth is mandatory: “What I argue for is a progressive tax, a global tax, based on the taxation of private property.”

As we can anticipate, his solutions, are not welcomed at all by the richest sectors of society. His book raised huge controversy, and originated a series of articles on the Financial Times, written by Chris Giles, that debunked Piketty’s conclusions, by proceeding to a painstaking analysis of his data, claiming to have discovered mistakes and unexplainable entries in Piketty spreadsheets.

Paul Krugman, who mentioned  Piketty´s book to be an “epic” and a “sweeping vision” came in defense of Piketty’s work, dismissing Giles conclusions, by pointing out to us what seems to be a commonsensical evidence: Inequality is a fact!

As the nobel laureate writes: “In short, this latest attempt to debunk the notion that we’ve become a vastly more unequal society has itself been debunked. And you should have expected that. There are so many independent indicators pointing to sharply rising inequality, from the soaring prices of high-end real estate to the booming markets for luxury goods, that any claim that inequality isn’t rising almost has to be based on faulty data analysis.

One way or another “Capital in the Twenty-First Century” made it to be the greatest sensation of this year and promises a continuing debate on one of the most vital questions of our times: how to end inequality by redistributing wealth to all sectors of society.