Monday, March 24, 2014

Piketty, Capital in the Twenty-First Century

Thomas Piketty’s Capital in the Twenty-First Century (translated from the French by Arthur Goldhammer, Belknap Press of Harvard University Press, 2014) was published on March 10 if you believe Amazon, or will appear on April 15 if you believe the Harvard press release. It is already beginning to cause a stir. Admittedly, some responses, for instance Paul Krugman’s, have only been promised, not yet delivered. And the reviewer for The Economist, who is “live-blogging” the book, has just finished chapter 2. The delay is understandable. Capital is a nearly 700-page book, rich in data as well as social policy recommendations. Both will be controversial.

For fifteen years Piketty’s research centered on the historical dynamics of wealth (a notion he uses interchangeably with capital) and income. His goal was to understand what drives inequality. The short answer: Inequality happens when the return on capital exceeds the overall growth rate of the economy. His solution: a worldwide progressive tax on capital.

Critics in the popular press will seize on these bullet points and denounce Piketty for what he is, a French socialist, or what he’s not, a Marxist. Case closed—and the book can remain unread. But the case isn’t closed—and the book should definitely not remain unread.

If, more nuanced critics may argue, Piketty’s policy prescription is not only unworkable (which the author pretty well admits) but fundamentally misguided (as many in the investment community would contend), does this taint his research findings? That is, did he either skew or misinterpret the data to reach the conclusion that inequality rises dramatically when countries experience the lethal combination of rising returns on capital and falling or negative economic growth?

I am not an economist, so I will have to defer to their expertise. I can say, however, that I found the historical data, quite independently of the overall thrust of the book and some of the causal links Piketty suggests, revelatory, even shocking. I realized, reading this book, how short-sighted I have become or perhaps always was. And I suspect I have a lot of company.

To take but a single example, consider the “new normal.” In a recent piece in Business Insider, Mohamed el-Erian described the concept as signaling “the likelihood that western economies would not reset in a typical cyclical manner,” that “economic activity would remain persistently sluggish and unemployment unusually high.” Piketty views the so-called new normal as a replay of the old normal in the sense that “there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.” But, he points out, “a per capita output growth rate on the order of 1 percent is in fact extremely rapid, much more rapid than many people think.” (pp. 93, 95) Over a generation (30 years) growth would be more than 35%.

In this book Piketty eschews most technical economic terms, links faceless data to English and French novels (especially those of Austen and Balzac), and sets his arguments against the backdrop of political history. I assume that Piketty takes this tack not so much to appeal to a broader audience as to illustrate his belief that economics is not a science whose doctrines can be captured in mathematical formulas. In fact, he prefers the expression “political economy” because, to his mind, it “conveys the only thing that sets economics apart from the other social sciences: its political, normative, and moral purpose.” (p. 574)

Capital is not light reading; I spent many days in its company and suspect I haven’t seen the last of it. But I consider my time to have been exceedingly well spent. The book challenges commonplace beliefs and almost compels the reader to engage in a running dialogue. I would put it on my very short “must read” list.

1 comment:

  1. Thanks for the wonderful review. I also read Krugman's review of the book. I have just purchased a kindle version but will wait to start reading when I have the time to delve into such serious and large read.