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Home , Thomas Piketty

Policy Perspectives | Volume 22

The Working Class Hero: Piketty’s Capital in the Twenty-First Century Capital in the Twenty-First Century Thomas Piketty Translated by Arthur Goldhammer (Belknap Press, 696 pp., $39.95) By Nicholas Mastron

Thomas Piketty’s magnum Tracking four of his economic opus launches a broad reconsideration predecessors, Piketty develops the of the wealth inequality question by framing for his analysis. Malthus, he identifying opposing economic forces. argues, addresses the apparent as- Simply put, or sociation between class struggle can be shown by a sim- rates and income inequality, while ple equation: the total rate of return Ricardo constructs the role resource on capital (r) exceeds the total growth plays in the theoretical de- rate of the economy (g) or (r > g). velopment of the same inequality. Historical evidence, though, suggests For Piketty, capital––rather than that knowledge serves as the primary resource––scarcity creates the ulti- tool for closing this inequality gap. mate problem of inequality, which Piketty employs a three-hundred-year leads to his Marxist discussion. Marx historical analysis spanning more proposed that the rise in capital and than twenty societies to support this the stagnation of incomes question core argument and derive his unique the equity of . While methodology. Divided into four sec- Piketty holds this to be true and aptly tions, the book first defines income names this seminal work after Marx’s and capital, subsequently introduces Das Kapital, the methodologies and specific case studies, then constructs the apocalyptic epistemology Marx a new theoretical and methodological used are now outdated (Piketty 9). framework for addressing the in- Furthermore, Piketty suggests that equalities present between capital and how we track a persons’ income, income, and finally posits far-reach- chiefly through surveys, ing policy responses to the issues is also outdated. Here, he brings in stemming from these gaps. Piketty the fourth and final thinker, Kuznets, thus reconceives the epistemology of who contends that tax records reflect economic research on distributional a much more realistic picture of the equity. income problem. 102 10.4079/pp.v22i0.15115 Mastron

To grasp the core proposition, inequality among states. Chapter convergence and divergence must be 2, entitled “Growth: Illusions and understood in relation to the income- Realities,” serves to break down the capital, or wealth, conundrum. notion that economies become more Diverging income and capital ratios equal over time, demonstarted by the result in greater class distinctions, , which is derived from whereas converging income and data collected during the historical capital ratios result in a more equal rarity of the post- II boom state. However, societal institutional in both productivity and population. knowledge and economic education However, the inequality between directly correlate with a country’s capital and annual income from 1900 financial mobility and infrastructure until 2014 (instead of just post-WWII) in supporting large-scale . is in fact a U-shaped curve, the op- In short, a government’s efficiency posite of the Kutznets curve. Wealth and legitimacy determine this knowl- inequality measured relatively low edge spreading, thereby determining for forty to fifty years (roughly 1930- the effect to which wealth inequality 1980) due to the massive capital pervades a system. destruction resulting from the World Chapters 1, 2, 3, and 4 build Wars, but higher capital-to-income upon this discussion of the inequal- ratios existed within the rentier state ity r > g and posit the foundation before this period and have returned and nature of Piketty’s First Funda- since the market liberalization poli- mental Law of : the share cies of many countries (i.e., the “Big of capital incomes––that is, income Bang” reforms and “”). derived from capital possessions, Thus, the chapter outlines a historical such as financial, real estate, or firm revision of productivity growth and machinery––within total national in- population growth over the last three come (real GDP plus income from hundred years, with each type of abroad or α) equals the real rate of return growth equally responsible for total on capital (r) multiplied by the ratio economic growth (see Table 2.1 on p. between capital and annual income 73). Under low cumulative growth (β), or simply α = rβ. Piketty also rates, societal progress stagnates defines this capital-to-income ratio and becomes a significant barrier to (β) as wealth. As this share of capital changing generational outcomes. In incomes increases, two things occur. short, these historical advantages and First, capital owners become richer, decisions contribute to a country’s and Piketty uses the United Kingdom ability to economically grow, because as his primary case study to support even when growth rates decline, past this argument. Second, unless these economic and societal gains reinforce capital owners consume their entire the now-diminished benefits reaped. return from capital, they will have Piketty distinguishes pub- more to reinvest in other ventures lic wealth and debt from private in than otherwise, accelerating capital chapters 3 and 4. He uses historical accumulation over time, increasing records to show that most capital inequality. wealth was held in land prior to 1800. First, Piketty focuses on the Then, the nineteenth century saw the macroeconomic question of economic capital wealth shift into real estate 103 Policy Perspectives | Volume 22 and industrial capital. During the causing many to call for its elimina- nineteenth century, large government tion by the 1980s. Piketty concludes debts (deriving in part from civil and by stating, “debt is the vehicle of continental warfare) were financed important internal redistributions through private wealth, leading to the when it is repaid as well as when it is rise of the rentier state––an economy not” (135). based in large part on specific pri- This debt warning hints at vate patrons’ support––with wealthy why chapters 5 and 6 focus on Pik- citizens collecting steady, significant etty’s final theoretical law, or the incomes from government debt hold- Second Fundamental Law of Capital- ings. This primitive patronage system ism: the ratio of capital to income (β) within war-torn Europe constituted equals the rate (s) divided an early private-public partnership by the economic growth rate (g), or model that resulted in the working β = s/g. It should be noted that this class outcry embodied by Marx and equation is true in the long run, but other socialists. This ultimately led it does not hold in the short run. to the suspicions of public debt that Over the past 30 to 40 years within Marxists saw as profiting only the developed economies, retrenchment rich. While national capital remained in both technological innovation and relatively unchanged, private capital population growth has caused an expanded at a much greater pace than increase in wealth, or β, as compared public capital did, as capital owners to income. These high-, low- owned an increasing proportion of growth economies additionally yield the state through their debt holdings. more foreign investors that posess Conversely, the period from significant foreign capital, increasing 1920 to 1970 shows another vast the share of capital incomes within increase in public debt due to geo- that country. Would-be entrepreneurs political conflict, but this debt erodes become rentiers, creating a market for much more quickly than the previ- public debt patronage and driving r ous century’s war debts due to high even higher. and strict financial controls. Descending to the microeco- The rentier state could not continue nomic level, Piketty argues perhaps and subsequently diminished, while the most interesting point in his work: public debt during this time soared capital and labor’s elasticity of sub- to assist those people under severe stitution, or essentially the ability of a economic pressures. Again, the ratio firm to replace humans with machin- of national capital to national income ery, currently appears to be greater holds constant during this period, but than one, differing from pre-1800 the distribution of national capital levels (233), implying that capital favors a wider audience. Without the pays more than labor. He elaborates assistance of wealthy individuals, upon this through a literary example governments turned to businesses for known as Rastignac’s dilemma: if the necessary finances. Furthermore, one can simply earn with- many states sought higher inflation out working, then why toil all day? to help alleviate the long-term bur- People with wealth are able to make den on firms. However, inflation is more money on their investments a rough tool for debt management, than people who labor for a living. 104 10.4079/pp.v22i0.15115 Mastron

Since the 1970s, capital’s stock and its after Reconstruction, the American share of total national income have society significantly departed from a increased, reinforcing the above sce- fairly balanced capital-income ratio. nario. Coupled with a slowing growth Essentially, the argument deduces to rate and an increasing savings rate, the natural inequality of the distribu- capital’s power has increased within tion of capital as opposed to labor. society, and Rastignac’s dilemma has Data from the World Top Incomes reemerged, prompting many to recon- Database show that labor inequality sider the capital inequality question. among economic subgroups, orga- However, Piketty’s model nized into centiles, remains fairly hinges on the r > g inequality, which moderate, which should be expected. prompts consideration of the sticki- Yet the distribution of capital is ness of the rate of return to capital. increasingly unequal, and this trend The high elasticity between capital holds for almost all of the countries and labor substitution along with the included in this study. increasing returns to wealth hold- The interwar period (roughly ers (those aforementioned rentier 1915 until 1945) destroyed or “eutha- investors) keeps the weighted capital nizeed” the society of rentiers rather returns high. Restated, if the capital- than their simply being bested by to-income ratio increases so drasti- what Piketty refers to as the “society cally, wouldn’t the marginal return to of managers” (276-278). Yet, con- capital actually decrease, potentially trary to popular Marxist-inspired flipping the inequality equation? beliefs, enhanced collective bargain- Because Piketty’s model is more in ing and rising worker productivity line with the Malthusian tradition had minimal impact in undermining of demographic considerations of capital’s societal power. Instead, this ever-increasing population growth, interwar euthanizing allowed for this technical pitfall in his argument greater societal mobility due to the is worth noting even though history harsh economic impact that the wars suggests that this is not the case. had on the previously wealthy aristo- The third section of the book crats who had been protected by their addresses the structure of wealth and economic systems for their purchase income inequality over six chapters. of public debts, an argument Piketty Chapters 7, 8, and 9 all center on the employs vast amounts of real estate nature of income, while the latter and financial information to supple- three chapters consider income’s ment. Here, Piketty finally exposes relationship to capital. This relation- the goal of his work: “to compare the ship is actually between labor and structure of inequality in societies capital, given that labor is the source remote from one another in time and of income in the Piketty model. Fo- space, societies that are very differ- cusing on the concentration of income ent a priori, and in particular societ- argument, most people could not ies that use totally different words work their way into a better living and concepts to refer to the social until just before the World Wars. The groups that compose them” (252). In , outside of its southern doing so, Piketty returns to discuss- aristocracies, was originally a dis- ing class struggle, but he views the tinct exception to this principle, but actual problem as a centile struggle; 105 Policy Perspectives | Volume 22 this struggle emerges as the political are equally valued. Absent these control of capital really rests with the population advantages, Piketty calls top 1 percent of an economy, as op- for bureaucratic reform and for a uni- posed to the top 10 or even 5 percent fied retirement scheme based upon of an economy, who only saw modest individual accounts. In the closing or proportional gains to their wealth paragraphs of the chapter, the focus statuses. This is the purported causal shifts to the future of the welfare state link between capital and income in poor and emerging economies, but upon which the book is premised: this assessment indicates a greater capital controls income at a systemic need for research, where other schol- rather than just personal level. Hence, ars like Jeffrey G. Williamson have Piketty’s title reads only Capital, not begun historical economic analyses. Capital and Income, because capital is Chapter 14 evaluates income income of the richest sort, and thereby taxes, and argues for the potential culprit of inequality. reform. Although high taxes on the Piketty uses chapters 10, 11, richest populations would yield mini- and 12 to demonstrate that the real mal revenues, higher marginal rates rate of return on capital has histori- for top income earners would argu- cally been greater than the economic ably dissuade those earners from ask- growth rate, showing that this is not ing for higher salaries. Piketty uses a recent phenomenon. So if the dis- the US as an example, where dur- tribution of capital is almost always ing the 1960s and 1970s, the top US more unequal than the income dis- marginal tax rate was about 90 per- tribution, a concentration of wealth cent, which Piketty claims eliminated accumulates more quickly with access the main reasons for seeking higher to and control of capital, implying salaries. Now, the top US marginal that wealth control has always been tax rate is only 25 percent, which does held by society’s richest. not effectively dissuade higher sal- The final section of the book, ary attainment. Taxation, therefore, chapters 13 through 16, analyzes is a potential tool to curb the politi- potential regulatory frameworks for cal power of the richest members in capital in this century and the future a society by reducing their ability to outlook. Piketty begins in chapter 13 accumulate wealth through grossly by analyzing the welfare systems in inflated salaries. Now, a radical theme Sweden, , the United Kingdom, emerges within these policy recom- and the United States. He claims that mendations, separating Piketty from France, the United Kingdom, and the others: the implication in each of United States are inapt to manage the these suggestions that markets are demands placed upon their welfare indeed limited in their ability to ef- systems by their large populations. fectively institute equality, requiring Based on these outlooks, though, politics to intercede. smaller-populated developed econo- Chapter 15 outlines Piketty’s mies, such as those in Scandinavia, primary policy recommendation: a particularly Sweden, have stronger progressive and global tax on capi- prospects of retaining or regaining a tal. As stated previously, the profit balanced income-capital ratio, one in from capital investments is income to which the returns on labor and capital those who currently own the capi- 106 10.4079/pp.v22i0.15115 Mastron tal, rather than just relying on labor ing for a return to income (which most people rely on). within his policy recommendations, Therefore, a tax on capital could which he, himself, does not employ institute an income redistribution that substantively in his analysis. Perhaps could benefit a state. Admittedly, this he is establishing the baseline here for proposal suggests a highly unlikely a second exposé, Politics in the Twenty- policy outcome, but it deserves at- First Century. tention if only as a future reference Piketty’s work introduces sev- point and ideological foundation for eral revolutionary aspects to policy policymakers. One could argue that analysis and economic theory that here Piketty exits the academic realm must be critically assessed. First, the and enters the domain of concerned alternative methodology, inspired by citizens, and this is even present in Kuznets, highlights the inadequacies the work’s structure. Both the diction of relying on household survey data. used within these four policy chap- These traditional datasets, such as the ters and the relatively small space American Community Survey for the devoted to each suggestion indicates United States, are by nature depen- this stylistic shift. Furthermore, Pik- dent upon voluntary–– rather than etty speculates upon the proposed required––information. By using tax tax’s nature and its cost compared to records, Piketty shifts the burden of other systems, such as those in com- informational accuracy in analyzing munist or authoritarian states. The to governments’ ac- capital tax would force individuals to counting bureaus. Shifting to govern- declare their real wealth, as is already mental accounting of wealth might the case for income, suggesting that additionally prompt further efficiency the problem is also an accounting one. considerations and policies for un- This chapter additionally probes into derstanding taxpayer wealth rather three topic areas: the Chinese system than just income. Piketty’s extensive of capital control, redistribution of compilation of the records within the fossil fuel rents, and the possibility of World Top Incomes Database broad- redistribution through immigration. casts the latent potential of newer and Unfortunately, Piketty of- more complete economic resources. fers only superfluous commentary However, this tax return meth- rather than substantive critiques on odology also poses some legitimate is- these topics by not actually discuss- sues. First, tax returns are not always ing country-specific policies at any filed, potentially failing to capture the great length. Thus, Piketty’s weakest full scale of income disparities. Sec- points remain his policy recommen- ond, fiscal units, not necessarily indi- dations, as he does not identify in any viduals, serve as the basis for returns. of the systems surveyed the legal and This obfuscates the exact magnitude financial barriers to enacting his sug- of the income as well as capital ratios gestions. Politics is virtually ignored among economic subgroups. Another in his model, and this shortcoming potential pitfall in reliance upon tax merits greater attention, especially records is the changing definition of given his otherwise scientific exami- income, as various types have not nation of the volume’s critical ques- always been accounted for in the data tions. Piketty closes the book by call- (e.g., Social Security income in the 107 Policy Perspectives | Volume 22

United States). A related problem is economic access to the partial pub- Piketty’s definition of wealth, which licly subsidized protection of capital accounts for nearly any transferrable controllers. asset that could potentially generate a Finally, the slaying of conven- financial return. This broad definition tional economic wisdoms, rhetoric, represents a major point of contention and rules of thumb through the use among scholars and policymakers. of long-term historical and economic Very few consistent tax and income evidence constitutes the greatest shift accounting policies have lasted over Piketty and his school of thought the entire scope of this long-term have made on a very broad level. analysis. Problems in defining wealth Some of these slain axioms include and income could skew results to- the basic tenets deriving “trickle- ward greater disparities in the very down ” and the basic long run. economic growth theory that claims Piketty’s economic forecast- that income equality derives from a ing, holding the growth rate of the stronger national economy. Piketty is economy constant at 1.5 percent, fa- the twenty-first century working class cilitates a discussion about the effects hero in this devotion to income and of capital and income both on the wealth inequality. That said, Piketty macroeconomic and micro-cultural differentiates himself by not attacking levels (such as Piketty’s reliance on the business industry, per se; instead, French literature) throughout history. he is challenging the business phi- Inequality has mattered, presently losophies at work in many of these matters, and will continue to mat- economies. I concur with many schol- ter, given the direction and intent of ars that Piketty’s school of thought es- Piketty’s illustrations and evidence. tablishes a socioeconomic theory that Piketty’s linkage between present-day is both mature and detailed enough to income inequalities to labor inequali- lay the foundation for policymaking ties provides critical evidence to in the twenty-first century. tie Marxist concerns over workers’

Nick Mastron, originally from Memphis, Tennessee, earned his undergraduate degree in 2014 from the University of Memphis, majoring in Political Sci- ence, Economics, International Studies, and History and minoring in Spanish and Legal Thought/Liberal Arts. While an undergraduate student, Nick held positions at various nonprofits, including the Tennessee Intercollegiate State Legislature, Operation Broken Silence, the Memphis Area Women’s Council, and American Model United Nations. An Eagle Scout, Nick always wanted to be a public servant, which led him to work on political campaigns, develop a model United Nations program at the University of Memphis, serve as an aca- demic tutor, and finally move to Washington, DC, to attend the PhD program in Public Policy and Administration at the George Washington University, where his specialization is in Gender and Social Policy. For fun, Nick enjoys playing baseball, supporting the New York Yankees, and reading.

108 10.4079/pp.v22i0.15115 Mastron The reviewer dedicates this work to Darcy Sharp, his best friend and loving fiancé, for the long nights spent theorizing and sifting through these complex societal problems of income and capital while also binging House of Cards and The West Wing. He also acknowledges the supreme editing abilities and dem- onstrated empathy of Mathew Vicknair and Christine Mellen, without whom this review would remain infantile.

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