Capital in the twenty-first century

Thomas Piketty, translated by Arthur Goldhammer.

Why I looked at this book

I'm interested in the economics of inequality, but up to now I hadn't really taken on board that everyone seems to be talking about this book (even Bill Gates). So of course I need to read it as soon as possible.

The other thing is that I hope that it will help me in understanding what Marx was trying to say. I know that capitalism was supposed to collapse because of problems with decreasing return on capital. Trying to read the original is too tedious, and other peoples explanations are likely to be too politicised, or not really understand what they're trying to explain (I heard one explanation that Marx's claim was that capitalism would collapse because as the capitalists squeezed the workers, they would run out of customers. That just doesn't work, what's to stop capitalists selling to other capitalists - the railway companies originally planned just to sell luxury journeys for the rich).

Keynes also discussed how the return on capital would decrease, (although I think he thought more of a soft landing into a new golden age). So far I understand that the equation r>g is central to Piketty's ideas, where r is return on capital, so I really hope that this book will help me to understand the realationship of inequality in our society with return on capital and its variation.

First impressions

What I've read in the sample has confirmed my wish to read the rest of this book as soon as possible. Some of the discussion about this book suggests that many more people are talking about it than have read the whole 700 pages, but what I've read so far has been very readable, with a clear discussion of some of the ideas of 18th and 19th century economics. If it carries on in the same way then I can't see it as a book readers get bogged down in. Piketty also makes it very clear that his first concern is to get a clear idea of what is happening in the world's economies, and not to try to make it fit some preconcieved political idea.

Impressions while reading

The book is clearly in no hurry to get to the point, with the first 2 parts concentrating mostly on capital/income ratios, not getting to the central topic of inequality until part 3. So the pace is rather slow, as with Marx, but in this case I think it helps to give a gentle approach to the subject - with Marx it just gets tedious.

I did think Piketty could have been clearer about what counts as income - at one point he says how someone using their capital to buy a house will have income in the form of accommodation, but it doesn't seemt that he counts this form of income in his calculations. There has to be a dividing line between what benefits count as income and what doesn't, and I would have liked a more definite indication of where this is. For capital this isn't so much of a problem - Piketty makes the point that 'human capital' taken literally would equate to slavery. And on the issue of slavery, at one point Piketty says that 'one has to hope that [Jane] Austen's heroes and their descendants ... follow Sir Thomas's [Mansfield Park] lead by investing a portion of their land rents abroad'. I would hope not - my impression was that Austen was highlighting the irony of Sir Thomas's brutal supression of slave unrest being the action of a fine upstanding gentleman, whilst his children going in for amateur dramatics was the height of wickedness. (Of course maybe I got the wrong end of the stick)

Soemthing else I noticed was that in the graphs the effect of economic growth was factored out. A reasonable choice maybe, but it does have a significant impact in comparing different times. In 1810 you needed to be rich to play a part in the culture of the time - most people would be working on the land. Today, especially with the coming of the internet, you can do so on a moderate income. This can work both ways - there's less reason to worry about inequality, but also less reason anyone needs to be very rich, so maybe they cancel out, but it's something to be aware of.

Having read some part 3, with the return of inequality in our society, I'm eager to get on to part 4 where Piketty says waht might be done about it.

Main review

Well this is a long book. I've heard some say that it's the sort of book than everyone is talking about, but few have read in full. That's not how I see it, in a way it is a lot shorter than it could be - there are many more issues which could be discussed. For instance one thing that Piketty mentions is that compared to 200 years ago we are in an era of supermanagers rather than capitalists - those at the top can command high incomes. I would have liked more discussion of why this is (which might help in reducing this inequality). Me feeling is that those with entepreneurial skills are able to point to those starting businesses and cashing out at an IPO or those making money from financial trading as alternatives for them if they're not paid enough in their current employment.Another thing is a study I remember reading which said that typically people thought a comfortable level of wealth was twice what they actually had. Mentioning this would have helped to explain why the rich are so set on getting richer. In any case Piketty has convinced me that capitalists will always accumulate capital faster than the rate of economic growth. This has given me a better idea of what Marx was trying to say: more and more capital looking for returns will lead to the return on capital decreasing, and thus the collapse of capitalism.

So to my views on the book. Piketty sees capital inequality as the big problem in our society, in that the top 10%, 1% or 0.1% own proportionately much more of capital than the rest. I can understand this, but I don't see it as the biggest economic problem facing society. In the US and Europe I think that this is the low income of the bottom 25% or so. This is due to unemployment, or the threat of unemployment meaning that it is necessary to accept low wages. If you're in the middle then I think its possible to have a good quality of life, even if you are a bit envious of the super rich. Well maybe with house prices as they are keeping a roof over your head might be a struggle - I would see house prices as the second main economic problem we have.

In many parts of the book Piketty refers to rentiers, that is people who live off income from capital rather than work. We tend to have a negative opinion of such people, but it's important to note that in the context of this book those who use up their capital in this way are the good guys - they reduce capital inequality. The bad guys are the ones who have lots of capital but work hard to make sure that it grows even more.

Piketty's main suggestion is for a tax on capital. No exceptions, none of 'we'll tax one sort of capital but not another' - which would lead to capital moving to the untaxed areas. He suggests a progressive tax starting at 1% for fortunes over 1 million euros. 1 million euros sounds a lot, but is it? Many people approaching retirement with a house and savings will have assets exceeding this amount, but would see 10000 euros as a substantial fraction of their annual expenditure. And it's retirement which really shows the problem of this idea: Governments are urging people to make adequate provision for their retirement (when Piketty mentions 'rentiers' I tend to mentally substitute the word 'pensioners' for a less prejudiced viewpoint) - is it going to be taxed away before they get there? 'No exceptions' means that pension pots have to be taxed. An if you tax pension pots then what about pay as you go pensions? 'No exceptions' is all very well, but you have to draw the line somewhere.

So maybe we don't tax pensions, but go in for inheritance tax - why should people live off inherited money without having to work? Well this is a good question, but remember 'good guys'. I don't see it as that much of a problem for our society if a substantial proportion of families have wealth, in the form of property and investments, is passed from generation to generation, meaning that these people can get away from the 'rat race' to some extent. Indeed, with the amount of automation (which is what the investments are invested in) we have now compared with 200 years ago, the question is why we think that we all have to work so much.

So I definitely think that the 1 million euro level is too low. In fact in most of the book Piketty is talking about the top 10% at most, so it seems illogical to then propose a tax on the top 25% (which is roughly where 1 million euros will get you). But what about those with greater wealth? A tax here seems more reasonable, but there are still problems. This will include those entepreneurs who are setting up businesses which are yet to become profitable. (They will definitely be 'bad guys' in that their capital worth will be increasing substantially) They are concentrating on getting their business towards profitability, only taking a small income, but suddenly they are told that their stake in business is worth 100 million euros and they owe millions in tax each year. This would throw a spanner in the works of any new business, and have disastrous effects on the creation of new employment.

So there's a lot that I disagree with, but obviously the book has been very thought provoking for me - the graphs that Piketty provides give a lot to think about. There's lots more that I've thought about this book which won't really fit into this review, so I hope to write about it elsewhere soon. If you are thinking of reading this book, (or have started), then don't let the size of the book put you off - it isn't difficult to read, and it might help you think of better ways of dealing with the inequality in our society.
Coming soon:
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In 1930, John Maynard Keynes wrote Economic Possibilities for our Grandchildren, predicting an age of leisure in a couple of generations. Why aren't we there yet? That's just one of the questions asked in
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