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50 Economics Classics: Capital in the Twenty-First Century

50 Economics Classics: Capital in the Twenty-First Century

Capital in the Twenty-First Century

Thomas Piketty

Inequality has long been part of the French political debate, but it has now become a hot issue in America and Britain, too. In Capital and the Twenty-First Century, Thomas Piketty seeks to expose the canard of orthodox economics that ‘a rising tide lifts all boats’.

In fact, he argues, this was true of only a relatively short period, in the ‘Trentes Glorieuses’ (or 30-odd years following World War ll). According to him, as this period has long since ended, only big public policy gestures can save Western countries from being dominated by a combination of the meritocratic elite and the inherited rich.

Piketty devotes several pages to discussing the work of American economist Simon Kuznets. The ‘Kuznets curve’ shows how, in the early stages of industrialisation it is capital rather than labour that benefits most because capital is able to profit from new technologies. But as industrialisation matures, a greater proportion of society can receive its fruits in terms of higher real wages: ‘A rising tide lifts all boats.’

Piketty agrees, but notes that real incomes did not expand for Britain’s factory workers until the last third of the nineteenth century, generations after the Industrial Revolution had begun.

If the Kuznets curve isn’t real, where does it leave our societies? The signs in our own era are not good; new information technologies have created massive fortunes for a few, while wages for the majority have gone up very little.

Piketty points to the uncomfortable mathematical fact that in periods of slow economic growth (such as the rich world is in now), the share of capital in national wealth grows faster. Instead of doing the hard work of building a company and investing in people, it is more profitable for the better-off to collect dividends on real estate, shares and other capital. Greater property rights, freer markets or increased competition won’t make the situation any better, Piketty says, because more perfect markets tend to help capital more than they do labour.

Capital’s comeback

For most of human history, there was virtually no growth in productivity, only in population. The Industrial Revolution changed all this. The period 1700-2012 saw a 1.6% growth rate, half of which was due to actual growth in productivity per head. That doesn’t sound like much, but consider that over a 30-year period, a growth rate of only 1% will see an increase of standard of living of about a third.

The 30-year period after World War ll saw very high growth thanks to a lucky combination of a baby boom, advances in technology and rebuilding efforts after the war. But with world population growth now slowing, the chances for high growth for rich countries are small.

Before World War l, the bulk of Europeans worked their whole lives for a pittance for people who never had to work. The wealthiest 1% of the population in France and Britain owned fully half of each nation’s wealth.

The rise of a propertied middle class, comprising 40% of the population, was therefore one of the great changes of the twentieth century. It happened partly because the wealth of the top 10% was cut in half (due to war, depression and pro-labour government policy). Many more people now had to work, and wages became more important as the source of wealth.

But in the early twenty-first century, Piketty notes, wealth has made a comeback, and we are returning to the capital/income ratio seen in the eighteenth and nineteenth centuries. In short, a new Gilded Age.

The case for a global wealth tax

Piketty assumes that the rate of growth at a world level will drop to just over 3% until 2050; then it will fall to 1.5% from 2050 to 2100, which was the global growth rate in the nineteenth century.

Meanwhile, the rate of return to capital will stay steady at between 4% and 5%, as it has done throughout history. Therefore, he suggests, the only thing that can stop the domination of capital over labour would be a global tax on capital: an annual tax on the net value of assets a person has minus any debt. The alternative is the rise of nationalism, which brings with it protectionist policies and capital controls.

Final comments

Critics say that Piketty’s solution focuses too much on redistribution, when simple growth can lessen inequality. Perhaps he is also wrong to see the past as a guide to the future.

Recent research on the fabled ‘elephant chart’, a graph which seemed to show global inequality on a steep rise since 1980 (imagine the elephant’s trunk reaching into the air), shows the trend is not as steep as was once thought. We may never see a return to the income-equalising era of the Trentes Glorieuses, but neither, perhaps, is increasing inequality the inevitability that Piketty fears.

Copyright © Tom Butler-Bowdon, 2017. The above is an abridged extract from 50 Economics Classics by Tom Butler-Bowdon, published by Nicholas Brealey Publishing.

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