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Reading "Capital": Part 4, Conclusion, and recap

By R.A. | LONDON

LAST year Thomas Piketty, an economist at the Paris School of Economics and a renowned expert on global inequality, published a book titled "Capital in the Twenty-first Century"—in French. It was released in English on March 10th. We reviewed the book earlier this year, but it is detailed and important enough, in our opinion, to deserve additional discussion. We will therefore be publishing a series of posts over the next few weeks—live-blogging the book, as it were—to draw out its arguments at slightly greater length. You can read the previous entries for: the Introduction parts one and two, Chapter 1, Chapter 2, Chapters 3 and 4, Chapters 5 and 6, Chapters 7, 8, and 9, and Chapters 10, 11, and 12.

AND now we come to Part 4, which focuses on the critical question of how to structure policy in the world Mr Piketty describes. As this section contains some of the book's weaker arguments, this seems like an appropriate place to end our discussion with a grand assessment of the work's biggest contributions and shortcomings. I'll start with the former.

So what are the book's main contributions? First and perhaps most important are the data. As impressive as "Capital" is, it may ultimately prove less influential and significant than the World Top Incomes Database, on which much of the book is based. That, and the data on the distribution and evolution of wealth, represent an enormous achievement and the basis for the narrative. It's worth pointing out again that Mr Piketty has been just one of many economists working to pull these figures together. Were it not for this effort, the ongoing discussion on inequality would not be as serious and relevant as it is.

Second, the book challenges conventional wisdom concerning the economic history of the rich world in several important ways. Once again, Mr Piketty is not alone in demonstrating, for instance, Simon Kuznets' view that inequality would rise and then fall as industrialisation proceeded, or that the shares of national income flowing to capital and labour are not constant. But Mr Piketty has given these ideas new prominence, and with them the view that the 20th century's dramatic compression of wealth and incomes was largely down to the one-off shock of the interwar era. Putting this all together, Mr Piketty's book goes a long way toward challenging the 20th-century orthodoxy that distribution is not particularly important.

Third, "Capital" provides a framework for thinking about how inequality might evolve in future. Mr Piketty's data give us a view of the past. He also gives us his thoughts on how things might unfold in future (albeit with plenty of caveats). But even if readers doubt his forecasts for the rate of return on capital or for economic growth, they will have a way to think about how key distributions will change, thanks to this book. Among pundits, policy discussions have already begun to reflect this: the distributional effects of possible policy changes are beginning to be discussed in terms of how the policy might shift r or g (or s, the savings rate, or other key variables).

And fourth, "Capital", by dint of its extraordinary success, has created a focal point for an important discussion. It is the right book at the right time, you might say. It has given the debate about inequality a boost, and it has provided that debate with a mechanical framework to help shape and deepen the discussion. It is undoubtedly an important book, which is why this newspaper has devoted so much space to its discussion.

Now, the shortcomings.

First, there have been criticisms of the book that Mr Piketty probably ought to have seen coming and addressed pre-emptively. Writing a book is hard, and the temptation is often to try to address every criticism a reader might possibly have. That can make for an unwieldy and less persuasive book. Given the success "Capital" has had, I'm reluctant to second-guess Mr Piketty, but it does seem as though it would have been worth dwelling a bit more on how his r relates to other interest rates. Although the secular stagnation discussion had not really got going when Mr Piketty was writing this book, interest rates on rich-world government bonds had fallen to historically low levels and looked like staying there for years to come. Given the thrust of his argument, that r is typically larger than g, the prospect of low rates for years to come ought to have merited some discussion.

Second, given the nature and potential severity of the problem he describes, the proposed solutions look pretty uninspiring. In Chapter 13, Mr Piketty briefly looks at the social welfare state and its prospects. Perhaps a much larger state would be a good thing at some point, he suggests, but not until bureaucracies can be reformed and shown capable of managing two-thirds or more of national output. In the meantime, he reckons, governments need to examine how they provide education for their citizens, and they should reform pensions. How? He writes, for instance, that, "One of the most important reforms the twenty-first century social state needs to make is to establish a unified retirement scheme based on individual accounts with equal rights for everyone, no matter how complex one's career path." Well, all right.

In Chapter 14, he turns to income taxes. He states, interestingly, that progressive taxation is important in maintaining political support for globalisation. He observes that it was famously tax-antagonistic America that first toyed with top rates above 70%, first on income and then on estates. He argues that higher top tax rates were not particularly detrimental to growth. The main effect of their reduction was to encourage executives to bargain harder for big rises in pay packages, leading to soaring top incomes but not necessarily to faster growth. As a result, he says, higher top rates would be welcome, but he is not optimistic on this score; the egalitarian spirit and pressures of war that drove initial rises in top tax rates have faded.

And then in Chapter 15 he lays out his primary recommendation: a progressive global tax on capital. This, he freely admits, is a "utopian idea" which is unlikely to be adopted anytime soon. It is nonetheless a useful thing to talk about, he reckons, if only as a reference point for other policy proposals. He describes what a capital tax might look like, and he argues that alternatives (like communism, protectionism or capital controls) would be much more costly.

And that's the gist of it. But surely there should be more. If the threat to society is that r is growing by more than g, then why not outline proposals to dramatically expand capital ownership? Why not propose a universal basic income: an inheritance, effectively, for everyone? The space allocated to Part 4 feels wasted.

And that brings us to the third shortcoming, which strikes me as the biggest. The economics gets a serious treatment in this book, but the politics does not. That's somewhat ironic; Mr Piketty winds down his conclusion by saying that economics should focus less on its aspirations to be a science and return to its roots, to political economy. But theories of political economy should be theories of politics. And there is no r>g for politics in this book.

There are nods towards the importance of the interdependence between the political and economic. He notes that epoch-ending political shifts, like the French and American revolutions, were motivated in large part by fiscal questions. Similarly, he observes that progressive income taxation tended to emerge alongside the development of democracy and the expansion of the franchise. (Though, he also admits, the fiscal demands of the first world war deserve most credit for adoption of meaningful income taxation across the rich world.) And he discusses how concern about rising inequality (often among elites) helped motivate rising tax rates in America in the early 20th century.

But the ending the book deserved was another look back at the data, to see whether patterns in the interaction between wealth concentration and political shifts could be detected and described. That's not Mr Piketty's area of expertise, necessarily, but neither is most of the stuff in Part 4. And this really is the critical question. If the most likely outcome of the trends Mr Piketty describes is that somewhere down the line a left-of-centre government is elected and passes higher top income-tax rates, higher estate-tax rates and pension reforms, and that defuses the crisis, well, that puts the rest of the book in perspective. If the most likely outcome is revolution, well, that does too. And while it would be absurd to expect Mr Piketty to say definitely whether one possibility or another is bound to occur, I don't think it's asking too much, given the ambition of the rest of the book, to think we ought to be given some sense of his view on how social and political movements generally evolve in response to widening inequality, and how that evolution tends to be reflected in policy. What good is it to suggest utopian ideas about how to fix these problems without at least gesturing toward the political mechanisms needed to bring them about?

Maybe that is grist for "Capital 2: Capitalised!". But it belonged here.

For my part, I would say I generally think Mr Piketty's analysis is on the mark, with a few exceptions related to my particular view of how labour markets have been evolving. But "Capital" was critical to me in forming that view. I think the really fascinating dynamic in this book is the substitutability between labour and capital, something Mr Piketty mentions but does not devote an especially long amount of time to. But the stories we might tell in which capital becomes a dominant, potentially malign force are those in which many of the world's workers can only hold off the automation of their work by accepting ever lower levels of compensation. But that's my hobby horse and not his, and I don't fault him for not devoting masses of pages to it.

At any rate, I am grateful for the opportunity to think through these issues and debate them, and to have views of mine upended. It's not often that a book manages that, and this one did. I hope all of you, readers, have got something out of the book, and this series, as well.

You can see the previous entry in the series here.

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