Capital in the 21st Century: A review

I have read Thomas Piketty’s Capital in the 21st Century, which puts me, ironically, in the 1% of the book’s owners. However, this absence of information on the book’s contents has not stopped the chattering classes from chattering ad nauseam about it so I thought this an opportune moment to add further verbiage to the information vacuum, focusing specifically on how it informs what we do.

The book is truly fantastic; well written, well argued, and rigorously demonstrated. It is, perhaps, a paradigm shifting economic text but runs so contrary to received wisdom and challenges economic and political discourse so fundamentally that, even if policy makers were to buy in to the key assumption of increasing wealth concentration being undesirable, nothing is likely to change. Without that policy, media or wider public buy-in, the impact of the book will likely be limited to academia, champagne socialists in student unions, and t-shirts.

The central, and well covered, point of the book is that is r > g i.e. the rate of return on capital is greater than growth and that this rate of return increases more with greater wealth, and so inequality will continue to rise indefinitely in the absence of external shocks. This point is argued, in my opinion, conclusively – over half of the book’s 700 pages are devoted to it - and the plethora of counter-arguments come from a place of ideology and fear. That point accepted, what has not been discussed as widely are Piketty’s comments on why this has happened, wider economic structures and what we can do about it.

The book’s principle recommendation is a small but progressive tax on capital i.e. total assets, ranging from 0.1% to an extreme maximum of 10%, as a way of reversing the process of increasing capital accumulation. One benefit of this would actually be to enhance the democratic process through transparency; political and economic strategies and the democracy that underpins them would be based on solid statistics about wealth accumulation. On taxation it is shown that marginal tax rates have fallen substantially in the developed world over the last 30 years to the point where current debates over low and high tax rates are not in the same ball park as historical rates. As such Piketty recommends a higher marginal tax rate, optimally of 80%, for the very wealthy but this is seen to be of limited utility when compared with a tax on capital. The primary motivation here is to limit the incentive for exorbitant, self-determined executive pay, although this is not convincingly argued. For both of these measures the author argues convincingly that there will be no negative impact on productivity.

If inequality is accepted to a problem and a tax on capital, or to a lesser degree higher marginal tax rates, are seen to be the solution, then Piketty is less particular about what to do with the proceeds. He rightly states that social spending should not be seen as redistributive as access is equal for all, indeed in the case of pensions, the rich get more, but he stops short of saying we should spend more on x, y, or z, save to say that there should be minimum access standards to healthcare, education etc. One reason for this is that Piketty frequently alludes to the fact that neither of these measures are likely to raise a great deal of revenue, dependent on the rates set. Therefore, the book sees the imperative of introducing such measures as arresting societal collapse, in terms of averting crises of both growth and democracy. On debt however, Piketty sees a one of Capital tax as potentially rectifying the undesirable situation of governments owing money to capital, further exacerbating inequality; governments should rather tax than borrow from wealthy individuals. On inflation, Piketty demonstrates that this is in fact desirable as one form of redistribution, but it is relatively ineffective as wealth held in property and other assets will continue to appreciate and contribute further to inequality.

From my own analytical perspective I see only one contentious yet uncontested point in Piketty’s arguments, and it is a fundamental one. Piketty arrives at his conclusions with the predisposition that equality is the foundation of a democratic society. The overriding focus of the book throughout is on the rich rather than the poor, but because the rich are getting richer doesn’t necessarily mean the poor are getting poorer, depending on the definition of poverty. One trend highlighted by Piketty but not used to inform his conclusions is that median incomes are also increasing. We are no longer faced with a landed gentry but with a larger and growing elite, thus there is a shift in political power towards richer people. Further, Piketty’s assertion that this runs contrary to the foundations of a democratic society are not explored in any depth. To play devil’s advocate, imagine a fully transparent situation where, in a free and fair democracy, it was apparent that wealth was continuing to accumulate to the richest in society but that everyone was able to enjoy a better access to goods and services and experience a better quality of life. While the voting public – particularly those at the lowest end of the income spectrum - are unlikely to see this as a desirable situation, when faced with an alternative of a more equal form of lower growth where their access to goods and services stagnates or even reduces, they may in fact chose the more unequal configuration.

From international development’s and Springfield’s perspective, Capital is of limited relevance, particularly in the short term. Indeed, Piketty sees many of the current geopolitical forces as redistributive on a global scale – read China’s growth. However, there are two points worthy of attention. The first is that inequality exists regardless of development status. Growth, at the technological and productivity frontier will not exceed 0.5-1.5% in any sustained fashion. High growth rates in emerging economies are a form of catch-up and, should a point of competitiveness be reached, there is no inherent reason why inequality will be reduced. This point serves as justification for poverty reduction being focused on poverty rather than solely on growth.

The second point is more technical, tenuous, and policy – rather than operationally - relevant in nature and but serves to reinforce a common and often intractable constraint on our work. Globalisation – or more accurately the political structures that underpin it - is having a negative effect on many developing countries. Picketty sees the difficulties in implementing his recommendation of a tax on capital, and indeed much of the reasons why it is necessary, as products of either the presence or absence of international coordination. The proportion of national income received in taxes is lower for developing than developed countries as they seek to compete for investment in a world where capital flows ever more freely; and the gap is widening. This constrains the ability of developing country governments to implement effective social spending. The WTO, the Washington Consensus, and other international political pressures have all had some part to play in this, and trade liberalisation has been coerced in developing countries with no hope of tax revenue substitution or competitive industrial development. A tax on capital faces the same barriers to success. Small islands with few resources have little incentive to comply with regulations which limit their major economic activity. Piketty recognises this an proposes that such measures start at a regional level, such as the EU, with the theory that the market represents too great an opportunity – culturally, socially, and economically - for companies and individuals to flee on the basis of restrictions on capital.

A good book, an important book, but not one that’s going to change the face of development any time soon...

* this article was originally posted on the Springfield Centre website

© 2020 Agora Global Ltd.