My Review Of “Capital in the Twenty-first Century”

Capital in the Twenty First Century by Thomas Piketty

My rating: 5 of 5 stars

This book is an important contribution to the economic analysis of a major issue of our times, inequality. In a time when non-economists are comfortable talking about the 1% and the 99%, it is clear that this issue has moved into the forefront of social thinking in the 21st century. But even though the title promises an analysis of the 21st century, Piketty begins with an historical look, primarily at England and France. And he uses an interesting and hitherto ignored data source, literature. By looking that the novels of Jane Austen and Gustave Flaubert he brings in the assumptions that these novelists had about the nature of wealth and income in these societies. The point here is that inequality of income and wealth are not new results of our time, they are the natural outcomes of laws of economics. His fundamental law involves the rate of return on capital (r) and the growth rate of the economy (g) and he shows that the historical data support an average return on capital of 4-5%, and an average growth rate of the economy of 1-1.5%. And from this he works out that as long as r is greater than g, there will be tendency for wealth to concentrate and accumulate.

This is not healthy for society and cannot proceed indefinitely. Something will come along to restore the balance. In the late 18th century, this would be the French Revolution, followed by the Napoleonic Wars. In the 20th century, two World Wars very effectively wiped out a lot of accumulated wealth. But the inequality is rapidly growing again, as r>g would stipulate, and the growing class of multi-billionaires and increasing numbers of trillion+ companies give evidence. So how will we restore the balance this time? Piketty’s answer is that we should do this by a graduated tax on wealth, which is surely preferable to another World War, particularly with the proliferation of nuclear weapons.

This is a long book, and may be bit heavy going, but I think it is worth the investment of time and effort. Piketty is making the observation that a democratically-controlled tax policy of taxes on wealth to restrain the runaway accumulation is better than any alternative. And while I have joked about eating the rich from time to time, I doubt they would be tasty or particularly nutritious.

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