Monday, 9 July 2018

Capital in the 21st Century by Thomas PIketty

Pages: 571 
(655 if you read all of the footnotes)

I am very late to this party.  Capital caused a sensation in the English-speaking world when its translation was published in 2014.  Every second opinion piece or economics article or political piece that I read for months referenced Piketty.  A prolific-Facebook poster of my acquaintance became an academic fangirl. But at that time I knew that I'd have limited time and mental focus for reading anything complex, so after I looked at the length I concluded that I was unlikely to finish it.

I finally read Capital in March / early April of this year.  Yes, I know it's July.  No I didn't write this blog entry at that time.

I am late to this party in more ways than one.

However I did take a few notes about the book as I read it, so I am able share a few thoughts despite my always-hazy memory.

1.  Economists don't really understand economies.  They just don't have the data.  Detailed historical economic data exists only for a few countries, for a few factors, over a limited timespan.  Not to mention that the data for different places and for different eras is inconsistent.  So there is literally no way to prove general theories about how economies work.  You can draw well-founded conclusions only for certain phenomena, or for short term trends.

Fortunately for readers of Capital, data does exist about income and wealth distribution for a few countries (France and England) over a couple of hundred years, and for a number of other (mostly developed) countries for the 20th century.  This allows Piketty to draw some interesting conclusions.

2. Insofar as we can tell, the economy of the 20th century was far from typical.  The First and Second World Wars sent huge shock waves through world economies, and in particular European economies.  The government of Britain used taxation and deliberate inflation to pay for both wars,  decimating the inherited wealth of the aristocratic classes in the process.  Yes, all of those elegies for a lost way of life (Brideshead Revisited, Downton Abbey, etc.) do reflect a real change, and not just the onset of 'modernity'.

Prior to WWI, the wealthy could count on a fairly reliable return of 4% per annum on capital with basically no inflation.  After this, while technological change did reduce the return on capital on agricultural land, inflation and taxation meant that it was far more difficult to live on the gains from accumulated capital no matter how it was invested.

Don't be sad:  the result was a vast reduction in the economic importance of inherited wealth.  This gave rise to a healthy middle class,  widespread prosperity, and the ability of motivated individuals to join or exceed middle class status based on their own talent and effort.  In other words, these conditions created a perhaps historically unprecedented era of vastly reduced inequality that allowed most of us born in the 20th century to achieve a comfortable life.

To put this more quantitatively, prior to WWI the wealthiest 10 per cent of people owned 90% of all wealth in a wide variety of nations.  Afterwards, their share of the nation's overall wealth dropped to:
  • 70% in Britain
  • 55% in Sweden
  • 60% in France
  • 65% in the US
In other words, taxation helped level the playing field so that there was something left over for the rest of us.

3.  Ronald Reagan, Margaret Thatcher, and their neo-liberal cronies were and are Bad People.  The 1980s were an inflection point in Western economies.  Before this, high growth and policies like progressive taxation lessened inequality.  Since then, inequality has increased dramatically.

We can't necessarily reproduce the high growth rates of the post-War era.  But government policies (such as inheritance taxes, progressive income taxes, or taxes on capital) can have a profound effect on how wealth is distributed in a nation.

Less inequality is a Good Thing.  It doesn't mean that virtue goes unrewarded.  Quite the contrary.  The only way that economic Virtue (thrift, industriousness, initiative, cleverness) can be rewarded is if those virtues lead to economic success.  Economic success requires that there be "something left over for the rest of us" -- which can only happen if the influence of inherited wealth is limited.

Wait a minute!  Am I talking about two different things now?  No, not at all.  How do that top 10% manage to accumulate 90% of all wealth in a nation  in the first place?  Simple: by starting with inherited wealth and then preserving or expanding that wealth over their lifetimes.   

How does that work?  Well since antiquity, in different types of economies, and in different technological eras, the return on capital seems to have averaged 4-5% annually.  This is far higher than the typical growth rate of most economies. For example, in the time period 1970-2010, the annual growth rate of Western economies has been between 1.6-2.0%.  This means that 'new money' is created at less than 2% per annum as the economy expands.  "Old money" (capital) increases at 4-5% on average.  So barring appropriate taxation, inherited wealth grows faster than new fortunes can be made.

Inherited wealth beats industry and initiative. It's just math.

There are exceptions and exceptional eras.  Growth in China since 2000 has sometimes reached stratospheric levels (above 10%).  Post-War growth in Europe was also larger than 4% -- but replacing the entire infrastructure of bombed out countries will do that for you.

In stable economies, capital derived from investing inherited wealth overwhelms capital created by economic growth every time. And redistributing the wealth of nations so that it is owned by a small fraction of its population is not good for most of us. [See The Spirit Level by R.G Wilkinson and K Pickett, which outlines the negative societal effects of inequality over a surprisingly large range of social indicators -- for rich and poor alike.]

4. What else does Piketty have to say?  Many many things.  The book is almost 600 pages long, after all.  He provides evidence for his assertions ranging from quotes from Balzac and Austen to detailed charts and graphs of various economic data.  He delves into details about the mechanics of inequality, including evidence that the largest fortunes tend to earn more than 4-5% on average, accelerating inequality in favour of the wealthiest 1% (or .1% or .01%). He even suggests a solution:  a global tax on capital.

I could write more, but I'll leave it there to prevent my review from becoming as intimidatingly long as Piketty's book.

Overall, Capital is surprisingly readable, and indisputably relevant. There's a reason Piketty took the intellectual world by storm in 2013/14.

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