Bits of Books - Books by Title

Capital in the Twenty-First Century

Thomas Piketty

(London Times)

The great books of a lifetime divide according to those that tell you what you knew already but lacked the words to formulate, and those that teach you the wisdom to change your mind. In the first category I count Dickens, Mill and Orwell, who articulated, for me at least, what had been, until I encountered them, a juvenile and inchoate passion against injustice. Into the second category, later in life, fell the great liberal critics Burke, Berlin and Popper, whose unblinkered wisdom made me understand that practical remedies are worth a thousand utopian dreams.

The big question posed by the book of the hour, Thomas Piketty's monumental bestseller Capital in the Twenty-First Century is just this: what sort of book is it? A book that supplies words and graphs for those who knew it by instinct already? Or a book that moves minds and changes the argument? On the political left, first in America and now in Britain, Piketty is on a garlanded tour. In theatres across both lands he supplies the intellectual left with a densely plotted vindication that, when they said inequality was the great injustice of modern politics, they were right all along.

Piketty speaks for them when he argues that the gap between the rich and the poor is rising again, after a hiatus marked by the start of the First World War and the end of the Second. The wars eroded inherited, dynastic wealth and brought forth progressive policy through the state. These changes now look like a historical aberration as capitalism, Piketty says, has resumed its usual trajectory towards greater inequality. This trend has been helped along by the happy game played only by corporate super-managers, in which they award other corporate super-managers silly money, in a closed and charmed circle. I have met many such people, all of them highly intelligent, yet the task of defending their pay settlements turns every one of them without exception into a fool.

These ill-earned gains then feed a second trend, says Piketty, which is that the return on capital (property, share dividends, land and so on) is higher than the growth rate. In rich countries, the per annum growth lies between 1 per cent and 2 per cent. The return on capital is, on average, more than 4 per cent but less than 5 per cent. Therefore the gap between those who enjoy the fruits of wealth and those who rely on the wage packet for their income is growing and will keep on growing, especially as technology replaces manual labour.

In Europe, the wealthiest 10 per cent take about 35 per cent of the income but 70 per cent of the wealth. If the return on capital exceeds the return on growth in the long run, then the entrepreneurs of tomorrow will never catch up the entrepreneurs of today and, still less, the rentiers of yesterday.

This is a major claim, which explains why a book of left-wing economics is selling so well in America. It is also the place to start for an explanation of the cocktail of resentments that put Ukip in double figures in the opinion polls. The modern economy, says Piketty, is not rewarding hard work. We are heading, he says, back to the Belle Epoque captured immortally in the lecture that, in Le Pere Goriot, Balzac puts into the mouth of the rapscallion Vautrin. He commends to his friend Rastignac the virtues of marrying into money rather than the fool's game of trying to make it.

Piketty's solutions exist in the realm of political fantasy. He wants a global wealth tax and a levy of 80 per cent on incomes above half a million dollars. Despite reports to the contrary, none of the professor's solutions is being taken seriously in Ed Miliband's office. A gradual shift in the burden of taxation from income towards wealth is feasible and desirable, though. So is an attempt to spread wealth and the joys of capital. A share-owning democracy sounds like a good Labour clarion call, under Mr Piketty's banner.

It is a shame, in a way, that Piketty essayed any solutions at all that have allowed his critics on the right to cast him in the light of utopian unreality. His book works best as a critique of the present and as a warning of a future into which we may walk, blind. Perhaps Piketty is wrong. He has a tendency to read too much from population projections and it may be that the endless ingenuity of human beings under capitalism engineers another revolution in productivity. It may be that the returns to capital fade back below their super-normal level.

If Piketty does turn out to be wrong he will have been merely interesting. If he turns out to be right, though, his book is profound. That something unjust is happening is surely clear. Between 1977 and 2007 the richest 1 per cent of Americans took an astonishing 60 per cent of the growth in national income. Sixty per cent. The wealth of the richest 85 people in the world is greater than that of the 3.5 billion people who make up the bottom half of the world's population. You don't have to be the son of Ralph Miliband to think this is a ludicrous and unjustifiable state of affairs.

This is where Piketty has begun to change my mind. Hayek and Schumpeter both pointed out the tendency of capitalism to consume its own moral basis and this is what is happening now. There has to come a point when the equality of people as citizens is impaired by the rank appropriation of wealth on this scale. Perhaps we are not there yet, but are we happy with the direction in which we find ourselves travelling?

Piketty is telling the left what they know already and they have opened their arms to him. The right is usually more sceptical of grand schemes from intellectual gurus, and usually with good reason. When I say that people on the right spend less time thinking I do not mean it as an insult.

But this is different. Piketty is sounding the trumpets on the city walls. He is saying that this is our destination and it is a dire terminus. Ladies and gentlemen of the political right, are you listening? The defence of capitalism against Piketty has, so far, been lamentable. Is there no escape from Upton Sinclair's brilliant observation that it is difficult to get a man to understand something when his salary depends on his not understanding it.

Do too many of you do too well out of the new dispensation that you have no option other than to beat on, boats against the current, borne back ceaselessly into the past?

More books on Money

(London Times 2)

PIKETTY'S appeal, certainly to US liberals, is that he has provided an intellectual framework for the challenge to capitalism that was expected after the banking meltdown and global financial crisis but which never happened.

The Occupy movement, which targeted the richest 1% and claimed to speak on behalf of the remaining 99%, had a brief flurry, which in Britain included the occupation of St Paul's churchyard. But it faded.

Capitalism has picked itself up, dusted itself off and carried on more or less as before, though with the regulators keeping a closer eye on things, particularly in the banks.

Piketty, if he is right, has exposed a flaw in capitalism that existed before the crisis and will become increasingly evident as the 21st century progresses. The tendency towards greater inequality, to the rich becoming richer and the masses being left behind, may not bring about the collapse of capitalism - he insists he is not as apocalyptic as Marx - but it will put the system under increasing strain.

Measures to correct what he says is the fundamental force for divergence and the central contradiction of capitalism will be needed on grounds of fairness but also because inequality will eventually threaten democratic societies.

Part of the appeal of the book is that it is readable, despite its length. References to Jane Austen and Honore de Balzac show that this is one economist who has not spent all his life with his nose in economics texts.

There is a grand sweep of history in his use of data stretching back hundreds of years, particularly French data on incomes and inheritances, but also statistics for Britain and other countries. He also has a nice self-deprecating touch, such as when he criticises economists for being all too often preoccupied with petty mathematical problems of interest only to themselves.

There is one great advantage to being an academic economist in France. Here, economists are not widely respected in the academic and intellectual world or by financial and political elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy.

There are two essential conclusions in Piketty's book. The first challenges what is known as the Kuznets Curve.

Simon Kuznets was one of the giants of American economics in the 20th century. He published a seminal paper in the 1950s to demonstrate that, while societies had a tendency to become unequal during the early stages of industrialisation, in which the rewards went to the magnates and landowners, there was a natural tendency towards greater equality in capitalist societies. The longer growth goes on, in other words, the more its fruits are shared. Capitalism survives by spreading its rewards.

For Piketty, however, Kuznets identified what was a temporary and special case. Yes, there had been a tendency towards greater equality for much of the 20th century but that was above all a consequence of war and of policies adopted to cope with the shocks of war. Since 1980, capitalist economies have been reverting to their 18th and 19th-century norms, faithfully recorded by the novelists as well as the numbers, in which inequality widens. The rich get richer, the rest stagnate.

The reason why this happens is Piketty's second central claim, which could be summed up as: money will always go to those who already have it. The wealthy will always grow wealthier; inequality will increase because, according to Piketty, the rate of return on their capital or wealth, r, will always exceed the rate of growth of the economy, g. Most are stuck in the slow lane, held back by the economy's growth rate, which Piketty thinks will be quite modest in the 21st century. The rich are in their own fast lane. Money begets money.

If he is right, we may be seeing only the opening skirmishes in the defining battle of the 21st century. When Vince Cable, the business secretary, writes to FTSE 100 businesses telling them to curb executive pay, or when a sizeable minority of Barclays shareholders votes against bonuses, these may just be the early rumblings of far bigger wars to come. If the future is one of ever greater inequality, the wealthy may need to build very high walls to keep out the dispossessed.

But is he right? Before jumping onto the Piketty bandwagon we should note that the recent history of economics bestsellers changing the world is decidedly mixed.

In the 1990s, Will Hutton's The State We're In appeared to set the agenda but its theme of stakeholder capitalism was dropped by Tony Blair's new Labour as quickly as it had been picked up. Hutton, predictably, has been singing Piketty's praises.

In 2010, another book, The Spirit Level: Why Equality is Better for Everyone, by Richard Wilkinson and Kate Pickett, was widely attacked for its use of statistics and prompted a book-sized riposte.

Though Piketty is basking in the warm glow of praise, much of it effusive, the criticisms are starting to mount, even from some who might be expected to be sympathetic to Piketty.

Tyler Cowen, the well-regarded professor of economics at George Mason University in Virginia and co-author of the popular Marginal Revolution website, finds serious flaws.

'Overall, the main argument is based on two false claims,' he wrote last week. 'First, that capital returns will be high and non-diminishing . . . Second, that this can happen without significant increases in real wages . . . I'm not convinced by the main arguments and the positive reviews I have read worsen rather than alleviate my anxieties.'

James K Galbraith, son of the Keynesian economist JK Galbraith and, like Cowen, an economist who has done a lot of work on wages and income distribution, has been even more critical. Writing in Dissent, a quarterly journal, he accuses Piketty of a 'terrible confusion' between physical capital - the plant, machinery and buildings needed to make things - and financial wealth.

In straightforward terms, leaving aside academic niceties, Galbraith accuses Piketty of getting his understanding, and his facts, wrong.

'In global comparison, there is a good deal of evidence, and (so far as I know) none of it supports Piketty's claim that US income today is more unequal than in the major developing countries,' he writes. Piketty does not, he concludes, provide a very sound guide to policy and the book is not the accomplished work of high theory that its title, length and reception (so far) suggest.

Economists are meant to disagree and, though nobody would accuse Cowen and Galbraith of it, Piketty's success is provoking more than a little professional jealousy. That said, there are three important flaws in the book.

The first is that the idea that the rate of return will always exceed the economy's growth rate is assertion, and probably incorrect assertion, rather than fact.

The period leading up the financial crisis of 2007-9, indeed its prime cause, was the quest for a higher rate of return - the search for yield - in a world of low returns. That led to the taking of big, and in the end destructive, risks.

The second flaw is that Piketty is guessing. He is assuming, because it happened in the 18th and 19th centuries, and has been happening in the past three decades, that rising inequality is the new norm. Nobody knows whether that is the case or not.

Inequality is diminishing between countries, thanks to the rise of economies such as China and India. At the same time, inequality is rising within those countries, as happened in Britain, France and America after their industrial revolutions. But you would expect this domestic inequality to start to diminish, as Kuznets recorded in America, not least because mass production requires a mass of consumers.

The third flaw, as even Krugman concedes, is that Piketty's model might explain why plutocrats are getting ever wealthier but does not explain the phenomenon of the past three decades, the rise of top salaries. Chief executives, in banks and elsewhere, are paid sums relative to the average worker’s wages that their predecessors could only dream of. That reflects their bargaining power and and ability to persuade enough people - maybe in some cases wrongly - that their talent is in short supply and has to command premium international rates.

You do not need three centuries of data, Austen and Balzac to explain it. And already there are signs of a self-generated backlash against some of these boardroom excesses.

BIGGER than any of these problems, however, is when Piketty gets into policy recommendations. He would have been better advised to present his conclusions and leave it to others to decide what to do with them. As it is, he proposes a global tax on capital - wealth - which he concedes is 'a utopian idea' that 'is hard to imagine the nations of the world agreeing on . . . anytime soon'.

Worse is income tax. In 2007 Piketty worked with Segolene Royal, the French Socialist and former partner of President François Hollande. Hollande went for a 75% top tax rate. Piketty thinks it should be 80%.

This is dangerous territory. Piketty refers with a hint of admiration to Britain in the 1970s when the top rate of income tax - on earned and unearned income - reached a record-breaking 98%. Nobody, of course, paid it, and the effect was not just to kill the golden goose but to stuff it and cook it, too.

Perhaps he thinks 80% sounds modest in comparison with 98%. According to our estimates, the optimal top tax rate in the developed countries is probably over 80%, he adds. Such confiscatory rates are in his view the only way to stem the growth of high salaries, without damaging economic growth.

This is bizarre. Have we learnt nothing since the 1970s about the impact of very high tax rates on growth and incentives? Does anybody not think that the prospect of eye-wateringly high tax rates on success will stop people striving for success, taking the risks needed to stimulate innovation? The Levellers had nothing on Piketty when it comes to tax.

As it is, we have discovered in Britain that lower top tax rates both incentivise success and bring a bonanza for the taxman. The top 1% of income earners now account for nearly 30% of income tax revenues, against 11% in 1979. The main effect of high tax rates is to boost the tax avoidance industry.

Wealth is Piketty's great concern. But, according to Credit Suisse's latest Global Wealth Report, it is more evenly distributed in Britain than in Canada, Denmark, France, Germany, Ireland, Israel, Holland, New Zealand, Norway, Singapore, Sweden, Switzerland and America.

The reason for that exposes another flaw in Piketty's analysis. Wealth is spread through home ownership but also because it is pooled, in pensions and other investments. The modern-day holders of most wealth - or capital - are pension funds and other financial institutions, not the mega-rich. If those institutions get a better rate of return, the benefits flow back to ordinary people.

The Sunday Times Rich List also shows the money-begets-money model does not fit. We may envy the mega-rich but they are usually not the same names as 20 or 30 years ago.

The main effect of sky-high tax rates would be to preserve, rather than eliminate, differences in wealth by killing entrepreneurialism and the rise of new wealth creators at birth.

Piketty, the rock-star economist, has written a huge book and sold more copies than he or his publishers could have dreamt of. Mostly, it has been well-received. But his conclusion, slap huge taxes on the rich, is as crude as it could be. If politicians take it up, they will find that it comes back and bites them.

Piketty has been greeted as a kind of inequality messiah. But the one way to guarantee the slow growth he fears in coming years is to take his advice and tax growth out of existence.

(London Times reader's comments in response)

Piketty is much less black and white than most of the comments here seem to imply. Watch him interviewed - he specifically denies that inequality is bad, and in fact argues that it is needed to move forward. What he goes on to argue is that when it gets to the degree that we often see today it becomes a threat not only to our economic future but also to the democratic basis of our society. No one (unless very prejudiced) worries about a rich man who has worked hard for his fortune, whether hand or brain. Unfortunately many of the richest members today's society, if they didn't inherit their wealth, obtained it by simply manipulating money. There are a few people, like Dyson, who are often quoted by the right wing because they clearly worked hard to earn their wealth. However the problem lies not with them but with the financiers who over the last 40 years or so seem to have done little to oil the wheels industry (abstract or otherwise) but simply found ways of filling their pockets with their client's money. How can we possibly have anything but contempt for bankers who provide their clients, the savers, with an interest rate below the inflation rate, while awarding themselves enormous salaries and even bigger bonuses.

But this is exactly the opposite of Piketty's argument, because Dyson is a man with capital (in the form of his business), which he is using to generate a return. Piketty says this is a bad thing. The ludicrously-salaried financiers are employees (although privileged ones) using others' capital to generate incomes for themselves. Piketty argues that capital is a bad thing because over time it monopolises returns, but your example has a special class of labour doing the same thing. This is where it starts to get very messy, and simplistic solutions cause more problems than they solve.

Which would you rather reduce: inequality or poverty? You can't do both. Mr Piketty shows that the only time equality increased in the last two centuries was as a result of massive wealth destruction in the world wars. As wealth is much easier to destroy than create this is the only way such a massive 'correction' in favour of equality could happen. And the whole economy would necessarily suffer. Just imagine the mechanics of a perpetually equal utopia. No economic activity would be allowed as equality would instantly be destroyed. Piketty's own data shows that even a slight inequality would then grow and grow. Equality is for the dead. We living should focus on reducing absolute poverty.

But this simply isn't true. "Poverty" was not increased during the World Wars - the reality was the wars forced in effect redistribution from richest to poorest. One fact of the first world war - not often commented on - is that for many troops, serving in the army was the first time they were properly fed. In the ranks, many of those that survived returned fitter and stronger than they left - and richer. One reason than men "endured" the horrors of the trenches was that their expectations were already pretty low, living in slum accommodation and surviving off a poor diet. The second World War was a leveller - but not just a leveller down, but a leveller up for the poorest, as jobs became plentiful for women, whilst men were employed in the forces. It is a typical rightist argument to say to decrease inequality is somehow "Impossible" - but its nonsense. The most cursory glance at different governments shows you policy can make a difference, without destroying economies.

Growing inequality may be perceived as undesirable and, in a sense, unfair, but what is the "dire terminus" that Piketty writes about if no corrective action is taken? Philip Collins warns of "the equality of people as citizens" being impaired by the excessive growth of wealth of a small number of very rich people. Is it being claimed that there is an economic disaster of some sort looming, or is it a moral unacceptability that is being referred to? Either way, the proposed remedies, using taxation as the tool of rectification, appear to have limitations. Imposing high taxes on the very rich might reduce inequality of income by reducing the "take home pay" of the wealthy, but it doesn't necessarily make the less wealthy better off. The government revenue generated by this high taxation is more likely to be used to reduce the deficit, or prop up the NHS, or something similar, than to be handed out to ordinary citizens. And it does nothing to reduce absolute inequality, which would require taking away some of the accumulated wealth of the super-rich. Also, taxation of assets - such as the mansion tax or increasing the levels of council tax bands - can be as unfair as the inequality issues under discussion. The reasons have been well aired in the media, and boil down simply to the difference between the value of an asset such as a house (which can grow much faster than income) and the liquid assets (ready cash) available to pay the tax. This can be a serious and unfair difficulty for many people.

Why is it "ludicrous and unjustifiable" that "the wealth of the richest 85 people in the world is greater than that of the 3,5 billion people who make up the bottom half of the world's population"? It seems entirely logical to me. The bottom half of the world's population are, for the most part, uneducated, unemployed, have very little money, live in poor countries and don't enjoy the same levels of democracy and economic freedom as their counterparts in Western countries. We might as well state that Richard Branson, Alan Sugar, Cliff Richard, Joan Collins and Wayne Rooney have more money put together than the million poorest people in England, and argue that this is somehow unfair! With few exceptions, people do not steal their wealth from the poor, but make it through a combination of effort, education, entrepreneurial brilliance or just plain luck. Piketty himself will shortly discover this as he rakes in a fortune from his book. His success will not make him a villain whose wealth is deserving of plunder, but a clever guy who wrote the right book at the right time.

His solutions may be absurd, but there's definitely something wrong. Capitalism isn't working when years of growth end up only benefiting one segment of the population. The fact is median wages (not mean wages) - i.e. what the average guy/gal earns - have been pretty static for years. Moreover, on the macro economic level, it doesn't work either. If the richest accumulate more and more, they simply cannot spend it. So they purchase assets, leading to asset bubbles, as there is limited supply of assets, and ultimate - a financial crisis. Which is exactly what has happened.

The trouble is that high taxation transfers wealth from the entrepreneurs to the government. Socialism is the most effective way to destroy wealth ever invented - other than the likes of Genghis Khan or Mugabe but they were not political theorists, just egomaniacs. One inconvenient truth is that personal wealth is never wasted, it remains in the economy because it is either banked for banks to reinvest, invested directly or spent. But if it is taxed it is transferred to the government, the most incompetent spender of them all.

This "government always makes things worse" is a proposition for which there is absolutely no evidence, it is simply dogma, normally using the extreme examples of communist 5 year plans as some kind of killer argument. Ignoring of course the obvious other extreme - total government breakdown, which is just as bad. There seems to me plenty of evidence that "minimal government" simply leads to corporate interests stepping into the power vacuum, and leads to large inequalities, whereas plenty of governments take an active role, and produce more equal societies, without harming their economies. It is a choice, and maybe the small government/high inequality option is your preferred choice. But the hard right tries to pretend any alternative is impossible - and this is a lie.

Books by Title

Books by Author

Books by Topic

Bits of Books To Impress