Capital in the 21st Century
Posted on Apr 4, 2014
By Steven Pearlstein
Part of that American story, writes Piketty, reflects the surge in pay for corporate executives and Wall St. financiers who make up a large part of the top 1 percent of income earners. As Piketty sees it, their soaring compensation cannot be adequately explained simply by superior education or performance, but also reflect imperfectly competitive labor and product markets that allow the top 1 percent to extract way more than their real economic contribution. The wealthy, Piketty says, are also in a position to take more risk with their savings while having access to the best investment and hedge fund managers, allowing them to earn a higher return than middle-class savers. And unlike middle-class savers, they are likely to re-invest their investment income each year rather than spend it. Combine those higher-than-average returns with the magic of compounding and you begin to understand how a rigid class structure can begin to take hold.
Indeed, one of the more delightful touches that Piketty brings to his task is how he draws on the novels of Honore de Balzac, Jane Austen and Henry James to illustrate the economics of a rigidly stratified society built on a foundation of accumulated capital. But even these literary forays are buttressed by incredibly detailed data on the size and flow of inheritances in France and England over the last two centuries. The creative use that Piketty makes of this historical information is as impressive as the painstaking work he did in collecting it.
Although Piketty’s prose is clear and compelling and translated artfully into plain English by Arthur Goldhammer, this is a book aimed more at other economists than general readers. At 577 pages of text, and 75 pages of footnotes, it is annoyingly repetitious at times. Long discourses on topics such as inflation and the current euro crisis add little to his central thesis, while Piketty spends way too much time on tedious explanations of minor cross-country differences in economic history. Like Marx, he would have benefited from an editor with a sharper pencil.
In the end, Piketty’s analysis of the past is more impressive than his predictions for the future are convincing. He fails to adequately explain how the accumulation of so much capital looking for good investment opportunities won’t eventually drive down returns, as economic theory would suggest. And like the grand theorists before him, he too easily dismisses the possibility of a burst in technology-induced productivity that could usher in another extended period of above-average growth in output and average incomes. “If one truly wishes to found a more just and rational social order,” he warns, “it is not enough to count on the caprices of technology.”
Moreover, unlike the 19th century, where real estate and government bonds were the primary form of capital, it is riskier assets that generate most of the wealth in the modern global economy—assets that can more quickly lose value as a result of changes in technology or global competition.
Nor is it clear, as Piketty asserts, that the only way to avoid a future of slow growth and extreme inequality is through confiscatory taxation. His prescription is an annual global wealth tax of up to 2 percent combined with progressive income tax rates that run as high as 80 percent. Yet as he himself acknowledges, the “golden years” were golden because of a complex interplay among laws, regulations, taxes and other restraints on corporate power. If confronted with unacceptable levels of inequality, why would democratic societies in the future be unable or unwilling to formulate a similar set of institutional restraints on capitalism?
For all its faults, however, Piketty’s “Capital in the Twenty-First Century” is an intellectual tour de force, a triumph of economic history over the theoretical, mathematical modeling that has come to dominate the economics profession in recent years. Piketty offers a timely and well-reasoned reminder that there is nothing inevitable about the dominance of human capital over financial capital, and that there is inherent in the dynamics of capitalism a natural and destabilizing tendency toward inequality of income, wealth and opportunity.
Steven Pearlstein is a Washington Post business and economics columnist and the Robinson Professor of Public and International Affairs at George Mason University.
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