Abstract
Capital in the Twenty-First Century has been widely discussed and praised. Both attention and praise are – to anticipate part of the conclusion – justified. However, the argument of the book consists of more than one component and Capital can thus be evaluated from different perspectives. Piketty undertakes at least four things. First, he presents new data (i.e. historical description), secondly, he presents a theoretical framework to understand those data (theoretical analysis), thirdly, he formulates policy recommendations based on the theoretical framework (implicit prediction). These three aspects have been widely discussed. A fourth aspect has received considerably less attention. Piketty’s book lays down a challenge for conventional academic research, mostly but not exclusively for economics.
The data and theory should nonetheless be considered first, as they form the basis of the analysis. Piketty presents data about the distribution of income and wealth. Income inequality has been rising considerably in Western countries over the last decades. The share of capital income in national income has also been rising. And wealth inequality – typically larger than income inequality – is rising as well. The ‘top 10 per cent’ in the United States for example owns 70 per cent of all assets. Inequality is however also rising in the UK, France and Sweden – the countries Piketty focuses on. Unlike the OECD, the data are collected from tax-records – instead of questionnaires – which allows more detail and a longer time-horizon (going back to 1790 in the French case).
Piketty proposes that the empirical pattern of inequality should theoretically be understood as the net result of forces of divergence and convergence. The principal force of divergence is summarized by the inequality r>g, where r stands for return on capital and g for economic growth. This inequality is not a theoretical necessity, but has been an empirical reality in the last centuries. In a quite radical departure from mainstream economics that focuses on labour markets, technology and property rights, Piketty puts this inequality centre stage in his political-economic analysis. The inequality implies that return on capital exceeds return on labour. This in turn increases the share of capital in national income and – with a lag of some decades – increases the importance of inherited wealth. Furthermore, the return on capital increases the size of capital and tax on capital is typically lower than tax on labour; this, together with tax-avoidance, reinforces the divide between a class of rentiers and people who have nothing to sell but their labour. Forces of convergence are war (destroying capital), progressive taxation and education. These forces indeed decreased inequality in the period 1914–1970 (the top marginal rate in the US in the 1940s was 91 per cent) considerably, but have now lost importance. Marginal labour tax rates and capital-income tax rates have decreased. And despite the increasing education level of the workforce, the share of labour in national income decreased. Education can increase social mobility but may also reproduce social inequality if there are entry barriers for people with low incomes (Piketty points out that the average income of parents of Harvard students is US$450,000).
Whereas the data collection has generally been praised 1 , the theoretical implications have been widely discussed. Less attention has been paid to the consequences Piketty’s analysis might – or should – have for (economic) science. Two types of criticisms can be derived from the book. One is that economic science does not pay attention to relevant topics, two, that it focuses on relevant issues but in a manner that is incomplete or even incorrect.
On the first count, top economic journals and textbooks do not pay any attention to wealth inequality. And while income inequality has been on the agenda, the way it is presented is – according to Piketty – incomplete at best and ideologically biased at worst. The dominant Gini-coefficient gives little weight to both tails of a distribution. Ignoring the top is however not neutral, as it gives an artificially rosy picture. That 60 per cent of all economic growth since 1977 in the USA went to the top 1 per cent has gone unnoticed. The potential of inequality to turn a formal democracy (one man, one vote) into a post-democratic oligarchy (one dollar, one vote) is also largely ignored, both in economics and political science (with the exception of critical political economy). Ignoring relevant issues sometimes takes the form of touching upon the issue but assuming it to be irrelevant. In macroeconomic models, bequests are typically assumed to be zero, whereas inheritance is the major reproducer of inequality according to Piketty. The dominant median voter model assumes that political decisions are solely influenced by voters and that lobbying, cognitive capture and rent-seeking are not relevant. The Cobb-Douglas production function – central in textbooks and still a workhorse model in theoretical research – results by assumption in a constant share of labour and capital income.
The ignorance of important issues can be explained by both self-interest and herd behaviour. Piketty points out that leading academics belong to the top 10 per cent themselves and lack the inclination and incentive to dig deeper into the issue of inequality. Mathematical economic models are characterized by Piketty as naïve, limited, childish, simplistic and tautological, while leading to the false illusion of stability. However, modelling is the sine qua non in top journals.
If one not only accepts Piketty’s data but also his framework, economics should not so much change its topic foci but primarily its methodology. So should one accept Piketty’s thesis? The book does have loose ends. While emphasizing the political nature of inequality and economics more generally, the author does not work out the political aspects. Political events (war, democracy, progressive taxation, globalization) are essentially exogenous forces influencing an autonomous economic trend, instead of endogenous factors that should be analytically distinguished from economics but can never be separated from it ontologically. Analysis of Russia and China – with their different political regimes – could for example have explained different outcomes (war, democracy, oligarchy) of the interaction between the political ideal of equality and the economic reality of inequality. Piketty mentions but likewise does not explore the role of unions, or collective action in general, party systems and discursive power.
These loose ends should however not be mistaken for flaws. Not only because they are inevitable in any book dealing with over two centuries of political-economic (Western) world history, but primarily because the framework and the main thesis it embeds will not be falsified when the loose ends are addressed – as they might be by other researchers. The main message that the political choice for the economic system of capitalism does not necessarily lead to equality and the last centuries actually led to rising inequality is both convincing and relevant. The wider public is now discussing that message and its implications, and it would be no bad thing if the academic community were to follow the herd in this particular respect.