Book Review: CAPITAL IN THE TWENTY-FIRST CENTURY

‘CAPITAL IN THE TWENTY-FIRST CENTURY’ by Thomas Piketty is aimed at understanding the historical dynamics of wealth and income. Do the dynamics of private capital accumulation  inevitably  lead  to  the  concentration  of  wealth in  ever  fewer  hands,  as  Karl  Marx believed  in  the  nineteenth  century?  Or do the balancing forces of  growth,  competition,  and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes, as Simon Kuznets thought in the twentieth century? What do we really know about how wealth and income have evolved since the eighteenth century, and what lessons can we derive from that knowledge for the century now under way?

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the  twenty-first,  capitalism  automatically  generates  arbitrary  and  unsustainable inequalities  that radically  undermine  the  meritocratic  values  on  which  democratic societies  are  based. The book begins with a quick historical overview of previous thinking about the issues of wealth and inequality. Altogether it consists of sixteen chapters divided into four parts.

Part One, titled “Income and Capital,” contains two chapters and introduces basic ideas that are used repeatedly in the remainder of the book. Specifically, Chapter 1 presents the concepts of national income, capital, and the capital/income ratio and then describes in rather broad terms how the global distribution of income and output has evolved, giving due credence to inequality of capital and labor as an issue that arouses strong emotions.. Chapter 2 gives a more detailed analysis of how the growth rates of population and output have evolved since the Industrial Revolution. For example, how growth always should include a purely demographic component and a purely economic component, and only the latter results in an improvement in the standard of living.

The purpose of Part Two, titled “The Dynamics of the Capital/Income Ratio,” which consists of four chapters, is to examine the prospects for the long-run evolution of the capital/income ratio and the global division of national income between labor and capital in the twenty-first century. Chapter 3 looks at the metamorphoses of capital since the eighteenth century, starting with the British and French cases, about which we possess the most data over the long run. Chapter 4 introduces the German and US cases. Chapters 5 and 6 extend the geographical range of the analysis to the entire planet, insofar as the sources allow, and seek to draw the lessons from all of these historical experiences that can enable us to anticipate the possible evolution of the capital/income ratio and the relative shares of capital and labor in the decades to come. The first two parts of this book focus on the respective shares of global income going to labor and capital  and  on  how  those  shares  have  changed  since  the  eighteenth  century.

Part Three, titled “The Structure of Inequality,” consists of six chapters. Chapter 7 familiarizes the reader with the orders of magnitude of inequality attained in practice by the distribution of income from labor on the one hand and of capital ownership and income from capital on the other. Chapter 8 then analyzes the historical dynamics of these inequalities, starting with a comparison of France and the United States. Chapters  9  and 10  extend  the  analysis  to  all  the  countries  for  which  we  have historical  data  (in  the WTID),  looking  separately  at  inequalities  related  to  labor  and  capital, respectively. Chapter  11  studies  the  changing  importance  of  inherited  wealth  over  the  long  run. Finally, Chapter  12  looks  at  the  prospects  for  the  global  distribution  of  wealth  over  the  first  few decades of the twenty-first century.

The purpose of Part Four titled “Regulating Capital in the Twenty-First Century” and consisting of four chapters, is to draw normative and policy lessons from the previous three parts, whose purpose is primarily to establish the facts and understand the reasons for the observed changes. Chapter 13 examines what a “social state” suited to present conditions might look like. Chapter 14 proposes a rethinking  of  the  progressive  income  tax  based  on  past  experience  and recent  trends. Chapter  15 describes what a progressive tax on capital adapted to twenty-first century conditions might look like and  compares  this  idealized  tool  to  other  types  of  regulation  that might  emerge  from  the  political process, ranging from a wealth tax in Europe to capital controls in China, immigration reform in the United  States,  and  revival  of  protectionism in  many  countries. Chapter 16 deals with the pressing question of public debt and the related issue of the optimal accumulation of public capital at a time when natural capital may be deteriorating.

In conclusion, the author mentions of the increasing gap between the rate of return of capital and the rate of growth of income, where the returns from capital showing a steady increase. As this portends to dangers of the Middle Ages societies, there is an urgent need to modernize the social and fiscal policies. This can develop new forms of governance and shared ownership intermediate between public and private ownership, which is one of the major challenges for the century ahead. And this will call for a political integration that can lead to effective regulation of the globalized patrimonial capitalism of the twenty-first century.

Is another Middle Ages in the offing? The proliferation of the irrational in many other areas of life is a strong indication that this is a possibility. This book confirms it through the science of economics.