Review of Piketty’s Capital in the 21st Century

One way to summarise is as follows: Piketty’s astronomical sales have increased wealth inequality among economists. Is his new-found wealth deserved? What is the impact of this wealth on the democratic process? Should we tax his global sales? Should he set up a foundation to combat the negative effects of inequality?

This book’s strength is the novel approach Piketty takes to framing the problem of inequality. We are all aware that the distribution of income and wealth has become more extreme in the last 30 years. It is usually assumed that policies of deregulation and taxation have caused this. More recently, Brynjolfsson and others have argued that technology and globalisation are the underlying causes. Piketty, however, draws attention to the fact that the rate of return which owners of wealth generate is itself a critical determinant of the distribution of wealth. A central part of his thesis is that the very wealthiest in society save more and earn higher returns on their investments. Labour income grows more slowly than wealth. This is a novel focus for the debate.

But Piketty’s interpretation of the data and his predictions need to be considered very carefully. There are clear flaws. Much of the increase in the value of wealth in the last 30 years has been caused by declining real interest rates: this lies behind the huge capital gains in property, bonds and equities. But it is not repeatable. It is also likely to have economic consequences which drive down their prospective returns. For example, the surge in technological innovation which is creating many technology billionaires (in part due to financial conditions), is also sowing the seeds for the destruction of wealth in the industries it is rendering redundant.

What Piketty’s framework does, however, is force us to focus on which types of assets are owned by whom and what their prospective returns might be. Piketty’s tentative conclusion that the trend of wealth compounding at a rate higher than labour income may be right for the wrong reasons. The distribution of what is likely to be the highest returning asset – equity – is even more concentrated than property, or other financial assets, such as deposits. A structural reason why wealth may have an inherent tendency to become increasingly concentrated is that the wealthier you are the greater risk you can take with capital. Surprisingly, Piketty has little to say about shifts in the valuation and ownership of equities, which is hugely relevant to the last 30 years, and probably the next thirty.

Another omission in this fascinating book, is that Piketty does not sufficiently distinguish between the merits of various forms of wealth and returns. This is a legitimate criticism that Nassim Taleb has made. Tax policy should surely take into account the relative social merits of different forms of wealth. We want incentives that reward innovation and philanthropy which is focused on social enterprise and R&D, such as that of the Gates foundation. Unproductive wealth and disincentivising inheritance is a specific and more reasonable target for taxation.

There are also many more philosophical possibilities suggested by this book, which are beyond its remit but worth considering. The distribution of well-being and happiness in developed economies is much less extreme than the distribution of wealth, and arguably takes priority as a policy objective. It may also act as an incentive for more socially productive investment by the wealthy. We should not lose sight of this.

Despite these weaknesses, this book is original and thought-provoking. It is also written with clarity and style.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

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