Capital in the 21st Century by Thomas Picketty

A review of Capital in the Twenty-First Century would have to be a book in itself, so let this be just a reflection on some of Thomas Picketty’s wealth of material. And there is no better place to start than his startling demonstration of how little the structure of wealth ownership changes unless war intervenes. Furthermore, his demonstration that things are returning to “normal” after the twin conflict shocks of the 20th century world wars could easily induce depression in the reader if not tempered by resigned realism. Thomas Picketty’s book should be required reading for anyone – certainly anyone who happens to be British – who benefited from the social mobility that was available in the 1950s-1970s. We tend to blame the 1944 Education Act for creating the abnormal conditions that have led to a measurable, if temporary, decline in inequality. But Thomas Picketty sets the record straight by making it clear that this was merely a result of the aberrations of the war, which for several decades weakened the power of capital. Normal operations have now resumed.

Picketty describes how unequally capital is distributed, especially in developed societies. Typically, half the population owns nothing, while the top 10 percent own about half of the wealth. Capital, to Picketty, means potentially tradable assets whose ownership can be bought and sold. It includes fixed assets, property, equity, or cash, and excludes all forms of human capital, which can be an asset and have value, but its property can only be traded in slave societies, which no longer exist today. However, he considers capital distribution and income distribution separately, so that at least some element of human capital is represented in the latter. He observes that income is always more evenly distributed than investment capital, with the top 10 percent receiving only 25 to 30 percent of total income. So if there has been a shift in identity among the capital-owning elite over the last few decades, it has been due, at least in large part, to the very high rewards available to certain professions at the top of the income ladder. The phenomenon has also led to an increase in inequality observed in developed societies over the last few decades, particularly in the US and UK. Inequality continues to grow.

One of Picketty’s basic laws is that capital always grows faster than the economy as a whole. Success over earning power thus inevitably leads to relegation to the rentier class, a transformation necessary if newly acquired status is to be consolidated. Furthermore, if the inequality holds that capital growth is greater than economic growth, this implies that even the benefits of growth in the overall economy ultimately accrue to the owners of capital.

Historically, economic growth has been strongly associated with increasing population. Excluding the demographic component, economies have consistently grown at no more than about 2 percent. Two percent is still a significant rate if maintained. But growth spurts come with population spurts. The reverse is also likely to be true, which in itself makes it possible to view some facets of the current global economy in a more informative light. However, population boosts create economic boosts, and that’s no surprise. What is a little surprising is Picketty’s assertion, perhaps conjecture, that since France experienced population growth before other developed societies, we must all look to France as the setter of the international economic agenda, the historical standard, if you will, that others followed.

Another historical reality that is very evident in his data is the impact of foreign income throughout the 19th century and during the First World War. These “invisibles,” as they were sometimes called, were simply the profits of colonialism and slavery. They funded deficits, borrowing, and consumption at the heart of the empires they sprang from. In the modern world, he points out, there may be greater levels of foreign capital ownership than ever before, but the benefits and capital transfers are mutual, as are the benefits, and so the net transfers are small.

This story is illustrated in economic data. He cites a number of cases where an imperial power, which had accumulated large debts after conflict or recession, managed to earn five percent or more of its national income from invisibles, thereby enabling the country in question to service debt, who otherwise should have been paralyzing. Crucially in the modern world, that kick card may no longer be available.

One aspect of Picketty’s analysis surprises us. Throughout the book he uses fiction as a source of illustration, a source that will stop and marvel many academic readers of the text. Picketty often cites examples from Balzac, Austen, and others to illustrate general points about the behavior of capital. Although the process is very selective and, it must be said, apocryphal, it eventually convinces, but it is the novelists who eventually prevail, not the economic model. His argument, which he claims is so clearly exemplified in 19th-century fiction, is that capital is always more likely to be inherited, or even married, than to be earned. The endless machinations involved in finding a suitable marriage partner for suitable women in 19th century fiction is only the realization that as capital growth is always less, it is easier to marry money than to make it than economic growth.

If twenty-first-century capital can be criticized, it is for its rather sparse, even disparaging, account of human capital. Yes, this is absorbed in income data. But the author claims that “democratic modernity is grounded in the belief that inequalities based on individual talent and effort are more justifiable than other inequalities – or at least that’s the direction we hope to move.” He contrasts that belief with a Balzac character who forgoes a chance to go to law school to seek a marriage of fortune, then asks who would do such a thing today?

Well, if qualifications and qualifications acquired by students develop human capital, even if this is only reflected in higher earnings, then access to quality education is required before those qualifications and qualifications can be acquired. It could even be argued that educational experience is now not only sufficient for capital appreciation, but also necessary, since even the possibility of marrying capital may depend on attaining or not attaining the level of education required to enter that particular market .

So if education is just a commodity offered through a market, then the cost of accessing the most sophisticated and effective delivery systems will increase, as these are the most effective means of securing access to capital, be it through income or marriage. These costs will also increase as the demand for education, once it has become a market, will be highest by those who need to protect their existing capital assets and have the resources to pay for what they need. Education thus becomes a means of affirming and restoring wealth rather than a potential pathway for social mobility. Perhaps today it is still easier to marry wealth than to earn it. Apart from the fact that today the option of marriage can be determined by a certificate of education, which can be secured most effectively by existing access to wealth.

This argument seems to come full circle and illustrate how even in a materialistic society capital will always grow faster than the economy as a whole and why inequality will not only exist but increase.

No book review should focus on what a book is not. As a final note, let me describe Thomas Picketty’s book as essential reading for anyone with a mind. If you can empirically refute your analysis, rather than just denying its importance on ideological grounds, then please provide your data. If you can’t, then join the call for policies that seek to address the destructive imbalances that fuel growing inequality. It must be remembered that in order to underpin Capital in the twenty-first century, one must examine whether a particular text entitled Capital in the nineteenth century contained a grain of truth in asserting that the capitalist system eventually came under the pressure of its own inevitable imbalances would collapse. The conclusion seems to have been demonstrated and the reason for re-reading this other book is thus given.