This reaction to Thomas Piketty’s Capitalism in the Twenty-First Century originally appeared at The American Prospect.
Capital in the Twenty-First Century is written in the tradition of great economic texts. Where John Maynard Keynes wrote The General Theory of Employment, Interest and Money in reaction to the “classical economists” and Karl Marx wrote Das Kapital in reaction to the “bourgeois economists,” Thomas Piketty writes in reaction to the “US economists.” Like his predecessors, he does not mince words. After taking a professorship at MIT at 22, he moved back to Paris at 25, in 1995, because “I did not find the work of US economists very convincing.” Piketty’s method is an explicit critique of academics “too often preoccupied with petty mathematical problems of interest only to themselves.” While mathematical tools are critical to the modern economics profession, Piketty is right to call on all social scientists, including economists, to “start with fundamental questions and try to answer them.”
Piketty asks two fundamental questions in his new book: “What do we really know about how wealth and income have evolved since the 18th century, [and] what lessons can we derive from that knowledge for the century now under way?” Piketty and his colleagues have spent recent years putting together a World Top Incomes Database, their detailed investigation into income in countries around the globe, spanning several decades. In some cases — France and the United Kingdom — he also relies on facts about the accumulation of wealth going back centuries. As he puts it, “It is by patiently establishing facts and patterns and then comparing different countries that we can hope to identify the mechanisms at work and gain a clearer idea of the future.”
Informed by this historical, cross-country data, Piketty evaluates — and rejects — a number of generally accepted conclusions in economic thought, while being careful to note the limitations of inevitably “imperfect and incomplete” sources. The main finding of his investigation is that capital still matters. The data show a recent resurgence in developed countries of the importance of capital income relative to national income, back to levels last seen before World War I. In Piketty’s analysis, without rapid economic growth — which he argues is highly unlikely now that population growth is slowing — returns from investment will continue to grow faster than output. Inheritances and income inequality will keep rising, possibly to levels higher than ever seen.
Among other conclusions, the data lead Piketty to describe the popular argument that we live in an era where our talents and capabilities matter most as “mindless optimism.” The data also lead him to reject the idea that wage inequality has grown as technological change increased the demand for higher-skilled, college-educated workers.
Instead, Piketty’s evidence suggests it is the rise of what he calls the “supermanager” among the top 1 percent since 1980 that is driving the rise in earnings inequality. It is here that Piketty takes his sharpest swipe at economists. In his discussion of the thriving top decile, he points out that “among the members of these upper income groups are US academic economists, many of whom believe that the economy of the United States is working fairly well and, in particular, that it rewards talent and merit accurately and precisely. This is a very comprehensible human reaction.” Piketty agrees that in the long run, investments in education are an important component of any plan to reduce labor-market inequalities and improve productivity. But on their own they’re not sufficient.
This book is significant for its findings, as well as for how Piketty arrives at them. It’s easy — and fun — to argue about ideas. It is much more difficult to argue about facts. Facts are what Piketty gives us, while pressing the reader to engage in the journey of sorting through their implications.