Freedom, Markets, and Well-being Fall 2017

Piketty on Inequality

Overview

Professor Brown presented a slide deck on Thomas Piketty’s Capital in the Twenty-first Century.

She began with Thomas Malthus (1766-1834), David Ricardo (1772-1823), and Karl Marx (1818-1883). They all tried to use economic theorizing to make predictions about the broad course of society. While theoretically elegant, none of their theories was backed by decent empirical evidence.

By contrast, Simon Kuznets (1901-1985) had terrific data. But it only covered a period in history when inequality was unusually low.

Piketty has the same theoretical ambitions as Malthus, Ricardo, and Marx. But he also has data that is similar in quality to Kuznets’s while being vastly more extensive. Kuznets had data on the US for part of the twentieth century. Piketty has data for hundreds of years covering a dizzying number of countries. It is the combination of theoretical ambition, stellar data, and the importance of its topic that makes this book so remarkable.

What’s Up Next?

Piketty’s theory is that inequality in the wealthy countries is returning to its historical norms after a period when it was unusually low between World War II and the 1980s.

This is certainly interesting. But it isn’t necessarily bad. I think Matthew was exactly right when he said that we need to specify why inequality is undesirable. Otherwise, it’s just numbers.

This is why Piketty thinks it matters.

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. (Piketty 2014, 1)

There are two questions about this.

First, Piketty’s theory is that the historical rates of inequality happened because the returns to capital exceed the growth of the economy: r > g. But the rise in inequality that we have seen since 1980 is due to wages, not returns on capital. Some people are earning extraordinarily high compensation for their labor; they aren’t getting rich by investing capital. So why think we are going back to historical norms if the cause of inequality in our society is abnormal?

Second, Piketty’s introduction does not really explain what he means by calling inequalities “arbitrary” and “unsustainable.” Nor does he go into what he means by “meritocratic values” or explain why inequality undermines them and democracy. (This isn’t a criticism; there is only so much one can do in an introduction.)

Chapter 11, on inheritance, should address both points.

Use Your Imagination

Piketty thinks that a return to historic norms of inequality will have dramatic social effects. We can talk about whether that is likely to happen or not. And we can also talk about whether it would be good or bad if they happened. In order to do that, we have to imagine what life in a different kind of society would be like.

In particular, it might be helpful to think of possible advantages as well as disadvantages of returning to historic norms of inequality. What do super-rich families do that is good?

They support the arts and schools. (Prof. Brown comes from the Carnegie Building, for instance). They provide an educated elite to run the state. They sponsor great projects.

On the other hand, the idle rich don’t produce a lot. They don’t have to, after all. And the productive energies of everyone else are diverted into serving them or trying to marry into their families.

Anyway, my point is to imagine what society would be like, drawing on what you know of the past. Then try to judge what you imagine.

Extras

I referred to an interview in which David Frum said that one of his first jobs involved researching inequality at the Wall Street Journal. I was trying to make the point that this data about inequality makes everyone quite uncomfortable; as Frum describes it, his conclusions were unwelcome. The interview was with Ezra Klein. It’s worth your time both because he’s interesting and also because you can get a sense of how a career might go.

I do want to take one thing back. I said the Democrats didn’t have much to propose about inequality. That’s wrong. Obamacare did a lot.

References

Piketty, Thomas. 2014. Capital in the Twenty-First Century. Translated by Arthur Goldhammer. Cambridge: Harvard University Press.