Freedom, Markets, and Well-being Fall 2018

Piketty on Inheritance


Why did we read this enormous, complicated chapter?

First, it exposes the logic of Piketty’s theory. Piketty’s theory is that we are returning to historical rates of inequality generated by the inequality between the rate of return on capital and the rate of growth in the economy as a whole: r > g. But the slides Prof. Brown put up in our last class that show inequality increasing from the 1980s through the present day do not illustrate this theory. They show that the labor markets have, for whatever reason, rewarded some people with extraordinary salaries. The inequality we see now is due to unequal returns to labor, not r > g. So we need the part of the story that explains how we are going to get to the r > g world.

Second, Piketty goes into his misgivings about patrimonial capitalism at greater length in this chapter. In the opening chapter, we got this:

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)

What does he mean by “arbitrary,” “unsustainable,” “meritocratic values,” and “democratic societies?” These terms clearly express his reasons for caring about inequality but he does not explain what they mean in the introductory chapter. I think he gives us greater insight into his normative thinking in the eleventh chapter.

Inheritance and r > g

Our first question concerned the relationship between the historical data and the recent data about inequality. The former are the result of r > g while the latter are the result of unequal returns for labor. The material on inheritance is supposed to show two things.

First, it shows that r > g is, in fact, starting to play a role in the distribution of wealth in our society. People who have stopped working have more wealth than people who are nearing the end of their working lives. How could this be unless they are getting their wealth from something other than wages? Inheritance is not driving the dramatic increases in inequality (yet) but we can see that it is starting to have a larger influence than it did during the middle part of the twentieth century.

Second, it suggests that capital is going to be a bigger source of wealth in the future. The fact that 80 year olds have a lot of wealth shows that they are not spending their wealth down as the life cycle theory predicts. Instead, they are building up a big pile. This pile will go to their children after they die. So even if the inequality that we see now is entirely driven by wages, we should expect that more and more people will start life with a lot of inherited wealth.

Meritocracy and Democracy

Piketty thinks that greater inequality will be bad because it undermines meritocracy.

By meritocracy, he does not mean a system of government in which the best rule (as in Plato’s Republic, for example). He does mean that a society is a meritocracy if economic rewards go to those who earn them by using their superior training and skill. By contrast, Piketty thinks, it is arbitrary to distribute economic rewards through families; the person who is born into a wealthy family does not merit wealth in the way that a person whose skills command a high price in the labor market does, in his opinion.

What is so great about meritocracy? Piketty clearly thinks that it is rational and fair. By contrast, he says that non-meritocratic systems distribute wealth on an arbitrary basis. Those who are lucky enough to be born skilled should get financial rewards while those lucky enough to be born into wealthy families should not. That’s the idea.

A second thing to be said for meritocracy is that it rewards productive behavior and so it gets productive behavior. In the novels Piketty analyzes people devote their talents to trying to marry into wealthy families rather than making things or providing services that other people are willing to pay for. John Locke said that labor makes land thousands of times more valuable than it would otherwise be. Suppose he’s in the ballpark. Now imagine that effort being diverted into chasing a favorable match. Society will be much poorer.

A third thing to be said for meritocracy, as far as Piketty is concerned, is that it plays a valuable social role. He thinks that the belief that society is a meritocracy plays a useful social role. It helps to alleviate what he sees as a tension between the belief that everyone’s rights are equal and the observation that wealth is unequal.

Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. (Piketty 2014, 422)

In this paragraph, he isn’t using the term “democracy” to mean a system of government where those with political authority are chosen by popular vote. Rather, he means that a democratic society is one in which people think they have a chance to get rich through their own efforts. He thinks that democratic societies need their members to believe this to resolve the tension between equal rights and unequal wealth. I’m not sure what exactly he means, but my best guess is that he thinks the stability of the system requires people to think that the unequal holdings of wealth are due to talent or effort. He might also think that this belief is more important for the stability of a democratic society that officially subscribes to doctrines about equal rights, than it would be for aristocratic, monarchical, theocratic, or (maybe) communist societies. It’s too compressed for me to be sure what he’s thinking, but this seems to be the right neighborhood.

One thing that Piketty did not give much time to is the attitude of meritocracies towards those who fail. He did seem to approve of the way that the characters in Austen novels think of the wealthy as more fortunate, rather than more deserving, than everyone else. But he did not really delve into the fact that a functioning meritocracy treats those who do not succeed as deserving their bad fate. This is something we will get into when we read Darity, Rawls, Dworkin, and Williams.

Professor Brown’s Presentation

Professor Brown explained that the Modigliani life cycle model of savings isn’t a bad one if we’re concerned with the behavior of most people. It is not a great model if we are looking at the wealthy, as they do not draw their savings down at the end of their lives but rather pass it on to their heirs.

Then she went over Piketty’s equations; they seem to check out.

Finally, she pointed out a problem with turning savings into annuities. (Annuities are insurance plans of a sort where you pay a sum up front and then draw a regular payout until you die. The company that sells you the annuity is betting that you will die before the payouts exceed the invested value of the lump sum. You are willing to take the financial disadvantageous bet they offer because you don’t want to run the risk of running out of money.)

Where was I? Oh yes, the problem with turning savings into annuities. That’s basically what Social Security does. And that raises a problem. If people know they’re getting a payout when they retire, they will save less for their retirement while they are working. Since savings drive the growth of the economy, that seems like a bad thing and one that would potentially threaten the Social Security program, which operates on a pay as you go basis. As a solution, the US has opted for various tax advantaged retirement savings plans to replace the savings lost to Social Security.

Some things to think about

I think that Piketty’s book is extremely important. This phenomenon seems to be genuine and it has to have significant social effects. This is going to be your world when you’re my age. Probably.

So what would it be like to live in a world dominated by r > g? Piketty uses nineteenth century novels very effectively here. I think he’s right to do that. We need to employ the kind of observational skills that good novelists have in order to have a sense for what social life will be like.

One place to start in thinking about this would be to consider how our societies are, or are not, similar to the ones described in the nineteenth century novels. Here are a few differences.

So what would it be like to live in a society with nineteenth century levels of inequality coupled with our family structure and our technology? I lack the imaginative powers required to answer that. The only thing I feel confident in saying is that it’s not obvious that it would be exactly like a Jane Austen novel.

One more thing. While inequality has certainly gone up, absolute poverty has gone down. Here’s the Wall Street Journal

The global population living in extreme poverty has fallen below 750 million for the first time since the World Bank began collecting global statistics in 1990, a decline of more than 1 billion people in the past 25 years.

That’s mostly China and India. The distribution of wealth in China is a lot less equal now than it was in the past, but there is also a lot less poverty. That’s not obviously a bad tradeoff. (Note though that global inequality has gone down even as inequality within countries like China has gone up.)


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