Piketty’s project is to document the trajectory of what he calls patrimonial capitalism, a system in which “large fortunes reflect inherited wealth more than … entrepreneurial mettle” (Kunkel 2014). Piketty believes that the “arbitrary and unsustainable inequalities” characteristic of this system will “radically undermine the meritocratic values on which democratic societies are based” (Piketty, 1).
What is so great about this book? Aside from the elegant writing, that is. It’s the data. Previous studies of inequality have either been conjectural or based on a very limited data set. Prior to the work done by Piketty and his collaborators, the best data was assembled by Kuznets. But Kuznets’s data concerned a period in history that Piketty believes was unusual: the US between 1913 and 1948 (Piketty, 11).
On the basis of his historical evidence, Piketty believes that, absent political action, the levels of inequality are going to revert to historical norms.
We mostly had a presentation from Prof. Brown. The slides she used are available on Sakai. A couple of things are worth noting here.
First, the term “capital” refers to wealth and not just the means of production. And “wealth” is just wealth, not simply inherited wealth.
Second, the theory is that the historically normal return to capital (r) is 4.5% while the historically normal rate of growth (g) for the economy as a whole is between 2-3%. As long as r > g, those who have capital will gain more wealth than those whose wealth rises with the general economy. So if we return to historical norms, inequality will grow.
Piketty notes that population growth causes the economy to grow. So a growing population can reduce the gap between r and g while one that is contracting will have the opposite effect. Going well outside of my area of comfort, it seems to me that this might be misleading. A growing population means that there are more people making demands on economic resources. They may, collectively, raise g, but still be worse off individually than they would have been in a smaller population with a lower g. Arguably, something like this is happening in Japan now: population growth is low, but this does not obviously lower the standard of living.
Furthermore, as Prof. Brown noted, Piketty is assuming that a small portion of the population owns capital. If people who work own capital, their income is determined by both r and g and inequality in wealth would not necessarily follow from r > g. To put it another way, the distribution of capital ownership matters as well as the difference between r and g.
I gather that Piketty’s primary solution to the problem of inequality involves taxation: taxes on wealth and very high marginal income tax rates. We talked briefly about other ways of addressing the problem. For example, the state can act in ways that make inequality matter less: it is easier to be poor in a country with good public services than it is in a country without them.
The state can also let the market work by refusing to enforce restrictions on trade. We talked a lot about the licensing of doctors. As you well know, the medical profession is highly regulated and very difficult to enter. And, as you also know, doctors command very high salaries. This makes inequality worse on Piketty’s measures. It also makes life harder for those at the bottom of the income distribution by making a necessary service (medical care) more expensive than it would otherwise be.
The patent system is also worth looking at. Is it really necessary to provide incentives for valuable innovation or does it just make drugs more expensive? I won’t pretend to have an answer, but it strikes me as something worth investigating.
If you’re interested in this sort of thing, you might want to have a look at Dean Baker’s The End of Loser Liberalism. I’m not qualified to say whether he is right or wrong, but I look at the state differently after having read him.
As Prof. Brown said, the Piketty book is as prominent in the culture at large as an academic book gets, especially one with charts and math.
Here’s a tip with books. You can learn a surprising amount by reading reviews even if you haven’t read the whole thing. (This is an excellent way of putting your annotated bibliography together, by the way. If you find a book that looks interesting, read a few reviews to get the gist of its main claims before investing your time in the book itself.)
Anyway, here are five reviews of Piketty that are highly regarded (which isn’t to say they are right, mind you).
Kunkel, Benjamin. 2014. “Paupers and Richlings.” London Review of Books 36 (13). http://www.lrb.co.uk/v36/n13/benjamin-kunkel/paupers-and-richlings.
McCloskey, Dierdre N. forthcoming. “Measured, Unmeasured, Mismeasured, and Unjustified Pessimism: A Review Essay of Thomas Piketty’s Capital in the Twentieth Century.” Erasmus Journal of Philosophy and Economics. https://www.dropbox.com/s/cuyis02389txr93/Nov2014.pdf?dl=0.
Posner, Eric A., and Glen Weyl. 2014. “Thomas Piketty Is Wrong: America Will Never Look Like a Jane Austen Novel.” The New Republic, July 31. http://www.newrepublic.com/article/118925/pikettys-capital-theory-misunderstands-inherited-wealth-today.
Solow, Robert M. 2014. “Thomas Piketty Is Right.” The New Republic, April 22. http://www.newrepublic.com/article/117429/capital-twenty-first-century-thomas-piketty-reviewed.
Summers, Lawrence H. 2014. “The Inequality Puzzle.” Democracy, no. 32. http://www.democracyjournal.org/32/the-inequality-puzzle.php?page=all.