Freedom, Markets, and Well-being Fall 2020

Piketty on Inequality

Overview

Professor Brown presented a slide deck giving an overview of Thomas Piketty’s Capital in the Twenty-first Century. (You can find it on Sakai now.)

Thomas Malthus (1766-1834), David Ricardo (1772-1823), and Karl Marx (1818-1883) all used 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 his data covered a period in history when inequality was abnormally low.

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

Our discussion

Dylan B. caught what looks like a contradiction. On his first page, Piketty says that capitalism “automatically” generates arbitrary and unsustainable inequalities (Piketty 2014, 1). But later he says that the history of the distribution or wealth is deeply political and “cannot be reduced to purely economic mechanisms” (Piketty 2014, 20). I don’t know if that’s a deep problem of if it’s a matter of phrasing. But either way it’s a darn nice catch on Dylan’s part.

We talked a bit about why inequality matters for Piketty.

Ryan and Jordan thought it was important because great inequality makes social mobility difficult.

Lilly thought he had politics in mind. In an unequal society, the rich rule and that’s incompatible with democracy and justice. She referred especially to page 31.

Daisy thought one of his points was that we need to understand what’s happening with inequality in order to make informed, democratic decisions about what to do about it.

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.

Here 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. We will talk about that next time.

References

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