Capital in the Twenty‑First Century
Thomas Piketty, 2013

Back when I had a lot of history tutorials, the questions my students hated the most were the ones about books.  The books that showed up on standardized tests in history fell into three categories.  First, you had a very limited selection of canonical works of literature: The Scarlet Letter, Moby Dick, Adventures of Huckleberry Finn, The Great Gatsby, a handful of others.  Second, you had works of fiction that were not considered inherently great but that held historical import: Uncle Tom’s Cabin, The Jungle, that sort of thing.  And then finally you had non‑fiction.  Silent Spring showed up a lot.  So did The Feminine Mystique.  I don’t recall any books about economics showing up on the U.S. history tests; on the world history tests, there were two: The Wealth of Nations by Adam Smith, and Das Kapital by Karl Marx.  So it was a hell of a thing when the professors of the history and economics classes I was auditing back in the mid‑’10s excitedly reported that another book had just been published that was certain to join that august company.  I would not be talking about this in this article if that book were not Capital in the Twenty‑First Century by Thomas Piketty.  Time will tell whether people in the year 2023 are still talking about this book, let alone in 2113.  Which these days is about how long it tends to take me to get around to checking out the latest arrivals in the buzz bin—​except that with all the driving around I did this past summer, I did have a chance to give this a listen, since the one type of media I did have time for was audiobooks.  (Well, those and Masterchef Australia.)

Piketty begins by distinguishing his book from those of the economists of earlier generations, whose evidence for their assertions was that they had sat in a chair and thought really hard about those assertions.  They did not base their analyses on data, nor did they really have data on which to base their analyses.  Piketty, by contrast, has a century’s worth of income tax and estate tax records to work with, and exponentially more data as he gets closer to the present.  This emphasis on data marks Capital in the Twenty‑First Century as an scholarly book that happened to sell two million copies rather than a book written for a popular audience.  I always used to wonder why academic writers seemed to feel the need to follow even a limited and uncontroversial claim with half a dozen long chapters rattling off statistics, until I realized that if your audience is composed entirely of fellow experts who already know all the arguments, the data you’ve uncovered actually is the part they’ll find interesting.  There’s also the author’s own perspective to consider: framing an argument may take a few days, but compiling all that evidence, well, that’s a scholar’s life’s work.  That a scholarly book would therefore be primarily a showcase of evidence does make sense.  It also makes for some pretty dry reading.  However, Piketty continues his introduction by distinguishing himself from his contemporaries as well, accusing them of treating economics as a specialized branch of mathematics and of being more interested in spinning out abstruse theorems than in attempting to shed light upon human behavior.  His own book, he declares, is unashamedly a work of social science, even of history.  This aspect of the book I found much more interesting.

Consider a world of 1% growth, Piketty proposes.  That might not sound like very much, but it adds up to an economy that is a third larger after a single generation.  Those who come of age in such a society may find themselves entering a workforce vast sectors of which didn’t even exist when they were born.  A lot of people I went to college with, for instance, took first jobs with titles such as “web site designer” or “search engine developer” that would have made no sense when we started college, let alone when we were back in preschool saying that we wanted to be astronauts or typewriter salesmen.  This, Piketty contends, is a historical aberration.  Prior to the Industrial Revolution, 1% growth was virtually unimaginable; much more common was a rate of, say, 0.1%.  People died in a world very much like that into which they were born.  One of the most interesting observations Piketty makes about the stasis of life in a low‑growth world is that prior to the early twentieth century, novelists had no qualms about making repeated references to specific sums of money.  Jane Austen could say that a character had an annual income of six hundred pounds a year and could rest assured that her readers would instantly have a very precise picture of that character’s lifestyle, because a world without growth is generally a world without inflation; six hundred pounds meant the same in 1820 as it had meant in 1720, and would surely mean the same in 1920 and 2020.  She could also count on her readers to have an implicit understanding of the source of such an income.

That source was not work.  The book Piketty cites more than any other is Père Goriot by Honoré de Balzac.  Specifically, he repeatedly returns to a passage in which one character advises another to drop out of law school and marry a rich man’s daughter, for even the best‑paying salaried job he could aspire to, that of royal prosecutor—​an extremely difficult job to land—​would pay only a small fraction of the income he could draw from his prospective wife’s dowry.  This was, to use the George W. Bush administration phrase, an ownership society.  European states had been ownership societies from time immemorial, but to see the birth of such a society, look at colonial Virginia.  Though the first wave of British colonists could not adapt to their new surroundings and largely died off, the next wave discovered that the soil of the Tidewater region was ideally suited for the cultivation of a lucrative cash crop: tobacco.  For a while, people from many backgrounds could, with a little daring and a lot of luck, secure a fortune by founding a tobacco plantation.  Men such as Nathaniel Pope and Henry Soane, from families not particularly distinguished in England, established themselves among Virginia’s leading citizens.  But Tidewater land was a finite resource, and before long all the prime acreage had been gobbled up.  Newcomers found that they could not follow the footsteps that had been laid down just a few years earlier.  They had to work on land that had already been claimed by others, and when the tobacco they grew over the subsequent decades was sold back to the mother country, who pocketed the proceeds?  The descendants of the plantation founders, who held pieces of paper declaring that because they had been lucky enough to gestate in the right uterus, they were entitled to the product of the labor of the unlucky.  Tidewater Virginia thus became an aristocracy, divided between, on the one hand, a class that did grueling work for a meager subsistence, and on the other, a new class of Southern gentlemen born into wealth: men such as Nathaniel Pope’s great‐great‐grandson, George Washington, and Henry Soane’s great‐great‐grandson, Thomas Jefferson.

Jefferson was one of the chief beneficiaries of the dominance of the Tidewater aristocracy in the early United States—​and yet he was also instrumental in destroying that dominance.  As noted, coastal and riparian Virginia became an aristocracy because it was not growing.  Once the Tidewater region had filled up, a newcomer to the colony who didn’t want to work another man’s land had two choices: start a farm out in the Piedmont, the back country where the land was poorer and attacks from the indigenes were a constant threat, or else go to war against the aristocrats, as Nathaniel Bacon did in 1676.  That didn’t work out well for Bacon.  Attempting to topple the ownership class rarely does.  Part of that has to do with police power—​paying a few members of the working class a few extra dollars to do violence to the rest.  But a lot of it has to do with ideology.  Prior to the twentieth century, that meant inculcating among all classes an acceptance of the aristocracy—​of the notion that wealth should be allocated the way it was, with inheritance playing the dominant role, because some people are simply born better.  And along with wealth went power.  Eight of the first nine presidential terms were held by Tidewater aristocrats.  And yet!  After that they ceased to be relevant—​and the reason was the resumption of growth.  Thanks in large part to Jefferson’s Northwest Ordinance and Louisiana Purchase, those locked out of the Tidewater no longer had to settle for scratching out a living on the Piedmont.  They had two‑thirds of a continent to choose from, with river valleys and rich farmland that made the Tidewater look like nothing special.  Soon the landed gentry of Virginia owned only a tiny fraction of national wealth—​not because their slice of the pie shrank, but because the pie itself grew.  Imagine you’re playing Monopoly and get some lucky breaks early on.  You snatch up Park Place and Broadway, use the rent you collect from those properties to grab the Electric Company and Water Works, and soon you own the entire board right down to Mediterranean Avenue.  Triumph!  Except then you discover that your reward is to be promoted to round two, where the properties are not streets but cities.  You only own one, and it’s not even a great square.  It’s one of the powder blue ones near the jail.  You may grumble at the person who lucked out into a more advantageous position on the Luxury Tax side of the board.  But never fear: so long as growth continues, that person’s advantages will also eventually dissipate in turn.

The problem, Piketty contends, is that the era of growth may be drawing to a close.  The global economy has grown astronomically over the past couple of centuries, but what caused that growth?  The most basic cause of economic growth is population growth: even if your only economic activity is growing potatoes, if you have twice as many people kicking around, you have twice as many potatoes being grown and consumed.  At least, you do as long as you have twice as much arable land available to cultivate.  But as happened in Virginia, eventually you run out, and your region has hit its carrying capacity.  In the 21st century, it appears, the human population will exceed the carrying capacity of the entire planet.  The only reason it hasn’t already is the agricultural revolution that made land much more productive; while it’s not impossible that another one of those might be in the offing, there’s no guarantee, and in fact the opposite seems more likely due to climate change.  Economic growth also seems to be self‑limiting in that as a society becomes wealthier, and especially as that wealth is expressed in the education of women, population growth falls sharply.  This is already happening: annual population growth has been declining since 1968, and the world population has risen approximately 26% since the year 2000, compared to roughly 36% in the prior eighteen years.  What this means for the future is a matter of some controversy.  Last year the UN revised its estimates to account for the fact that the decline in Africa’s population growth rate has begun to level off rather than accelerate, and now projects that the global population will peak in the early 22nd century rather than in the 21st.  But at the time Capital in the Twenty‑First Century was written, most forecasts indicated that the peak was on the horizon.  IIASA projected the world population would peak at 9.4 billion in 2070; Deutsche Bank thought the peak would be even lower and earlier, with a global maximum of 8.7 billion in 2055.  After that, we (or rather, those of you who will still be alive, which is highly unlikely in my case) will be living in a stagnant or even shrinking world—​or, as Piketty repeatedly stresses, we will have emerged from a period of anomalous growth.

There are three basic ways to view any given state of affairs:

  • Things have always been this way.  Conan O’Brien once did a segment in which he hung out with a bunch of historical re‑enactors.  Approaching a group of young women in the troupe, he asked each one in turn what her father did for a living.  Each one answered, “He’s a farmer.”  Conan turned this into a running joke about how uninventive they all were.  But those actresses knew their historical period!  Nowadays the standard opening question upon meeting someone is “What do you do?”, as we live in a world with a dizzying diversity of occupations, and how we make a living is one of the primary ways by which we define ourselves.  It’s hard to imagine that things could ever have been different.  But in 1790, ninety percent of the American labor force consisted of farmers.  The past is a foreign country, they say; go looking for such seemingly timeless professionals as doctors and lawyers and teachers and shopkeepers there, and you will find startlingly few.  For more than a handful of people to make a living by means other than producing food is the historical anomaly.

  • This is the new normal.  Those who don’t fall into the trap of thinking that the way things are now is the way they’ve always been can still succumb to the temptation to assume that the way things are now is the way they will continue to be.  Sometimes they’re right!  As we’ve just seen, anyone who forecast that the advent of agriculture would turn out to mark a permanent change in the nature of human society has several thousand years’ worth of evidence to back up that prediction.  The notion that the transatlantic exploration of the 15th and 16th centuries would effect permanent changes in the makeup of the population of the Americas also seems to have panned out so far.  Things had been one way for over ten thousand years in the latter case and over a hundred thousand in the former, but now they are different, and it does not appear that they will be going back.  And Piketty does note a couple of fundamental changes to the structure of the economy that he anticipates will be permanent.  One is the rise of a patrimonial middle class.  Under the pre‑industrial class system, there was little difference between incomes at the 85th percentile and the 15th.  If you weren’t one of the aristocrats, who controlled virtually the entirety of the nation’s wealth and passed it on to their children, then you owned basically nothing and left your children nothing.  Today, most people still own next to nothing: their total assets amount to less than one year of their income, which is itself fairly meager.  Sometimes their assets are outweighed by their debts.  On the flip side, the top 1% still own over half of the world’s wealth: 50.1%, as of 2017.  But that other 49.9% is much more broadly distributed than it used to be, at least in the West.  Over a quarter of the world’s wealth now belongs to a new economic stratum in which children don’t have vast estates fall into their laps, but do receive gifts and inheritances amounting to several years’ worth of a typical worker’s wage: enough to pay for an education, to live on during an unpaid internship that unlocks a high‐paying long‑term job, to make a down payment on a house.  They still have to work for a living, but the starter capital they receive keeps them ensconced in the affluence in which they were raised.

    But that brings us to the other big change: even the aristocrats now work for a living, at least nominally.  Who are the top 1%?  To my surprise, the uppermost centile is not dominated by financiers; they make up 20% of it, which is disproportionate to the financial sector’s 10% role in the economy but not wildly so.  About 5% of the uppermost centile is made up of Cardi B and Gigi Hadid and other celebrities I hadn’t heard of but who my students tell me are famous.  Nearly all the rest of the top 1% are “supermanagers”: top corporate executives who, rather than sitting on their accumulated capital and collecting rents as did aristocrats of the past, instead collect stratospheric salaries.  This is indicative of an ideological shift, as it is no longer widely accepted that some people are simply born better than others; the rich now feel compelled to justify their wealth by framing it as income derived from uncommonly difficult and productive work.  The fact that this work tends to consist of sitting in luxurious offices running companies into the ground has not prevented this framing from taking hold; the results of the 2016 election illustrate how tens of millions of voters automatically attribute intelligence, industry, and competence to a rich man, even when his wealth has been proven to derive from money laundering rather than business acumen and even when he is demonstrably stupid, lazy, and incompetent.  Still, the fact that an aristocrat feels the need to boast of his brainpower and vocabulary rather than merely his bloodline is indicative of a significant shift.

  • This too shall pass.  It’s fairly rare for even significant shifts to take hold over the long term, though, and projecting current trends over even the relatively near term tends to be a mug’s game.  Look at all the sci‑fi from the 1980s and ’90s that took it as a given that the lion’s share of capital in the 21st century would be controlled by Japan.  That proved no more prescient than the sci‑fi from the dawn of the space program that projected that because it is 2018 I must be transmitting this post from a lunar base.  The economic miracle in Japan, Piketty repeatedly reminds us, had a precedent: Western Europe’s “trente glorieuses”, the thirty years following 1945 when the economy prospered, income inequality narrowed, and a consensus arose that capitalism had been tuned to the point that it worked for everyone and would do so indefinitely.  Then along came the ’70s and the end of the boom.  Why didn’t the good times last forever?  Because the reason for all that economic growth was that Europe was rebuilding from two devastating world wars!  Of course the economy will hum along when nations are dedicated to accomplishing that kind of massive project!  And if Japan continued to soar while Europe faltered, well, think how much more rebuilding Japan had to do.  In fact, even putting aside the devastation of World War II and two atomic bombings, Japan had some extra ground to make up to achieve the standard of living the West had enjoyed.  This is another key point Piketty makes: the reason that countries such as China and South Korea have been able to grow at staggering rates, five to ten times the one to two percent growth that Piketty already considers revolutionary, is that it’s a lot easier to lift an impoverished population up to a richer country’s standard of living than it is for a rich country to push its standard of living to heights never before achieved.  Rapid growth might continue here and there as different parts of the world make the leap China is now making, but eventually you run out of regions that haven’t yet closed the gap.  At that point it’s back to low growth.

    Ah, but won’t another gap have opened up by then?  Piketty’s conjecture is that it won’t.  As noted, he describes the burgeoning growth of the mid‑20th century as an anomaly brought about by the recovery from two world wars—​an anomaly that can’t be repeated, as the next world war will return the world to the insects—​but the larger anomaly is the Industrial Revolution itself.  That is what lifted a few parts of the world to previously unattained levels of growth, starting with Britain, which from the year 1000 to the eve of the Industrial Revolution had seen its economic growth rise from 0.09% annually to 1.02%, then saw it double to 2.05% with the beginning of industrialization.  That’s about as much as you can expect when you enter uncharted territory.  But once the path had been laid down, others could travel along it a lot faster.  When Josef Stalin subjected the USSR to forced industrialization a century later, the Soviets achieved 6.7% annual growth in the midst of the Great Depression.  Japan industrialized at a 9.3% annual clip.  China, which had stagnated for two millennia—​a century of 0.4% growth here, a half‑century of 0.4% decline there—​industrialized to the tune of 5% annual growth under Mao, 7% annually a generation later, and 13% annually the generation after that.  Perhaps in a few decades economic analysts will be marveling at a similar transformation in Africa.  But that too will just be industrialization, delayed by a quarter of a millennium.  As other parts of the world catch up to the West, how will the West race on ahead—​or, for that matter, how will these other parts of the world race past the West?  Only by hitting upon some other boost to productivity on par with the Industrial Revolution.  But that’s the “2. ???” before the “3. PROFIT!”.  You can’t just stipulate the timely arrival of an economic miracle.  In its absence, all of us will creep along, and that likely means a return to aristocracy.

So if this is correct, is there anything to be done?  Piketty’s main answer comes, surprisingly, from the United States.  The U.S. had its own “trente glorieuses”, but unlike those of Western Europe, its prosperous years can’t be chalked up to a postwar rebuilding effort—​in the 48 states, isolated from WWII battlefields by two vast oceans, there was virtually nothing to rebuild.  The reason America did well in the ’40s, ’50s, and ’60s was political.  In response to Herbert Hoover’s refusal to fight the Great Depression through aggressive governmental action, the American electorate booted him out of office and awarded the presidency to Franklin Roosevelt, who set the U.S. economy on a drastically different course that would last for multiple generations.  Between 1936 and 1981 the top marginal tax rate was at least 70%, and reached as high as 94%, while the top marginal estate tax rate from 1941 to 1976 was 77%.  The result was a “Great Compression” that saw a significant transfer of wealth from the bank vaults of the rich to the wallets of the middle class and the poor, who kept the economy humming by actually spending it.  And though these rates were initiated by Democrats, multiple Republican administrations kept them in place, in recognition of the fact that they served as the underpinnings of prosperous New Deal America.  The administration that took a chainsaw to those underpinnings was that of Ronald Reagan, who kicked off decades of disastrous fiscal policy choices that have led us to a 2020s that looks to be more inequitable than the 1920s.

Piketty writes that, after crunching the numbers, he has found that a tax of 82% on that portion of personal income that surpasses a million dollars would maximize standards of living, causing no adverse effects to the economy and fostering many beneficial ones, such as creating incentives for companies to direct profits toward reinvestment rather than lining the pockets of top executives.  Wouldn’t millionaires just flee?  Piketty offers a number of arguments why that’s unlikely, but agrees that tax havens are a huge problem; accordingly, he calls for a regionally implemented but ultimately global tax, not on income, but on capital itself, at a rate of perhaps 2% on holdings in excess of two million dollars.  He spends a full chapter spelling out how such a tax could realistically be engineered.  It might still seem impossible, but for the past four months so has finishing this article, and yet here’s the end of it.  Compared to getting this fuckin’ thing done, constructing a utopia should be relatively easy.

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