Capital In The Twenty First Century by Thomas Picketty

A review of Capital In The Twenty First Century would itself have to be a book, so let this be a mere reflection on some of Thomas Picketty’s wealth of material. And there is no better place to start than his startling demonstration of how little changes in the structure of the ownership of wealth, unless war intervenes. Furthermore, his demonstration that things are getting back to ‘normal’ after the twin conflict shocks of the twentieth century’s World Wars could, unless tempered by resigned realism, easily provoke depression in the reader. Thomas Picketty’s book ought to be required reading for anyone – certainly anyone who happens tp be British – who benefitted from the social mobility available in the 1950s to 1970s. We have tended to blame the 1944 Education Act for providing the abnormal conditions that led to a measurable, albeit temporary, decrease in inequality. But Thomas Picketty sets the record straight by clarifying that it was merely a result of the aberrations of war, which for a few decades weakened the power of capital. Normal service has since been resumed.

Picketty desribes how unevenly capital is distributed, especially in the developed societies. Typically, half of the population owns nothing, while the top ten per cent has about half of the wealth. For Picketty, capital means fixed assets that could potentially be traded, whose ownership can be bought and sold. It includes fixed assets, property, equity or cash, and excludes all forms of human capital, which may be an asset and may have value, but, he argues, its ownership can only be traded in slave societies, which now do not exist. He considers capital distribution and income distributions separately, however, so at least an element of human capital is represented in the latter. He observes that income is always more evenly distributed than fixed capital, with the top ten per cent receiving just 25 to 30 per cent of total incomes. As a consequence, if there has been any shift in the identity of the capital-owning elite in recent decades, then this has come about at least in large part as a result of the very highly remuneration available to certain professions at the very top of the income ladder. The phenomenon has also resulted in an increase in inequality observed in developed societies during recent decades, especially in the USA and United Kingdom. Inequality continues to increase.

One of Picketty’s fundamental laws is that capital always grows faster than the wider economy. Thus success via earning power inevitably leads to a graduation into the rentier class, a transformation that is needed if newly acquired status is to be consolidated. Furthermore, if the inequality stating that capital growth is greater than economic growth holds true, it implies that even the advantages of growth in the general economy will also eventually accrue to the owners of capital.

Historically, economic growth has been strongly associated with increasing population. Without the demographic element, economies have consistently attained no more than around two per cent growth. Two per cent is still a significant rate if maintained. But spurts in growth come with spurts in population. The opposite is also likely to be true, which in itself allows some facets of the current world economy to be seen in more informative light. Population surges produce economic surges, however, and this comes as no surprise. What does surprise a little is Picketty’s assertion, perhaps assumption, that since France experienced population growth before other developed societies, then we must all look to France as the setter of the international economic agenda, the historic standard, if you like, that others followed.

Another historical reality that shows up very clearly in his data is the effect of foreign earnings throughout the nineteenth century and through World War One. These “invisibles”, as they have sometimes been labelled, were simply the profits from colonialism and slavery. They financed deficits, borrowing and consumption at the heart of the empires from which they were drawn. In the modern world, he points out, there is perhaps a greater degree of foreign ownership of capital than ever before, but the benefits and capital transfers are two-way, as are the benefits, and thus net transfers are small.

This history is illustrated in economic data. He cites a number of cases where an imperial power, having amassed large debts after periods of conflict or downturn, managed to earn five per cent or more of its national income from invisibles, thus allowing the country in question to service debts that otherwise would have been crippling. In the modern world, crucially, this get-out-of-jail card is perhaps no longer available.

One aspect of Picketty’s analysis does surprise us. Throughout the book he uses fiction as a source of illustration, a source that will cause many an academic reader of the text to pause and wonder. Picketty often cites examples from Balzac, Austen and others to illustrate general points about the behaviour of capital. The process, though highly selective and, it must be said, apocryphal, does eventually convince, but it is the novelists that eventually shine through, not the economic model. His argument, which he claims is illustrated so clearly in nineteenth century fiction, is that it is always more likely that capital will be inherited or indeed married rather than earned. The endless machinations associated with finding a suitable marriage partner for eligible females in nineteenth century fiction are mere recognition that it is easier to marry money than earn it, capital growth being always lower than economic growth.

If Capital In The Twenty First Century can be criticised, then it is in its rather scant, even dismissive coverage of human capital. Yes, this becomes absorbed into income data. But the author does maintain that  “democratic modernity is founded on the belief that inequalities based on individual talent and effort are more justified than other inequalities – or at least we hope to be moving in that direction.” He contrasts this belief with a Balzac character who foregoes the chance of studying law in order to seek marriage to a fortune, and then asks who would do such a thing today?

Now if credentials as well as skills obtained by participants in education do develop human capital, even if this is only reflected in increased earnings, then access to high quality education is needed before these skills and credentials are attainable. It might even be argued that now the educational experience is not only sufficient for capital advancement but also necessary, since even the opportunity to wed capital may hinge on the attainment or not of educational levels that are preconditions for entering that particular market.

And so if education has become just another commodity offered via a market, then the cost of accessing the most highly developed and effective delivery systems will rise, since these are the most effective means of securing access to capital, whether via earnings or marriage. Such costs will also rise since, having become a market, educational demand will be highest from those with a need to protect their existing ownership of capital, and they have the resources to pay for what they need. Education thus becomes a means of confirming and re-asserting wealth, rather than a potential avenue for social mobility. Perhaps today it is still easier to marry wealth than earn it. Except that today the option of marriage may be determined by an educational credential that can most effectively be secured by existing access to wealth.

This argument, it seems, closes the loop and illustrates how, even in a materialistic society, capital will always grow faster than the economy as a whole and why inequality will not only persist, but increase.

No book review should concentrate on what a book is not. So as a final note let me describe Thomas Picketty’s book as essential reading for anyone with a brain. If you can disprove its analysis empirically, rather than merely deny its significance on ideological grounds, then please present your data. If you can’t, then join the call for policies that will attempt to address the destructive imbalances that result in growing inequality. It must be remembered that, underpinning Capital In The Twenty First Century is a need to examine whether a certain text called Capital in the nineteenth century contained a grain of truth in asserting that eventually the capitalist system would collapse under pressure of its own inevitable imbalances. The conclusion appears to have been demonstrated, and the case for re-reading that other book is thus made.