Why Thomas Piketty’s wrongheaded economic manifesto is all the rage

The Liberals’ New Hero

by Guy Sorman

Capital in the Twenty-First Century, by Thomas Piketty 

It’s not every day that an academic work, written by a French economist and published by a university press, is celebrated as a “watershed book,” but this is what commentators are saying about Thomas Piketty’s Capital in the Twenty-First Century—at least, liberal commentators. 

The New York Times’s Paul Krugman, among others, has deemed Capital the most important economic book in a decade. Less ideological readers should be more cautious. 

Piketty’s book is important and deserves respect: his 700-page opus, a decade in the making, brings together an incredible amount of data on the accumulation of capital since the Industrial Revolution. 

If you want to know, say, the relative income of a landowner in the United States or in France compared with an entrepreneur in the mid-nineteenth century, Piketty has an answer. 

Piketty also helps explain why the French remember their revolution and the subsequent Napoleonic period fondly: “It was an era of relative high wages for the lower class following the redistribution of land and mobilization of labor to meet the needs of military conflict.” 

His book is a trove of similar historical nuggets.

Piketty claims that he has not written an anticapitalist book. Karl Marx’s Das Kapital was not anticapitalist in the same fashion: it only purported to explain how and when capitalism would collapse from its internal contradictions. 

“The bourgeoisie will dig its own grave,” Marx wrote. 

Among other goals, Piketty aims to examine the circumstances in which entrepreneurship or wage employment is more or less financially rewarding than capital ownership. 

According to his theory, “When the rate of return on capital is higher than the economy’s growth rate, capital income tends to rise faster than wages and salaries.” 

This happens to be the current situation in the West. As a consequence, inequality rises, because workers’ income stagnates when capital-owner revenue accumulates.

If the trend continues for years, the capital owners transmit this accumulated wealth to their heirs—and they become an entrenched oligarchy, a financial aristocracy.

“The entrepreneur inevitably tends to become a rentier,” Piketty writes, “more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.” 

This apocalyptic vision of capitalism’s inevitable collapse is strictly recycled Marxist prophecy. (Piketty, it’s worth noting, is interviewed at length in the latest number of the Marxian New Left Review.) 

Piketty admits that “the American nation is not yet there,” but we might get there if the government doesn’t do something to curb the trend. Piketty’s formula here is the classic Jeremiah tactic: predict a disaster, wait for it to happen, and then proudly announce, “I told you so.”

To explain why the preordained transformation of entrepreneurs into unproductive rentiers hasn’t yet happened, Piketty adds a new twist to Marx. 

Wars and global crises—“shocks,” in Piketty’s parlance—wipe out accumulated wealth, allowing true entrepreneurship to start anew. 

The rejuvenating role of disasters may have some historical basis (Piketty argues convincingly for it in the case of the two world wars). But a more straightforward and less ideological analysis would show that, apart from such cataclysmic events, innovation—or “creative destruction,” as Joseph Schumpeter described it—opens the field to new entrepreneurs, while eradicating rent seekers. 

“Shocks” of the kind Piketty describes are hardly needed.

Piketty also updates Marx’s pessimism. “Are we headed towards the end of growth for technological or ecological reasons, or perhaps both at once?” he asks. Marx thought that nothing more could be invented beyond the steam engine. By including ecology among the list of concerns, Piketty expands the declinist criteria, thus dismissing those still naïve enough to believe in progress.

Piketty’s statistics are superficially impressive, but they can’t be taken at face value. 

• His gross income figures, for instance, exclude redistribution and social programs. 

• The inequality figures he cites would be much less striking if he computed them—as is commonly done—based on net income after redistribution. 

Not doing so seriously distorts economic conditions. 

Piketty seems unwilling to concede that income alone, however calculated, does not account for all social reality: we all benefit from progress in multiple areas—health, transportation, consumer technologies—regardless of income.

Piketty’s book is less interested in economic efficiency than in social justice. “Building a just society,” he writes, “is the purpose of democracy.” For Piketty, “just” is the equivalent of “egalitarian.”

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