Piketty’s thesis: more work needs to be done on the question of differential returns to capital and its effect on concentration of wealth in ever fewer hands

Piketty Is the Anti-Marx

By NOAH MILLMAN 

Capital in the Twenty-First Century, Thomas Piketty, Belknap, 696 pages

When Karl Marx wrote his magnum opus, Das Kapital, he was responding to a radical change in the nature of economic relations. Industrialization was uprooting the peasantry and concentrating it in urban slums, eradicating traditional privileges and driving traditional crafts into obsolescence, and enabling the owners of capital to amass extraordinary fortunes on the backs of a labor force that appeared to have less and less control over its own destiny.

These changes demanded a response—and response required an adequate understanding of the dynamics of the changes he and others observed. Though Marx had quipped in his youth that “the philosophers have only interpreted the world, in various ways; the point is to change it,” Das Kapital was fundamentally a work of interpretation—it was, paradigmatically, a work of theory.

Marx’s political and economic program has been deservedly out of fashion for a third of a century but, as if to declare a generational swing of the pendulum, this year’s most talked-about big economic book consciously echoes its 19th-century antecedent, right from the title. Capital in the Twenty-First Century, by French economist Thomas Piketty, appears to update Marx’s analysis for our own era and to put the question of the distribution of wealth back in the center of economic and political analysis. But Piketty’s doorstop book is very different from the one Marx wrote, almost its opposite both methodologically and in its implicit politics.

Piketty’s book is anchored in a series of very simple ideas. First is the equation r > g, where r is the rate of return on capital and g is the growth rate of the overall economy. It is not hard to demonstrate that if r is substantially greater than g, then capital will capture an ever greater share of the national income. Why? Because if the return on capital (net of depreciation and taxes and so forth) is greater than the overall growth rate, then that return should be sufficient for some of it to be saved and reinvested, adding to the stock of capital. And if the capital stock grows, and returns to capital do not degrade—an important and contestable assumption—then by definition the share of income claimed by capital must grow.

Moreover, it isn’t hard to demonstrate that r must always be at least modestly greater than g. Why? Because if it were lower than g, no one would ever invest in capital stock. One would be better off relying on the growth of income generally to provide for the future and consume all one’s current income rather than saving any of it.

Piketty’s second idea is even simpler: namely, that β = s/g, or the ratio of capital to national income is equal to (or approaches over time) the ratio of the long-term savings rate to the long-term growth rate. Again, this should be intuitive: if a certain country grows slowly and saves a lot, then its capital stock should steadily increase in value, until it is many multiples of the national income; another country with rapidly growing income but little savings should see its capital stock grow slowly relative to the size of the national income.

From these very simple, largely unassailable ideas, Piketty derives an alarming conclusion: that, absent political intervention, wealth will compound more rapidly than income grows, swelling to a larger and larger multiple of national income and claiming an ever larger percentage of the national income itself, to the point where inherited wealth comes to matter more than earned income. At which point we will have returned to the very patrimonial world that preceded capitalism.

This is the first irony of Piketty’s analysis. Although his book is titled to recall Marx’s, Marx told a story about how capitalism changed economic relations, tearing apart old hierarchies in a ruthless quest for efficiency. Piketty tells a story about how capitalism did not change economic relations. Heredity mattered a lot in Balzac’s Paris, but it surely mattered even more in Louis XIV’s—and Piketty argues that it matters more now than it did in 1950 and will matter in the future as much as it did in 1850. Piketty’s book could have been titled The Capitalist Road Back To Serfdom.

Which is why Piketty’s politics also differ dramatically from Marx’s. Marx was an apocalyptic optimist. He saw the horror wrought by industrialization, but he also saw the extraordinary power industrialization unleashed, and he imagined a way that the power would ultimately make it possible—inevitable, actually—for the horror to be overthrown.

Piketty is a pessimistic meliorist. He sees the growth of wealth and its concentration as the natural results of very simple and universal laws, as applicable in a precapitalist context as in the modern world of unshackled finance. But he finds a meliorist solution in a powerful redistributive state such as historically existed, and continues to exist, in his native France—albeit now under threat from the tax and regulatory competition between states that characterizes our new, globalized world.

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