This is an attempt to summarise the 1800 pages of Thomas Piketty’s two most famous tomes in about 3 pages. It is summary rather than an analysis and is designed as a background reference for a range of my blog posts which reference Piketty.
Introduction
Piketty’s work, and the collaboration of academics coalescing around the World Inequality Database, helped put questions of inequality on the cultural and political agenda around the world. For me, Piketty’s books also rekindled my longstanding interest in big picture political economy.
There are lots of book reviews and summaries of Piketty’s work, some good simple reproductions of the main arguments, and some where I wondered if I was reading the same books being discussed! There is also a Primer on Piketty’s Theoretical Framework, but far from being a good introduction, it is a mathematical proof and a more complex (though shorter) read than Piketty himself.
While Piketty is nothing if not prolific, this summary only deals with what I take to be his two biggest theoretical works, the famous Capital in the Twenty-First Century (2014) and Capital and Ideology (2020).
Piketty’s Capital in the Twenty-first Century
Core Argument
Capital in the Twenty-First Century was published in French in 2013 and in English a year later. It contained a wealth of data and provided a macro-economic analysis of issues of inequality raised by the political mobilisations of the Occupy movements of the previous decade.
The core argument through 680 pages is that in the last 40-50 years inequality in western countries has increased and is on track to regain levels not seen since the Belle Epoque prior to World War 1. There is lots of data, argument and two mathematical formulas to support this thesis, but the underlying driver of this trend is that where the rate of return on capital (r) is greater than the growth rate of the economy (g), then (all other things being equal) it will result in greater inequality.
Piketty notes, this relationship of r > g is simply an accounting equation (not an old-style “law” of capitalism). Indeed, it really just common sense: if a part of anything grows faster than the whole, then the other part(s) must grow less quickly and the faster-growing part becomes relatively bigger.
The inequality arising out of r > g refers initially to the balance between capital and labour (and by capital here Piketty largely means wealth or property in all its forms). r > g leads to returns to capital taking an increasing share of the economy (in profits, rents and interest) while the wage share will decrease.
Of itself this says nothing about the distributional outcomes across households (or possible governmental redistributions), but as all the data provided by Piketty shows, capital is disproportionately owned by the top 10 percent, and in particularly by the top 1% and 0.5% of households. An increase in capital’s share of the income therefore translates to income and wealth accumulation at the top end and greater inequality across the economy.
As an aside, I note that there are some debates about Australian “exceptionalism” and evidence from Ranaldi and Milanovic that Australian households have a relatively greater mix of capital and wage incomes. This would mean that r>g may not lead to the same concentration of wealthy and inequality here. However, beyond the singular asset owned by many Australians (their homes), around 70% of all financial assets in Australia are owned by the highest net worth quintile. The bottom 40% of the wealth spectrum owned just 6% of all financial assets (calculation from (ABS, 2019 Table 7.4). This still gives plenty of scope of for the sorts of processes Piketty identifies.
Empirical Analysis
Against this theoretical background, Piketty charts the course of inequality in selected Western countries (mainly France, England and the US) from the steady accumulation of wealth throughout the nineteenth century to the destruction and limitation of wealth in the period 1914-1970s through war, depression and inflation and progressive taxation. Finally, since the 1980s we have seen the rise again of inequality, largely driven by low economic growth (so that r > g) and the winding back of progressive taxation.
In this analysis, Piketty shows that small differences in the rate of return, growth rates and taxation rates can make significant cumulative differences in the long term (where inheritances also play a crucial role).
Further, wealth distribution is always more unequal than income distribution and the focus on wealth is also warranted because those with the highest wealth (the top 1%) exert powerful influence on the social landscape and political order (a theme taken up more fully in the second book).
Piketty’s Capital and Ideology
Piketty’s second tome (1093 pages), published in English in 2020, builds on the analysis of the first in two ways. Firstly, with access to new data he extends the analysis to more countries with more diverse histories, including Russia, India and Brazil. Secondly, while Capital in the 21st Century focused on economic drivers of inequality, Capital and Ideology documents the ideologies and institutional structures that protect and promote those inequality regimes.
Piketty begins by examining pre-modern “ternary” societies, that is, societies with three main classes: warrior classes (with coercive powers), clerical classes (who provided intellectual leadership and justification) and the lower classes. He traces the different manifestations of these structures and their pathways to the modern state unifying tax and coercive powers around the protection of private property.
This development of modern states was accompanied and justified by “propertarian” ideology and institutional arrangements that reached their high point before World War I (with record inequality). However, this trajectory was challenged in the 20th century by the rise of social democracy and the utilisation of government for redistribution (through highly progressive income taxes [up to 90%] and inheritance taxes [e.g. 30-60%]).
While he seldom uses the word “neoliberalism”, Piketty then tracks the last 50 years with changes in social democracy, the abandonment of policies aimed at redistribution, and the subsequent return of inequality. For each country, the changes in political institutions are detailed, most notably showing that labour and social democratic parties in the US and much of Europe, and in India and elsewhere, have shifted from being the preferred parties of lower socio-economic groups to being the preferred parties of the more highly educated, non-business classes (the “Brahmin left”).
The failure of social democracy to address income and wealth distribution has meant that these issues are no longer the axis of political contest (left/right). With globalisation and inequality seen as inevitable, “identitarian” cleavages fill the political vacuum as people scramble to protect ethno-religious identities or cultural borders. These cleavages can be egalitarian or the opposite, dependent on the particularities of the political mobilisation. Indeed, the key message is that political mobilisation drives institutional change, and that if we do not mobilise around economic inequality, then other factors will capture the public debate and inequality will go unchecked.
Policy Proposals
The final chapter of Capital and Ideology outlines policy proposals which arise from Piketty’s analysis. All reflect a base understanding that inequality should be limited and that to do this, we need to think about wealth as social and temporary. Wealth should not confer unlimited inalienable rights. Currently income is temporary, but wealth accumulates over time and generations. For Piketty wealth should be subject to some level of social control and should circulate through the economy (endowed and taxed back). This reflects his earlier observations that capital may originally be entrepreneurial and productive, but always end up in unproductive returns to rentiers.
He proposes a number of large-scale policies or directions to limit inequality, based including:
- Co-management and power-sharing within corporations
- Progressive income taxes and a basic income provision
- Progressive annual wealth tax
- Progressive inheritance taxes
- Universal capital endowments of $100k or more paid to 25-ish year olds (and taxed back over time)
- A public register of assets to facilitate greater transparency of wealth
- A constitutional principle of fiscal justice based on non-regressivity and publication of information on how tax is apportioned among the population
- A progressive carbon tax
- A just distribution of educational investment
- Replacing tax deductions for political and charitable giving with funding vouchers for people to allocate to their preferred charities.
- Transnational democracy and new global institutions.
Simple really.