Face it: how many of us in our daily lives are going to have the time to tackle a 700-page tome on economics? Even if it’s the book that explains everything that’s going on in our turbulent world. Well, lucky you, you don’t have to, because we’ll do it for you. In the first of a series, the in-house wonk at the Tropicalist will summarize and dole out, chapter by chapter, all the bits of wisdom from the landmark 2014 book Capital in the Twenty-First Century by Thomas Piketty.
Placing Piketty’s work in the context of past economic thinking helps to illustrate both its value and its limitations. The author traces the economic discourse on distribution back to what he terms the birth of “classical political economy” in England and France in the late eighteenth and early nineteenth century.
(His survey does not stray from the mainstream Western canon – for example, there is no mention of the fourteenth century Tunisian scholar Abd al-Rahman Ibn Muhammad Ibn Khaldun al-Hadrami, increasingly recognized as the forefather of modern economics. This limitation is unfortunate but, since the global economic order is largely a Western construct, the canon is its intellectual foundations.)
The 250-year period in questions spans the French and industrial revolutions; the expansion and contraction of European colonialism; two world wars; a Great Depression; and an era of post-colonial globalist economic development in Asia, Africa and the Americas. It has been a period of tumultuous social change, when people’s view of the future could careen between extreme optimism and extreme pessimism from year to year, from country to country.
Piketty highlights two key figures from the 19th century who believed that capitalism had an unstable propensity towards inequality – David Ricardo and Karl Marx.
Ricardo introduced the “Principle of Scarcity,” by which land would become increasingly scarce relative to other goods in the economy, driving up its price and the rents paid to owners to the point of social disruption. Land prices stayed high for many years after his work – seeming to prove this principle – but eventually came down. While the principle of scarcity may not have been borne out by reality, it can prevail over extended periods of time (think oil shocks in the 1970s or urban real estate today).
Marx built upon Ricardo by focusing on capital, which, unlike land, was not subject to finite supply. Marx posited a “Principle of Infinite Accumulation” whereby capital would inexorably accumulate in fewer and fewer hands. Eventually, one of two things would happen: return on capital would fall, leading to conflict among capitalists, or capital’s share of national income would increase to the point of violent labor revolt. Neither came to pass, as returns to labor began increasing in the late 19th century.
What both Ricardo and Marx had in common was a lack of data – they developed their hypotheses based on an intuitive view of capitalism’s weaknesses. Broad data did not become available until the advent of comprehensive income tax regimes in the 20th century, and the first economist to use them to discuss distribution was Simon Kuznets. Using data from the U.S. between 1913 and 1948, Kuznets uncovered a trend of diminishing income inequality, later expanded into the “Kuznets curve” – the idea that income inequality followed a bell curve during the process of economic development.
The explosion of inequality in developed countries in the fifty plus years following Kuznets’ original work suggested that the data he used may have been an aberration. Interestingly, in his books, Kuznets was circumspect about the limitations of his study. But in his public lectures, he was much more bullish, and explicitly admitted that his intent in doing so was to keep emerging post-colonial states tied to the Western development path, rather than turning to communism.
Piketty’s work draws on a more comprehensive set of income and wealth data from multiple countries to draw conclusions about the pattern of distribution both across and within countries.
He argues that the forces for convergence (development of human capital, diffusion of knowledge) are ultimately weaker than the forces for divergence.
The latter include the fact that the return on capital exceeds economic growth (allowing income from capital to accumulate as wealth faster than income from labor) and slower population growth (increasing the importance of inherited wealth relative to earned wealth).
We will explore these ideas in future instalments.