Steve Reads

I was just minding my own, Googling for an image of the cover of [book: Capital in the Twenty-First Century] for inclusion in an eventual review, when I happened upon the [newspaper: Wall Street Journal] getting it horribly, horribly wrong, and I was awoken from my dogmatic slumbers. I guess I’ll be writing that review now, then.

I really cannot emphasize this enough: there is nothing in that [newspaper: Journal] piece that gets Piketty even half right. That the piece contains the phrase “this book is less a work of economic analysis than a bizarre ideological screed” is proof on its own that the author wasn’t even reading the same book that the rest of the literate Anglophone world was.

The best thing you can do to combat the [newspaper: Journal] piece is to go read Piketty himself. Really, you need to do that. If people aren’t still citing Piketty himself in 30 years, they will be citing works that would not have existed without him; it’s really that good.

If you don’t read Piketty, what you need to know is the single mathematical statement that dominates the whole book: the rate of return on invested capital historically exceeds the rate of growth of the economy. If that continues over a long enough time scale, the weight of the past (in the form of inherited fortune) comes to dominate the present (in the form of new growth, entrepreneurship, etc.). Over long time scales, the rate of return on capital has exceeded the economy’s rate of growth; the only times when capital’s share of national wealth has dropped have been times of global-scale war. War made necessary the systems of income taxation that we have today; war destroyed capital, in the form of land and factories. In normal eras, inheritance comes to be viewed as the only way to “make it”: entering “the professions” (law, medicine) and working hard is not going to get you into the 1%. In short: under ordinary circumstances, everyone knows that the only way to become part of the aristocracy is to marry an heiress. That’s why the works of Austen and Balzac play such a central role in Piketty’s book: they illustrate what everyone knew in their guts in the 18th and 19th centuries, even when they didn’t necessarily have economic data to back it up.

And we’re heading back to that world: the basic depressing thrust of [book: Capital in the Twenty-First Century] is that we’ll almost inevitably end up in the land of “marry an heiress” whenever the rate of return on capital exceeds the economy’s rate of growth, which it almost always does.

You can choose to respond to this, or not. Piketty has his doubts that a society in which the wealthiest 1% own 90-plus percent of the assets is politically stable. As an economist with some humility, and with a great many critical things to say about his discipline, he is at pains — again and again and again — to observe that the problems of whether and how to respond to growing inequality are not merely technocratic problems of optimal tax policy to be solved by convex maximization; they must be solved by democratic polities in command of all the facts. And every generation encounters different variations of the governance problem, which require constant democratic engagement to handle them. One problem our generation faces is the increasing mobility of capital, which makes taxation by a single nation-state feel increasingly toothless. Even measuring the problem we’re trying to solve, Piketty observes, is getting harder: the wealthy seem to be hiding an astonishingly large quantity of money in offshore tax havens.

To sum up, then: inequality may be a problem; if it’s a problem, it cannot be solved by infinitely wise economists, but must instead be solved at the ballot box; if it’s going to be solved at the ballot box, the electorate must know the extent of the problem it’s solving; and increasingly, multinational capital flows make it hard for the electorate to know the extent of the problem it’s solving.

One of Piketty’s solutions is a modest tax on assets, in large part just to get some record of how large inequalities are. This would require some international coordination, of course; money hiding in Swiss banks needs to be exposed to the sunlight. As Piketty archly notes, it’s no more utopian to expect this to happen than it is to expect European nations to come together and agree on a common currency in the absence of a common government, yet somehow they’ve managed to do that.

As you might expect, it’s the modest asset tax that gets the [newspaper: Journal] author’s panties in a bunch. Wealthy people don’t want to pay more money, and the cossacks have always worked for the czar; so it shouldn’t surprise anyone that the [newspaper: Journal] would be upset. And it may well be a safe bet that most people aren’t going to read a 600-page work on the economics of inequality, so maybe the [newspaper: Journal] will win by default. You, my intelligent reader, won’t allow that to happen, will you? The [newspaper: Journal] has been blinded by tears of rage, to the point of actual illiteracy. On the one side I might quote Upton Sinclair: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” On the other, more hopeful side, I’ll quote Jefferson: “let them stand undisturbed as monuments of the safety with which error of opinion may be tolerated where reason is left free to combat it.” Let’s approach the [newspaper: Wall Street Journal] as Jefferson would have, if for no other reason than that I think that’s what Piketty would want us to do.

The final thing to say about Piketty’s masterpiece is that its very durability derives from the fact that it is exactly the opposite of the “screed” that the [newspaper: Wall Street Journal] has manufactured out of whole cloth. Whenever possible, Piketty maps out all branches on the road ahead, and makes clear that the choice of path is not up to him; it’s up to democracies. He’s fair to a shocking and refreshing degree. As soon as the ideologues at the [newspaper: Journal] are done hyperventilating, perhaps they’ll be able to see that [book: Capital in the Twenty-First Century] is an astoundingly fair book, with ammunition aplenty for all sides in the debate. Indeed, much of what Piketty is saying is that democracies require knowledge for their effective functioning — not because that knowledge arms one side or the other, but because everyone on all sides needs it. Our perspective on inequality is a moral judgment that should be based on the soundest of reasons, and those reasons should be based on facts. Piketty doesn’t supply the judgment, but he does supply the facts.

P.S.: There’s really so much more to say about the book. For one thing, Piketty makes the point that you really need to distinguish between labor income and capital income in any analysis of inequality, so that naïve measures like the Gini coefficient hide more than they illuminate. And when you pick apart the numbers in this way, you find that the U.S. distribution of labor income — labor, not capital — is more unequal than at probably any other time or any other place in recorded history, because the wealthiest people are largely a new class of “supermanagers” rather than the basketball players or world-famous musicians that we might imagine. You really need to be in the top 0.1% or 0.01% before you find people largely living more off of capital assets than they are off of their labor.

Rather than explore all of the reasons why you should read this book, and all of the things that you’d learn, I’d just strongly recommend that you read it yourself. It’s seriously worth your time — again, because Piketty’s role is to inform democratic debate.

P.P.S.: Having now made up my own mind about Piketty, I can go and read the reviews I’ve been waiting to read, like Krugman’s.

P.P.P.S.: The title of the post, by the way, is a hat tip to Mary McCarthy.