Capital in the Twenty-First Century, by Thomas Piketty (Belknap, 696 pp., $39.95)

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.” He doesn’t explain why this should be so, though his equation of the two surely explains why Capital in the Twenty-First Century has political appeal among American academics, the media, and liberal politicians on both sides of the Atlantic—from President Obama to French president François Hollande. Offering no alternatives to the free market, the Left now fights for income equality, and Piketty’s book is thus an intellectual boon.

Piketty does not believe that free markets can spontaneously generate greater equality: government intervention is therefore needed, mostly through taxation. His market pessimism contradicts the findings of most classical economists, who see the rise of a huge middle class as an outgrowth of capitalism. Piketty rejects what he considers an optimistic illusion about markets born in the 1960s. From the end of the World War II until the late 1970s, a middle class expanded in the West, and incomes from wages and capital converged. But this convergence, Piketty argues, was a historical accident. In the long run, he says, capital owners always prevail over employees. In his insistence, Piketty sometimes contradicts himself. At one point, he argues that income divergence occurs independent of political influence. But he also writes that the current divergence was initiated by the policies of Ronald Reagan and Margaret Thatcher, who “scrapped taxes on the wealthy.” The inadequacy of his framework is powerfully illustrated by the example of France, where the gap between the so-called 99 percent and the 1 percent became wider under a socialist government during the 1980s. Was François Mitterrand a hidden Reaganite?

This contradiction between ideological judgments and objective data is the book’s fundamental flaw. The emergence of a super-wealthy minority (closer to 0.001 percent than to 1 percent, as Piketty himself admits) has likely occurred for different reasons in different countries. For instance, the new oligarchies in Russia, Nigeria, or China can’t be explained as a consequence of the free market. Inequality in these nations results from corruption, a one-party system, and kleptocracy. In the United States, a super-wealthy minority—“superstars and supermanagers,” as Piketty calls them—has attained financial preeminence predominantly through globalization: entrepreneurs like Bill Gates or large hedge fund managers operate in a worldwide market, gaining unprecedented profits. Their riches may be considered excessive or unfair—but that would be a moral judgment, not an economic one.

The author shows his true colors in the book’s final chapter, where he deems equality of income an end in itself. To achieve it, governments must redistribute wealth, fortifying what Piketty calls the “social state,” which embodies a better society. How to finance it? By taxing capital owners. As Piketty concedes, taxes on wage earners in the United States and in Europe have reached their limits: therefore, only capital taxation could increase the resources of the social state. But how can a nation-state levy taxes on capital owners when capital itself knows no borders? Piketty calls for a “utopian solution”: global capital taxation. Piketty reminds readers that taxing income, when initially proposed in the early twentieth century, was regarded as utopian. Now, he believes, the time has come to tax capital—massively. The European Union, he suggests, should lead the way. This is a paradoxical suggestion, since most European governments stopped taxing capital in order to stem its flight. Even France’s modest tax on capital hasn’t prevented entrepreneurs from moving to Belgium. Krugman, who fully endorses Piketty’s agenda, wants the United States to take the lead here, as it did a century ago in pioneering the income tax.

Piketty refuses to allow for any alternatives to his desired social state. Wouldn’t a negative income tax, as proposed by Milton Friedman 50 years ago, be more effective in alleviating poverty and inequality than a utopian global tax on capital? Piketty starts from unproven evidence—the state is good and growth is spontaneous—to plead for capital taxation.

Piketty’s book has other flaws. The author never considers whether some degree of inequality is necessary for growth in a market economy. Instead, he attacks economists for “relying too much on mathematical models and not understanding the deep structures of capital and inequality.” He thus ignores the fact that economists whom he dislikes have identified the actual factors of growth—such as property rights and the rule of law—based on empirical observation. Without the economic models he scorns, countries like China, India, and Ghana would not have seen such spectacular growth—and their poorest citizens would have far fewer opportunities. Piketty admits that he considers economics not a genuine science, but a subdivision of the social sciences, such as history or anthropology. Such a view is much more common in socialist-leaning France (Piketty now teaches at the Paris School of Economics) than in the United States (where Piketty once taught, at MIT).

Capital in the Twenty-First Century couldn’t have become a bestseller in the United States without the current concern over income inequality. This concern has merit, but is the tiny super-wealthy minority whom Piketty disparages a major source of social, political, or economic unrest? Hardly. Besides, why should we care that Bill Gates is a billionaire? Piketty never asks if such billionaires, through philanthropy or by financing new economic activity, might spread their wealth more effectively than the government does by confiscating it. Philanthropy is non-existent in France, and it goes entirely unexplored by Piketty.

As a source of knowledge, Capital in the Twenty-First Century is formidable; as an ideological pamphlet, it breaks no new ground. The book marshals new data to rekindle old socialist answers. By all indications, the Left has already fallen in love with Piketty’s book; those of other persuasions will find its remarkable trove of data useful. I found particular value in the many anecdotes Piketty shares describing the origins of wealth in various nations throughout history. He convincingly shows that wealth is more often a matter of luck than talent. The question then becomes: should one be punished for his luck? Piketty would say yes. Like a true socialist, he sees himself as a moralist on the side of the angels. Yet, hidden behind the garb of history, statistics, and social science, Piketty’s arguments are more self-righteous than moral.

Photo by Parti Socialiste du Loiret/Flickr


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next