Published by The Drum, Tuesday 22 April
It’s an economics book with just two equations but whole pages on Honore de Balzac and Jane Austen. Before its publication in English this month, world-leading economic commentators from Paul Krugman to Martin Wolf were a-twitter to interpret it and weigh its historic importance.
It’s entitled Capital in the Twenty-First Century, and everyone seems to accept that it’s in the same league as Marx’s original. What’s all the fuss about?
Thomas Piketty is a French economist. His book provides a detailed map of inequalities in wealth and income around the world and over time. It finds that in many developed countries the top 10 per cent, and even more worryingly the top 1 per cent, control an increasing proportion of their country’s wealth. These trends have been asserted before. What is definitive about Piketty’s work is the extraordinary wealth of evidence he employs to prove them.
Piketty isn’t interested in trends over a mere decade. Instead, he uses data spanning more than three centuries to show that after 50 years of declining inequality, wealth inequality has returned to the levels of the Gilded Age of the early 1900s. Downton Abbey is back.
With this historical sweep, Piketty argues that the post-war period of low wealth inequality and rapid income growth was an aberration rather than a norm that we can expect to continue.
Piketty’s book is revolutionary because it links trends in income to trends in wealth. It revolves around the return on capital – how much you get, after tax, if you invest a dollar in a company’s shares or in housing, for example. Piketty contends that if the return on capital is higher than the economic growth rate, then wealth tends to become more concentrated. The rich get richer.
In fact, he maintains, wealth concentration is “normal”. The mid-20th century was unusual. Two world wars destroyed capital. Economies grew fast due to post-war reconstruction and the baby boom. After World War II there were high taxes on wealth and top income-earners, which reduced the after-tax return on capital. As a result, for the first time in recorded economic history, in many developed countries the middle class accumulated a large chunk of the wealth.
Whether or not you buy his explanation, there is no arguing with Piketty’s facts: wealth has again become more concentrated in all developed countries. Does this matter?
The left has always been worried about inequality. But Piketty provides a powerful story about why conservatives should worry as well. He raises the spectre of 19th century attitudes: what really mattered was what you inherited and whom you married. It didn’t matter how hard you worked, the key to high income was a lot of wealth. As the hero of Balzac’s Pere Goriot is advised, rather than working hard to become a successful lawyer, you would be better off paying court to a rich heiress.
But this time is different. As Piketty’s own parsing of the data shows, in the 21st century one can become part of the top 1 per cent of both income earners and wealth owners by becoming a top corporate executive. Piketty works through various explanations of this change. The growth of super-earners is not mostly about sports and media stars. The data show that most people in the top one thousandth of income earners are corporate executives. He conjectures that the fundamental problem is remuneration committees that effectively enable executives to set their own salaries.
The 21st century is also different because today wealth is primarily tied up in residential property rather than in agricultural land. And this is why falling rates of home ownership among younger generations in Australia are such a worry. The middle third are starting to lose the means to accumulate significant wealth.
Whether our novels return to universally acknowledged 19th century truths about the need to marry well ultimately depends on patterns of inheritance. Again our times are different – most people will inherit at the age of 60 rather than 35. One side-effect of doing away with death duties is that, unlike Piketty’s France, Australia has poor data on inheritance patterns. But our best guess is that Australian inheritances – like those overseas – favour the rich. Only the truly wealthy tend to hand on significant fortunes to their heirs.
There are ways to avoid a return to this world. Piketty suggests a global wealth tax, particularly aimed at the use of foreign tax havens that minimise taxes for the rich. Other choices might include a significant lift in property rates, the end of dividend imputation, or even the reintroduction of estate duties, or death taxes.
None of these things have been on the agenda for a long time in Australia. But around the world, Piketty’s painstaking assembly of the data on inequality will change the conversation.
Capital in the Twenty-First Century is light on the algebra and surprisingly easy to read. But a 685-page tome is not for the faint-hearted. There is a high ratio of ideas to page, and a lot of charts.
Just as well a book this important doesn’t come along too often.