Thomas Piketty is a professor at the Paris School of Economics. Over the last few months he has become the most talked about economist globally with the release of the English edition of his book Capital in the Twenty-First Century (The Belknap Press of the Harvard University Press). The original was written in French.
Capital has been the second best-selling book on Amazon.com for a while now. This is a rarity for a book which is not exactly a bed time read and runs into 577 pages (without including the nearly 80 pages of notes). But that is not a surprise given the important issues the book tries to address. In this book Piketty deals in great detail about the “distribution of wealth”.
As he writes “The distribution of wealth is one of today’ most widely discussed and controversial issues. But what do we really know about its evolution over the long term? Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes…?”
In this interview he speaks to Vivek Kaul. Kaul is the author of the Easy Money trilogy which deals with the evolution of money and the financial system and how that led to the current financial crisis. The second book in the trilogy Easy Money—Evolution of the Global Financial System to the Great Bubble Burst releases in June 2014.
You write that “It is an illusion to think that something about the nature of the modern growth or the laws of the market economy ensures the inequality of wealth will decrease and harmonious stability will be achieved”. Why is that incorrect? Has capitalism failed the world? Capitalism and market forces are very good at producing new wealth. The problem is simply that they know no limit nor morality. They can sometime lead to a distribution of wealth that is so extremely concentrated that it threatens the working of democratic institutions. We need adequate policies, particularly in the educational and fiscal areas, to ensure that all groups in society benefit from globalisation and economic openness. We want capitalism to be the slave of democracy and the common good, not the opposite.
A major part of your book deals with how capitalism leads to inequality…
History tells us that there are powerful forces going in both directions — the reduction or the amplification of inequality. Which one will prevail depends on the institutions and policies that we will collectively adopt. Historically, the main equalizing force — both between and within countries — has been the diffusion of knowledge and skills. However, this virtuous process cannot work properly without inclusive educational institutions and continuous investment in skills. This is a major challenge for all countries in the century underway.
What is the central contradiction in capitalism? How does that lead to inequality?
In the very long run, one powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital rto exceed the rate of output growth g. That is, when rexceeds g, as it did in the 19th century and seems quite likely to do again in the 21st, initial wealth inequalities tend to amplify and to converge towards extreme levels. The top few percents of the wealth hierarchy tend to appropriate a very large share of national wealth, at the expense of the middle and lower classes. This is what happened in the past, and this could well happen again in the future. According to Forbes global billionaire rankings, top wealth holders have been rising more than three times faster than the size of the world economy between 1987 and 2013.
That clearly is a reason to worry. Why are you confident that in the years to come economic growth rate will be lower than the return on capital. What implications will that have on capitalism and the inequality that it breeds?
Nobody can be sure about the future values of the rate of return and the economy’s growth rate. I am just saying that with the decline of population growth in most parts of the world, total GDP (gross domestic product) growth rates are likely to fall. Also, as emerging economies catch up with developed economies, productivity growth rates are likely to resemble what we have always observed at the world technological frontier since the Industrial revolution, i.e. between 1 and 2% per year. With zero or negative population growth, this suggests that total GDP growth rates will fall much below 4-5%, which has been the typical value for the average rate of return to capital in the very long run.
So what is the point that you are trying to make?
My main point is not to make predictions, which by nature are highly uncertain. My main point is that we should have more democratic transparency about how the different income and wealth groups are doing, so that we can adjust our policies and tax rates to whatever we observe. As long as top groups grow at approximately the same speed as the rest of society, there is no problem with inequality per se. But if the top rises three times faster than the size of the economy, you need to worry about it.
Your book is being compared to Karl Marx’s Capital. How different is your work from his?
One obvious difference is that I believe in private property and markets. Not only are they necessary to achieve economic efficiency and development — they are also a condition of our personal freedom. The other difference is that my book is primarily about the history of income and wealth distribution. It contains a lot of historical evidence. With the help of Tony Atkinson, Emmanuel Saez, Abhijit Banerjee, Facundo Alvaredo, Gilles Postel-Vinay, Jean-Laurent Rosenthal, Gabriel Zucman and many other scholars, we have been able to collect a unique set of data covering three centuries and over 20 countries. This is by far the most extensive database available in regard to the historical evolution of income and wealth. This book proposes an interpretative synthesis based upon this collective data collection project.
Any other differences?
Finally, Marx’s main conclusion was about the falling rate of profit. My reading of the historical evidence is that there is no such tendency. The rate of return to capital can be permanently and substantially higher than the growth rate. This tends to lead to very high level of wealth inequality, which may raise democratic and political problems. But this does not raise economic problems per se.
One of the most interesting points in your book is about the rise of the supermanager in the US and large parts of the developed world and the huge salaries that these individuals earn. You term this as meritocratic extremism. How did this phenomenon also contribute to the financial crisis?
According to supermanagers, their supersalaries are justified by their performance. The problem is that you don’t see it the statistics. In the US, between two thirds and three quarters of primary income growth since 1980 has been absorbed by the top 10% income earners, and most of it by the top 1% income earners. If the economy’s growth rate had been very high, rising inequality would not have been such a big deal. But with a per capita GDP growth rate around 1.5%, if most of it goes to the top, then this is not a good deal for the middle class. This has clearly contributed to rising household debt and financial fragility.
(Vivek Kaul can be reached at [email protected])
The interview originally appeared in The Corporate Dossier, The Economic Times on May 23, 2014