The just-published Capital in the Twenty-First Century (all 700 pages!), by French economist Thomas Piketty, is already a New York Times bestseller. The author, who is currently touring America, is a star, and all major media have noticed his book. New York Times columnist Paul Krugman calls it the decisive book of the past decade.
So why is Piketty, who is best known in France as adviser to the Socialist Party, hailed as the Messiah in the United States (where he once taught, at MIT).?
Piketty’s title is obviously borrowed from Karl Marx, just as is the thesis he defends, but in a modernized fashion. Piketty shows, with startling statistics dating back over two centuries, as well as historical and literary anecdotes, that owners of capital always manage -- except in the case of war -- to get richer faster than workers and entrepreneurs. The accumulation of capital in the hands of a minority creates an aristocracy of rentiers, people who live off investment income: they are no longer entrepreneurs, that is, they do not create anything anymore.
This conflict between passive investment and enterprise leads, according to Piketty, to the depletion of capitalism. Marx imagined that such a conflict would inevitably bring the death of capitalism and its replacement by socialism. Piketty does not share this outlook: the capitalist machine, incomparable to any other when it comes to wealth creation, can, he writes, be saved by redistributing income. The “social state,” to use Picketty’s vocabulary, would reconcile business and market efficiency with “social justice.” But this redistribution has broken down these days because income taxation has reached its limits. Therefore, Piketty suggests, capital should be heavily taxed to finance the welfare state. Since capital has no borders, the tax must be global.
In Europe the reception to Piketty’s ideas has been only lukewarm because taxation of capital in Germany, Spain, and France has led to capital flight. The priority in Europe now, including for the Left, is not the development of the welfare state but its limitation. In the United States, however, where tax contributions remain relatively low, Democrats are seeking a political model that would distinguish them from Republicans, one that would reconcile income equality and capitalism. Piketty’s book allows them to remain capitalist while raising taxes. Hence the success of Piketty, who also has the “virtue” of being French. (Books explaining how French women stay thin become huge bestsellers in America.) Piketty also fits well with the Occupy Wall Street movement that launched the slogan “We are the 99 percent” (who are supposedly exploited by the 1 percent).
Yet there is a great weakness in Piketty’s book, which has been raised by several American classical-liberal economists: at no time does he examine the causes of growth and the perhaps key role of the 1 percent, who in the United States are nearly all entrepreneurs and not rentiers.
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. This disruption of the status quo 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 displacing rentiers. Shocks of the kind Piketty describes are hardly needed.
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 -- according to net income after redistribution. Not doing so seriously distorts economic conditions.
Moreover, Piketty seems unwilling to concede that income alone, however calculated, does not account for the total social reality: we all benefit from progress in multiple areas -- health, transportation, consumer technologies -- regardless of income. As advances in productivity lower prices, real incomes rise.
Piketty’s book has other flaws. The author never considers whether some degree of inequality is necessary for growth in a market economy. (After all, people are different and some are better than others at serving consumers.) 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 the economists he dislikes have identified the actual factors of growth -- such as property rights and the rule of law -- based on empirical observation. Without the free-market 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.
All in all, Piketty, as an ideologue, brings nothing new to the Marxist religion; however, as a collection of historical anecdotes, his book is fascinating. His explanation of the popularity of the French Revolution and of Napoleon among the French people is remarkable: it was, he demonstrates, a period of high relative wages and low rents as a result of the redistribution of Church property and the mobilization of workers in the service of war. (Whether this is a good way to create prosperity is another story.)
Nevertheless, Piketty’s American success owes nothing to his talents as an historian. The American Left is looking for a new lease on life, and it hopes to have found it in France. French socialists will appreciate the irony.