Capital in the Twenty-First Century

In his introduction to this book, Piketty states, “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” He further states that “Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact.” He then addresses this paucity with the presentation and analysis of the results the project he led to acquire an enormous volume of historical data about global income and wealth. In the introduction, he briefly reviews the contributions but also the errors of earlier debate without data. These included Malthus’s concern with overpopulation and the need to end all welfare, Ricardo’s principle of scarcity with population and production growing as land becomes increasingly scarce, and Marx’s principle of infinite accumulation with the industrial revolution leading to no limit on the accumulation of capital (which did not consider coming social democracy, technological progress, and how to organize society without private capital). The Kuznets Curve of 1955 introduced data from US tax returns and Kuznets’s own estimates of national income to conclude that inequality increased in the early phase but declined in the later phases of industrialization. Unfortunately, this curve greatly understated the roles of the World Wars and violent economic and political shocks that led to the reduction in inequality between 1914 and 1945 and failed to explain the rising inequality after 1970. Piketty seeks to contribute “to the debate about the best way to organize society…to achieve a just social order….achieved effectively under rule of law…subject to democratic debate.” He states he has “no interest in denouncing inequality or capitalism per se…as long as they are justified.” He worked briefly in the US and found the work of US economists unconvincing. “There had been no significant effort to collect historical data on the dynamics of inequality since Kuznets, yet the profession continued to churn out purely theoretical results without even knowing (the) facts.” He found that “the discipline of economics has yet to get over its childish passion for mathematics and the purely theoretical and often highly ideological speculation.” Subsequently, he returned to France and set out to collect the missing data. He gathered data in two main categories: 1) inequality in distribution of income and 2) inequality in the distribution of wealth and the relation of wealth to income. For income, he built the World Top Incomes Database (WTID), which is based on the joint work of some thirty researchers around the world. This data series begins in each country when an income tax was established (usually 1910-1920 but as early as the 1880s in Japan and Germany). For wealth his sources included estate tax returns (usually dating back to the 1920s, but in a few cases as far back as the French Revolution), the relative contributions of inherited wealth and savings, and measures of the total stock of national wealth. In collecting as complete and consistent a set of historical sources as possible, he had two advantages over previous authors—a longer historical perspective (now including data from the 2000s) and advances in computer technology. Piketty reports two major conclusions from his study. “The first is that one should be wary of any economic determinism in regard to inequalities of wealth and income (that they emerge according to immutable natural laws). The history of the distribution of wealth has always been deeply political and it cannot be reduced to purely economic mechanisms. In particular, the reduction of inequality…between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war.” “The resurgence of inequality after 1980 is due largely to political shifts…especially in regard to taxation and finance. The history of inequality is shaped by the way…actors view what is just…as well as the relative power of those actors.” The second conclusion is “that the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence (equality) and divergence (inequality)….There is no natural, spontaneous process to prevent destabilizing ineqalitarian forces from prevailing permanently.” “Over a long period of time, the main force in favor of greater equality (convergence) has been the diffusion of knowledge and skills.” Other proposed forces for greater equality, such as advanced technology creating a need for greater skills or class warfare giving way to less divisive generational warfare as the population ages, appear to be largely illusory. “No matter how potent a force the diffusion of knowledge and skills may be, it can nevertheless be thwarted and overwhelmed by powerful forces pushing…toward greater inequality (divergence).” With respect to income, the spectacular increase in inequality from labor income, particularly in the US and UK, largely reflects the recent marked separation of the top managers of large firms from the rest of the population, not because of increased productivity, but because they can set their own remuneration. This separation is amplified by marginal tax rates that actually decrease for the highest incomes. Capital income from large fortunes also contributes to income inequality but may be understated due to hidden off-shore accounts and by producing only the relatively small portion of income needed for expenses while the rest remains within the fortune. (Fig. I.1 shows income inequality in the US from 1910 to 2010.) With respect to wealth, inequality (divergence) is increased when the rate of return on capital significantly exceeds the growth rate of the economy (r > g) as it did until the nineteenth century and is likely to in the twenty-first century. “Under such conditions it is inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin” and lead to extreme inequality. This increasing inequality of wealth is greatly amplified by structural factors leading to higher rates of increase for the largest fortunes that are no longer related to whatever entrepreneurial activities were at the onset of their origin. (Fig. I.2 shows wealth inequality in Europe from 1870 to 2010.) This analysis also shows a major shift in the main components of wealth from land, slaves (in the US), and colonies (in Europe) to domestic capital and housing. Historically, the rate of return on capital was 4.5-5% from antiquity to 1913, fell to 1.5% by 1950, and is rising again to 4% or more by 2012 and beyond. During the same period, the global rate of growth was close to zero before the industrial revolution, rose to 1.5% by 1913 and to 3.5% in the mid to late twentieth century (due to catch-up after World War II and in the developing world), and is now falling and projected to be 1-1.5% in the twenty-first century. Thus the unusual fall of the return on capital (r) below growth (g) in the mid twentieth century was associated with a temporary reduction in the rate of increasing inequality. (Fig 10.10 shows a comparison of the return on capital [r] to growth [g] from antiquity to 2100.) This review barely scratches the surface of the core contribution of this book, which is the enormous volume of data and analysis it provides. The numerical information is presented in a very well developed series of 97 illustrations and 18 tables. This information is used as support for extensive analysis and discussion of the many aspects of historical, present, and likely future inequality that often contradict positions related to ideology and simplistic models. An excellent 22 page overview of “A Social State for the Twenty-First Century” is provided at the beginning of the fourth and final part of the book. This is followed by “Rethinking the Progressive Income Tax,” “The Question of the Public Debt,” the author’s preference for “A Global Tax on Capital,” and finally, the conclusion. The conclusion reiterates that the principal destabilizing force leading to ever-increasing inequality is a return on capital (r) significantly higher than the rate of growth of income and output (g) for long periods of time. Hence wealth accumulated in the past grows more rapidly than output and wages, and the entrepreneur inevitably tends to become a rentier no longer of use in promoting growth. A progressive annual tax on capital would be the right solution to this problem, although it would require a high level of international cooperation. Piketty objects to the expression “economic science” which implies little to do with the logic of politics or culture in conclusions about inequality. He prefers the expression “political economy” which considers economics as a sub discipline of the social sciences, alongside history, sociology, anthropology, and political science. He insists that economic and political changes are inextricably entwined and must be studied together. This review is supplemented by a relatively random selection of multiple comments and assertions from the book: “The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets.” “Capital…is always risk-oriented and entrepreneurial, at least at its inception; yet it always tends to transform itself into rents as it accumulates….” With respect to global inequality, the industrial revolution led to growth of Europe and America’s share of global output to two to three times their share of population. This share is now rapidly decreasing due to higher growth in developing economies in the “catch-up” phase than in mature economies. Europe and America’s share of global production of goods and services rose from about 30-35% in 1700 to 70-80% from 1900 to 1980, fell to 50% by 2010, and may go as low as 20-30% later in the twenty-first century. European and American national inequality rose to record heights in 1910, decreased markedly by the 1940s due to the world wars and Great Depression, then began a rapid return to high levels after the 1970s, particularly in the US. The share of national income for the top 10% in Europe was over 45% in 1910, under 25% in 1970, and about 30% in 2010. In the US it was over 40% in 1910, under 30% in 1970, and nearly 50% in 2010. “Numerous studies mention a significant increase in the share of national income in the rich countries going to profits and capital after 1970, along with the concomitant decrease in the share going to wages and labor.” In the past several decades, the share of national income for the top 0.1% increased from 2 to 10% in the US, from 1.5 to 2.5% in France and Japan, and from 1 to 2% in Sweden. “It is important to note the considerable transfer of US national income—on the order of 15 points—from the poorest 90% to the richest 10% since 1980”— 5 to 7 times greater than the 2 to 3 points in Europe and Japan. “The vast majority (60 to 70%)…of the top 0.1% of the income hierarchy in 2000-2010 consists of top managers. By comparison, athletes, actors, and artists of all kinds make up less than 5% of this group.” “At the very highest levels salaries are set by the executives themselves or by corporate compensation committees whose members usually earn comparable salaries….” “It is when sales and profits increase for external reasons that executive pay rises most rapidly. This is particularly clear in the case of US corporations…pay for luck.” Global inequality of wealth in the early 2010s is comparable to that of Europe in 1900-1919. The top 0.1% own nearly 20%, the top 1% about 50%, the top 10% between 80 and 90%, and the bottom half less than 5%. The share of national wealth ownership in Europe for the top 10% and top 1% was 90% and over 50% in 1910, 60% and 20% in 1970, and about 63% and 24% in 2010. During this time, the share for the 50th to the 90th percentile increased from 5% to 40%, creating a middle class, but the share for the bottom 50% remained at 5%. In the US, shares for the top 10% and top 1% were about 80% and 45% in 1910, 64% and 30% in 1970, and about 70% and 34% in 2010—with a much more rapid increase after 1970 than in Europe, reaching 70% and 34% versus 63% and 24% by 2010 (while the bottom half claim just 2%). Inherited wealth is estimated to account for 60-70% of the largest fortunes worldwide. This figure is lower than the 80-90% reached during the belle Epoque, but trending strongly toward a return to that level. Forbes magazine divides billionaires into three groups—pure heirs, heirs who subsequently grow their wealth, and pure entrepreneurs, with each of these groups representing about a third of the total. Due to increased life expectancy, the average age of heirs at the age of inheritance has increased from thirty in the nineteenth century to fifty in the twenty-first century, although with larger inheritances. Today, transmission of capital by gift is nearly as important as transmission by inheritance. This change counters increased life expectancy and accounts for almost half of the present inheritance flows. “No matter how justified inequalities of wealth may be initially, fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility.” Large fortunes experience increasing rates of growth related to size alone independent of their origins— 10% from $15-30 billion, about 9% from $1-15 billion, about 8% from$500 million to $1 billion, about 7% from $100-500 million, and about 6% below $100 million for university endowments. From 1990 to 2010, the fortune of Bill Gates, the Microsoft genius, grew from $4 billion to $50 billion, while that of Liliane Bettencourt, a cosmetics heiress who never worked a day in her life, grew at a similar rate from $2 billion to $25 billion. In 2013, sovereign wealth funds were worth $5.3 trillion ($3.2 trillion from petroleum exporting states and 2.1 trillion from nonpetroleum states like China, Hong Kong, and Singapore), similar to the total of $5.4 trillion for Forbes billionaires. Together, these sources account for 3% of global wealth. Large amounts of unreported financial assets are held in tax havens—approximately 10% according to the negative global balance of payments (more money leaves countries than enters them). In the US, parents’ income has become an almost perfect predictor of university access—average income of parents of Harvard students is currently about $450,000. “Broadly speaking, the US and British policies of economic liberalization (after 1980)…neither increased growth nor decreased it.” The US economy was much more innovative in 1950-1970 than in 1990-2010….Productivity growth was nearly twice as high in the former period as in the latter. In most countries taxes have (or will soon) become regressive at the top of the income hierarchy.” The optimal tax rate in the developed countries is probably above 80%. One of the most important reforms (is) to establish a unified retirement scheme based on individual accounts with equal rights for everyone, no matter how complex one’s career path. Debt often becomes a backhanded form of redistribution of wealth from the poor to the rich (who as a general rule ought to be paying taxes rather than lending). Inflation is at best a very imperfect substitute for a progressive tax on capital. It is hard to control, and much of the desired effect disappears once it becomes embedded in expectations. Defining the meaning of inequality and justifying the position of the winners is a matter of vital importance, and one can expect to see all sorts of misrepresentations of the facts in service of the cause. No hypocrisy is too great when economic and financial elites are obliged to defend their interests—and that includes economists, who currently occupy an enviable place the US income hierarchy. “Modern meritocratic society, especially in the United States, is much harder on the losers, because it seeks to justify domination on the grounds of justice, virtue, and merit, to say nothing of the insufficient productivity of those at the bottom.” The history of the progressive tax over the course of the twentieth century suggests that the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed.

This is a tremendous book! It is a great start to understanding the current state of our global economy. The central argument being for the global taxation of wealth to restore a world that is becoming less egalitarian by each decade. Piketty uses two equations, known as "The Fundamental Laws of Capitalism," and a girth of historical data to arrive at his point. The equations are: a = r * B where r = rate of return; B = the capital/income ratio; a = the share of income from capital in the economy and B = s/g where B = the capital/income ratio; s = the savings rate; g = growth rate of the economy These two laws are inter-related. Equation 2, states that the lower the growth of the economy, the more power is exerted by inherited capital because via equation 1, it will generate a larger share of income in the economy. Growth in world output up until the 17th century was nonexistent. Therefore, throughout much of human history there were very rigid social class structures that prevented people from accumulating wealth over their life and in due process passing on a better life to their children. Piketty cites Jane Austen novels here as evidence that the central characters of her novel thought it more worthwhile to marry into wealth than to work for it, for no matter how hard one worked or in what sort of profession, it was impossible to generate the type of lifestyle the wealthy enjoyed. The entire dynamic of wealth changed during 19th century at the advent of the industrial revolution. Suddenly, growth in world output went up to 1.5%. Society was more dynamic. Social class was more fluid. However, the structural forces that breed inequality in society did not change, for the nature of capital did not change. According to the author, over the long run, the capital/income ratio will continue to increase because capital can be reinvested and over time will generate a higher return than income. On the eve of WWI, the value of capital/income in Europe and America was a hair under 7. This was the marking of a rare point in history. For the brief 30-year period of war and instability that followed, the value of capital did not increase faster than that of income. On the contrary, it shrank relative to income. It is as if an external shock restored a social equilibrium. The capital/income ratio reached a low point of a hair over 2 in the early 1950s. The baby boomers that followed were born into what might be considered the most equal society in the history of civilization. They were given a rare opportunity to truly live the “American Dream” and (now me talking) believe that they are entitled to everything they earned. Unfortunately, their kids were not born into a similar opportunity. The capital/income ratio has steadily crept up since the 1950s and now stands at around 5.5 in Europe and 4.5 in the U.S. These statistics mask some of the already inegalitarian societies like Italy where the ratio is closer to 7. What is further the problem is that world output, which grew on average of 3% in the 20th century, is falling. The author does not believe that this trend will reverse because historically, about half of growth in world output is generated by the growth in population and the other half through actual progress in technology and productivity. With demographics set to shrink in the coming decades, it seems unlikely that we will be able to sustain the 3% growth in world output in the future. Thomas Piketty’s solution is a global tax on capital. To purge society from systemic convergence toward inequality, you must eliminate the upper hand that capital affords to the beneficiaries of inherited wealth. I completely buy his argument here. The wealthy do have access to better wealth managers and investment vehicles that ordinary people like myself just do not. Ultimately however, what truly matters, and what is truly difficult to analyze, is whether society would be better off with such a tax. As the author states himself, half of the people in our country have zero savings. This relative proportion has been uniform throughout history. However, these same people today can live, materially speaking, much richer lives than the wealthy predecessors discussed in Jane Austen novels. The purchasing power parity has increased like seven-fold over the last few centuries, this all thanks to in great deal to the innovation and efficient allocation of resources over the past few years. Perhaps this picture would have been different with a global tax on capital. It would have been interesting to see what Piketty’s thoughts would be on how this sort of tax would affect entrepreneurship, if the risk taker knew that as soon as they sold their business they would be met with a yearly tax on their wealth. I think the bigger question that is left unanswered in the book is who would ultimately receive the proceeds from such a tax and for what purpose would it be used? Would society be truly better off if the government could tax capital and spend more as opposed to the vast amount of institutional funds and PE shops which for the most part allocate capital on the behalf of the wealthy? Regardless of whether you agree with the politics of the book, you should read it, if not for the data alone. The author poses a serious question in this book and provides a well thought out solutions. I might not be completely convinced of his thesis just yet, but I am much more knowledgeable about the the nature of capital/income split. This was a great and sobering starting point. Cheers!

I can’t remember the exact number of pages in this book. It is up around 700 pages. Even though it is a large book with a lot of pages, and there are some mathematical formulas, I think that most people are capable of reading this book. I think that this book is worth the time and effort to read. The mathematical formulas are not too complex, and the book isn’t stuffed too full of formulas. There are only a few formulas in the book. If the readers think about the ideas presented in this book then I think that it would be a worthwhile use of their time. I also believe that the politicians and bureaucrats in the government should make the effort to read this book.

It is a really accessible book for anyone interested in economics and it puts on the table a very important problem of capitalism: income inequality and the dynamics of wealth accumulation in a few hands. Piketty's work is mainly empirics and there is no place in it for any kind of determinism. Although quite long, the book is very well written and is entertaining.

A pesquisa envolve uma singular articulação de ampla base de dados coletadas em 20 países com uma meticulosa análise histórica dos fatos que estão por trás destes dados. Tal combinação revela uma espantosa regularidade na inexorável acumulação do Capital. Haja crise, haja crescimento, seja qual for a tecnologia, no Capitalismo, mostra-nos Piketty, a acumulação patrimonialista é uma Lei, levando à crescente desigualdade. Muito bem escrito, com recursos literários, é uma história de fatos e dados para se pensar em como enfrentar o futuro menos desigual.

Thomas Piketty’s Capital in the Twenty-First Century is a groundbreaking and meticulously researched exploration of wealth, inequality, and the forces that shape economic structures. Blending historical analysis with modern data, Piketty offers one of the most compelling economic studies of our time, challenging long-held assumptions about capitalism and wealth accumulation. A Data-Driven Masterpiece What sets this book apart is Piketty’s extensive use of historical data. Drawing from centuries of records across multiple countries, he presents a comprehensive picture of how wealth and income distribution have evolved. His findings reveal a central truth: when left unchecked, capitalism tends to concentrate wealth in the hands of the few, leading to rising inequality. Clear, Engaging, and Accessible Despite its depth, Capital in the Twenty-First Century is surprisingly readable. Piketty explains complex economic concepts in a way that is accessible to non-specialists, using clear language, real-world examples, and engaging narratives. His writing makes economic history come alive, showing how inequality has shaped societies over time. A Powerful Argument for Reform Piketty does not just diagnose the problem—he also proposes solutions. He advocates for progressive taxation, wealth redistribution, and policies that promote economic fairness. His arguments are well-reasoned and backed by data, making a compelling case for rethinking modern economic systems. Verdict: Essential Reading for Understanding Inequality Capital in the Twenty-First Century is a must-read for anyone interested in economics, politics, and the future of global wealth distribution. It is an intellectual tour de force that challenges conventional wisdom and offers a powerful vision for a more equitable world. Whether you agree with Piketty’s conclusions or not, his work is impossible to ignore.

Well written, interesting and highly relevant. It is similar to what Robert Reich has been saying for a long time but with some real facts to back it up and a lot of good background