It’s hard to think of a work of economics—certainly not one published in the past 30 years or so—that has had as extraordinary and instantaneous an impact outside the guild of professional economists as Thomas Piketty’s “Capital in the Twenty-First Century“. An early review of Piketty’s book—which was published in his native language, French, in 2013, and appeared in a luminous translation by Arthur Goldhammer in March this year—declared it to be “one of the best books in economics written in the past several decades”. Robert Skidelsky, reviewing it for Prospect, called it a “timely intervention in the current debate about inequality and its causes”, while the Nobel laureate Paul Krugman asserted that “Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to.”
Although the book is voluminous (it’s nearly 700 pages long), data-heavy and densely researched, its thesis is easy to summarise: capitalist economies have a natural tendency to incubate highly unequal distributions of income and wealth. And the period stretching roughly from 1913 to 1975, in which inequality went into a relatively steep decline, turns out to have been a historical anomaly that was the product of external factors—specifically, two world wars, the Great Depression, the power of organised labour and progressive taxation. Over the past 30 years or so, that decline has gone into reverse. In the early 21st century, private fortunes, Piketty writes, “seem to be on the verge” of returning to levels last seen in the late 19th century, the heyday of “rentier” capitalism.
That, in itself, is not an original conclusion, of course. What is unusual about Piketty’s book, however, is the empirical basis he offers for that conclusion. Working with a number of colleagues, notably Anthony Atkinson and Emmanuel Saez, Piketty has assembled copious data measuring inequality of both income and wealth in all the major world economies over almost two centuries. “Capital”, therefore, is both a tour de force of empirical research and a reminder to Piketty’s colleagues in the economics profession of the value of history and “collaboration with the other social sciences.”
I spoke to Piketty on the phone last week from Paris, where he is a professor at the Paris School of Economics.
JD: I’d like to start where your book ends. You end with a plea for what you call a “political and historical economics”. The book is a treatise in what used to be called “political economy”, isn’t it? Because what was central to the tradition of political economy were precisely the kind of distributional questions that this book is concerned with.
TP: That’s right. I’m quite attached to this notion of political economy. I don’t believe that there’s room, in the social sciences, for a separate science of economics. Economists should be modest and be aware that they are part of the broader social science community. We need to be pragmatic about the methods we use. When we need to do history, we should do history. When we need to study political science, we should study political science. So “political economy” best describes what I’m trying to do.
What I have seen over many years in economics departments is that complicated mathematics is used as a way of impressing colleagues in other fields. Economists seem to believe that this is a way of looking scientific. But it’s also true that an increasing number of economists are doing applied work, doing policy evaluation rather than the kind of excessively mathematical work I was just describing. So I don’t want to seem as if I’m being too harsh on my colleagues!
The book is, among other things, a masterpiece of empirical research—the evidence you accumulate for your argument about inequality in developed capitalist economies is impressively copious. An important part of that argument is your critique of the “Kuznets Curve”—the hypothesis put forward in the 1950s by the Belarusian-American economist Simon Kuznets according to which economic inequality decreases once an economy reaches a certain level of average income. Could you explain why you think Kuznets didn’t show what he thought he’d shown about declining inequality? It looks to me as if you’re making an empirical claim there about the quality of his evidence.
It is important to say that Kuznets was writing in the early 1950s and he did the best he could with the available data. And remember that he only looked at the US. He used returns from the federal income tax that was created in 1913 to measure the level of top decile incomes. By comparing it with national income, he could compute the share of national income going to that top decile. This was the first ever measure of income inequality, but it was only for one country, the US, and only for a 35-year period, 1913-1948. But still, it was a lot more than what economists had had before. The problem was not so much his findings, which are correct concerning declining inequality in the US at the time, but the conclusions he derived from them. If you read his books, Kuznets was well aware that the decline was largely due to the two world wars and progressive tax policies and that it was not a “natural” outcome in any meaningful sense. In the Cold War context, it was very tempting for Kuznets and his followers to interpret these findings using a much more universal, optimistic mechanism, which became the Kuznets Curve—the view that you have a natural evolution in economic development towards declining inequality. So by and large, I think this was a product of the Cold War. People wanted to be optimistic and to be able to tell poor and newly independent countries that they didn’t have to become socialist; all they had to do was wait and growth would bring about a reduction in inequality.
What I have done, with the help of many colleagues, is to extend Kuznets’s data series to the entire 20th century and the early 21st century. And I’ve also extended it from one country to over 30 countries. So it’s not that we’re cleverer than Kuznets. It’s just that we have a lot more data. It’s easy now to come to a different conclusion. What’s strange is that this hadn’t been done before. This reflects partly the fact that this was the kind of work that was considered to be too historical for economists and too economic for historians. So nobody was doing it.
Now that we have this longer perspective, we can see that the decline in income inequality that Kuznets observed roughly between 1913 and 1945, and which did indeed take place in the US and every European country, as well as Japan, was largely due to the two world wars, the Great Depression and the policies that were enacted following these shocks. So there was nothing natural about it. This is particularly clear in the US, where you’ve seen a huge reversal of the Kuznets Curve over the past 30 years.
So one way of describing the results of your research would be to say that you’ve put the Kuznets Curve the right way up? It’s a U-shaped curve again.
Right. And the other aspect is to extend the analysis even further by looking not only at income inequality, but also at wealth inequality.
Why is it important in your view to look at wealth as well as income?
It’s important for several reasons. The first is purely technical. It allows you to have a longer perspective, because you have data on wealth going back to the 19th century, even the 18th century in some cases. This allows you to put the shocks of the 20th century into a longer run perspective. With income, the problem is that the data we have start just a little bit before the First World War—1913 in the US, with the creation of the federal income tax, 1914 in France, 1909 with the creation of the progressive income tax in the UK. So when we looked at income, our series showed a huge decline in inequality starting with the First World War, but because we only have data from a few years before the war, we can’t study the evolution [of inequality rates]. But we have series for wealth inequality for the whole of the 19th century—not only for France, but also for Britain and to some extent for the US.
Another reason why it’s important to look at wealth is that a big part of the reduction in income inequality during the first half of the 20th century is actually due to the reduction of top capital incomes. That is, top incomes coming from the returns to high wealth holdings. So if we want to understand this process, it’s useful to look at wealth. Income from wealth is the product of the rate of return on the wealth stock people own. If you want want to understand where this wealth stock comes from, you cannot just look at the income stream coming from wealth—you need to study the wealth accumulation process directly. And this is something Kuznets did not do.
By studying wealth and capital—and in my book I use these two terms interchangeably—I am returning to the pre-Kuznets tradition of 19th-century economists who looked at wealth and inheritance. And novelists were of course very much interested in wealth in this period, because the entire society was constructed around wealth and capital.
One aspect of the book that many reviewers have commented on is the way you use examples from literature, particularly the dilemma that confronts Rastignac in Balzac’s novel Le père Goriot. Now you’re clearly not using those literary examples merely as decoration or light relief are you?
The primary reason for using these examples is that they influenced me a lot in my research. For a long time I’ve been trying to answer the “Rastignac dilemma” [that by marrying Mme Victorine, he’ll be able to get his hands on her fortune and achieve an annual income ten times that which he could earn as a royal prosecutor]. And I’ve been asking myself why it is that inheritance flows today seem to be lower than at the time of Balzac. What has changed? And it took me a long time to understand that, in a way, we are returning to very high inheritance flows. I’m not claiming that we’re returning to a world identical to Balzac’s, but in some ways we are in a transition.
Reading those 19th-century novels helped me to explore the question what has really changed since Balzac’s times. What are the deep reasons for those changes? Are they going to continue? Or can things go into reverse? What these novels show is that income and wealth are not only about numbers. They are about power relations between different groups of people. So using these literary references is a way to acknowledge that. It’s important to understand that behind the numbers, the data, you have social groups, people with hopes and disappointments. Money is always more than money.
Is there a connection here with your reluctance to use indices of inequality such as the Gini coefficient in your work? In the book you write that “statistical indices such as the Gini coefficient give an abstract and sterile view of inequality, which makes it difficult for people to grasp their position in the contemporary hierarchy”.
The Gini coefficient, and more generally synthetic coefficients used to summarise inequality in a country with a single number, have had a negative impact on thinking about social inequality. The problem with such coefficients is that they tend to describe inequality in an abstract and technical way. Like any single number used to summarise inequality, with the Gini coefficient you are going to aggregate information from the top of the [income] distribution, from the bottom and the middle. And so you don’t know, in the end, whether you have a high Gini coefficient because there’s a lot of inequality between the poor and those on middle incomes, or between the middle and the top or even the between the top and the very top.
One of the central claims made in the book—possibly the central claim in the book—is that, despite what Kuznets and others thought they had shown, the years between, roughly speaking, 1913 and 1975, which witnessed a decline in inequality, were an aberration and that we are returning to 19th-century levels of wealth inequality. Could you say something about the differences, as well as the similarities, between the rentier capitalism of the 19th century and what you call the “patrimonial” capitalism of the early 21st century?
The main difference is that we are not back there yet. In particular, we still have today, especially in Europe, a patrimonial middle class which didn’t exist in 1913. The concentration of wealth today is less extreme than it was in 1913 and we need to understand why and to ensure that things will continue like that. We need the middle class to continue to expand rather than shrink. It’s important for our democratic institutions. [The emergence of a property- and asset-owning middle class] is one of the major changes to have occurred in the past century. In recent decades, it is true, we have started moving towards a re-concentration of wealth. In the case of the UK, on the eve of the First World War, you basically had no middle class, or a very small one—90 per cent of national wealth belonged to the top 10 per cent. Today, that figure is closer to 70 per cent. That’s still very large, and it was closer to 60-65 per cent 30 years ago. So it declined and then increased again.
A big difference between today and a hundred years ago is that you have 20-30 per cent of national wealth in the UK and other European countries belonging to what I describe in the book as the “patrimonial middle class”, by which I mean the 40 per cent of the population that is neither in the top 10 per cent nor the bottom 50 per cent. The bottom 50 per cent still own less than 5 per cent of the total, so that hasn’t changed much over the past century.
So the existence of this patrimonial middle class makes a big difference to the political, social and economic landscape. The question is what happens next? Is this group going to get stronger or is it going to shrink? Is their share of national wealth going to be reduced, which is, to some extent, what has been happening in the past 30 years?
Politicians in most of the advanced economies are very worried about what’s happening to the assets of that patrimonial middle class. Are they right to be worried?
I think they should be worried. With low growth and wages and labour income growing only very slowly, it is more difficult for people who start out with low or no wealth to accumulate wealth than it was in the postwar period. And for those who have little wealth, the modern financial system and financial markets seem to have, if anything, made access to good returns even more unequal than it used to be. If you have £100,000 or £200,000, it’s hard to get a good return these days. Whereas the data we have seems to indicate that people at the very top are getting much bigger returns. Once you have a big pile of assets, you’re able to access financial instruments and sophisticated portfolios which ensure that year after year your wealth keeps rising much more quickly than the assets of the middle class. This is an issue I address in the book by looking also at university endowments. This is useful because there we have access to much more detailed financial statements and information than we do for individuals like Bill Gates or [the French heiress] Liliane Bettencourt. The information we have about them is highly imperfect. But I find the same results when I look at the better quality data on university endowments. If you start with an endowment of $1bn, you have access to much higher returns than if you start with an endowment of $10m. The same applies to individuals. And if you make long-run projections on the basis of this information, it’s rather frightening. So I think it’s reasonable for politicians to have started to worry about this.
You argue that if the rate of return on capital remains above the rate of growth of the economy, then inequality will rise inexorably. So I have a question about growth. Are you saying that the levels of growth that we saw in the developed world during the “Golden Age” of capitalism, and which were accompanied by a decline in inequality, are unrepeatable?
At least for countries that are at the technological frontier, yes, they are unrepreatable. It’s important to understand that there are two instances in history at which you see such a high growth rate. One is when you are having to catch up with other countries. This is what happened during the postwar period. A lot of time had been lost between 1914 and 1945. GDP in 1945 or 1950 was much lower than what it would have been without the two world wars. So there was a lot of catch-up going on. And there was also catch-up with the US, which had been less affected by the Second World War. So the first reason for high growth rates is catching up and transition. And this is what you’re seeing with China and other emerging economies today, which still have a lot to do to catch up with the developed countries.
The other reason why you can have a large GDP growth rate in an economy over an extended period of time is if you have large population growth. It’s important to realise that this has been a big part of economic growth throughout the 20th century. More generally, if you look at total GDP growth at the world level since the Industrial Revolution, what you find is that the total growth rate between 1700 and 2012 is, as far as we can measure it, 1.6 per cent per annum. About half of it comes from population growth and the other half comes from per capita GDP growth. You can infer two things from these numbers. First, population growth has been of half of total output, historically. Second, these numbers can seem very small but they were in fact sufficient to completely transform the world. Population growth of 0.8 per cent per year may seem small, but if you do that for 300 years you go from a global population of 600 million in the early 18th century to 7 billion today. The question is whether that is going to happen again? Are there going to be 70 billion of us in 300 years’ time? Maybe not.
According to UN population projections, the 0.8 rate of population growth is going to fall to 0 per cent. As for the productivity-growth complement, which has also been 0.8 per cent in the long run at the world level, it is an illusion to think that we could get back to 3 or 4 per cent per year in the long run.
The corollary of that is your claim that the return on capital will remain at the historical rate of 3-4 per cent per year.
There’s no natural force that should push the rate of return down to the growth rate, or the growth rate up to the rate of return. It would be an incredible coincidence if the two would be equal, since they are largely determined by completely different forces. The rate of return is determined by people’s attitude towards time, saving and investment and also by how much technology uses capital. Whereas the growth rate is determined by attitudes towards fertility, the rate of innovation and so on. And there’s no logical reason why these two should be equal. They are both expressed in percentage terms, but they measure completely different aspects of economic reality. So we can’t wait for this incredible coincidence to happen in order to solve our problems.
As for solving our problems, part four of the book is devoted to your prescriptions for “regulating capital in the 21st century”. You sketch out a case for, among other things, a global tax on capital, which you describe as a “useful utopia”. Do you mean by that the international cooperation required to implement such a tax is unlikely to be achieved?
I am a lot more optimistic than a lot of commentators seem to think! A complete global tax is certainly a long-run objective. And it’s not going to happen any time soon. But between that and the other extreme, which would be a complete absence of cooperation, you have other possibilities. There’s a lot individual countries can do on their own. For instance, most countries have a property tax. The difference with the kind of progressive tax on net wealth that I am proposing would be that it would, in effect, reduce the property tax for people who are trying to accumulate wealth—take someone who has bought a house for £300,00 and has a mortgage of £280,000. Their net wealth is very small. They are paying back almost as much in interest payments as a tenant would pay in rent. In a standard property tax system, that person would pay the same amount in property taxes as someone with no mortgage. What I propose is that you increase the property tax on people with a lot of financial assets.
Now, it’s entirely possible for individual countries to move in that direction so as to foster wealth mobility. The point is not to destroy wealth but rather to increase the possibility for people to accumulate wealth for themselves. But if you want the maximum of progressivity in a wealth tax at the top end, it’s true that individual countries can’t do it on their own—smaller countries, at least. I think the US or China could do a lot on their own, but for European countries, we need a lot more participation. In the Eurozone, it’s difficult to have a common currency without any provision for a common budget and common taxation. Without those things, you’re left with a highly dysfunctional set-up. That’s why I’m strongly in favour of more federal union in Europe. We’re asking, for example, the Greek government make their rich taxpayers pay more—it’s a very reasonable demand—but at the same time we’re not helping Greece to implement tax reform. It’s very difficult for individual countries to tax the wealthy in a way that is fair with respect to other citizens if, at the same time, wealthy Greeks can transfer their financial assets to German or French banks in a matter of seconds. So we’re being inconsistent here. The only way to make progress is to have more fiscal coordination. Technically, that’s certainly feasible, but whether there would be the political will to do it is another matter. But I want to be optimistic. This is not a zero-sum game.