FORCES OF DIVERGENCE
Is surging inequality endemic to capitalism?
BY JOHN CASSIDY
In the stately world of academic presses, it isn’t often that advance orders and publicity for a book prompt a publisher to push forward its publication date. But that’s what Belknap, an imprint of Harvard University Press, did for “Capital in the Twenty-first Century,” a sweeping account of rising inequality by the French economist Thomas Piketty. Reviewing the French edition of Piketty’s book, which came out last year, Branko Milanovic, a former senior economist at the World Bank, called it “one of the watershed books in economic thinking.” The Economist said that it could change the way we think about the past two centuries of economic history. Certainly, no economics book in recent years has received this sort of attention. Months before its American publication date, which was switched from April to March, it was already the subject of lively online discussion among economists and other commentators.
Piketty, who teaches at the Paris School of Economics, has spent nearly two decades studying inequality. In 1993, at the age of twenty-two, he moved to the United States to teach at M.I.T. A graduate of the élite École Normale Supérieure, he had recently completed his doctorate, a dense mathematical exploration of the theory behind tax policies. Plenty of bright young European scholars move across the Atlantic, of course, and many of them end up staying. Piketty was not to be one of them. “It was the first time I had set foot in the United States,” he recalls in the introduction, “and it felt good to have my work recognized so quickly. Here was a country that knew how to attract immigrants when it wanted to! Yet I also realized quite soon that I wanted to return to France and Europe, which I did when I was twenty-five. Since then, I have not left Paris, except for a few brief trips.”
Part of Piketty’s motivation in returning home was cultural. His parents are politically engaged Parisians who took part in the 1968 riots. When he was growing up, his intellectual role models were French historians and philosophers of the left, rather than economists. They included members of the Annales school, such as Lucien Febvre and Fernand Braudel, who produced exhaustive analyses of everyday life. Compared with this scholarship, much of the economics that Piketty encountered at M.I.T. seemed arid and pointless. “I did not find the work of U.S. economists entirely convincing,” he writes. “To be sure, they were all very intelligent, and I still have many friends from that period of my life. But something strange happened: I was only too aware of the fact that I knew nothing at all about the world’s economic problems.”
In Paris, he joined the French National Center for Scientific Research, and, later, the Écoles des Hautes Études en Sciences Sociales, where some of his heroes had taught. The main task he set himself was exploring the hills and valleys of income and wealth, a subject that economics had largely neglected. At first, Piketty concentrated on getting the facts down, rather than interpreting them. Using tax records and other data, he studied how income inequality in France had evolved during the twentieth century, and published his findings in a 2001 book. A 2003 paper that he wrote with Emmanuel Saez, a French-born economist at Berkeley, examined income inequality in the United States between 1913 and 1998. It detailed how the share of U.S. national income taken by households at the top of the income distribution had risen sharply during the early decades of the twentieth century, then fallen back during and after the Second World War, only to soar again in the nineteen-eighties and nineties.
With the help of other researchers, including Saez and the British economist Anthony Atkinson, Piketty expanded his work on inequality to other countries, including Britain, China, India, and Japan. The researchers established the World Top Incomes Database, which now covers some thirty countries, among them Malaysia, South Africa, and Uruguay. Piketty and Saez also updated their U.S. figures, showing how the income share of the richest households continued to climb during and after the Great Recession, and how, in 2012, the top one per cent of households took 22.5 per cent of total income, the highest figure since 1928. The empirical work done by Piketty and his colleagues has influenced debates everywhere from Zuccotti Park, the short-lived home of Occupy Wall Street, to the International Monetary Fund and the White House; President Obama has said that tackling inequality and wage stagnation is our foremost challenge.
The question is what’s driving the upward trend. Piketty didn’t think that economists’ standard explanations were convincing, largely because they didn’t pay enough attention to capital accumulation—the process of saving, investing, and building wealth which classical economists, such as David Ricardo, Karl Marx, and John Stuart Mill, had emphasized. Piketty defines capital as any asset that generates a monetary return. It encompasses physical capital, such as real estate and factories; intangible capital, such as brands and patents; and financial assets, such as stocks and bonds. In modern economics, the term “capital” has been purged of its ideological fire and is treated as just another “factor of production,” which, like labor and land, earns a competitive rate of return based upon its productivity. A popular model of economic growth developed by Robert Solow, one of Piketty’s former colleagues at M.I.T., purports to show how the economy progresses along a “balanced growth path,” with the shares of national income received by the owners of capital and labor remaining constant over time. This doesn’t jibe with modern reality. In the United States, for example, the share of income going to wages and other forms of labor compensation dropped from sixty-eight per cent in 1970 to sixty-two per cent in 2010—a decline of close to a trillion dollars.
Piketty believes that the rise in inequality can’t be understood independently of politics. For his new book, he chose a title evoking Marx, but he doesn’t think that capitalism is doomed, or that ever-rising inequality is inevitable. There are circumstances, he concedes, in which incomes can converge and the living standards of the masses can increase steadily—as happened in the so-called Golden Age, from 1945 to 1973. But Piketty argues that this state of affairs, which many of us regard as normal, may well have been a historical exception. The “forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century,” he writes. And, if current trends continue, “the consequences for the long-term dynamics of the wealth distribution are potentially terrifying.”
Is surging inequality endemic to capitalism?
BY JOHN CASSIDY
In the stately world of academic presses, it isn’t often that advance orders and publicity for a book prompt a publisher to push forward its publication date. But that’s what Belknap, an imprint of Harvard University Press, did for “Capital in the Twenty-first Century,” a sweeping account of rising inequality by the French economist Thomas Piketty. Reviewing the French edition of Piketty’s book, which came out last year, Branko Milanovic, a former senior economist at the World Bank, called it “one of the watershed books in economic thinking.” The Economist said that it could change the way we think about the past two centuries of economic history. Certainly, no economics book in recent years has received this sort of attention. Months before its American publication date, which was switched from April to March, it was already the subject of lively online discussion among economists and other commentators.
Piketty, who teaches at the Paris School of Economics, has spent nearly two decades studying inequality. In 1993, at the age of twenty-two, he moved to the United States to teach at M.I.T. A graduate of the élite École Normale Supérieure, he had recently completed his doctorate, a dense mathematical exploration of the theory behind tax policies. Plenty of bright young European scholars move across the Atlantic, of course, and many of them end up staying. Piketty was not to be one of them. “It was the first time I had set foot in the United States,” he recalls in the introduction, “and it felt good to have my work recognized so quickly. Here was a country that knew how to attract immigrants when it wanted to! Yet I also realized quite soon that I wanted to return to France and Europe, which I did when I was twenty-five. Since then, I have not left Paris, except for a few brief trips.”
Part of Piketty’s motivation in returning home was cultural. His parents are politically engaged Parisians who took part in the 1968 riots. When he was growing up, his intellectual role models were French historians and philosophers of the left, rather than economists. They included members of the Annales school, such as Lucien Febvre and Fernand Braudel, who produced exhaustive analyses of everyday life. Compared with this scholarship, much of the economics that Piketty encountered at M.I.T. seemed arid and pointless. “I did not find the work of U.S. economists entirely convincing,” he writes. “To be sure, they were all very intelligent, and I still have many friends from that period of my life. But something strange happened: I was only too aware of the fact that I knew nothing at all about the world’s economic problems.”
In Paris, he joined the French National Center for Scientific Research, and, later, the Écoles des Hautes Études en Sciences Sociales, where some of his heroes had taught. The main task he set himself was exploring the hills and valleys of income and wealth, a subject that economics had largely neglected. At first, Piketty concentrated on getting the facts down, rather than interpreting them. Using tax records and other data, he studied how income inequality in France had evolved during the twentieth century, and published his findings in a 2001 book. A 2003 paper that he wrote with Emmanuel Saez, a French-born economist at Berkeley, examined income inequality in the United States between 1913 and 1998. It detailed how the share of U.S. national income taken by households at the top of the income distribution had risen sharply during the early decades of the twentieth century, then fallen back during and after the Second World War, only to soar again in the nineteen-eighties and nineties.
With the help of other researchers, including Saez and the British economist Anthony Atkinson, Piketty expanded his work on inequality to other countries, including Britain, China, India, and Japan. The researchers established the World Top Incomes Database, which now covers some thirty countries, among them Malaysia, South Africa, and Uruguay. Piketty and Saez also updated their U.S. figures, showing how the income share of the richest households continued to climb during and after the Great Recession, and how, in 2012, the top one per cent of households took 22.5 per cent of total income, the highest figure since 1928. The empirical work done by Piketty and his colleagues has influenced debates everywhere from Zuccotti Park, the short-lived home of Occupy Wall Street, to the International Monetary Fund and the White House; President Obama has said that tackling inequality and wage stagnation is our foremost challenge.
The question is what’s driving the upward trend. Piketty didn’t think that economists’ standard explanations were convincing, largely because they didn’t pay enough attention to capital accumulation—the process of saving, investing, and building wealth which classical economists, such as David Ricardo, Karl Marx, and John Stuart Mill, had emphasized. Piketty defines capital as any asset that generates a monetary return. It encompasses physical capital, such as real estate and factories; intangible capital, such as brands and patents; and financial assets, such as stocks and bonds. In modern economics, the term “capital” has been purged of its ideological fire and is treated as just another “factor of production,” which, like labor and land, earns a competitive rate of return based upon its productivity. A popular model of economic growth developed by Robert Solow, one of Piketty’s former colleagues at M.I.T., purports to show how the economy progresses along a “balanced growth path,” with the shares of national income received by the owners of capital and labor remaining constant over time. This doesn’t jibe with modern reality. In the United States, for example, the share of income going to wages and other forms of labor compensation dropped from sixty-eight per cent in 1970 to sixty-two per cent in 2010—a decline of close to a trillion dollars.
Piketty believes that the rise in inequality can’t be understood independently of politics. For his new book, he chose a title evoking Marx, but he doesn’t think that capitalism is doomed, or that ever-rising inequality is inevitable. There are circumstances, he concedes, in which incomes can converge and the living standards of the masses can increase steadily—as happened in the so-called Golden Age, from 1945 to 1973. But Piketty argues that this state of affairs, which many of us regard as normal, may well have been a historical exception. The “forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century,” he writes. And, if current trends continue, “the consequences for the long-term dynamics of the wealth distribution are potentially terrifying.”
Not trying to portray the gap as desirable, just questioning if its the gap itself, or the economic condition of those at the bottom that we should be concerned with.
