25 April 2014

The Pleasure of Piketty

Very occasionally there is a book which is a joy to read. Even more rare are the occasions when the book is from the non-fiction shelf. I might be unusual in treating economics books as recreation, but Thomas Piketty's Capital in the Twenty-First Centuryis a delight.

The book has two qualities which appeal to me and make it one of the most enjoyable reading experiences I've had outside of science fiction. Firstly, this is study built on evidence. It is not a theoretical text but puts its empiricism up front. Thomas Piketty has assembled datasets, with the help of collaborators and followers, which allow him to look at wealth, income and their distribution over long periods of time and across various, mostly developed, countries. The data is imperfect and he openly discussed the limitations this puts on the ability to draw conclusions, which lends a pleasing honesty to the narrative.

The second great pleasure in this book are the number of fresh ideas the evidence allows him to present. each chapter exposes new insights into the various questions, how much wealth countries accumulate, how income is distributed and how wealth is concentrated. After reading this book the way we understand and think about inequality is completely transformed. The fresh insights just keep coming page after page, chapter after chapter.

Here are a few examples of his key insights.
  • In the 19th century European countries had accumulated wealth (or capital) equal to around seven years of national income. That fell during the period of the world wars and the great depression to 2 to 3 times annual income in the 1950s. But it is on the rise again with capital around 4 to 6 times income now.
  • As the level of relative wealth fell so too did the income from capital which accrued to the richest individuals. For this reason as well as egalitarian post-war policies, income inequality fell but began rising again from the 1980s.
  • Wealth inequality also fell from a high point before WWI (when the top 10% owned 90% of the capital in Europe and 80% in the US). It too has been rising since the 1980s.
  • Inequality of wealth has not reached its previous level in part because the second 40% now claims a greater share of wealth, giving rise to what he calls a patrimonial middle class. (I will return, as M. Piketty would say, to this point.)
The book exposes some of the dynamics behind the accumulation of capital and rising inequality. The rate of return on capital is usually (but not necessarily) higher than the rate of growth (r>g). As a consequence, those fortunate enough to own wealth are able to add to the stock of capital and so increase the concentration of wealth.

He argues that the shocks of the world wars and the great depression caused the capital/income ratio to fall from a "normal" level to which it is now returning. That normal level is given by the stability condition β=s/g, where β is the ratio of capital to income, s the saving rate and g the growth rate. So a saving rate of 10% and a growth rate of 1.5% gives a capital around 7 times income.

One conclusion from all this is that the post war period when inequality seemed to be consigned to history was an exceptional period. It is also the time when my generation were forming their perceptions of the world and its political reality. It seems our ideas are falsified by taking a wider historical perspective. (Another point to which I will return).

There is a great deal more in the evidence and analysis in the book than I am able to set out now. There will be much more to say on this book and inspired by its evidence and conclusion. For myself, I am still trying to reconcile the algebra, which I feel he offers more as heuristic than as a model.

This conversation is only just beginning.

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