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Economics
LAST year Thomas Piketty, an economist at the Paris School of Economics and a renowned expert on global inequality, published a book titled "Capital in the Twenty-first Century"—in French. It will be released in English on March 10th. We reviewed the book earlier this year, but it is detailed and important enough, in our opinion, to deserve additional discussion. We will therefore be publishing a series of posts over the next few weeks—live-blogging the book, as it were—to draw out its arguments at slightly greater length. Starting today, with the book's introduction.
Capital, as I will refer to Mr Piketty's book from here on out, is an incredibly ambitious book. The author has self-consciously put the book forward as a companion to, and perhaps the intellectual equal of, Karl Marx's Capital. Like Marx, Mr Piketty aims to provide a political economy theory of everything. More specifically, he attempts to re-establish distribution as the central issue in economics, and in doing so to reorient our perceptions of the trajectory of growth in the modern economic era. Mr Piketty's great advantage in attempting all this, relative to past peers, is a wealth of data and analysis, compiled by himself and others over the last 15 or so years.
Mr Piketty begins in an introduction that proceeds in two parts. He first describes the intellectual tradition into which the book falls. The second, which is the basic outline of his theory, I will tackle in the next post.
The study of political economy emerged in the first decades of the Industrial Revolution, in the late 18th century, in Britain and France. The great thinkers of the era were attempting to understand the dramatic societal and economic changes of the day and to describe their mechanics in a way that would allow them to anticipate future developments. To a great extent they focused on distributional issues—and worried that distribution spelled serious trouble for the capitalist system. The Reverend Thomas Malthus, for instance, famously worried that overpopulation would drive down wages to subsistence level, leading to dangerous political upheaval. To short-circuit this possibility the compassionate reverend recommended that governments cut off assistance to the poor and limit their reproduction.
David Ricardo's 19th century analysis was more measured but nonetheless similar in its concern about the sustainability of the contemporary economic system. He focused his attention on the relative scarcity of factors of production, and the effect of scarcity on shares of national income. Output and population were rising fast, he noted, while land supplies remained fixed, suggesting that land prices might rise without bound. As a result, he speculated, land rents would come to eat up a steadily rising share of national income, threatening the capitalist system.
Ricardo was wrong in the long run—soaring agricultural productivity (which both he and Malthus failed to anticipate) meant that agricultural land was not the scarce factor for very long. But he was right in the short run, and the short run matters. A period of a few decades in which the price of a scarce resource soars can lead to enormous accumulation of wealth in the hands of relatively few owners of capital. That concentration can persist even after technological change eases the initial scarcity: a point Mr Piketty notes is relevant in thinking about soaring prices for urban property or natural resources.
And then there was Marx. He (along with Friedrich Engels) was the first of the great political economists to wrestle directly with the effects of industrial capitalism. Marx was reacting to the reality of industrial growth at the time: through the first century or so of industrialisation output grew steadily, but there was virtually no meaningful increase in real wages. In the "hungry 1840s", when the Communist Manifesto was published, capitalism seemed like an incredibly raw deal for workers. That had begun to change by the time Marx published the first volume of Capital, in 1867. But the emergence of steady wage growth did little to diminish concentrated wealth.
Marx saw capitalism as fundamentally flawed, containing the roots of its own destruction. As owners of capital gobbled up the gains from growth, they would accumulate still greater piles of capital—"infinite accumulation". This would either drive the return on capital down to nothing, leading the capitalists to destroy the system by battling it out with each other, or it would allow the capitalists to capture a rising share of national income (like Ricardo's landowners), leading the workers to revolt. But Marx also turned out to be mistaken. He did so in large part, says Mr Piketty, because of a lack of data, and because he and others failed to anticipate that rapid technological growth could reduce the relevance of past wealth accumulation.
This latter factor helps shape one of the main elements of Mr Piketty's theory of everything: that the rate of growth is hugely important in determining how long a shadow old wealth casts. If not exactly an equaliser, fast growth nonetheless puts a finger on the scale on the side of those without great wealth.
Now, this entire line of theoretical work was thrown into upheaval by the events of the period from 1914-1945. The chaos and policy shifts of the period wiped out much of the world's previously accumulated wealth and set the stage for a burst of rapid, broad-based growth. Meanwhile, economists were for the first time gathering detailed data on personal incomes. And so when Simon Kuznets began looking at inequality trends in the 1950s, the data suggested to him that in "advanced phases" of capitalist development inequality tended to fall. The idea that inequality rose and then fell as an economy developed became known as the Kuznets curve. For the first time hard data had been brought to bear on distributional questions, and the news seemed pretty good. Kuznets' view became the foundation from which modern economics approach distributional issues, despite the fact that it was based on a very limited period during which declining inequality could not remotely be considered the result of natural economic processes.
That, as Mr Piketty sees it, is where he comes in. For most of the 20th century the distribution of incomes was a minor issue within economics. Growth and management of the business cycle were the sexy economic issues.
That is now changing, based in part on the academic work Mr Piketty has done (much of which is accessible at the World Top Incomes Database). While emerging-market growth has narrowed global inequality, income inequality within countries, including many large emerging markets, has been rising. The return of the importance of scarce land, resources, and intellectual property has contributed to a resurgence in wealth accumulation. Distributional worries are back, and Mr Piketty argues that that is the natural state of affairs rather than an aberration.
"In a way", Mr Piketty writes, "we are in the same position at the beginning of the twenty-first century as our forebears were in the early nineteenth century: we are witnessing impressive changes in economies around the world, and it is very difficult to know how extensive they will turn out to be...". It can be frightening and disorienting to find oneself at such an economic juncture. We look back on Malthus' worrying with the smugness of hindsight. But those who read Malthus at the turn of the 19th century and concluded that industrialisation would result in political upheaval, misery, and war turned out to be right. It also led to quite a few good things. But the process of getting there has been anything but smooth, and distributional issues inevitably play a role when the march toward prosperity slows or beats a temporary retreat.
This is an important book arriving at an appropriate moment. It's also an entertaining and informative read, and so I hope you'll join me in reading through and discussing it.
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