Capital in the 21st Century.

Position::Book review


Thomas Piketty has ignited a new debate on the issue of inequalities of income and wealth. In his groundbreaking book titled "Capital in the 21st Century," Piketty, a French economist, provides a sweeping historical account of the dynamics of the capital accumulation process for over three centuries and more than 20 countries with primary focus on France, Germany, Sweden, Great Britain, Japan, and the United States. Piketty explores the long-term evolution of capital and "deep structures of inequality" with the enormous amount of historical data he collected while working with several prominent researchers over the past 15 years working ... His 685-page book reflects this monumental work and the development of a rich framework to analyze megatrends of global inequality.

The book is written in the rich literary styles of Adam Smith, Keynes or Marx. Alternating between the references to Jane Austen's characters and charts of unequal distribution, he walks us through a host of economic theories and concepts. Despite the historical flavor and narrative style, Piketty's work is a comprehensive scientific inquiry. Instead of using extensive mathematical models, he uses only three simple equations and yet provides a deep and rigorous understanding of the working of a capitalist system. No wonder the book is hailed as a "one of the watershed books in economic thinking" (Branko Milanovic) or a book "that will change the way we think about society and the way we do economics" (Paul Krugman).

Growing inequality is recognized as a defining issue of our time. Piketty has elevated the debate on inequality to a new systemic level by placing inequality of wealth and income in a broader, long-run context of the functioning of a capitalistic economy. As stated by Tyler Cowen, he has provided a "general theory of capitalism."

The previous studies on inequality either implied that the inequality is not a serious problem or that it was an "underdevelopment phenomenon" affecting only poor countries. Kuznets, in his seminal study (1955), showed that the initial inequalities caused by industrialization and intersectoral mobility will be automatically reduced as the economy grows and that a rising tide lifts all the boats. Similarly, Solow's theoretical model demonstrated that an economy progresses along a "balanced growth path" as the shares of capital and labor in national income remain constant. With a belief in self-correcting market mechanism, a general feeling of optimism prevailed and the issue of inequality was relegated to the background. Other research studies focused on inequality as poverty and studied income inequalities with a primary emphasis on the bottom 10% or 20% of the households. Most of the contemporary research relied on abstract mathematical models and analyzed the growth-inequality nexus with little or no historical evidence.

Piketty's book changes the direction, scope, and the focus of the existing discourses on inequality. Piketty reshapes the debate by "putting the distributional question back at the heart of economics."

Piketty's work represents a major contribution to the field on several counts. He shows that wealth and income concentration in advanced, rich countries is a serious problem. Inequality is not only a third-world phenomenon. He shifts the focus from poverty or lower end of the distribution to the wealth concentration in the top 1% and .1% of households. He takes a structural view of wealth and income concentration and shows a serious concern that the fundamental 'forces of divergence' leading to wealth concentration at the top have "destabilizing" consequences for democratic values and the functioning of a capitalist engine. He insists, therefore, that "inequality-not poverty, not hunger, not disease, not human rights, not expanding liberties- matters." Inequality matters because it endangers the very foundation of democracy and economic sustainability. Bringing the role of the inheritance and spiraling effect of wealth accumulation to the center of his analysis, Piketty makes a unique contribution to the existing debate. The gravity of the problem is evident when he states that there is no automatic reduction in wealth concentration at the top--"... there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently." To counter the growing concentration of wealth and income, state intervention is essential. Piketty therefore, recommends a global wealth tax...

To continue reading