Thomas Piketty's Capital in the Twenty-First Century (Piketty, 2014) is the most talked about work of political economy to have appeared in recent years, if not decades. Since its publication in French last year (Piketty, 2013), and the subsequent publication, earlier this year, of its limpid translation into English by Arthur Goldhammer (Piketty, 2014), Piketty's book has received critical acclaim worldwide. Paul Krugman has described Piketty's book as 'magnificent, sweeping meditation on inequality', which has wrought 'a revolution in our understanding of long-term trends' (Krugman, 2014). Branko Milanovic, former lead economist of the World Bank, describes Capital in the Twenty-First Century as 'one of the watershed books in economic thinking' (Milanovic, 2014), while Jacob Hacker, progenitor of the idea of'predistribution' (see Hacker, Jackson & O'Neill, 2013), has described Piketty as 'a Tocqueville for today' (Hacker and Pierson, 2014; see also Paul Segal's review essay in this issue of Renewal).
Piketty's book has also begun to shape the way in which parties of the left think about the challenges they now face in creating a more just and equitable economic settlement. Shadow Cabinet member Stewart Wood, one of Ed Miliband's most thoughtful advisers, has described Piketty's work as 'providing an intellectual foundation' for many of the things that the next Labour government will hope to do in tackling inequality and falling living standards (Eaton and Wood, 2014; see also Pearce, 2014). Although Miliband has joked in interviews that he has read 'only a few pages' of Piketty's Capital, the truth is that, as Miliband himself knows well (see e.g. Miliband, 2011, 2014; Eaton, 2014), social democratic politicians can only hope to triumph in the future if they get to grips with the full implications of Piketty's meticulous diagnosis of our current malaise of extreme and worsening inequality, and if they are prepared to take political steps to fight inequality that are of a scope and scale to match the daunting dimensions of the problem of inequality itself.
Martin O'Neill of Renewal and Juncture's Nick Pearce interviewed Professor Piketty on a recent visit to London (1).
Nick Pearce: Your book has received a huge amount of attention. Can we start with some of the central critiques of your core arguments? To begin with, there are those on the left who say that your treatment of the category of capital is a fairly orthodox one. It essentially puts together assets and their relative prices, instead of treating capital conceptually as constituted through relations of production and other structures of power, as it would be in Marxian and other heterodox traditions. (See, for example, Galbraith, 2014).
Thomas Piketty: I have read that. I think that it is a bit unfair in the sense that I really try hard in the book to do justice to the multi-dimensionality of capital. The history of real estate is not the history of land, it is not the history of financial assets or business assets, or the public debt; all these different assets come with different power relationships, and with different social compromises to determine their rate of return, and the labour return that is used together with these assets.
At some point in the book I also take the sum of all of these assets, and use the market prices of these different assets to compute the total capital stock of the economy. But I try to make clear in the book that while this may be fine for some purposes--this addition of different kinds of capital, in computing the capital stock --one always needs to keep in mind that this is a pretty abstract operation. I certainly don't claim that you can summarise the multi-dimensionality of capital, and the inequality and power relationships that go with it, by making this gigantic operation of adding all of these categories together. In fact, in the book I have long parts in different chapters where I try to tell the story of the public debt, the story of real estate bubbles, the story of 'slave capital', which of course is a very particular kind of wealth, and of the power relationships that go along with it, and this all plays a role in the book. So, I find that this critique--although I can hear it--is not really justified in the sense that I do perfectly agree that capital is a multi-dimensional concept.
In particular, the market value of assets may not always coincide with their social values, so this does not mean that it is the only way to measure the value of capital. For instance, I have a long discussion about the value of German manufacturing companies and the fact that their market value may not be as large as British, American or French corporations, but apparently that does not prevent them from producing good cars (2). The market does a number of things, but there are also a number of things that the market does not do so well; and putting a price on assets is always a complicated business. Sometimes you put a higher price on an asset just because you have less access to power than other stakeholders or groups in society, and that might not be a good thing. So I try to do justice to this multi-dimensional view of capital and when I use the standard textbook economic model, with one type of capital and one type of good, and no relative price issues, I always try to make clear that I do not believe that this is a model that can adequately describe the structure of capital in any country. Still, I think that it is useful to use this model from time to time to refute the claim that, even if the world were operating like that, in this simple, benchmark textbook model then everything would go fine.
One central point of the book is that even if you didn't have real estate bubbles, even if you didn't have any capital market 'imperfection', and even if you didn't have all this complex multi-dimensionality of capital assets, we would still have this fundamental inequality--that is, 'r > g'--of the rate of return to capital greater than the growth rate, and we would still have big problems of inequality to solve. I do not pretend that this model is sufficient to explain the world, but I am trying to make the point that even if it were, we would still have a complex inequality problem to solve. I think it is important that the way I use the benchmark of orthodox neo-classical economic models in this way is in order to refute some claims that are often made about the implications of this model, not because I believe in it--not because I believe that this is an accurate description of the structure of ownership in any country.
Martin O'Neill: Another issue that has come up in the reception of your book, in Paul Krugman's very positive review in the New York Review of Books (Krugman, 2014), is that the phenomenon of the very high salaries of managers in the corporate sector, and particularly in the financial sector, is something that does not fit so easily with a model that is about returns increasing to capital, rather than to labour. Krugman suggested that you don't have as much of a story about that phenomenon as you do about increasing returns to capital. What is your response to Krugman?
Thomas Piketty: I think that he has a point. I think that the book is too short--I should have made it longer [laughs] so that I could have spoken about all of this. But I think there is not enough about financial deregulation, so I think he has a point.
Now, there is not enough on this, but I do talk about financial deregulation and about the impact on inequality of finance. In particular, there are two important impacts to which I refer. One is that clearly it [financial deregulation] is a big contribution to rising top incomes in the financial sector. And the other part of the story, which plays a big role in the book, is the fact that increased financial sophistication has probably increased inequality in asset returns between different groups of people. For example, there is the fact that a very large portfolio can manage to get a 7 or 8 per cent return, whereas people with 100,000 [pounds sterling] can hardly get the...