Capital in the Twenty-First Century
Thomas Piketty (translated by Arthur Goldhammer)
BELKNAP PRESS, 2014
Capital in the Twenty-First Century is a very important book that is not really about capital, and is not really about the twenty-first century. It is predominantly a work of analytical economic history, focusing on the late nineteenth century to the present--with words of warning for the future, nestled among caveats regarding the pitfalls of economic predictions. And its subjects are the dynamics and distribution of incomes and wealth, where wealth is to capital what an hourly wage is to an hour of work: the market value, not the thing itself.
Inequality is the great challenge of our time. Still, Piketty's runaway public success was expected by no one--his publisher ran out of copies in the first few weeks--and is due in no small part to generous endorsements from uber-public intellectual Paul Krugman, Nobel Prize-winning economist and New York Times columnist (and who sportingly admitted to 'sheer, green-eyed professional jealousy' (Krugman, 2014)). Piketty's book has spawned countless reviews and commentaries. Yet this text of 577 pages plus endnotes is no easy conquest, and the public sphere is occupied by more opinions of Piketty than readers of Piketty. In addition, the combination of fame and the ideological nature of its subject has given him the status of Big Game to be hunted by ambitious economists and journalists--very publicly in a belligerent and careful-but-not-quite-careful-enough critique by the Financial Times' Chris Giles that turned out to be badly misguided (Giles and Giugliano, 2014 and Piketty, 2014). (Piketty points out that if Giles were correct it would imply that Britain today had one of the most equal distributions of wealth in modern history, which is risible).
They are the 1 per cent
Given this exposure it is ironic that one of Piketty's great contributions to the lexicon of public debate is not usually credited to him: through his unearthing of data on the incomes of the richest 1 per cent, he is ultimately responsible for the slogan 'we are the 99 per cent', for without him we would not know who does not fall into that category (1). Starting with France, Piketty used income tax data to reveal the incomes of the richest in society, which had previously been inaccessible. Following this work, Piketty and the great British economist of inequality Tony Atkinson led a project of dozens of researchers to collect top income data from around the world, which have been collated into a database that now covers 29 countries (2).
The key finding of this research is that the income share of the richest 1 per cent has risen dramatically in many countries around the world since the 1980s. In the US the richest 1 per cent received about 8 per cent of total income through the 1960s and 1970s. This share started to rise in the mid-1980s, reaching about 18 per cent in recent years. Britain followed a similar pattern, its share rising from a low of only 6 per cent in 1980 to 15 per cent. Famously egalitarian Sweden has become less so, having seen its top 1 per cent income share rising from only 4 per cent in the 1980s to 7 per cent. Still, it is important to note that major increases were not inevitable: in both France and Japan there has been only a modest rise, from about 7 per cent in the 1980s to about 9 per cent now.
The greatest increase in top incomes has occurred in Anglo-Saxon countries, and is due to the rise of the 'super-manager': senior executives in both finance and the rest of the corporate world whose salaries and bonuses have soared in the last three decades. The standard right-wing defence of huge top incomes is that they represent the marginal product, or value added, of their beneficiaries. As a scientific explanation this is standard neo-classical economics--if the heroic efforts of a super manager will add $10 million to a firm's shareholder value then its shareholders will be willing to pay anything up to $10 million to retain him (3).
Piketty gives a novel and convincing knock-down of this argument. He points out that in most cases there is simply no way to assess the value added by a manager. Consider the CEO of a multi-national firm with gross revenues of $10 billion. How much extra value does he produce compared to the next guy who might do the job? Is it $100,000, or $1 million, or $10 million? If revenues increase by 10 per cent, does it mean the CEO has himself created an additional $1 billion of revenue, or would it have happened without him? There is no objective and reasonable way to evaluate these...