Piketty’s Capital: I

Thomas Piketty’s Capital in the Twenty-First Century is a surprising best-seller (how many economics books make the New York Times best-seller list?) and has been getting lots of press lately.  Reading it, I have some comments and observations, which I will make in a series of posts rather than in one extended review.  I’m figuring there’s a limit to how much readers of The Beacon will want to slog through at one time.  It’s economics, after all, and my experience is that people don’t have a high level of tolerance for abstract economic commentary.

The basic idea behind Piketty’s detailed analysis is that the rate of return on capital is greater than GDP growth, so people who get their incomes from the ownership of capital will find their wealth and income growing relative to the average person over time.  The result is greater inequality in income and wealth, which can be socially destructive if it is not controlled.  Ultimately, Piketty proposes a global tax on wealth as one way to address the problem of inequality, but I will get to that in a later post, after discussing other issues related to the book.

The book is easy to read, although long at 685 pages.  And with that many pages of economics, which does make for dry reading, I wonder how many purchasers will actually read the whole book, rather than just hold it up as a reference when speaking about the growing problem of inequality.  Piketty is convincing.  He has done a nice job of collecting a substantial amount of historical data for many countries, and using it to demonstrate that there is, indeed, a substantial amount of inequality in income and wealth, and that inequality has been growing over the past 30 years.

Piketty explains where he got the data, how various economic measures are constructed, and how they are related to each other in enough detail that I am persuaded he has done a good job of collecting and presenting the best data available on the subject.

In short, the book is competently researched and written.

The book has obvious Marxist undertones.  Piketty favorably cites Marx more than just in passing, and the class conflict pitting the owners of capital against those whose incomes come from labor has a clear Marxist slant.  But Piketty also recognizes some problems with Marx’s analysis, and ultimately the places where I would take issue with Piketty are more related to his reliance on concepts more closely associated with neoclassical economics, and with his aggregation of economic measures without clearly thinking through the economic processes behind those measures.

Because his data on growing inequality is convincing, I am not taking issue with that.  But his framework for projecting growing inequality in the future is less convincing, for reasons he does not appear to recognize.  Capital does not just exist and produce a rate of return.  It has to be employed productively, which Piketty acknowledges in his words, but not in the empirical framework he uses to draw his conclusions.  Therein lies the most fundamental problem with his analysis.  His framework misrepresents the nature of capital, how it is valued, and how owners of capital earn their returns.

I am reluctant to tax readers of a blog with too lengthy a post, so for interested readers, I will put up additional posts with more specific comments on Piketty’s analysis.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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