Why the rich will probably get richer


CAPITAL IN THE TWENTY-FIRST CENTURY by Thomas Piketty (2013) translated by Arthur Goldhammer (2014)

Thomas Piketty of the University of Paris is the world’s foremost authority on income distribution and the super-rich. All the charts you see how income is being redistributed upward to the top 1 percent of income owners are based on work by him and his collaborators. In this new book, based on 20 years’ work, he concluded that it is not an aberration that ever-greater shares of income go to a tiny elite. Piketty said this is the natural working of a market system.

According to Piketty, the higher you go on the income scale, the larger the amount of income comes from investments rather than work. When the economic grows at a higher percentage rate than the average rate of return on investment, income becomes more widely distributed. When the average rate of return on investment is greater than the rate of economic growth, the owners of economic assets gain at the expense of everybody else.

His research is based on 200 years of data on income and wealth distribution in France, the UK, the USA and other countries, which now can be analyzed and processed with computer technology. His book would be a good supplement to David Graeber’s Debt: the First 5,000 Years, whichi is sketchy on precisely the past two centuries.

Piketty concluded that the average rate of economic growth since 1800 is about 1 percent a year for the countries he studied, and the average rate of return on investment is about 4 to 5 percent a year. Unless something happens to change one or the other figures, a wealthy elite will grow richer and richer at the expense of everyone else, until there is nothing left to invest in.

pikettybookcover00Piketty defines “capital” as anything you can own that will generate income. In the late 18th and early 19th centuries, capital (by his definition) consisted mainly of agricultural land and government bonds. Now it consists mainly of housing, industrial machinery and stocks and bonds of private corporations. Few economists would define “capital” in so broad a way, but if all you’re interested in is income distribution, it doesn’t matter what form “capital” takes.

If you read English and French novels set in the early 19th century, the characters consist mainly of members of what Piketty calls the “dominant” class, which are the 1 percent of the population who receive 30 to 60 times the average income, and the “well-to-do”, who consist of the next 9 percent. Characters in Balzac and Jane Austen seek wealth through inheritance, marriage and patronage of wealthier and more powerful people. Nobody in those novels thinks that wealth is acquired through hard work and superior talents. Piketty said there is nothing to prevent a reversion to this kind of world, although the difference between wealth and poverty wouldn’t be quite so extreme.

The reason the history of the 20th century was different, he wrote, is the great destruction of capital during the two world wars and the Great Depression. This cleared the deck for the great surge in prosperity of 1945-1975, which benefited all segments of the population. Since then, according to Piketty, the growth in income has been sucked up by the dominant and well-to-do classes.

Now I don’t think that someone born in 1900 would have thought the prosperity of 1945-1975 justified the catastrophes of 1915-1945. This points to an important limitation of Piketty’s book. It is full of fascinating information, drawn from a wide variety of sources, ranging from centuries of income and property tax records to social history, economic theory, literature and financial journalism.

Thomas Piketty

Thomas Piketty

But when you get right down to it, he deals with only one subject, the income share of the super-rich. He doesn’t have theories on how to eliminate poverty, promote economic growth, set priorities for public investment or any other important objective. This is not a criticism. It is just a description of what the book is and isn’t about.

His one subject – which is important – is the economic elite and how, short of violent revolution, to prevent from sucking up an undue share of society’s wealth and income. But as the experience of 1915-1945 shows, destroying the power of capital does not, in and of itself, make things better for everyone.

Piketty focuses on data from France and the UK because the United States is, in good and bad ways, exceptional compared to the rest of the world. During the past 200 years, the boundaries of France remained roughly the same and population grew from 30 million to 60 million. During the same period, the United States expanded from a narrow strip along the Atlantic to the Pacific coast, and its population grew from 5 million to 300 million.

Income distribution in the United States historically has been more equal than in Europe, he noted, at least for white men in the Northern states. The chief form of capital in the early United States was agricultural land, and this was very cheap compared to Europe. Early settlers and immigrants brought little wealth with them. What they created was the fruit of their labor. A great deal of the capital for building U.S. factories and railroads came from European investors. The great American hereditary fortunes did not emerge until the dawn of the 20th century.

The South was different from the North because the economic elite possessed enormous capital in the form of enslaved human beings. Piketty estimated that in the 1770-1810 period, the economic value of slaves in the South exceeded the value of all land, housing and other forms of wealth, and also exceeded the total wealth of the North. The result was a high concentration of wealth, and a large gap between rich and poor white people, which persists to this day.

Differences in earned income, while great in all countries, have seldom been as important as differences in income from wealth. The exception is the surge in corporate compensation in the United States and other English-speaking countries in the last generation. Piketty showed, by means of international comparisons, that the current size of executive compensation cannot be justified on the basis of merit or results. It is the result of executives being able to influence their own pay, and the lack of standards as to how much is enough.

The disturbing fact about investment income is that the more you have of it, the higher your rate of return. Piketty compared the returns on endowment funds of American universities, which are a public record, by size categories. The larger the fund category, the higher the percentage return, with Harvard by far outpacing all the rest.

This is because the larger the fund, the more the owner can afford to get expert investment advice, and the better able the owner is to invest small amounts in high risk, high return investments. Also, unlike an individual who has saved for retirement, the super-wealthy person or institution does not have to take out a significant percentage to live on.

The implication is that once you reach a certain level of wealth, your wealth becomes self-sustaining.  A Bill Gates or a Steve Jobs can simply coast. He not longer needs the entrepreneurial drive that brought him success in the first place. Piketty’s analysis of the Forbes 400 list indicates that inherited wealth is at least as important as entrepreneurial wealth, and he thinks Forbes vastly underestimates income from passive investments because of lack of access to tax havens.

Piketty’s solution is a tax on capital – which, remember, is by his definition any form of income-producing property – sufficient to bring the average return on investments down to the expected rate of economic growth. He pointed out that some forms of wealth, such as real estate and buildings, already are taxed. In principle, taxing stock portfolios is no different.

Since the average rate of return is greater for greater wealth, his proposed tax would be graduated, with a zero or 0.1 percent rate for fortunes below 1 million euros and perhaps rising as high as 2 percent above 5 million. These don’t seem high, but they are high compared to expected rates of return. He also favors continuation of the graduated income tax and inheritance taxes. His purpose is not to prevent people from getting rich. It is to prevent the rich as a group from getting richer at a faster rate than the economy is growing.

The revenue from the wealth tax should be spent in reducing government debt, which Piketty sees as a transfer of income from taxpayers to wealthy holders of government bonds. It is better to tax the rich than borrow from them, he said.

Piketty’s proposals require much better information about wealth and income than we have now. The first step would be for the international community to require reporting of financial information from places such as Switzerland and the Cayman Islands that act as tax havens.

The 577-page book and the 76 pages of notes are crammed with information of interest even to those who don’t accept his basic argument. It is not written in technical language, which is part of the reason it is so long; Piketty, like the late Isaac Asimov, explains everything from the groun up.  If you don’t have time to read the whole book, his core argument can be found in the Introduction or Conclusion.  Or click on some of the links below.


http://www.hup.harvard.edu/features/capital-in-the-twenty-first-century-introduction.html [Introduction to the book]

http://www.yjs.fi/wp-content/uploads/2013/12/Thomas-Piketty-pres..pdf [Power Point summary]








Everything wrong with capitalism, as explained by Balzac, “House” and “The Aristocats”

Kapital for the Twenty-First Century?

http://www.salon.com/2014/05/06/would_piketty_run_for_office_the_best_selling_economist_sounds_off_to_salon/ [Added 6/21/14]


Here are some quotes from the book.

There is one great advantage to being an economic historian in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites.  Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.

This, in any case is the charm of the discipline and of the social sciences in general: one starts from square one, so that there is some hope of making major progress.  In France, I believe, economists are slightly more interested in persuading historians and sociologists, as well as people outside the academic world, that what they are doing is interesting (although they are not always successful).


The main purpose of the health sector is not to provide other sectors with workers in good health.  By the same token, the main purpose of the educational sector is not to provide students to prepare to take up an occupation in some other sector of the economy.  In all human societies, health and education have an intrinsic value: the ability to enjoy years of good health, like the ability to acquire knowledge and culture, is one of the fundamental purposes of civilization.


The fact that income inequality in the United States in 2000-2010 attained a higher level that than observed in poor and emerging countries at various times in the past — for example, higher than in India or South Africa in 1920-1930, 1960-1970 and 2000-2010 — also casts doubt on any explanation based on objective inequalities of productivity.

Is it really the case that inequality of individual skills and productivites is greater in the United States today than in the half-illiterate India of the recent past (or even today) or in apartheid (or post-apartheid) South Africa?  If that were the case, it would be bad news for US educational institutions, which surely need to be improved and made more accessible but probably do not deserve such extravagant blame.


The main effect of inflation is not to reduce the average return on capital, but to redistribute it.  And even though the effects of inflation are complex and multidimensional, the preponderance of the evidence suggests that the redistribution induced by inflation is mainly to the detriment of the least wealthy and to the benefit of the wealthiest, hence in the opposite direction from what is generally desired.


The evidence suggests that a [tax] rate of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the U.S. economy, but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (and even harmful) behavior.  Obviously it would be easier to apply such a policy in a country the size of the United States than in a small European country where close fiscal coordination with neighboring countries is lacking. …  [snip] …  The idea that all US executives would immediately flee to Canada or Mexico and no one with the competence or motivation to run the economy would remain is not only contradicted by historical experience and by all the firm-level data at our disposal; it is also devoid of common sense.


There are two main ways for a government to finance its expenses: taxes and debt.  In general, taxation is by far preferable to debt in terms of justice and efficiency.  The problem with debt is that it usually has to be repaid, and that debt financing is in the interest of those who have the means to lend to the government.  From the standpoint of the general interest, it is preferable to tax the wealthy than to borrow from them.


There are a thousand and one ways to do social science, and accumulating data is not always indispensable or even (I concede) especially imaginative.  Yet it seems to me that all social scientists, all journalists and commentators, all activists in the unions and in politics of whatever stripe and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it, and its history.  Those who have a lot of it never fail to defend their interests.  Refusing to deal with numbers rarely serves the interests of the less well off.

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6 Responses to “Why the rich will probably get richer”

  1. Holden Says:

    Wow, I have to read this. Thanks for that synopsis.

    When I was an econ student, I remember noticing that over time, the economy works in cycles, which is mainly what Piketty is describing. The economy ramps up, then crashes. Keynesian economic policies since WWII have seemed to cool down the severity of the cycles in the US economy.

    Apart from Keynesian economics, the USA is also quite different from the rest of the world in that we have a young, very different history that is absent of these ruling classes found in Europe. We are very much more individualistic.

    We also have a tendency to find ways to generate a lot of new wealth, which allows our economy to keep expanding. Now that we have recently found such large reserves of oil and natural gas, I don’t see why we can’t expect to continue to see this trend, so long as we can continue managing opponents like the Chinese and Russians effectively.


  2. whungerford Says:

    I don’t know if Piketty’s idea about rates is right or not, but the idea that capitalism, unregulated, makes the rich richer and the poor poorer is far older.


  3. Charles A Says:

    A Marxist review of Piketty’s book is at


    • philebersole Says:

      Piketty’s analysis does overlap a good deal with Marx’s.

      What you find in Marx that you do not find in Piketty is the advocacy of worker control of the means of production (capital) and recognition of the reality of class struggle.

      Piketty thinks the problem of hyper-concentration of wealth can be solved within the framework of the free-market system, and on the level of intellectual debate.

      Marxism-Leninism has not (to put it mildly) provided a good alternative to capitalism.

      But Marx was surely right in saying that people who hold inordinate amounts of wealth and power cannot be expected to give them up without a fight.


      • karlbonner1982 Says:

        Have you read or listened to Richard Wolff? He’s what you might call a ‘New Marxist’ who promotes a non-bureaucratic, bottom-up approach to designing an alternative to traditional capitalism. His model is called the WSDE (workers’ self-directed enterprise) where all workers spend one day a week performing the role of “capitalists”: they decide what/where/how to produce, and how to allocate business profits, by democratic decision-making.

        While Wolff likes to think of the WSDE as an anti-capitalist economic model, it’s also perfectly fair to think of it as a “different form OF capitalism” where everybody is a laborer Monday-Thursday and a capitalist on Friday. Many worker-owned companies – even democratically managed ones – nonetheless produce widgets to sell in a competitive marketplace, and so the enterprise can look like a capitalist firm on the outside, at least.


      • philebersole Says:

        Thanks for the pointer to Richard Wolff. I am very interested in this kind of thinking, but have not read the work of this particular author.


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