Why Everyone Is Obsessed With This Academic Book on Economics

Sometimes a relatively dense academic book breaks out of the Ivory Tower and takes the world by storm. Such is the case with French economics professor Thomas Piketty's Capital in the Twenty-First Century. Here's one reason why the book is capturing people's imaginations — and fueling speculation about our global future.

In a recent review on Book Forum, economics journalist Doug Henwood explores what is crucial about Piketty's work. Henwood, who reports on the dark side of capitalism in his blog and weekly radio show Left Business Observer, points out that there is one basic takeaway in Piketty's book. If we look at the past two centuries of economic history in Europe and the United States, we see an astounding pattern. Capital will accumulate in a tiny portion of the population, no matter what we do. Capitalism is, fundamentally, an economic system that promotes inequality.

Writes Henwood:

The core message of this enormous and enormously important book can be delivered in a few lines: Left to its own devices, wealth inevitably tends to concentrate in capitalist economies. There is no "natural" mechanism inherent in the structure of such economies for inhibiting, much less reversing, that tendency. Only crises like war and depression, or political interventions like taxation (which, to the upper classes, would be a crisis), can do the trick. And Thomas Piketty has two centuries of data to prove his point.

In more technical terms, the central argument of Capital in the Twenty-First Century is that as long as the rate of return on capital, r, exceeds the rate of broad growth in national income, g—that is, r > g—capital will concentrate. It is an empirical fact that the rate of return on capital—income in the form of profits, dividends, rents, and the like, divided by the value of the assets that produce the income—has averaged 4–5 percent over the last two centuries or so. It is also an empirical fact that the growth rate in GDP per capita has averaged 1–2 percent. There are periods and places where growth is faster, of course: the United States in younger days, Japan from the 1950s through the 1980s, China over the last thirty years. But these are exceptions—and the two earlier examples have reverted to the mean. So if that 4–5 percent return is largely saved rather than being bombed, taxed, or dissipated away, it will accumulate into an ever-greater mass relative to average incomes. That may seem like common sense to anyone who's lived through the last few decades, but it's always nice to have evidence back up common sense, which isn't always reliable ...

Henwood also points out that Piketty brings rigor and historical evidence to the battle cry of the Occupy movement. Occupy popularized the idea that there is a growing divide between the wealthiest 1 percent of our population and everyone else. In Piketty's careful analysis of capital accumulation over the past two centuries, we discover that this is in fact measurably the case. He writes:

[Many] continuities stand out in Piketty's historical narrative. One is the stability in the rate of return on capital—the same 4–5 annual percentage, decade in and decade out. Another is the preponderance of that magic 1 percent figure, which seemed like a polemical simplification in the Occupy days, but clearly has an actual historical basis.

But something has changed within that 1 percent: While it was once dominated by a population of rentiers, coupon clippers who barely worked if at all, it is now dominated, especially in the United States, by a group of star CEOs and financiers who flatter themselves that they're being paid for their extraordinary talents.

Economics as a discipline loves stories about equilibrium and convergence. Vast inequities should, in theory, be "competed away," as neoclassical economics likes to say. But mostly they're not. Globally, poorer countries should gain on richer ones as technology and education spread and mobile capital's search for higher returns makes the poor less poor. That has happened to some degree, but rapidly developing economies such as India and many African nations remain much poorer than the United States or Western Europe. In the case of personal wealth, old fortunes should decline and be replaced by new ones, just as manual typewriters were replaced by electric ones, and electric typewriters were superseded by computers. But in fact old money is remarkably persistent. Yes, we've seen the creation of a large number of new fortunes over the last few decades, a change from wealth's dark days of the mid-twentieth century. Bill Gates is the son of a well-off lawyer who was nowhere near a billionaire; Mark Zuckerberg sprang from the loins of a dentist and a psychiatrist. They are the very picture of modern new wealth. But despite those new fortunes, inheritance remains very important. David Rockefeller, worth $2.8 billion at the age of ninety-eight, is number 193 on the Forbes 400. Overall, Piketty concludes, it's likely that half or more of the wealth of the upper orders originates in inheritance.

We're seeing a new "Gilded Age," where inheritance is a deciding factor in who becomes the wealthiest. This flies in the face of democratic ideals, of course. But it also underscores how broken the capitalist system is right now — inequalities aren't being "competed away," and very few fortunes are being created from new ideas. Instead, fortunes are being maintained by powerful families.

Henwood concludes by pointing out that Piketty's weakest argument is about how we should repair the brokenness of our economic systems. Short of a massive disaster caused by war or depression, there is little evidence from history that these wealth disparities get corrected "on their own." Piketty advocates for better educational policies, and gradual change via democratic processes. Henwood believes that political uprisings and protest movements should be added our our toolbox of solutions.

It's worth reading Henwood's whole book review. If you get fully Piketty-obsessed, the UC Berkeley economist Brad LeLong has been blogging up a storm about it for weeks now, and you can read a fascinating essay where he argues with Piketty's conclusions here.