Monday, April 21, 2014


Prof. Thomas Piketty, Paris School of
Economics, author of "Capitalism..."
Prof. Thomas Piketty (pronounced PEAK-et-tee) of the Paris School of Economics has been on a triumphal tour of the U.S. media to promote the new translation from French of his book Capital in the Twenty-First Century (Cambridge, Mass.: Belknap Press/Harvard University Press, 2014). What's the fuss?

The closest analogy seems to be the publication of John Maynard Keynes's General Theory, which in 1936 provided a way of thinking about monetary and fiscal policy that provided an economic rationale for the massive injection of monetary liquidity that was engineered by FDR and his first Treasury Secretary, Will Woodin, and the Federal budget deficits that followed.

Reportedly economists were awed then by the way Keynes solved several problems at once. Piketty has done the same thing for the discussion of income inequality.

But don't take my word for it. Paul Krugman has published several blogposts on Piketty's book, and his review appears in the May 8 issue of The New York Review of Books, entitled "Why We're in a New Gilded Age." Krugman sees several stages in the debate over inequality:

First, denial that rising inequality was happening on any major scale. Because of a stream of new data, sometime in the early 1990s
you could mostly say, “Oh, yeah? Guess what.” The evidence for a sharp rise in inequality [since 1975], a definitive break with the three postwar decades, was overwhelming.
Second, denial that those who were getting richer was a small group.  The whole top 20 percent, it was said, i.e., well-educated Americans, were getting richer.
But at a certain point — to a large extent thanks to Piketty and Emmanuel Saez [at Berkeley] — we got to say “Oh, yeah? Guess what.” Actually, rising inequality was in large part about the rise of a tiny elite, the one percent and within that the 0.1 percent.
Third, denial that the ones getting richest fastest were a tiny elite as in the Gilded Age.
The answer [from Piketty] was, “Oh, yeah? Guess what.” We don’t have Gilded Age* survey data, but we do have tax records back to the early 20th century, and top income shares are right back at late-Gilded-Age levels.
In his review of Piketty's book in the NY Review, Krugman gives credit to Piketty for the increased interest in income inequality and above all in the focus on the top 1 percent. He also credits Saez and Anthony Atkinson at Oxford.

Piketty's bottom-line message, says Krugman, is that the United States is on a path back to
"patrimonial capitalism" in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.
Krugman gives credit to Piketty for using tax records to go back before survey data on incomes were generated by the Census Bureau and other agencies. This takes the United States back to 1913 and Britain back to 1909. France has wealth-tax records going back to the French Revolution.

Piketty's essential theory is that if workers can be replaced easily by machines, the rate of return to capital (r) will exceed the rate of growth (g) and this will lead to greater concentration of wealth.

Krugman thinks this is a terrific theory. He and Piketty both have a nagging concern that maybe the higher inequality of income resulting from "supersalaries" could be a significant factor. But the onus for this goes back to the U.S. government for lowering the tax rate, thereby making the marginal increase in incomes worth the time of CEOs to pursue.

The drift toward oligarchy is not inevitable, but Piketty and Krugman think it is probable. This will be comforting for you, or afflicting, depending on your POV. But, Krugman says, with the publication of this book "we'll never talk about wealth and inequality the same way we used to."

* Some writers use "Gilded Age" as largely synonymous with "Belle Epoque". The advantage of using "Gilded Age" is multiple - it doesn't require a decision and word processing technology surrounding an acute accent over the E in Epoque, it doesn't require the reader to know anything about a complicated period of European history, and it refers to American robber barons that we all know about, like Andrew Carnegie. The main difference in the timing is that the Belle Epoque starts in the early 1870s and goes all the way to World War I, whereas the Gilded Age stops with the end of the 19th Century or maybe with the death of Queen Victoria in January 1901 (in those days, finance still revolved around London).

P.S. The CityEconomist Blogpost just clicked over 75,000 page views. Thank you for reading!!