Thomas Piketty Seminar

In my view, _Capital in the 21st Century_ is primarily a book about the history of the distribution of income and wealth. Thanks to the cumulative efforts of several dozen scholars, we have been able to collect a relatively large historical database on the structure of national income and national wealth and the evolution of income and wealth distributions, covering three centuries and over 20 countries. In effect, we have been extending to a larger scale the pioneering historical data collection work of Simon Kuznets and Tony Atkinson (see Kuznets, 1953, and Atkinson and Harrison, 1978). My first objective in this book is to present this body of historical evidence in a consistent manner, and to try to analyze the many economic, social and political processes that can account for the various evolutions that we observe in the different countries since the Industrial Revolution (see Piketty and Saez, 2014, for a brief summary of some of the main historical facts). Another important objective is to draw lessons for the future and for the optimal regulation and taxation of capital and property relations. I stress from the beginning that we have too little historical data at our disposal to be able to draw definitive judgments. On the other hand, at least we have substantially more evidence than we used to. Imperfect as it is, I hope this work can contribute to put the study of distribution and of the long run back at the center of economic thinking.

In this essay, I seek to discuss a number of implications of my findings, in particular regarding the optimal regulation of capital and the complementarity between the “predistribution” and the “redistribution” approach. I will also attempt to address some of the very valuable comments made by the participants to the Crooked Timber symposium. First, I will clarify the role played by r>g in my analysis of wealth inequality. Next, I will present some of the implications for optimal taxation, starting with inheritance taxation and then moving with annual taxation of wealth, capital income and consumption. Finally, I will emphasize the need to develop a multi-sector approach to capital accumulation. This will lead me to stress the limits of capital taxation and the complementarity with other public policies aimed at regulating the accumulation and distribution of capital (such as land use, housing policies, intellectual property rights, co-determination and participatory governance). [click to continue…]

A quick announcement – we’ll be publishing Thomas Piketty’s response to the seminar in early January, it being the time of year when many readers are likely to be spending time with their family or being otherwise engaged. In the meantime, readers may be interested in the Foreign Affairs debate on economic inequality (which evidently owes a ton to Piketty) and Dan Hirschman’s paper on why Piketty’s work seemed so surprising when it first came out. And to all who celebrate it, happy Christmas, and to those who don’t, happy holidays! Myself, I’ll be spending it with my extended family in the West of Ireland (including Milo, the Crooked Timber Christmas dog

Note I wrote two pieces in response to Piketty’s Capital and managed to get confused as to which one was meant for this seminar. Here’s the piece I sent in originally, and which is referred to in Piketty’s forthcoming response. The crucial point is that, thanks to a combination of strong employment growth and redistributive taxation and welfare policies Australia has, to a substantial extent, avoided the sharp increase in inequality seen in other English-speaking countries. The conclusion

Australia’s experience belies the claim that any attempt to offset the growth of inequality must cripple economic growth. On the contrary, the evidence suggests that there is plenty of scope for progressive changes to tax policy that would partly or wholly offset the trends towards greater inequality documented by Piketty.

[click to continue…]

One of the more depressing features of Capital in the 21st Century is the air of inevitability attached to the much-discussed r > g inequality. This is exacerbated, on the whole, by the fact that Piketty’s proposed policy response, a progressive global tax on wealth, seems obviously utopian.

What about a much simpler alternative: increasing the rate of income tax applied to the very rich, and removing preferential treatment of capital income? Piketty’s own work with Saez yields the conclusion that the socially optimal top marginal rate of taxation, after taking account of incentive effects, would be 70 per cent or more. Such rates prevailed, at least nominally, in the mid-20th century, without obvious ill effects. Again, Piketty provides the relevant evidence.

So, is there something about a globalised world economy that renders a return to high marginal rates of taxation impossible?

[click to continue…]

Professor Piketty and his colleagues at the Top Income Distribution
Study have put us all in great debt for the great increase in our
knowledge of historical development of inequalities in income and in
wealth in a number of leading countries.

Notice I have already mentioned two inequalities, income and wealth.
There is one more leading inequality which does not receive much
attention in Piketty’s work: consumption. Papers and books have already
appeared which try to measure this inequality. Many more inequalities,
e.g. health, educational achievement, race, and gender differences have
been the subject of study, but these are more specialized and less
central to economic analysis.

There is a strong argument for emphasizing consumption. Why, after all,
do we consider inequality in wealth, income, or consumption to be
undesirable? If we consider only economic arguments, it is because the
poor are being deprived of goods that are valuable to their lives,
exactly because they are more basic than the desires of the rich.

This has important implications for how we evaluate Piketty’s arguments
about inequality. It suggests an alternative metric of inequality, one
under which some of the problems that Piketty identifies are not, in
fact, problematic.

Consider a world, like that envisioned by Piketty, in which the rich
consume relatively little (compared with their property income). They
accumulate wealth by investing in industry, thereby increasing output in
the future. If they do not consume more in the future, but instead,
simply continue to accumulate, then the additional future output is
available for the consumption of the poor.

If, instead of being available to the poor, the additional output were
somehow reinvested in the productive sector, we would find a world in
which the ratio of investment to consumption is steadily rising. This is
not the world we live in, and would produce visible results contrary to
even casual observation.

In the neoclassical picture, consumption is the ultimate end of the
economy. The rich accumulate for ultimate consumption, perhaps of
generations in the far future, or, in some significant part, for
philanthropy. Piketty seems instead to have a picture of the economy as
a process of automatic accumulation, without regard to planned
consumption. Estates grow at the market rate of return (100% saving out
of property income). This is not a realistic account of how rich people
– or indeed anybody – treats their income. It also leads us to ignore
the politics of how this wealth is actually consumed.

Taking consumption seriously has important implications for measurement.
If we are truly concerned with inequality, we should be most concerned
with the distribution of consumption. The measurements we should look to
are measurements of inequality in consumption, since it is differences
in consumption that we really ought to care about.

This also has implications for policy: for example, if what we care
about is differences in consumption, we might consider a progressive tax
on total consumption of an individual. This would have to be done on an
annual basis, like the current income tax, not at point of sale. Such a
tax was long ago proposed by John Stuart Mill and later by Irving Fisher
and Nicholas Kaldor. Piketty refers to Kaldor’s work but does little to
refute it, saying only that no such tax exists. This is true, but of
course the progressive wealth tax favored by Piketty is equally untried
in practice.

We might be especially moved to consider a consumption tax if we
consider that Piketty’s proposed wealth tax seems in any case to be much
higher than it sounds. If we are to assume, say a 5% return on property,
then a 2% per annum tax on wealth would amount to about 40% of property
income. If investment is financed by property income, this implies a
very considerable reduction in investment. Is this desirable? One might
doubt it, especially since the effects on investment would be
substantial, even apart from incentive effects, which might also be
quite considerable.

Thomas Piketty’s *Capital in the Twenty-First Century* presents a
troubling puzzle for social democrats and for parties of the
centre-left, as well as for academics interested in developing a more
egalitarian public policy agenda. Supported by a previously unimagined
wealth of statistical detail, gained through the archival labour over
many years of a large team of researchers, Piketty’s book confirms
profound concerns about the long-range dynamics of capitalism. Wealth
does not naturally disperse down to the many, but sticks to the few, and
especially to those who carry the arbitrary advantages of patrimonial
inheritance. The facts of inequality are devastating, and come with an
accompanying sense of deflation at the level of policy and political
action. We may have come to see the grim facts of capitalism’s internal
dynamics more clearly than ever before, but it is much less clear that
we have the tools to cure capitalism’s disfiguring disease of
accelerating inequality. Hence we see that a common reaction to
Piketty’s work on the left is one of resignation or even despair. The
sardonic good humour and cautious optimism displayed by Piketty himself
can seem oddly out of place against the background picture that has been
created by his years of ground-breaking research. [click to continue…]

*Capital in the Twenty-First Century* was a classic as soon
as it was published.[^21] It deserves a place on bookshelves beside its
illustrious namesake of the 19th century. Capital, in
*Capital*, is the wealth of nations. It extends beyond
firms’ traditional productive capital to encompass the entire public and
private patrimony that can be sold on a market (thus excluding
non-transferable forms of capital such as human, cultural and social
capital). The book is the culmination of fifteen years of individual and
collective research on the evolution of income and wealth inequalities.
Thanks to data based on the collection of income tax, Thomas Piketty and
his colleagues had already widely explored income inequality in France,
the United-States, India, China, and more generally in the world by the
early 2000s, fuelling a unique and remarkable dataset: the *World
Top Incomes Database.* However, this work focused on income
rather than wealth, and hence provided an incomplete account of economic
inequality. This new book fills in this gap in a very timely fashion. [click to continue…]

It’s the unfortunate fate of greatly influential books to be greatly
misunderstood. When a book is sufficiently important to reshape
intellectual and political debates, it escapes, at least to some extent,
its author’s intentions. People want to latch onto it and use it as a
vehicle for their own particular gripes and concerns. Enemies will
distort the book further, some because they dislike the book’s message,
others because they feel that they, rather than the book’s author,
should have been the messenger adorned by history with
laurels. The book will further be subject to the more ordinary forms of
misprision and adaptation (some helpful; others less so) that all books
are subject to. [click to continue…]

Imagine that you’re a person who is obsessed with airplanes. Naturally
you’re excited when everyone starts talking about this big new book,
*Aviation in the 21st Century.* You get your copy and start
reading. Just as you’d hoped, there’s a detailed discussion of the
flight characteristics of a vast variety of plane types and a
comprehensive record of different countries’ commercial fleets, from the
beginning of aviation until today, plus a few artfully chosen
illustrations of classic early planes. But long stretches of the book
are quite different. They are devoted to the general principle that, in
an atmosphere, heavier objects fall faster than light ones, building up
to the universal law that lighter-than-air objects will float. Finally,
in the conclusion, you find some bleak reflections on the environmental
consequences of air travel – hardly mentioned til now – and a plea for
the invention of some new technology that will allow fast air travel
without the use of fossil fuels. How do you feel, when you set the book
down? You would be grateful for the factual material – even if the good
stuff is mostly relegated to the online appendices. You would be
impressed by the rigorous logic with which the principle of buoyancy was
developed, and admire the author’s iconoclastic willingness to break
with the orthodox view that all motion takes place in a vacuum. You
probably share the author’s hopes for some way of eliminating the carbon
emissions from air travel. But you might also find yourself with the
uneasy feeling that the whole is somehow less than the sum of its parts. [click to continue…]

Early in *Capital*, Thomas Piketty writes:

> [H]istorical experience suggests that the principal mechanism for convergence [of incomes and wealth] at the international as well as the domestic level is the diffusion of knowledge. In other words, the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education. (p. 71).

Yet when he turns to policy prescription in part IV of the book, his
treatment of education is relatively brief and mainly forms a part of
his discussion of the “modernization of the social state.” By this he
means that ‘the tax and transfer systems that are the heart of the
modern social state are in constant need of reform and modernization,
because they have achieved a level of complexity that makes them
difficult to understand and threatens to undermine their social and
economic efficacy.’ Given the emphasis Piketty places on education as a
force for equality in the opening section of the book, the brevity of
the final discussion disappoints. He might have said much more. In what
follows, I will summarize Piketty’s educational policy prescriptions,
comment on the theoretical framework underlying them, and then point to
what I take to be an even more important source of education’s
egalitarian effects. [click to continue…]

I would like to raise two related questions to Thomas Piketty. The first
concerns his repeatedly declared conviction that economic theory cannot
explain trends in inequality by itself, that policies and institutions
are equally important, and that economists must therefore put forward
their hypotheses and explanations with this interdependence in mind.
Given what I have understood Piketty’s main thesis to be, I wonder up to
which point he is actually committed to that claim. The second concerns
Part Four of _Capital_, where Piketty sketches a proposal for how to
regulate capital in the 21st century. In a nutshell, my concern about
Piketty’s proposal is that there seems to be a friction between the
diagnosis offered in the rest of the book (which seems to draw a rather
bleak picture of the power of capital in the early 21st century) and the
suggested cure (which seems to rely on the optimistic hope that, once
well-minded citizens will have recognized the problem, the only hurdle
will be to find the right policy to fix it). To put it provocatively,
both my questions are inspired by the suspicion that Piketty seems to
hold on to a social-democratic optimism of sorts at all costs, whereas
his findings seem to push him in a different direction. With the label
‘social-democratic optimism’ I mean two things: on the one hand,
optimism about the role of policies and institutions in taming capital
on the one hand; on the other, the persuasion that what politics is
fundamentally about is making citizens understand what the problems are
in a well-minded, reasoned dialogue, and then they will be persuaded to
do the right thing. [click to continue…]

Thomas Piketty’s *Capital in the Twenty-First Century* is an important and valuable contribution to political economy, both empirically and philosophically. Piketty grounds his theory in vast empirical data,rather than settling for elegant mathematical models. He courageously embraces the fact that economic theory is inevitably value laden, and proposes a theory of the historical dynamics of wealth accumulation in order to offer an updated moral critique of capitalism. Grounding his prediction in the historical data and profoundly simple mathematics, Piketty projects that economic inequality is likely to increase and to favor those who own inherited capital over time. He advances the normative judgment that rising inequality is unjust and must be
contained. Although Piketty raises important concerns about the
possibility of growing wealth inequality, he fails to normatively ground
or argue for his presupposition that this inequality is unjust. Since
relative poverty can coincide with high levels of objective or
subjective well-being, this presupposition is brought into question.
However, there are causes of inequality (including wealth inequality)
that clearly can be shown to be unjust. By considering other forms and
causes of inequality and oppression, we can distinguish between those
forms of wealth inequality that are unjust and those that are
normatively benign. In this way Piketty’s concerns about growing wealth
inequality from inheritance can be partly justified, though of course
not empirically verified. Piketty’s argument for the injustice of
growing economic inequality has two parts. The first part is an
empirical, economic argument for the claim that returns from inherited
wealth will far outstrip income. This argument can be summarized as
follows. Let *r* be the rate of return on capital, and *g* be the growth
rate of the annual flow of national income.

1. If *r>g*, then (wealth) inequality will grow over time.

2. Individuals who own a greater amount of capital earn a larger *r.*

3. Growth, *g*, is likely to be slower in future.

4. If *r* is great enough and g is low enough, then there will be ever
more capital from older, inherited wealth, than from wealth saved
from income.

5. Hence, (wealth) inequality will increase, and inherited wealth will
make up the greatest amount of capital. [click to continue…]

Thomas Piketty’s *Capital in the 21st Century* tells us a great deal about the evolution of inequality in wealth and income over a long period and how that distribution is likely to evolve unless we intervene. What Piketty does not do is to tell us why inequality is bad or why people care about inequality, although we can glean some knowledge of his personal beliefs here and there. In what follows I draw on some aspects of Rousseauvian moral psychology to suggest that the reasons people care about inequality matter enormously and that because some people value inequality for its own sake, it will be harder (even harder than Piketty thinks) to steer our societies away from the whirlpool of inequality. [click to continue…]

What a marvelous and ambitious book this is. I share all the reasons for
praising it: its breadth, its ambition, its grasp of history, and its
use of hard-earned statistical series. And I love the way Piketty relies
on various novels to paint the picture of class and economic strategies
in periods long gone. I also share many of the criticisms, particularly
by my brethren in political science, political theory, and political
sociology: its failure to comprehend the complexity of power, politics
or institutions. [click to continue…]