[WSF-Discuss] “Capital”, summarised in four paragraphs

Nishant | நிஷாந்த் nicheant at gmail.com
Wed May 7 20:08:34 CDT 2014


Thomas Piketty’s “Capital”, summarised in four paragraphs
http://www.economist.com/blogs/economist-explains/2014/05/economist-explains

May 4th 2014, 23:50 by R.A.

IT IS the economics book taking the world by storm. "Capital in the
Twenty-First Century", written by the French economist Thomas Piketty, was
published in French last year and in English in March of this year. The
English version quickly became an unlikely bestseller, and it has prompted
a broad and energetic debate on the book’s subject: the outlook for global
inequality. Some reckon it heralds or may itself cause a pronounced shift
in the focus of economic policy, toward distributional questions. This
newspaper has hailed Mr Piketty as "the modern
Marx<http://www.economist.com/news/leaders/21601512-thomas-pikettys-blockbuster-book-great-piece-scholarship-poor-guide-policy>"
(Karl,
that is). But what’s it all about?

"Capital" is built on more than a decade of research by Mr Piketty and a
handful of other economists, detailing historical changes in the
concentration of income and wealth. This pile of
data<http://piketty.pse.ens.fr/files/capital21c/en/Piketty2014FiguresTablesLinks.pdf>allows
Mr Piketty to sketch out the evolution of inequality since the
beginning of the industrial revolution. In the 18th and 19th centuries
western European society was highly unequal. Private wealth dwarfed
national income
<http://piketty.pse.ens.fr/files/capital21c/en/pdf/F3.1.pdf>and was
concentrated <http://piketty.pse.ens.fr/files/capital21c/en/pdf/F10.3.pdf>in
the hands of the rich families who sat atop a relatively rigid class
structure. This system persisted even as industrialisation slowly
contributed to rising wages for workers. Only the chaos of the first and
second world wars and the Depression disrupted this pattern. High taxes,
inflation, bankruptcies, and the growth of sprawling welfare states caused
wealth to shrink dramatically, and ushered in a period in which both income
and wealth were distributed in relatively egalitarian fashion. But the
shocks of the early 20th century have faded and wealth is now reasserting
itself. On many measures, Mr Piketty reckons, the importance of wealth in
modern economies is approaching levels last seen before the first world war.

>From this history, Mr Piketty derives a grand theory of capital and
inequality. As a general rule wealth grows faster than economic output, he
explains, a concept he captures in the expression r >
g<http://piketty.pse.ens.fr/files/capital21c/en/pdf/F10.9.pdf>(where r
is the rate of return to wealth and g is the economic growth
rate). Other things being equal, faster economic growth will diminish the
importance of wealth in a society, whereas slower growth will increase it
(and demographic change that slows global growth will make capital more
dominant). But there are no natural forces pushing against the steady
concentration of wealth. Only a burst of rapid growth (from technological
progress or rising population) or government intervention can be counted on
to keep economies from returning to the “patrimonial capitalism” that
worried Karl Marx. Mr Piketty closes the book by recommending that
governments step in now, by adopting a global tax on wealth, to prevent
soaring inequality contributing to economic or political instability down
the road.

The book has unsurprisingly attracted plenty of criticism. Some wonder
whether Mr Piketty is right to think the future will look like the past.
Theory argues that it should become ever harder to earn a good return on
wealth the more there is of it. And today’s super-rich mostly come by their
wealth through work, rather than via inheritance. Others argue that Mr
Piketty’s policy recommendations are more ideologically than economically
driven and could do more harm than good. But many of the sceptics
nonetheless have kind words for the book’s contributions, in terms of data
and analysis. Whether or not Mr Piketty succeeds in changing policy, he
will have influenced the way thousands of readers and plenty of economists
think about these issues.

*Dig deeper:*
"Capital" is a great piece of scholarship, but a poor guide to
policy<http://www.economist.com/news/leaders/21601512-thomas-pikettys-blockbuster-book-great-piece-scholarship-poor-guide-policy?fsrc=explainsdig>(May
2014)
Why did the French version of "Capital" not make the same
splash?<http://www.economist.com/blogs/charlemagne/2014/04/thomas-piketty?fsrc=explainsdig>(April
2014)
Revisiting an old argument about the impact of
capitalism<http://www.economist.com/news/finance-and-economics/21592635-revisiting-old-argument-about-impact-capitalism-all-men-are-created?fsrc=explainsdig>(January
2014)
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