Monday, April 21, 2014

Capital in the Twenty-First Century

I recently read "Capital in the Twenty-First Century" by Thomas Piketty (translated by Arthur Goldhammer).  This long (685 pages) 2013 book by a French economics professor has become popular in liberal circles.  However in my opinion it isn't very good.

The book can be summarized as follows.   Around 1900 wealth was large (in terms of years of annual income) and concentrated (unequally distributed) in France and similar nations.  By 1950 wealth was smaller and more evenly distributed but then became to grow larger and more concentrated again.  The author projects further increases in the years ahead, takes for granted that something needs to be done about this and proposes a worldwide tax on capital.

The historical part which traces the distribution of wealth from 1800 or so to the present is of some interest but could have been presented much more concisely.  Piketty concedes that economists in 1900 or 1950 would have been unwise to expect to be able to accurately predict the future distribution of wealth but then undaunted makes his own predictions.  I see little reason to give them much credence.

Piketty's main policy recommendation is a worldwide graduated tax on wealth.  His arguments for this aren't likely to convince anyone not already favorably disposed.  He professes to be concerned about wealth becoming concentrated in a few large inherited fortunes but much less drastic steps would prevent this.  For example requiring large estates be split at least 10 ways (that is no single heir could inherit more than 10%).  This would fairly quickly disperse large fortunes.  As Piketty acknowledges simply abolishing primogeniture has had such an effect.  

In contrast it appears likely that Piketty's wealth tax would not simply cause wealth to be spread more widely but instead would cause wealth to be diverted into consumption which would over time substantially reduce the amount of wealth.  It is unclear why Piketty thinks this is a good idea.  Piketty's predictions rely on the claim that there are few diminishing returns to wealth, that it is possible to productively employ ever increasing amounts of wealth.  So what is the benefit of a poorer society with less wealth available to increase labor productivity?   

Piketty attributes the problems of current (and former) actually existing wealth taxes to difficulties arising from trying to impose such a tax in a single country.  Hence his proposal for a worldwide tax.  But the difficulties could also be attributed to the compromises required to get a wealth tax enacted and these would only increase if you had to get the tax enacted worldwide.

The book seems unfocused and much too long.  Which makes it harder to identify the key points.  Among other things Piketty rambles on about the novels of Austen and Balzac at considerable length.   Which he cites as sources for the claim that around 1800 it was difficult to live a decent life without access to inherited wealth.  Whatever the truth of this it has little relevance to today's conditions where anyone in the top 10% of labor income is doing fine.

Piketty makes some curious claims, for example on page 432 that:

... In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations.

This seems debatable to say the least.  But perhaps Piketty is more bothered by the few people who are much richer than he is than by the billions who are much poorer. 

In summary I found this book hard to get through and I don't recommend it.  If you are interested reading a few reviews seems like a less painful way to pick up the main ideas.

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