What’s impressive about Thomas Piketty is his analysis not his politics

His book has become an unlikely bestseller, but his study of financial inequality is more than certain



An unlikely entry has appeared recently at the top of the best-seller lists of books in the US. It is a work of economic history and theory written by a Frenchman, Thomas Piketty. Its title is Capital in the Twenty-First Century. It has been compared to such seminal works as The Wealth of Nations by Adam Smith, Das Kapital by Karl Marx and The General Theory of Employment, Interest and Money by John Maynard Keynes.

It is a strangely gripping book, partly because it highlights stretches of economic history that have relevance now. Piketty reminds us, for instance, that when Marx published the first volume of Das Kapital in 1867, the most striking fact of the day was the misery of the industrial proletariat. It was not until the second half – or even the final third – of the 19th century that a significant rise in the purchasing power of wages occurred. Looking back, that appears counter-intuitive. For the first half of the 19th century was precisely the period when Britain’s industrial revolution took off. A failure to share wealth at such a propitious time puts into context the stagnation of purchasing power that most people experience today.

Above all, it is the unchanging features of capitalism that Piketty is concerned to illustrate. In particular he sets out to answer the question of whether the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands. In other words, is there some inbuilt, irreversible momentum in the system, as Marx believed, that means that we can never escape from large inequalities in wealth?

Yes, is the author’s answer, and he expressed it as a law rather like one of Newton’s laws of motion. Thus, Piketty states – and this is the most important sentence in the book – “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the 19th century and seems quite likely to do again in the 21st century, capitalism automatically generates arbitrary and unsustainable inequalities.”

So what is the return on capital? It is the return you get from, say, a deposit with a building society, or from unit trusts, or from owning a flat that you rent out, or from a business you have established once you have paid yourself an appropriate salary. Over very long periods of time this has averaged 5 per cent per annum but I prefer to think in terms of a range of 3 per cent to 7 per cent. And the rate of growth of output and income? In the UK it is currently running at 2 per cent to 3 per cent per annum and is a bit above trend. Between 1990 and 2012, per capita output – and with it income – grew at an annual rate of 1.6 per cent in Western Europe, 1.4 per cent in North America and 0.7 per cent in Japan.

Here then is what the law really means in today’s terms. My salary is likely to rise at around 2 per cent per annum unless I change my job or I am promoted. But the value of a portfolio of shares, were I fortunate to own one, would be likely to rise by about 7 per cent per annum over time, comprising roughly 3 per cent of dividends and 4 per cent of profits that companies retain to fuel future expansion. Owning capital thus comfortably beats working, and almost always has done.

Note that when the author referred to the return on capital exceeding the growth of output and income, he adds the phrase, “as it did in the 19th century and seems quite likely to do again in the 21st century”. So what happened in the 20th century? Quite simply the following: the First World War, the Russian Revolution, the Great Depression, the Second World and, immediately afterwards, a forced redistribution of wealth in a number of European countries. At the same time capital and its income began to be taxed at significant rates. All these factors pushed the return on capital well below the growth of incomes so that disparities in wealth suddenly became much less severe.

The form of capitalism that emerged from the war years had also changed in two important respects. While the top 10 per cent of the population once owned 90 per cent of the wealth, now they found themselves sharing some of it with a new middle class, which in 2010 owned roughly 35 per cent of all capital. This is welcome. But much less acceptable has been an explosion of very high salaries in recent years. Once there were excessive concentrations of capital; now there are also excessive concentrations of income.

In fact the main countervailing forces for the reduction and compression of inequalities are the diffusion of knowledge and investment in training and skills. For these are the ways to increase the productivity of labour and thus its economic value. This is not, however, a market mechanism. It depends in large part on the educational and training policies of the government of the day. Piketty does not believe that this will be sufficient. So he recommends a global wealth tax. In practice, the chances of such a measure coming into force are close to zero. This utopian idea is the only disappointing aspect of a book that has been more thought-provoking than anything I have read for a long time.

Sir Alan Moses should remember what Fourth Estate means

It was almost inevitable that a senior member of the judiciary should be appointed as the first head of the new Independent Press Standards Organisation. The task has fallen to Sir Alan Moses, a member of the Court of Appeal. Appointing a judge is the ultimately safe choice. So rare are lapses in judicial behaviour that nobody would think of even looking for some shortcoming or other.

Moreover, the work of barristers and journalists shares some similarities, though no doubt the former would claim to work to higher standards of accuracy. But both have to “mug up” new subjects and situations from a standing start. Both must master the art of asking questions and assessing the answers. Both must know how create a compelling narrative or argument. The main difference is that the law is a profession whereas journalism is undoubtedly a trade.

It should work. Journalists have a natural respect for judges, either because their newspapers often appear in court as plaintiffs or defendants, or because they are regularly reporting court proceedings.

And for his part, Sir Alan should remember that we are the Fourth Estate in the sense first used by Edmund Burke, who said “there were Three Estates in Parliament (The Lords Spiritual, the Lords Temporal and the Commons); but, in the Reporters’ Gallery yonder, there sat a Fourth Estate more important far than they all.”


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