Piketty #1: Return of the Masters

* Thomas Piketty’s new book, Capital in the 21st century (‘Le capital au XXIe siècle’) is out, but yet to be translated from the French, so as an exercise designed to give me an incentive to learn about the economic history of income inequality and also to whet the appetites of those people who want to read Piketty’s book but don’t want to wait for the English translation to come out (next year, I’m told), I’ve decided to read and blog the book. I’ll try to outline Piketty’s argument, discuss it a bit, give my thoughts on its application to Australian economic history, and translate the best bits.

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It’s possible to get pretty much all the way through an undergraduate – and, for all I know, a postgraduate – education in economics completely ignorant of the work of Karl Marx and David Ricardo. Income inequality will probably feature in some of your elective courses (certainly in development economics, if that’s your poison), but it’s unlikely to rate much of a mention in the compulsory string of micro- and macroeconomics classes that are the mainstay of the degree. You can certainly get through a major in French without knowing the name of Honoré de Balzac, and it wouldn’t surprise me if Jane Austen was not exactly a compulsory part of an English major, either.

You won’t be able to get past Thomas Piketty without knowing them, though. Piketty is a French economist and economic historian, well known for his role in the creating of the World Top Incomes Database, the richest source of raw data about historical distributions of income ever assembled. He opens his discussion of capital in the twenty-first century by dragging us back to the nineteenth, introducing us in turn to Thomas Malthus, David Ricardo and Karl Marx, all of whom, according to Piketty, did something very worthy:

they put the question of wealth distribution at the heart of their economic analysis, and they tried to study long term trends. While their answers weren’t always satisfying, they asked the right questions.

Piketty doesn’t even try to conceal his disdain for the state of contemporary, “American” economics, which he thinks has yet to emerge from

its infantile obsession with mathematics and theoretical and often very ideological speculation, to the detriment of historical research and an engagement with other social sciences.

He doesn’t think that a purely mechanical model of economic inequality will suffice: it is a question too much infused with the political and the historical to be understood with calculus alone. Marx, Malthus Ricardo may not have been able to understand the dynamics of income inequality due to a paucity of high quality data, but they at least understood its centrality to economic life.

The need for quality data, for Piketty, might explain why inequality has languished as a topic for serious economic inquiry: the legwork required to treat it seriously is “too historical for economists, too economic for historians”.

We know much too little in the social sciences for us to divide ourselves stupidly. If we hope to make progress on questions like the distribution of wealth or the structure of social classes then it is evident that we must proceed pragmatically, using the methods of historians, sociologists and political scientists.

Instead, Piketty argues, the economics profession has relied on the admittedly seminal empirical and theoretical contribution of Simon Kuznets, whose analysis of incomes and national accounts, particularly in the United States, seemed to suggest that while income inequality increases as economies industrialise, it will then tend to decrease.

This panglossian attitude, much too optimistic for Piketty (as, indeed, it has been for other researchers of inequality, who have largely rejected Kuznet’s idea of a negative quadratic relationship between economic prosperity and income inequality), has lulled economists to sleep with a “fairytale”. They have neglected to understand the dynamics of inequality because they thought it was irrelevant. But the twenty-first century, Piketty thinks, will not permit them this luxury.

We are about to witness changes in the global economy as frightening and monumental as those wrought by the Industrial Revolution, and there is no point closing our eyes to them. “There is no reason to believe that growth will naturally find an equilibrium,” we are warned.

Instead, Piketty introduces what he calls first the “fundamental driver of divergence“: the condition r > g, where r is the average return on capital and g is the average growth rate of national income. When the return on capital exceeds economic growth, we should expect to see a rise in income inequality.

Piketty outlines his approach quite neatly: he will do his best to consider inequality in market income (although, perhaps inadvisedly after his stoush last year with Richard Burkhauser, he doesn’t stress the difference between pretax and after tax income) since the early eighteenth century and across the developed world. He spends a while defending his emphasis on the French case, making a very compelling argument for French economic history as a topic of study for economists:

Some readers will no doubt be surprised that I have given such importance to the example of France, and may suspect me of nationalism. I should therefore justify myself. Above all, it is a question of sources. The French Revolution may not have created a just and ideal society. But we shall see that at the least, it had the merit of putting in place an incomparable method of observing wealth: the system of registering property –land, housing and financial – in the 1790s is astonishingly modern and universal for that period, and explains why French data on inheritance are probably the best in the world. The second reason is that France, because it is a country that underwent demographic transition quite early, constitutes one of the best places to observe what is in store for the rest of the planet. The French population has certainly grown in the past few centuries, but at a relatively slow pace. France had more than 30 million people by the time of the Revolution, and has hardly more than 60 million at the beginning of the 2010s. It’s the same country, the same order of magnitude. In comparison, the USA had hardly 3 million people at the time of the Declaration of Independence. By the 1900s it had 100 million people and more than 300 million by the start of the 2010s.

As someone who sort of fell into French economic history by accident, I like the audacity of the claim. In my next post, I’ll look, I think probably fairly cursorily, at the first part of Piketty’s book, which deals with defining national income and capital.

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3 Comments on “Piketty #1: Return of the Masters”

  1. They have neglected to understand the dynamics of inequality because they thought it was irrelevant. But the twenty-first century, Piketty thinks, will not permit them this luxury.

    That seems likely so far. It would be interesting to look back on previous criticisms of economic theory and see whether academics wanting to better their discipline or alternatively historical circumstance itself sent thinkers in their next direction.

  2. The French Revolution may not have created a just and ideal society. But we shall see that at the least, it had the merit of putting in place an incomparable method of observing wealth

    Very interesting. If only econjobrumors were awash with rumours of high quality data sets!


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