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Book Review: Capital In The Twenty-First Century

[Epistemic status: I am not an economist. Many people who are economists have reviewed this book already. I review it only because if I had to slog through reading this thing I at least want to get a blog post out of it. If anything in my review contradicts that of real economists, trust them instead of me.]


Thomas Piketty’s Capital In The Twenty-First Century isn’t just a book on inequality. It’s a book about quantitative macroeconomic history. This is much more interesting than it sounds.

Piketty spent decades combing through primary sources trying to get good statistics for what the economies of various Western countries have been doing over the past 250 years. Armed with these data, he tries to put together a theory of the very-long-term forces at work in economic change. His results touch on almost every big question in politics and economics, and are able to propose sweeping theories where other people resort to parochial speculation. While more knowledgeable people than I are probably already familiar with much of this, I used him as an Econ History 101 textbook and was not at all disappointed in the results.

The most important thing I learned from Piketty is that since the Industrial Revolution, normal economic growth has always been (and maybe always will be) between 1% and 1.5% per year. This came as news to me, since I often hear about countries and eras with much higher growth rates. But Piketty says all such situations are abnormal in one of a few ways.

First, they can have high population growth. Population growth will increase GDP, and it will look like a high economic growth rate. But it doesn’t increase GDP per capita and it shouldn’t be considered the same as normal economic growth, which is always between 1% and 1.5% per year.

Second, they can have temporary bubbles. This definitely happens, but after the inevitable bust, the whole period will eventually average out to 1% to 1.5% per year.

Third, they can have “catch-up growth”. This is a broad category covering any period when a country that was previously underperforming its fundamentals gets a chance to catch up. This can happen after a long war in which a devastated country gets a chance to rebuild. Or it can happen after dropping communism or some other inefficient economic system, as the country transitions to a more practical form of production. Or it can happen when a Third World country globalizes and gets the benefits of First World technology and organization. But if a country is at peace and on the “technological frontier” (ie one of the highest-tech countries that has to invent its own advances and can’t get them by osmosis from somewhere else), it will always have growth of 1% to 1.5% per year.

For most of the 20th century, one or another of those conditions has been true in most places. Whether it was the Baby Boom in the US causing high population growth, or the dot-com boom, or Germany and Japan’s decades of miraculous economic recovery after World War II, or China’s catch-up growth after Deng Xiaoping’s liberalization, people have gotten growth of more than 1% to 1.5% per year and learned to expect it. In the Third World, which continues to experience good catch-up growth, their expectations will probably be met. In developed countries, they are bound to be disappointed.

I was happy to learn this, because the graph above has always haunted me. It seems to say that no matter our policies, no matter our good or bad decisions, no matter our triumphs and defeats – the US GDP per capita will always grow at the same rate. How can that be true, when some countries have such high GDP growth sometimes, and others such low growth? How can it be true when in 1870, the US was in the same kind of Gilded Age rapidly-industrializing business climate that China is today? How can it be true when I remember so many years of 5% growth in the US, and so many other negative-growth recessions? But Thomas Piketty is right and common sense is wrong. The US grows at 1% to 1.5% per year, forever, just like everyone else outside a few special circumstances.

Piketty uses this point to construct a super-ambitious zoomed-out version of 20th century history. Everything was going normally until the two World Wars, which devastated Europe and Japan, but set the US back only slightly. The US and Britain had the Baby Boom and minor catch-up growth, meaning a pretty great 1950s. Continental Europe had the whole process of rebuilding their economy from the (sometimes literal) ashes, a period the French called the Trente Glorieuses (Thirty Glorious Years) of near-constant economic boom. Around the 1970s, the US and Britain realized that Continental Europe and Japan were doing much better than they were, what with their near-constant economic boom, freaked out, and decided their economies were somehow rotten; this led to Thatcher and Reagan getting elected on a platform of cleaning up the economy. Around the same time, Europe recovered fully from its devastation and went back to normal economic growth; Japan, which had been a bit more devastated, took another few years but then had its own bust and went back to normal (or subnormal) growth. The US and Britain, seeing that they were now “caught up” to their Continental and Japanese competitors, declared “mission accomplished” and gave Thatcher and Reagan the credit. Since then it’s mostly been smooth sailing, with the normal 1%-1.5% + population growth (which works out to a little bit more in the US and a little bit less in Japan, given these countries’ high and low fertility rates respectively).

I don’t fully understand this theory. It proposes a very long time for Europe to get over World War II, which doesn’t really match graphs that show the GDP rebounding basically immediately even in the hardest-hit countries (maybe it would be more revealing if I had a log graph like the US one above, so I could do more than try to eyeball the trend). It also suggests that Americans judge the state of their economy by comparing it to Europe (or at least did in the 1970s), which doesn’t really match how most people I know think. In particular, in 1990 they would have had to have said “Our economy is now equal or better to the Europeans, we’re happy now” when this was entirely a function of Europe cooling down and didn’t involve any improvement in the US economy at all. Still, this is a persuasive model and one of the only ones I know that makes sense of the straight line graph above.


All this is just exposition. Piketty’s main focus is inequality between labor and capital, and he starts with the idea of the rentier.

A rentier – an old word I’m surprised we don’t have a better-known modern equivalent for – is something like the strict sense of “capitalist”: a person who lives off the interest on savings instead of working. Trust-fund kids who live off dividends from investments, landlords who live off literal rents from their properties, and aristocrats who lived off the profits from their estates are all rentiers.

It’s fitting that Piketty uses an old word, because rentiers were more common and more important in the old world than they are today. Although he presents tables of statistics proving this is the case, Piketty also urges us to consider Jane Austen novels for a more intuitive sense of the situation. Few of her characters work honest jobs besides occasionally some sort of vague “managing investments”. They’re all obsessed with their dowries and their families’ endowments. That’s because they live off the interest of their principal, which usually stays the same throughout their life and which often comes from a dowry. Some of these people are titled aristocrats, others are “gentry”, others might not have qualified for either role – but they all live off interest.

Piketty (himself a Frenchman) also cites this passage on 19th-century French novelist Honore de Balzac’s Pere Goriot:

The darkest moment in the novel, when the social and moral dilemmas [Eugène de] Rastignac faces are rawest and clearest, comes at the midpoint, when the shady character Vautrin offers him a lesson about his future prospects. Vautrin, who resides in the same shabby boardinghouse as Rastignac and Goriot, is a glib talker and seducer who is concealing a dark past as a convict, much like Edmond Dantès in Le Comte de Monte-Cristo or Jean Valjean in Les Misérables. In contrast to those two characters, who are on the whole worthy fellows, Vautrin is deeply wicked and cynical. He attempts to lure Rastignac into committing a murder in order to lay hands on a large legacy. Before that, Vautrin offers Rastignac an extremely lurid, detailed lesson about the different fates that might befall a young man in the French society of the day.

In substance, Vautrin explains to Rastignac that it is illusory to think that social success can be achieved through study, talent, and effort. He paints a detailed portrait of the various possible careers that await his young friend if he pursues studies in law or medicine, fields in which professional competence counts more than inherited wealth. In particular, Vautrin explains very clearly to Rastignac what yearly income he can aspire to in each of these professions. The verdict is clear: even if he ranks at the top of his class and quickly achieves a brilliant career in law, which will require many compromises, he will still have to get by on a mediocre income and give up all hope of becoming truly wealthy:

“By the age of thirty, you will be a judge making 1,200 francs a year, if you haven’t yet tossed away your robes. When you reach forty, you will marry a miller’s daughter with an income of around 6,000 livres. Thank you very much. If you’re lucky enough to find a patron, you will become a royal prosecutor at thirty, with compensation of a thousand écus [5,000 francs], and you will marry the mayor’s daughter. If you’re willing to do a little political dirty work, you will be a prosecutor-general by the time you’re forty.… It is my privilege to point out to you, however, that there are only twenty prosecutors-general in France, while 20,000 of you aspire to the position, and among them are a few clowns who would sell their families to move up a rung. If this profession disgusts you, consider another. Would Baron de Rastignac like to be a lawyer? Very well then! You will need to suffer ten years of misery, spend a thousand francs a month, acquire a library and an office, frequent society, kiss the hem of a clerk to get cases, and lick the courthouse floor with your tongue. If the profession led anywhere, I wouldn’t advise you against it. But can you name five lawyers in Paris who earn more than 50,000 francs a year at the age of fifty?”

By contrast, the strategy for social success that Vautrin proposes to Rastignac is quite a bit more efficient. By marrying Mademoiselle Victorine, a shy young woman who lives in the boardinghouse and has eyes only for the handsome Eugène, he will immediately lay hands on a fortune of a million francs. This will enable him to draw at age twenty an annual income of 50,000 francs (5 percent of the capital) and thus immediately achieve ten times the level of comfort to which he could hope to aspire only years later on a royal prosecutor’s salary (and as much as the most prosperous Parisian lawyers of the day earned at age fifty after years of effort and intrigue).

The conclusion is clear: he must lose no time in marrying young Victorine, ignoring the fact that she is neither very pretty nor very appealing. Eugène eagerly heeds Vautrin’s lesson right up to the ultimate coup de grâce: if the illegitimate child Victorine is to be recognized by her wealthy father and become the heiress of the million francs Vautrin has mentioned, her brother must first be killed. The ex-convict is ready to take on this task in exchange for a commission. This is too much for Rastignac: although he is quite amenable to Vautrin’s arguments concerning the merits of inheritance over study, he is not prepared to commit murder.

What is most frightening about Vautrin’s lecture is that his brisk portrait of Restoration society contains such precise figures. As I will soon show, the structure of the income and wealth hierarchies in nineteenth-century France was such that the standard of living the wealthiest French people could attain greatly exceeded that to which one could aspire on the basis of income from labor alone. Under such conditions, why work? And why behave morally at all? Since social inequality was in itself immoral and unjustified, why not be thoroughly immoral and appropriate capital by whatever means are available?

Piketty’s figures show that rentiers became more and more powerful from the 1700s all the way until the Belle Epoque (early 1900s), then declined precipitously around the period of the World Wars. What happened?

This is where he brings in his famous inequality (no pun intended) r > g – that is, the rate of return from capital is greater than the growth rate.

Rentiers’ money grows with the rate of return on capital. As they get profits/dividends/rent/interest on their capital, they consume some fixed fraction of it and add the rest back to their principal. As their principal grows, so does their yearly income. If they have enough money (and most of them do), the amount they consume even in a very luxurious lifestyle will be trivial, so we can approximate this by saying their income grows at the rate of return.

(One of the few checks on this process is population growth among the rentier class – if a rentier has five children, he may have to consider splitting his fortune five ways, which would mean that the fortune of each individual rentier decreases by a factor of five each generation. This means the growth of rentier power is strongly influenced by population growth, which will become important later.)

Laborers are assumed to have few savings and live a hand-to-mouth existence. Their income grows whenever they get a raise. So the growth of their income is approximated by the GDP per capita growth rate.

In ordinary times, the rate of return on capital always averages about 4% – 5% per year, and the GDP per capita growth rate always averages about 1% to 1.5% per year. So in ordinary times, rentiers’ yearly incomes should always be pushing further and further ahead of laborers’, and inequality should always increase. This is exactly what happened between the 1700s and 1914.

During crises – especially wars and economic busts – the situation reverses. If a rentier invests all his money in a factory, and the enemy bombs that factory, the rentier is broke. The laborers in the factory are also pretty unhappy, but they have the opportunity to get a job in a new factory when the war ends, in a way that the rentier – whose family might have spent several generations accumulating their capital – might not. The same is true of hyperinflation: laborers will get paid hyperinflated wages to spend on hyperinflated goods – but rentiers, who might have their money in currency-denominated investments like government bonds, can lose decades of careful fortune-gathering. Finally, if the government decides to respond to the crisis with confiscation of resources, or wealth taxes, or any interference in the economy, it’s likely to be the rentiers who are hardest-hit. Because rentiers’ wealth takes decades or generations to accumulate, but laborers live hand-to-mouth, a crisis lasting five years will give laborers a bad five years (after which they’re in the same position as pre-crisis), but can ruin rentiers completely. The period 1914 to 1945 – containing two World Wars and the Great Depression – was an unprecedented prolonged multi-crisis that caused “the collapse of the rentier world”.

When the dust settled, a big chunk of the multi-generational fortunes that were dominating Europe had been destroyed or “haircut” down to more manageable levels. This was both a cause and an effect of immediately-post-war governments imposing rentier-unfriendly policies like high top-bracket tax rates that essentially prevented the rentier class from re-forming. And with the post-war Baby Boom increasing demographic growth, the conditions for rentiers (who do best when they don’t need to split their inheritance among too many children) got even worse. The period around the World Wars was the only one in history where g effectively outperformed r, leading to conditions where laborers win and rentiers lose out.

As a result, the point in the income distribution where people switch from mostly-laborers to mostly-rentiers used to be when you got into the top 1% in 1900. Today you have to go all the way to the top 0.1%.

On the other hand, since World War II the First World has had fifty-plus years of relative peace and prosperity. The last few decades have seen decreasing population growth and tax cuts for the upper class. These are the perfect conditions for the rentier class to make a return, and this is exactly what the data show.

…sort of. If you measure in capital/income ratio, rentiers are doing pretty well. If you look at inequality, it’s pretty high. If you look at various comparisons of share given to capital vs. labor, capital is coming out on top. But then where are the rentiers? Aside from occasional jokes about trust-fund kids, you rarely hear about them. And Piketty’s own data confirm that only the top 0.1% of the population makes most of their income from capital, compared to the entire top 1% back during the Belle Epoque.

I’m not sure about this, and for a point which is kind of the center of his entire argument, Piketty doesn’t seem too sure either:

We need to understand the reasons for this long-term change, which are not obvious at first glance, since I showed in Part Two that the capital / income ratio has lately returned to Belle Epoque levels. The collapse of the rentier between 1914 and 1945 is the obvious part of the story. Exactly why rentiers have not come back is the more complex and in some ways more important and interesting part. Among the structural factors that may have limited the concentration of wealth since World War II and to to this day have helped prevent the resurrection of a society of rentiers as extreme as that which existed on the eve of World War I, we can obviously cite the creation of highly progressive taxes on income and inheritances (which for the most part did not exist prior to 1920). But other factors may also have played a significant and important role.

If I understand Piketty right – and reading a bit between the lines – I think there are at least three things going on.

First, there’s more of a middle class these days. The middle class doesn’t entirely live off capital, but they have some savings and investment. Instead of 1% of people making all their money off capital, we have 30% of people saving for retirement and living off the profits of their nest egg.

Second, there are more super-rich “laborers”, for a broad definition of laborer that includes CEOs of big corporations. If we’re talking about how far in the income distribution you have to go before you get to rentiers, having a bunch of super-rich laborers screws up that statistic. I don’t think Piketty presents the more interesting statistic of what percent of people are rentiers, and I’m not sure why not. These people not only muddle the statistics, they also get much more media attention. When we talk about rich people, we talk about Bill Gates and Jeff Bezos, not the nth-generation scion of the Rockefeller family.

Third, capital is increasingly owned by institutions. There are hundreds of billions of dollars tied up in the endowments of top universities, and trillions tied up in the sovereign wealth funds of oil countries like Norway and Saudi Arabia. These don’t look like a particular individual walking around in a top hat and monocle, but they still distort the flow of money away from people who work for it and toward the people lucky enough to be part of the relevant institutions.

But if Piketty is right, if there’s no crisis then rentiers’ share of the pie will continue to increase. Either it will eventually overwhelm these considerations, and we’ll wake up one morning and notice we have an idle hereditary nobility again. Or it won’t overwhelm these considerations, and more and more of the pie will go invisibly to people other than average laborers, without any conspicuous signs of what’s happening.


Along with rentier-vs-laborer inequality, Piketty touches on income inequality among labor (remember, “labor” includes anyone who works a job, including CEOs).

He confirms what everyone already knows: the share of the top 10% (especially top 1%) has been increasing for decades now. This is most pronounced in the Anglosphere, but still happening somewhat in Continental Europe and Japan.

More things everyone already knows confirmed: most of the people benefiting from this are top executives at major corporations. Their average salaries have increased by orders of magnitude over the past few decades.

He addresses an argument made by supporters of high CEO salaries: might there not be a good economic justification for paying these people a lot? Suppose that having the best candidate (rather than the second-best candidate) as CEO increases your company’s profits by 1% – surely a plausible number. And suppose your company makes $10 billion/year. Then having the best CEO would increase your profits by $100 million. So two companies in a bidding war for the best CEO ought to be willing to offer them a salary of up to $100 million/year to join.

Piketty isn’t buying it. This isn’t really his area of interest, so he doesn’t throw the same overwhelming level of statistical artillery at it that he does at some other things, and I don’t consider him to have proven it beyond doubt in the same way as some of his other conclusions – but he makes a few strong arguments. First, there are no signs that this situation is more true in the past few decades or in the Anglophone world, but these are the only places where CEOs get paid so much. Second, with appropriate caveats and controls there are no signs that good CEOs get paid more than bad CEOs. Third, CEO pay seems to clearly increase because of some factors outside of CEOs’ control, for example in an economic boom (though wouldn’t this increase company profits, and so be consistent with the 1% scenario above?)

He thinks that executive salaries have increased because – basically – corporate governance isn’t good enough to prevent executives from giving themselves very high salaries. Why didn’t executives give themselves such high salaries before? Because before the 1980s the US had a top tax rate of 80% to 90%. As theory predicts, people become less interested in making money when the government’s going to take 90% of it, so executives didn’t bother pulling the strings it would take to have stratospheric salaries. Once the top tax rate was decreased, it became worth executives’ time to figure out how to game the system, so they did. This is less common outside the Anglosphere because other countries have different forms of corporate governance and taxation that discourage this kind of thing.

This matters not just because it produces income inequality, but because today’s income inequality is tomorrow’s rentier-vs-laborer inequality. A CEO who earns $5 million per year can make $50 million, retire, invest the money, and pass the fortune on to their children. The more giant fortunes like this are around, the more rentiers there are in the next generation and the more inequality perpetuates itself.

Piketty is especially afraid of very large fortunes because of his fascinating data showing that these grow more quickly than other fortunes. Using the Forbes rich list, he calculates that Bill Gates et al must have grown their fortunes at rates approaching 8% – 10% per year – far higher than the 4% – 5% rate of return on capital Piketty usually uses. Forbes is a pretty sketchy data set, but he finds the same thing with the largest college endowments. The richest colleges, like Harvard and Yale, see their endowments grow at 10.2% yearly. Somewhat rich colleges (= $1 billion) grow at 8.8%, medium-rich colleges (= $500 million) at 7.8%, middling colleges (= $100 million) at 7.1%, and the poorest colleges (= $100 million) at 6.2%. And all of these do better than the average person saving for retirement, who – again – gets about 4% to 5%.

Piketty suggests this is because the richer you are, the more economy of scale you have in hiring really good financial planners. I am a little confused how this interacts with the conventional wisdom that experts are crap and you should invest in index funds, but I think the financial planners Piketty talks about aren’t people who are very good at picking which stocks will go up, but more like people who know a guy who knows a guy in Singapore who can use your money to fund an unlisted Burmese mining project nobody else in the West has ever heard of.

I’m still confused why there isn’t a mutual fund that lets retirees pool together their money to give it to one of these people. Part of the answer must be “there are only so many unlisted Burmese mining projects”, but then how do economies of scale help exactly? Piketty doesn’t answer, almost as if he is more interested in explaining the dynamics of inequality than in providing me personally with investment advice.


Taken together, all of this suggests a gloomy conclusion.

Income inequality can be expected to remain high. This will produce further rentier-vs-labor inequality, which conditions are already right to exacerbate. Not only will rich people separate from poor people, but the super-rich will separate much faster from poor people and even from other rich people. As more and more fortunes accumulate, we will get either the sort of rentier society typical of Europe in the 19th century, or a covert version of the same where the profits of rent go invisibly to various people connected to rentier institutions.

Piketty suggests the obvious direct solution: a global tax on wealth. He is okay with having this be merely nominal on fortunes up to hundreds of thousands of dollars, but he wants it to be significant on larger fortunes, and punitive on the largest fortunes. This will help prevent these from growing exponentially at the rate of return and prevent the rebirth of rentier society.

He is pessimistic about this ever working, because if any country does it unilaterally, rentiers can just move their wealth to another country. He suggest an EU-wide tax, but I do not entirely understand his reasoning for why Europeans wouldn’t then just move their wealth to the Cayman Islands or one of the many other perfectly good banking systems that are not in Europe.

He does give measured praise to the US system, including the FATCA laws, which place penalties on any country that don’t report the details the US needs to tax American citizens’ holdings in those countries. I think he hopes Europe could pass a law like this, but stronger.

I agree with his pessimism. Absent a World War level crisis that would make for a cure worse than the disease, it’s hard to imagine everyone coming together to solve the sorts of problems Piketty brings up. I believe his predictions are likely to come true, with little chance of governments having the will to push a solution.

If a wealth tax itself is impossible, there are other things that might help a little. I can’t help but note that solving the housing crisis would be a big help here. Rents go directly out of the pockets of laborers and into the pockets of landlords, and are probably the biggest such transfer in today’s economy. Anything that lowers them has a big effect on the rentier-vs-laborer balance.

College is another big way that laborers get into debt. Although much of the debt is low-interest and government-owned, not all of it is, and even when it is this is scant consolation to the people who have to pay it.

Finally, one of the historically most important ways to decrease the power of rentiers is to increase birth rates, so they are forced to split their fortunes many ways every generation. Right now the birth rate of the rich is at historic lows. This might offer a point of agreement between rentier-fighting liberals and conservatives, who are already concerned about declining birth rates. Unfortunately, the main proposed solution to low population growth – giving workers better maternity leave – is likely to miss the rentier class entirely. I’m not sure what kind of policies might better target them.

So as not to end on a completely pessimistic note, I want to mention three causes for optimism I found in Piketty.

First, if we believe Piketty’s data, there is no Great Stagnation, at least not in economic growth. Piketty argues that (outside of special circumstances) economies always grow at 1% – 1.5% per year, and First World economies are currently growing at 1% – 1.5% per year. If we expected them to grow more, it’s because we’re not adjusting for falling birth rates, or getting too excited by passing booms and busts, or comparing them to catch-up-growth like in China. Whatever our sins in terms of decreased innovation and efficiency, they have not yet hit the economic growth rate.

Second, catch-up growth provides a powerful force for reducing inequality between nations. Given enough time, the US economy will keep growing at 1% to 1.5% per year, and sub-Saharan African economies will keep growing at 3% to 8% per year. Will this continue until the latter have caught up entirely? Unclear. Reviewers of this post have mentioned Acemoglu’s theory of entrenched inequality due to poor institutions, Sachs’ theory of entrenched inequality due to disease burden, and Jones’ theory of “hive mind” style entrenched inequality, as reasons why full catch-up might be hard. But all of these factors can potentially be improved with a growing economy, so they are not causes for total defeatism. Capital In The Twenty-First Century has overall made me more optimistic about the prospects for Third World catch-up.

The third thing that impressed me about the book is that we can talk about these kinds of things at all. Reading Piketty feels closer to reading real science – the type where there are universal laws that make clear predictions – than most economics or social science I’ve read. Marx liked to say he had discovered the universal laws that govern history; Piketty’s claims are only slightly more modest, but much more believable. They make the actions of individuals seem very small – one recurring theme is some faction taking credit for improving the economy or fighting inequality when economic fundamentals meant things had to change then regardless of what anybody did.

But they also suggest points of leverage. I don’t know if good economists knew all this stuff already. But I didn’t, and learning it makes me more optimistic that we might one day find a way to solve the problems Piketty talks about. Even if his wealth tax doesn’t work, he has good explanations of all the other factors that contribute to inequality and what would happen if we changed each. Now it’s just a matter of political will.

And although that’s a pretty big “just”, I hope that maybe the move to a society of rentiers will change the political calculus enough to make people take these problems more seriously. I complain about attacks on “meritocracy”; maybe we can see how much people like hereditary rent-seeking, and whether getting rid of that makes a better rallying cry. Maybe “everyone productive vs the idle rich” will make for less toxic politics than “people who earn more vs. people who earn less”. I can always dream.

EDIT: Commenters add that there have been some compelling criticisms of Piketty, especially by Matthew Rognlie (paper, summary) and Phillip Magness (paper, comment)