Book Review-Thomas Piketty-"Capital"

     "Capital" is a landmark publication with possible historical ramifications, dependent in large part, on how the outside world accepts Picketty's no-nonsense approach to the title of his book.  The original publication certainly became a talking point all around the main economic front.  We have to ask why this is the case.  It is in part because Piketty used standard and proper academic practices of proof, in-depth data and explanation.  The other is that his data displayed inequality on a grand scale with at least several ideas that the entire world should ponder, one being that capital will grow faster than the economy in the 21st century and that the money made in return for capital will almost go exclusively to our 1%. 

     Picketty has two other main arguments.  One is that we need transparency with our corporate and economic data.  Without this, it is difficult for us to have clear data to lead us setting policies to quell inequality.  The other important idea is the idea of a global progressive tax as a necessity to help us not go back to the same levels of inequality that existed before WW1.  

    Picketty does an amazingly convincing job in dispelling any more neo-conservative myths attached to the "trickle-down"theory.  He warns us that "there is no natural, spontaneous process to prevent destabilizing, inegaliatarian forces from prevailing permanently."  It is difficult not to see how capital will grow much faster than income.  How inheritance will play a much more prevalent role than it did for the second-half of the 20th century.  He has made at least as strong if not stronger case for redistribution of wealth since Marx.  

     Almost as prominent as Piketty's ideas are his criticisms of his own field of study.  "To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and purely theoretical and often highly ideological speculation at the expense of historical research and collaboration with other social sciences."  This is Piketty saying that beyond economics, beyond modern theory, his book is a historical study of the Western world since the French Revolution.

     Our projected 21st century economic growth rate of about 1-1.5% is above but still more similar to what was happening in Victorian England, rather than the 1950's in New York or the 1970's in Toronto.  The slower growth is due in part to our slower population growth and increase in average age.  It is noteworthy that up to the Industrial Revolution our economic growth was below 0%.  We have to watch for the growing disparity between return on capital and rate of growth.  Piketty predicts growing disparity between these two will have "powerful and destabilizing effects on the structure and dynamics of social inequality."

     The importance of the middle class cannot be underestimated.  It changed how wealth was distributed during the 20th century.  In 1900 there was no middle class.  At the beginning of the 20th century, the U.S. was much more egalitarian than its Western European counterparts.  By the late 20th century, the reverse was true.  Inequality was its lowest and the middle class was at its highest (especially from about 1950-80, what many would call the glory years of the American Empire, after FDR's Second Deal).  

     Between 1910-1960, the top incomes were earned mainly through work.  From the 1970's on, the top incomes have been split between work and inheritance.  According to Piketty, inheritance is starting to take over like it did before the economically revolutionary World Wars, which Piketty consents is the reason behind our glorious post-WW2 years.  Otherwise, the middle class has never had much of a life in our history.

     He wants us to change some of our ways of thinking.  "In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations."  Both economists and national governments do not have the means, with our lack of transparency, to keep up with the daily global transfer of wealth.  Billionaires today own about 1.5% of the world's private wealth.  More notable is that up to 10% of the world's GDP may be held in unreported tax havens.

     Piketty's major recommendation, the one that we need to consider is a progressive global tax on capital.  It would "expose wealth to democratic scrutiny, which is a necessary condition for effective regulation of the banking system and international capital flows."  This idea is not so much an embrace of taxation("Taxation is neither good nor bad in itself.  Everything depends on how taxes are collected and what they are used for")as more a strong argument for private wealth to come under the public eye.  On a larger scale, Piketty sees taxes as a necessity for society to have a common destiny and produce collective action.  Lower taxes in the U.S. and the UK have not fuelled economic growth above other Western nations.  We had higher economic growth after the two world wars when progressive taxation was put in place.  Piketty concedes, however, that a global progressive tax on capital is a "utopian" idea and unlikely to happen in the near future if at all.  

     Currently, our governments are poor in the Western world, even if our nations seem wealthy.  Our governments are poor because of high public debt.  Piketty examines three methods for curing us of this debt:  taxes, inflation and austerity(aka cutbacks).  With inflation, Piketty worries about how it can become uncontrollable and that it is an imprecise distributor of wealth.  He adds that central banks should be tightly regulated.  With the other two ideas, taxation and austerity, he has a definite liking of the former and a dislike of the latter.

     In the specific case of Greece, the situation is hopeless because the wealthier citizens have thrown their money elsewhere, ruining the hope of any progressive taxation working, while austerity cuts have led to further privatization of public assets and left the nation at the mercy of the EU and the IMF, two institutes that are non-democratic.

     As to what level of public debt is desirable, Piketty says this question cannot be answered until we can collectively decide "what level of public capital is desirable and what is the ideal level of total national capital?"  Piketty even goes further in saying that "debt often becomes a backhanded form of redistribution of wealth from the poor to the rich, from people with modest savings to those with the means to lend to the government(who as a general rule ought to be paying taxes rather than lending)." We currently spend more on the interest of debt than on higher education.  Debt is definitely a major problem Piketty agrees but his method of progressive taxation is not even considered in the world of economics, with inflation brought up often and austerity presented as being the only choice.

     In "Capital" Piketty observes what was already evident but was not seen as acceptable thinking even five years ago and is still largely discounted today.  That capital growth overrides income,  That our growing inequality is taking us back to what it was like before WW1.  For this, Piketty deserves acknowledgement of courage.  The greater achievement of the book, however, is the expression of his ideas, even if they seem like a faraway utopia at this point.  That the corporate world needs greater transparency("The world is not divided between a political elite on one side and on the other, an army of commentators and spectators, whose only responsibility is to drop a balloting box once every four or five years").  That we need a global progressive taxation system.  Our  planet needs to consider what "Capital" says as the middle class is becoming a rare species.

****1/2