Stephan Kaufmann

This is a review of a review...because this book sets out to review Thomas Piketty's monumental work: "Capital in the twenty first Century"...... (685 pages in the English version). A fair bit of hype has accompanied Piketty since his book started drawing attention. The economic changes that Piketty describes come against a background of: lowered general taxes; A shift from direct taxes to indirect taxes such as VAT; A trend to flat taxation rather than progressive taxation for interest and dividends..and competition between countries to attract capital...part of which was a weakening of labour unions. All of this was leading to increased inequality of incomes in western countries. In 2010 the IMF published a study pointing out the connection between growing inequality and financial crises.
One thing seems to get lost in the discussion about inequality and that is the general rise in global wealth. For example, around 1800 about 85% of the world lived in extreme poverty but today that percentage is down to nine. And over just the past 20 years the level of extreme poverty in the world has halved. And in 1965 there were 125 countries where > 5 percent of children died before their fifth birthday. Today, only 13 countries fit that category. So yes....inequality might have gotten worse in my country ....but I'm significantly wealthier and healthier than my grandparents....and so are most others.
The central equation in Piketty's analysis is the ratio of capital to wealth and income to economic performance.
National income is the total sum of income available to residents of a country regardless of legal classification.
Capital, is the sum total of non-human assets that can be owned and exchanged. It excludes human capital on the grounds that it cannot be owned by another person or traded on the market. (I'm not so confident about this...the assets of a legal services firm are really the sum of the human capital in the form of knowledge of the partners, associates, clerks etc. and their skills in the court rooms. It is not their offices or computers....which are probably rented anyway. And such assets have been sold to other legal firms or have been listed on stock exchanges. In fact I understand that most of the assets of companies these days is in the form of intellectual property or human capital. What is being sold or purchased when a soccer star is purchased by a rival soccer club? (What else but the human capital?).
The ratio of capital/ income is called beta by Piketty and is useful as a way of comparing per capita wealth in countries over time. According to Piketty, the ratio in western countries is between 5-6 at the moment.
Income is derived from labour in the form of wages, salaries fees, etc. plus income from capital in the form of interest, dividends, profits.
Wealth grows when some of the income is not consumed but saved. And the only people who can save are those who do not live hand-to-mouth.
According to Piketty, the pool of wealth tends to grow faster than income so the capital-income ratio increases. And the reason for this is that returns on capital (r) are historically higher than the performance of growth (g) in incomes. so r > g.
A high number .....say 7 represents high inequality. A low number, (say 3) represents a more even distribution of wealth.
That would not be an issue if wealth was evenly distributed but it's not. (Piketty doesn't attempt to explain why he takes inequality as a given and examines its development over time.
According to Piketty, until about 1500 per capita growth in income was close to zero . (But before 1800 Piketty really has no data ...relies on novels).
After all the analysis, Piketty concludes that the average return on capital (r) over the long term averages out at about 4-5 %. The long term growth of economic performance (g) averages out at about 1-2 %. So r > g.
In France and Britain, from 1700 to 1910 Beta was about 7 it then fell to about 2.5 in Britain and less than 3 in France. The USA was similar but started lower around 5 in 1910.
Why these changes? Well capital is no longer just in land but in industry (and increasingly in IP). And progressive taxation was implemented after WWI. Between 1910 and 1920 the richest tenth of french households held 90% of the wealth. Between 1950 and 1970 this share supposedly fell to 60-70%. (Similarly in Britain).
After 1970 tax policy shifted to advantage capital; The share of wages in National income has declined; inheritance became increasingly important as a source of wealth; unequal access to education has allowed super rich managers.
Projecting forwards 80 years to 2100, Picketty predicts, worldwide, an acceleration of inequality with Beta approaching 7.
In the phase 1950-1970 effort tended to be rewarded. In the future, it's not effort that will determine prosperity but background and family...that is "inheritance". The guarantee of prosperity will be having rich relatives rather than hard work.
Piketty's solutions: 1. A wealth tax which would be progressive ..up to say 5-10%.
2. A progressive income tax on high incomes (Up to 80%)
Though he appreciates that one of the reasons for current situation is competition between countries for capital...so it will require international cooperation and agreement.
There has been a lot of criticism of Piketty's thesis ...as one would expect. But it seems to have withstood the criticism fairly well. His predictions are based on past trends over the last 30 years. (Which may prove to be an unreliable guide if artificial intelligence starts to take away jobs, for example).
Other critics ..such as writers in The Economists argue that growing inequality does not inevitably lead to instability. Others argue that inequality acts as an incentive for outstanding performance.
The Financial Times criticised his data ...but after correcting the data nothing much is changed. And Piketty and friends acknowledge that it's difficult to clarify exactly what counts as wealth. And the rich, have reason to understate their taxable incomes.
Picketty has also been criticised on the grounds that he doesn't really provide a reason for the rise in inequality. And again, because of the increasing importance of financial markets...where the growth in capital no longer has material limits. And again because his work is rather Eurocentric.
The authors of this review acknowledge that Piketty has at least ignited a broad debate about taxation wealth and inequality. And they make the point that his work tends to refute the neoclassical school of economics which assumes the free forces of the market leads to equilibrium and this is a social optimum. Paul Krugman is a supporter of Piketty suggesting that the inequality it documents must provoke a will to change things towards a redistribution ..more state and less market. The authors suggest that real change will not come just from Piketty's sort of analysis but from social struggles. (Such as the sit-down strikes in the US around 1932). On the whole, I felt that this book was a good summary of the larger work. Gave me the feeling that they had captured the gist of the original book. (But, I'm not really in a position to make this call until I've read the original). Current book wasn't particularly easy reading....and maybe that could have been improved.… (plus d'informations)

My wife ordered this book for me thinking it was Piketty's "Capital". Oops. I read it after finally reading the real thing. This is a totally unnecessary venture that seems like an attempt to cash in by getting university students to purchase it once they've been assigned the Piketty book and decide to cheat instead.

But the last 20 pages of this 70-page book are an attack on Piketty -- wait for it -- from the left. It seems that Germany still has some Marxists who won't give up. Their rather feeble objections to Piketty culminate in his failure to advocate for a social struggle instead of tax remedies for inequality. Viva la revolucion!

And they charged a lot for this tiny paperback. Some Marxists aren't above a little capitalist greed, I guess.… (plus d'informations)