[Thomas Piketty's] Capital in the Twenty-First Century is a very important book that is not really about capital, and is not really about the twenty-first century. It is predominantly a work of analytical economic history, focusing on the late nineteenth century to the present – with words of warning for the future, nestled among caveats regarding the pitfalls of economic predictions. And its subjects are the dynamics and distribution of incomes and wealth, where wealth is to capital what an hourly wage is to an hour of work: the market value, not the thing itself. ….
As inequality rises and wealth becomes increasingly unearned, how can a democratic capitalist society respond? Regarding income inequality, Piketty advocates taxing incomes above $500,000 or $1 million at a rate of 80 per cent. Importantly, the point is not to bring in revenue, because it would probably bring in very little – remuneration at the top end would probably fall dramatically, given the small return to higher salaries. But given that taxes at this rate did not slow down growth in the past, and that countries that still have high top income tax rates have not fallen behind the US and the UK, the evidence indicates that their loss would be everyone else’s gain.
How does this work? The knock-on effect of top incomes on everyone else’s incomes, or what economists call general equilibrium effects, are rarely acknowledged, and indeed Piketty does not spell them out. But next time you hear someone suggest that a concern with top incomes can only be driven by envy, recall that, one way or another, the rest of us have to pay for those incomes: as workers, higher pay at the top means our salaries have to be lower; or as consumers, it raises the prices we face; or as pension-holders, it lowers share prices and profits that fund our retirement. Again, since the evidence shows that excessive pay at the top does not increase the size of the pie, their ever-growing slice comes at everyone else’s expense, and trimming it would leave more for the rest of us. ….
In 1913, just before the outbreak of the First World War, the historian and socialist theorist R. H. Tawney observed that ‘what thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice a problem of riches’. Let us hope that this time around we find a solution to the problem of riches that does not require global catastrophe.
Paul Segal, “Review Essay: The problem of riches“, Renewal 22: 3/4 (2014).
HT: Mark Thoma
Paul Segal is Senior Lecturer in Economics at King’s International Development Institute, King’s College London. For more reviews, see the current issue (no. 69) of Real-World Economics Review (ungated, free access). This special issue on Piketty’s Capital contains essays by Robert Wade, James K. Galbraith, David Colander, Dean Baker and others.
Capital in the Twenty-First Century was translated from the French by Arthur Goldhammer and published by Belknap Press in 2014.