Sunday, May 4, 2014

Thomas Piketty's Magisterial 'Capital in the Twenty-First Century'

This is the book everyone's talking about. If you are at all interested in economics, particularly economic history, and if you are at all cranky about the crop of liars, frauds and economic illiterates currently governing us, then it's a must read.

I've spent the past week reading all of its 685 pages (one has the time, you know, when one's retired) and I must say it's been an enthralling experience. I'm not an academically trained economist, although I did a unit of economic history at university eons ago, but I've been obsessed with the subject ever since I discovered the brilliant and Nobel prize winning economist Paul Krugman two decades ago. I've read all his books, Slate and New York Times columns, and his thousands of blog posts ever since. The man is a liberal, progressive voice of sanity in today's economic and political madness.

Now I have another hero - Piketty. His central thesis is that over the last 300 years the return on capital has been significantly higher than the growth rate of the economy, and thus incomes, in every Western country including Japan. The only exception to this was the period between the two world wars last century when capital was destroyed on a grand scale - by bombed buildings and infrastructure on the one hand, and expropriation and runaway inflation on the other. Since then capital has resumed its inexorable growth, ensuring wealth and power is increasingly accruing to the top decile of the population, especially the top one percent. Rapidly growing inequality is the result. The middle class forty percent and the bottom fifty percent of society become increasingly resentful and powerless, and this can only have rather dire consequences for social cohesion into the future. 

Governments can do things - like introduce annual taxes on capital holdings; reverse the flattening of progressive taxation of incomes that has taken place since the Reagan/Thatcher years - but this requires global will and courage, and the wealthy increasingly control governments anyway. 

A couple of insights stand out. From the beginning of the Christian era until the year 1700 world population growth was virtually non-existent - less than 0.1% per year. Economic growth was similarly stagnant. In the last three centuries however population growth has been significant, at 0.8% per year. In the 20th century it was bullish, at 1.4%. This propelled considerable economic growth. However that growth is projected by the latest UN forecasts to fall to 0.4% by the 2030's and settle, once again, to around 0.1% in the 2070's. Thus economic growth will similarly decline, propelled as it is mainly by population growth. Incomes - wages and salaries - will follow. 

The return on capital, however, will continue at around 4%-5% each year for a long period of time. The phenomenon of 'patrimonial capitalism' will dominate. As wealth accumulated in the past grows more rapidly than output and wages, according to Piketty, 'the past devours the future'.

(Gina Rinehart anyone? Jamie Packer? The Murdochs? Their power grows, the rest of us labouring suckers shrink).  

Piketty relies on comprehensive databases of economic and social statistics from many countries (including Australia and New Zealand) that he and his colleagues have painstakingly built over the last fifteen years. Thus the many graphs and tables presented (115 in all) are fascinating in themselves. Simply perusing these can convey the whole story succinctly.

He is a natural-born teacher. This book is a narrative, providing context and perspective for today's realities and debates. He provides constant introductions, summaries and recaps as he goes. As a reader the main arguments and themes are always clear. The book is very logically organised.

The writing is clear and non-academic in style. He uses the personal pronoun 'I' not the impersonal 'we'. Thus he intimately connects with the reader in the telling of this 300 year story, even when the math equations get a bit heavy.

The English translation is, on the whole, pretty good, though the word 'concretely' (meaning 'in practice') appears far too often. Is it even a word?

In summary, a ground-breaking, wonderful, fascinating and very important book. 

(Paul Krugman's very positive review in the New York Review of Books is here)

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