If you like totalizing theories of economics the way I do—which is to say, if you like reading descriptions of those theories—you have probably heard about Thomas Piketty and Capital In the 21st Century. The English translation of the 700-page book has been well-received since its publication last month, and Piketty has been interviewed in just about every outlet imaginable, including the New York Times. That one is worth reading, if for no other reason than for his observation that the income distribution that characterized the late 19th and early 20th centuries, when “the top 10 percent of the distribution was full of rental income, dividend income, interest income,” is coming back.
This claim ties into the central argument of Piketty’s book, which is that when returns on capital exceed the rate of economic growth, inequality increases. Piketty is essentially describing an economic climate in which it is more profitable to invest (or have invested) than to work—an economy that inevitably transfers wealth upward. The observation is significant in part because it seems prosaic, but also because returns on investment have exceeded economic growth during most of the periods for which historic data is available.
Piketty believes that the relative surge in wages and equitable distributions of wealth that occurred after World War II were anomalies. It wouldn’t be a Times article without fun factoids on historical inequality, so here we go:
In 2012 the top 1 percent of American households collected 22.5 percent of the nation’s income, the highest total since 1928. The richest 10 percent of Americans now take a larger slice of the pie than in 1913, at the close of the Gilded Age, owning more than 70 percent of the nation’s wealth. And half of that is owned by the top 1 percent.
The insight of Capital in the 21st Century, if I understand it correctly, is that such conditions are natural. We think of the Roaring Twenties or the Gilded age as periods of peculiar excess, when the rich got absurdly richer through weird market bubbles or manifestly unfair social arrangements. Piketty’s contention is that the fairness and growth of the middle 20th century were peculiar, and that present conditions of inequality—unprecedented in the scale of our lifetimes—are the inevitable result of an untended economy.
It’s a striking contention, not least because it contradicts the
theory article of faith that if we do nothing, the economy will make all of our lives better. You may recognize this idea from the sum content of Republican economic policy for the last 30 years.
The idea that the best way to manage the economy is to do nothing and let it make us all rich is seductive, partly because it demands so little effort and partly because it is unfalsifiable. To the laissez-faire economist in the 21st century, any failure of the market can be written off as a failure to completely remove burdensome regulations and taxes. But on the tax side, at least, we have been lifting those burdens from capital (read: rich people) for decades, and the result is inequality not seen in the modern era.
It’s almost as if those interventions burdened the economy the way irrigation ditches burden the river. If we just let the river flow naturally, we’d all get more water. A rising tide lifts all boats, as they say. Piketty’s contention is that when we let the river flow naturally, we get floods.
“Trickle-down economics could have been true,” he tells the Times. “It just happened to be wrong.” The promise of Capital In the 21st Century is that it empirically challenges one of the great, untested assumptions of contemporary policy: that the economy will provide for us if we just leave it alone.
If you accept that as a postulate, it follows that, for example, lowering taxes on the rich creates jobs. But what if that assumption were wrong? If letting everybody make as much money as they can however they can doesn’t necessarily improve our lives, what have we been doing for the last three decades?
The broad answer to that question is that we have been increasing inequality. It’s there in virtually every statistical analysis of income and wealth distribution. Of course, that’s not necessarily a result of our taxation and regulatory policies. It could be a result of the flat housing market, or the breakup of LCD Soundsystem, or any of the other phenomena with which it correlates. But Piketty has offered one plausible mechanism and empirical evidence to back it up. It’s up to the dogmatists to counter with something empirical, too.