What to do about capitalism in the 21st Century
By DAVID WARSH
BOSTON
"Economist Receives Rock Star Treatment": That was the recent headline on Jennifer Schuessler’s story in The New York Times. The facts bear her out. Thomas Piketty, 42, of the Paris School of Economics, seemed to be everywhere last week. Publication of his 685-page Capital in the Twenty-First Century had been moved up by two months, sales were soaring (46,000 copies so far), a triumphant tour of Washington (meeting with Treasury Secretary Jack Lew) and New York (appearing at the United Nations) has been completed. Encomiums were pouring in. “Pikettty has transformed our economic discourse,” wrote Paul Krugman in the current New York Review of Books. “We’ll never talk about wealth and inequality the way we used to.”
Not bad for an economist who traded an appointment at the Massachusetts Institute of Technology for a job as a researcher for the French government in 1996, when he was 25. “I did not find the work of US economists entirely convincing,” he writes in the introduction to Capital in the Twenty-First Century:
" I was only too aware that I knew nothing at all about the world’s economic problems. My thesis consisted of several relatively abstract mathematical theorems. Yet the profession liked my work. I quickly realized that there had been no significant effort to collect historical data on the dynamics of inequality since [Simon] Kuznets [in the 1950s and ’60s], yet the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained.''
He went home to collect some of the missing facts.
Piketty wanted to teach at the Ecole des Hautes Etudes en Sciences Sociales, the elite institute whose faculty had included many of the foremost figures in the Annales school, including Lucien Febvre and Fernand Braudel – a group of scholars, most of them quantitative historians, that achieved enormous influence around the world publishing in the journal Annales. Economies, sociétés, civilisations (or Annales. Histoire, Sciences Sociales as it is called today).
Piketty got that job, along with time to do the research he wanted, first producing a book in 2001 on high incomes in France since 1901, then enlisting Anthony Atkinson, of Oxford University, in a similar investigation of Great Britain and several other countries. His friend and countryman Emmanuel Saez, of the University of California at Berkeley, produced similar data for the US. The World Top Incomes Database (WTID) is the result. Data on wealth, following the methods of Robert Lampman, of the University of Wisconsin, came next. Starting in 2003, Piketty began setting up the new Paris School of Economics; in 2006, he was named its first head. He resumed teaching and writing the next year.
Piketty’s thesis is set out succinctly on the first page of his introduction:
"When the rate of return on capital exceeds the rate of growth of output, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. There are ways nevertheless democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.''
What are those measures? Four chapters in the fourth section of the book draw a variety of policy lessons from the first three parts for a “social state:”
The right solution is a progressive annual tax on capital. This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.
Piketty says he’s left Paris only a few times on short trips since returning nearly 20 years ago. My hunch is that, after last week, it will be a long time before he takes another. He’s left behind a beautiful book, one that will receive a great deal of attention around the world in the years to come. He’s gone home to work on others.
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Michael C. Janeway, a former editor of The Boston Globe, died last week. He was 73. It was he who, as managing editor, permitted Economic Principals to begin in 1983 as a column in the Sunday business pages. I have always been grateful to him, and to Lincoln Millstein, still very much alive, who led the blocking.
David Warsh is a long-time financial journalist and economic historian and proprietor of www.economicprincipals.com