Thomas Piketty (translated from French by Arthur Goldhammer), “Capital in the Twenty-First Century”, The Belknap Press (2014) 577 pp plus 78 pages of notes

In Capital in the Twenty-First Century, Thomas Piketty has compiled and analyzed an extensive collection of economic data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings, based on fifteen years of effort, will, and already have, influenced debate about wealth and inequality.  I found the data extremely interesting but the proposed solutions to lessen inequality are too far-fetched to ever work.  

No-one reading this book will remember the era preceding WWI, an era of extreme inequality, an era of inequality entitled the ‘Gilded Age’ in the U.S.  Readers of this book are mostly baby-boomers and later generations; generations brought up in an age of unprecedented wealth equality, an equality that paradoxically was brought about because the ‘gilded’ age social structure of inequality was interrupted by two world wars.  This interruption and the resulting lessening of extreme inequality is over, according to the author.  We are now returning to another ‘gilded’ age, an age of inequality that inevitably follows when the returns on capital exceed the rate of economic growth, inequality that will cause discontent and undermine democratic values if not modified.

Marx’s prophecy of an apocalypse to be brought about by unbridled capital accumulation by a few has so far been avoided in the industrial west.  Marx did not anticipate modern growth, based on growth of productivity and the diffusion of knowledge, that occurred in the twentieth century along with two world wars. But the author maintains we seem to be getting back to what Marx observed.  Pg. 438:  Inequality of wealth in the early 2010s appears to be comparable in magnitude to that observed in Europe in 1900-1910.  The top thousandth-percent seems to own nearly 20 percent of total global wealth today, the top 1 percent about 50 percent, and the top 10 percent somewhere between 80 and 90 percent.  The bottom half of the global wealth distribution undoubtedly owns less than 5 percent of total global wealth.  (Note: this is wealth, not income).

This is a crisis. The justification for capitalism is that it is supposed to allocate reward based on "merit" -- it is supposed to move capital into the hands of the people who can do the most with it -- and if all our policy decisions are made in service to a class of supermanagers whose wealth comes from squatting on a fortune managed by others who grow it without its owner ever doing a notable thing apart from being born to dynasty, there is no more reason for capitalism. Piketty darkly hints that the last time this happened, the world tore itself to pieces, twice, in an orgy of destruction that left millions dead and whole nations in ruin.

My Notes:

Pg. 1:  When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and is again, only interrupted by two world wars, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

Pg. 11:  After the nineteenth-century apocalyptic predictions by Ricardo and then Marx, predictions gave way to a similarly excessive fondness for fairy tales, or at any rate happy endings.  According to Kuznets’s theory (1955), income inequality would automatically decrease in advanced phases of capitalist development, regardless of economic policy choices or other differences between countries, until eventually it stabilized at an acceptable level.   His data was heavily influenced by two world wars and the improvement he believed was a natural occurrence in a capitalist society.

Pg. 20:

Premises of book:

1.         The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms.  The reduction of inequality that took place between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war.  Similarly, the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance. 

2.       The dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence.  Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently. (i.e., excluding the French Revolution).

3.      Piketty's thesis has been shorthanded as r > g: that the rate of return on capital today -- and through most of history -- has been higher than general economic growth. This means that simply having money is the best way to get more money.

Pg. 41:  Briefly, the shocks that buffeted the economy in the period 1914-1945—WWI, the Bolshevik Revolution of 1917, the Great Depression, WWII, and the consequent advent of new regulatory and tax policies along with controls on capital—reduced capital’s share of income to historically low levels in the 1950s.  Very soon, however, capital began to reconstitute itself.  The growth of capital’s share accelerated with the victories of Margaret Thatcher in England in 1979 and Ronal Reagan in the United States in 1980, marking the beginning of a conservative revolution.  Then came the collapse of the Soviet bloc in 1989, followed by financial globalization and deregulation the 1990s.  All of these events marked a political turn in the opposite direction from that observed in the first half of the twentieth century.

Pg. 46:  In this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market.  Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies.  (Only in a society with slaves are humans considered capital).

Pg. 54:  Rents tend to rise until the return on capital is around 4 percent (i.e. annual rent on a $1million property will rise to $40K).  (Actually: rents in the U.S. often equate to 6 or 7 percent, not 4 percent as the author stipulates; this is my ratio of 1/15 of property value per year in rent).

Pg. 59:  From 1900 to 1980, 70-80 percent of the global production of goods and services was concentrated in Europe and America.  By 2010, the European-American share had declined to roughly 50 percent, or approximately the same level as in 1860.  In all probability, it will continue to fall and may go as low as 20-30ppercent at some point in the twenty-first century.  This was the level maintained up to the turn of the nineteenth century and would be consistent with the European-American share of the world’s population.

Pg. 62:  The population of the planet is close to 7 billion in 2012.  If global output and the income to which it gives rise were equally divided, each individual in the world would have an income of about 760 euros per month (this was less than 70 euros per month in 1700-p. 86).

Pg. 103:  It was essentially inflation that allowed the wealthy countries to get rid of the public debt they owed at the end of WWII.  Before WWI there had been little inflation as money was linked to metal.  In the nineteenth and early twentieth centuries, everyone knew that a pound sterling was worth about 5 dollars, 20 marks, and 25 francs.  The value of money had not changed for decades.

Pg. 120:  The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets.

Pg. 159:  In 1800, slaves represented nearly 20 percent of the population of the US: roughly 1 million slaves out of a total population of 5d million.  In the South, where nearly all of the slaves were held, the proportion reached 40 percent: 1 million slaves and 1.5 million whites for a total population of 2.5 million.  By 1860, the proportion of slaves in the overall population of the US had fallen to around 15 percent (about 4 million slaves in a total population of 30 million), in the South, however, the proportion remained at 40 percent: 4 million slaves and 6 million whites.  The total market value of slaves represented nearly a year and a half of US national income in the late eighteenth century and the first half of the nineteenth century, which is roughly equal to the total value of farmland.  If we include slaves along with other components of wealth, we find that total American wealth has remained relatively stable from the colonial era to the present, at around four and a half years of national income.

Pg. 209:  Annual rental value of housing, which accounts for half of total national wealth, is generally 3-4 percent of the value of the property.  For example, an apartment worth 500,000 euros will yield rent of 15,000-20,000 euros per year.  This is also true for more modest housing: an apartment worth 100,000 euros yields 3,000-4,000 euros of rent a year.

Pg. 251:  In France in 1789, it is generally estimated that the aristocracy represented 1-2 percent of the population, the clergy less than 1 percent, and the ‘Third Estate’, meaning all the rest, from peasantry to bourgeoisie, more than 97 percent. 

Pg. 257:  Currently, in the early 2010s, the richest 10 percent own around 60 percent of national wealth in most European countries, and in particular in France, Germany, Britain, and Italy.  The most striking fact is that in all these societies, half of the population own virtually nothing: the poorest 50 percent invariably own less than 10 percent of national wealth, and generally less than 5 percent.  In the US, the top 10 percent own 72 percent of America’s wealth, while the bottom half claim just 2 percent.  By 2030 the US may set a new record if inequality of income from labor continue to increase as they have done in recent decades.  The top 10 percent would then claim about 60 percent of national income, while the bottom half would get barely 15 percent.  US inequality in 2010 is quantitatively as extreme as in old Europe in the first decade of the twentieth century.

Pg. 294:  Since 1980, income inequality has exploded in the US.  The upper 10 percent’s share increased from 30-35 percent of national income in the 1970s to 45-50 percent in the 2000s—an increase of 15 points of national income.  It is natural to wonder how long such a rapid increase can continue.

Pg. 297:  In the author’s view, there is absolutely no doubt that the increase of ine2uality in the US contributed to the nation’s financial instability.  The reason is one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the US, which inevitably made it more likely that modest households would take on debt and able to do so because of the deregulation of the financial industry.

Pg. 309:  In the US a federal minimum wage was introduced in 1933 and the minimum wage reached its maximum level in 1969, at $1.60 an hour (or $10.10 in 2013 dollars). 

Pg. 353:  The annual growth rate from antiquity to the seventeenth century never exceeded 0.1-0.2 percent for long.  Also, the rate of return on capital was always considerably greater than this: the central value observed over the long run is 4-5 percent a year.  In particular, this was the return on land in most traditional agrarian societies.  Thus throughout most of human history, the rate of return on capital was always at least 10 to 20 times greater than the rate of growth of output (and income).  Indeed, this fact is to a large extent the very foundation of society itself: it is what allowed a class of owners to devote themselves to something other than their own subsistence.

Pg. 422:  If the distribution of inherited capital becomes as inegalitarian in the twenty-first century as it was in the nineteenth. And if growth slows and the return on capital increases, which could happen, for example, if tax competition between nations heats up, it would lead to significant political upheaval.  Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which a belief in a society in which inequality is based more on merit and effort than on kinship and rents.  This belief and this hope plays a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. 

Pg. 427:  The US federal estate tax, created in 1916, has never applied to more than a small minority of estates (generally less than 2 percent), and the requirements for declaring gifts are also fairly limited. 

Pg. 433:  According to Forbes, the planet was home to just over 140 billionaires in 1987 but counts more than 1,400 today, that equates to around $5.4 trillion (2013). 

Pg. 471:  The author notes that the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a progressive global tax on capital.  Such a tax would also have another virtue: it would expose wealth to democratic scrutiny, which is a necessary condition for effective regulation of the banking system and international capital flows. 

Pg. 475:  Between 1920 and 1980, the share of national income that wealthy countries chose to devote to social spending increased considerably.  In just half a century, the share of taxes in national income increased by a factor of at least 3 or 4.  This took place at different levels in each country, however: just over 30 percent of national income in the US, around 40 percent in Britain, and between 45 and 55 percent on the European continent (45 percent in Germany, 50 percent in France, and nearly 55 percent in Sweden).

Pg. 477:  Spending on education and health consumes 10-15 percent of national income in all the developed countries today.  Primary and secondary education are almost entirely free for everyone in all the rich countries, but higher education can be quite expensive, especially in the US and to a lesser extent in Britain.  Public health insurance is universal (that is, open to the entire population) in most countries in Europe, including Britain.  In the US, however, it is reserved for the poor and elderly. 

Pg. 478:  Along with access to education and health, public pensions constitute the third social revolution that the fiscal revolution of the twentieth century made possible. 

Pg. 505:  When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much).  It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive—or if not to end them, then at least to make it extremely costly to sustain them and strongly discourage their perpetuation. 

Pg. 508:  After experiencing a great passion for equality from the 1930s through the 1970s, the US and Britain veered off with equal enthusiasm in the opposite direction. 

Pg. 522:  The Foreign Account Ta Compliance Acct (FATCA) adopted in the US in 2010 and scheduled to be phased in by stages in 2014 and 2015 requires all foreign banks to inform the Treasury Department about bank accounts and investments held abroad by US taxpayers, along with any other sources of revenue from which they might benefit.  However, there is good reason to believe that certain trust funds and foundations can legally avoid any obligation to report their assets.  For another, the sanction envisioned by the law (a 30 percent surtax on income that noncompliant banks derive from their US operations) is insufficient. 

Pg. 540:  The developed world is currently indebted at a level not seen since 1945.  The question of public debt is a question of the distribution of wealth, between public and private actors in particular and not a question of absolute wealth.