The link between capital and inequality

Thomas Piketty’s ‘Capital in the Twenty-First Century’ has attempted to use a mathematical analysis of trends in inequality, which have become central to political-economic dialogue since the financial crisis.

What is Capital in the Twenty-First Century about? 

The book is written by French economist Thomas Piketty and focuses on wealth inequality in Western Europe and the US since the 18th century. It argues that concentration of wealth among a select few is a core feature of capitalism that needs to be tempered by intervention from states, otherwise it threatens the democratic order.

His analysis looks at the relationship between return on capital and economic growth, inheritance of wealth and the trend towards greater wealth concentration over the past 300 years. Of particular note is the reversal in inequality seen in the mid-20th century, where a combination of two world wars, the Great Depression and debt-fuelled recession were responsible for the destruction of wealth, in particular that owned by the elite. Ensuing government policies to redistribute wealth increased economic growth and reduced reliance on inherited wealth. However, following the financial crisis, Piketty believes the world will see prolonged low growth, increasing the role of inherited capital and increasing inequality. He concludes by arguing that a global tax on wealth and progressive income tax reaching up to 80% are required to resolve this problem.


How has the political and economic community responded to the book?

Paul Krugman, a Nobel Prize-winning economist, hailed Capital in the Twenty-First Century as one of the most important economic books of the year, and possibly the decade. Numerous other renowned economists have joined Krugman in praising the book for providing a unifying theory of inequality.

However, Piketty has also attracted his fair share of criticism. Several critics note he fails to make a case for why inequality matters, while others note he has not accounted for diminishing returns on capital over time. Others suggest his proposed solution is naïve or perhaps even utopian. The Financial Times’ economics editor, Chris Giles, also noted that the book contains a number of data errors that falsely suggest a larger share of the world’s wealth is being held by the richest few since the 1970s.


Is it worth reading?

If you are interested in the topic of inequality, which is almost certainly likely to be one of the defining political battlegrounds in years to come, then it would certainly be worth investigating Capital in the Twenty-First Century. Politicians are already campaigning heavily on issues such as the cost of living and looking at ways to constrain pay in financial services firms.

As for Piketty’s thesis, it certainly highlights an important issue and puts across a fairly solid critique. However, similar to Marx’s Das Kapital, while it defines the problem well, its proposed solution perhaps fails to account for various realities.

Taking wealth could be disastrous for pension savers. Europe is diving headlong into a pensions crisis as its population ages and governments have for many years been desperately trying to emphasize the importance of saving money for retirement. To then go and levy a large tax on that wealth that people have sensibly accumulated to provide for themselves in old age could risk making this major problem even worse.