The Top of the World


Doug Henwood reviews Thomas Piketty's Capital in the Twenty-First Century, in Bookforum:

The core message of this enormous and enormously important book can be delivered in a few lines: Left to its own devices, wealth inevitably tends to concentrate in capitalist economies. There is no “natural” mechanism inherent in the structure of such economies for inhibiting, much less reversing, that tendency. Only crises like war and depression, or political interventions like taxation (which, to the upper classes, would be a crisis), can do the trick. And Thomas Piketty has two centuries of data to prove his point.

In more technical terms, the central argument of Capital in the Twenty-First Century is that as long as the rate of return on capital, r, exceeds the rate of broad growth in national income, g—that is, r > g—capital will concentrate. It is an empirical fact that the rate of return on capital—income in the form of profits, dividends, rents, and the like, divided by the value of the assets that produce the income—has averaged 4–5 percent over the last two centuries or so. It is also an empirical fact that the growth rate in GDP per capita has averaged 1–2 percent. There are periods and places where growth is faster, of course: the United States in younger days, Japan from the 1950s through the 1980s, China over the last thirty years. But these are exceptions—and the two earlier examples have reverted to the mean. So if that 4–5 percent return is largely saved rather than being bombed, taxed, or dissipated away, it will accumulate into an ever-greater mass relative to average incomes. That may seem like common sense to anyone who’s lived through the last few decades, but it’s always nice to have evidence back up common sense, which isn’t always reliable.

There’s another trend that intensifies the upward concentration of wealth: Fortunes themselves are ratcheting upward; within the proverbial 1 percent, the 0.1 percent are doing better than the remaining 0.9 percent, and the 0.01 percent are doing better than the remaining 0.09 percent, and so on. The bigger the fortune, the higher the return.

More here. Also see these reviews of the book by Jacob Hacker, Paul Pierson, Heather Boushey, and Branko Milanovic.