Review of Capital in the Twenty-First Century by Thomas Piketty

Capital in the Twenty-First Century by Thomas Piketty (Belknap Press, 2014) is the economics publishing sensation of our times, especially in the United States. Currently the number one seller on the US Amazon web site and widely debated in the “blogosphere”, this long book is being favourably compared to the seminal works of Adam Smith, David Ricardo, and Karl Marx which placed the distribution of income and wealth at the very centre of economic inquiry.


As an aside, there seems to have been remarkably little discussion and debate of the book in Canada to date. It does not yet appear on the Globe and Mail best seller list and has received few reviews.


Karl Marx famously thought that capitalism would lead to the concentrated accumulation of the means of production in fewer and fewer hands, leading to a collapse in profitability and socialist revolution led by an impoverished working-class. (As Piketty notes, he lacked good data, and wrote as capital was indeed rapidly accumulating and mainly before rising productivity fed through to rising wages.)


Piketty is no Marxist, but he does think that are very strong tendencies for capitalism to lead to the extreme concentration of financial wealth in the hands of a small oligarchic elite if democratic political forces do not push back and implement policies to promote shared prosperity. He places particular emphasis upon the need for progressive taxation of income and, especially, wealth, and calls for an internationally co-ordinated progressive tax on accumulated wealth.


Piketty’s big fear is that we are on our way back to the “Gilded Age” society of the late nineteenth century in Europe and North America in which the top 1% owned about half of all wealth, and could live very comfortably off inheritances which produced annual incomes equivalent to about thirty times the average wage. This was the world of the idle rich “rentier” who lived off an inherited fortune. He warns that, if we allow wealth to become concentrated in very few hands, the past will again “devour the future.”


Piketty and various colleagues have transformed our understanding of inequality over the past decade or so by assembling detailed historical data on the distribution of income and wealth, and this book greatly adds to our empirical knowledge, especially of the ultra rich. It also makes a novel contribution by showing that the “capital to income ratio” – the level of the total stock of capital or wealth compared to annual income measured by GDP – has varied over time. This in turn has enormously important consequences.


The book defines capital as wealth, in the sense of assets which can be sold on a market, meaning land, housing and the privately owned means of production as represented by shares, bonds and similar financial assets. By this measure, the stock of wealth can vary in size relative to the annual flow of national income, and generally fell from a high point before the First World War to a low point after World War Two, but has been rising in a U turn since the 1970s.


Piketty’s central argument is that, if the capital to income ratio is high, and if the rate of return on capital is greater than the rate of economic growth, then inequality will inexorably rise unless offset by political forces. He thinks this will likely happen over the next few decades since global growth is slowing down due to demographic factors, since the rate of return on capital is normally greater than the rate of economic growth, and since the political forces that used to counter inequality have grown much weaker.


It is important to underline that Piketty is very cautious in advancing this central argument, and alert to the fact that contingent economic and political forces are always at play. He thinks that the decline in the capital to income ratio for much of the twentieth century and a shift towards greater equality in the distribution of income and wealth was due to two world wars, the Great Depression, and hyper inflation episodes which destroyed large concentrations of wealth, as well as social democratic policies of redistribution which were in place from the 1940s through the 1970s. He offers us more of a warning than a firm prediction, but it is a warning that should inspire great concern.


Piketty demonstrates through meticulously harnessed historical data that the capital to income ratio has indeed risen since the 1970s, even though it was generally assumed by economists to be more or less constant. In the case of Canada, the stock of wealth has increased from two times GDP to four times GDP since the early 1970s, though this ratio is quite low compared to the United States and, even more so, compared to most European countries.


One key factor behind the rising stock of wealth has been high rates of return to capital compared to labour since the 1970s as wages have risen more slowly than strong corporate profits. As a result, retained corporate savings have increased, and stock prices have tended to increase at an even faster pace than earnings. The capital share of income has also increased because technological progress has continued to boost productivity even in a period of slow growth, and because labour has lost bargaining power due to cuts to minimum wages, the decline of unions, and the shift or production and investment to lower wage countries.


Pikkety does not argue that the rate of return on capital must always exceed the rate of economic growth. But he does argue that this is very likely to happen as growth slows, especially if new capital investment continues to boost productivity.


Having made a strong economic case that returns to capital are likely to exceed growth moving forward, Piketty shows that wealth is always much more unequally distributed than income, and has begun to become much more unequal compared to the levels of the mid twentieth century.


Strikingly, he contrasts the Gilded Age to what he calls the patrimonial capitalism of the mid twentieth century when a significant middle class first emerged. While the bottom 50% have always had very little net wealth (about 10% of the total), the middle class – defined as the 40% between the bottom 50% and the top 10% – had some 40% of all wealth at mid century compared to just 5% in the Gilded Age. The top 1% share fell from 50% in the Gilded Age to as low as 20% to 25% at mid century before beginning a new ascent.


Piketty further shows that in European countries (data are very limited for North America) inheritance makes up a large share of wealth. In France, some two-thirds of all net wealth is now inherited, well up from the low point at mid century. And very large stocks of wealth are accumulating at the very top in the hands of the top 1% and the top 0.1%. The limited evidence we have shows that the world’s super rich are rapidly increasing their share of wealth and that a significant part of this concentrated wealth consists of inherited family fortunes.


The picture is somewhat different in the United States and Canada, where the stock of wealth compared to GDP is lower than in Europe, and inherited wealth is likely less important. But, the warning is that as income inequality mounts and more and more income goes to the top 1%, this will spill over into much greater wealth inequality. Today’s top 1% in North America are often “super managers” who earn their income, rather than clip coupons, but their children will inherit large fortunes and become tomorrow’s idle rich.


Piketty has mounted a huge challenge to conventional neo classical economics which holds that returns to capital reflect productive contributions determined by the marginal productivity of new capital investment. He could have made a sharper distinction between wealth and capital as a productive factor, and could have mounted more of a frontal attack on textbook economics regarding the determinants of the rate of profit and income shares as argued by Jamie Galbraith and Tom Palley among others. However, Piketty shows that political institutions and processes are central to the distribution of income and wealth, attributes the rising income share of the top 1% in North America in part to the power of corporate insiders, and holds that there is something of an inherent dynamic to greater inequality of income and wealth under capitalism.


Some progressive economists have criticized Piketty for being insufficiently critical of capitalism as a system, and he indeed maintains that broadly shared prosperity is possible on the basis of predominantly private ownership of the means of production if democracy effectively counters the forces pushing for greater wealth and income inequality.


Piketty’s policy prescription is for an internationally co-ordinated progressive global tax on wealth to deliberately limit the growth of very large fortunes. While considered utopian by many critics, he does show that at mid century the US and the UK in particular levied steeply progressive and indeed punitive personal income taxes and estate taxes to deliberately counter the extreme concentration of wealth. He also shows that there was a large shift towards greater equality in the thirty years of post War social democracy due in part to progressive policy choices.


Piketty has also been criticized, with greater justification, for stressing the need for progressive taxation and generally ignoring other redistributive mechanisms such as higher minimum wages, stronger unions, closer controls on excessive pay and profits, and closer regulation of the financial sector. He touches on these other mechanisms which would help equalize pre tax incomes only in passing and has too little to say about how broadly shared prosperity at mid century was based upon a strong labour movement, limited international investment flows, and a closely regulated financial sector


But these issues for discussion by progressive economists do not detract from a huge achievement.


  • Mario Seccareccia

    I enjoyed your comments on Piketty. However, Piketty seems to fit beautifully the evolution of the traditional left in Europe (like Holland’s socialists in France) and so-called “liberals” (like Krugman) in the US, who seek a solution to growing income inequality merely through taxation. We ought to let the market determine the outcomes and the Robin Hood State then does the post-market redistribution. Look at what Holland is doing in France. Clearly I don’t think that this is the correct way to go. The focus instead should be not so much on taxation as a solution (even though I’m certainly not against that per se), but on the evolving structural/institutional determinants of these market outcomes, such as the growing importance of finance, globalization, etc. Unless one focuses on addressing the institutional transformations that bring about these changing K/Y ratios (with all the measurement problems that Jamie Galbraith raised) and r>g (with its measurement problems), merely proposing, say, a global wealth tax may only offer some cosmetic redress. In addition, comparing the 1% at the time of the French revolution and the 1% today is like comparing apples and oranges! Moreover, Piketty’s reference model is still the standard neoclassical model, and not such a great challenge to neoclassical theory but more of what I would describe as tinkering around the edges. As you say, there seems to be a lot of useful information, but the insights appear to be a lot more limited.

  • Another article I recently read on this suggests, as you do in passing near the beginning of this article, that the thesis here is fundamentally at odds with that of Marx. I’m not so sure.
    If I understand correctly, Mr. Piketty contends that as long as the rate of profit exceeds the rate of economic growth, concentration of wealth will continue to rise, all else remaining equal; and there’s some fairly simple “power of compound interest” math behind that. And he believes that generally the rate of profit tends to exceed the rate of economic growth.
    Marx, although I’m sure this is a ludicrous oversimplification, posited that as investment continued and production increased, the rate of profit would tend to fall, leading to crises. I have the impression that there’s a certain proto-Keynes position there–if workers aren’t getting bleedin’ paid much, the level of production will at some point exceed their ability to purchase what is produced; this being the insight that led Keynes to the “In case of crisis, give them money so they can buy stuff!” approach to overcoming depressions.

    It seems like those ought to kind of contradict, but consider: If greater inequality and wealth concentration lead to reduced purchasing power for the masses (as they do), then this will reduce economic growth. Indeed, Marx’s falling rate of profit is a product of falling economic growth generally, isn’t it, of markets being unable to continue expanding due to, basically, stagnant demand as capitalists pocket all the dough to invest? But if economic growth is low or zero, even a very low rate of profit will still lead to continuing operation of Piketty’s mechanism of rising concentration of wealth. Indeed, in a crisis, if economic growth is negative, as long as the rate of profit is less negative, concentration of wealth will still rise.

    Seems to me these two theses needn’t be at odds.

  • Maybe with financialization, capitial can generate profits without production or having to bother with the likes of workers.

  • Marx was right that there is a tendency to the over accumulation of capital which would depress the profit rate. Arguably he neglected an important counter tendency, namely for technological progress to increase returns to capital.

    He was right to argue that one sided accumulation of capital can result in over production relative to effective market demand,

  • I agree with Mr. O’Connor about financialization . . . but I wonder if that even represents the action of capital as we normally think of it. It seems more like almost-naked political action, in which governments simply hand wealthy institutions money or the right to print it (leaving aside the right to commit what would otherwise be considered fraud). If governmental power is just used to arrange for one sector to have a greater proportion of the stock of money, leaving a smaller proportion for everyone else, that’s something that could happen in any economic system with elites–it’s just the power of the state giving massive handouts to those with pull, it’s not economics at all, not even really “political economy”.

  • Review by geophysicist Geoff Davies:

    “When one looks into the mechanisms that have operated in market economies, one can readily identify mechanisms that pump wealth from the 99% to the 1%. One can then think of ways to stop or reverse these flows, so wealth flows more fairly to everyone involved in its generation. It will be much more effective to fix the problems at the source than just to apply traditional retro-active bandaids like taxes. In my own book Sack the Economists, I identified seven fairly obvious such mechanisms.”

    more at

  • Before everyone gets too swoony:

    Just imagine, a French Socialist endorses French Socialist policies. Stop the presses!

  • Piketty data base on wealth in Canada is here. Interesting to note that contra the housing share of wealth has fluctuated around one quarter since 1970, so the rise in wealth relative to income is attributable mani lay to financial assets.

  • Avoidance of much of the financialization of the economy and how the cultural accounting of profit is the failing of Piketty. I am pretty sure a generally accepted interpretation of Marx, is that Capital fails for many many reasons- not just the over accumulation thesis, I would have a look at David Harvey’s latest book, 17 Contradictions of Capital for support on this topic.

    For all the statistics that Piketty cites the key statistics that are missing especially for today is the off balance sheet activities of the shadow banking activities. There is a lot of ficticious wealth being generated- (one of those 17 contradictions where in volume 2 Marx notes that finance capital must exist locked within the circuitry of production capital and commodity capital, and respect those parameters- otherwise it can become over encumbered. You cannot just have finance capital printing its own wealth- it leads to inflation and also a decrease in productivity as it drains productive investment. Some would argue that finance capital can lead to tech development and such, and so be it if it is invested into such avenues- but a majority of the finance is poured into speculative derivative vehicles that produce zero real wealth- so it is in fact a negative some game overall and very destructive.

    See my piketty watch here on my website- I am tracking it with Google trends and Google Correlate to see which States in the US are showing the most interest in Piketty.

  • Piketty’s data does not even support his own key thesis. He claims r > g, then kind of backs off and says “well most of the time, anyway”. The relevant comparison would be whether after-income-tax returns on capital exceeded the growth rate of the economy, but he never does a serious comparison on that basis.

    So far all the praise seems to be a case of “look, a big thick book that I think supports my previously-prepared position.” Absolutely pathetic.

  • This week’s issue of Science (May 23) has a theme collection of articles on inequality by a diverse set of authors, including Piketty. And it’s open access.

    Table of contents at:

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