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Thomas Piketty: Capital in the 21st Century

Just finished reading Thomas Piketty's now-famous book Capital in the Twenty-First Century. It's a big book, takes a while, but it's thoroughly worth it. It's admirably data-driven, yet clear and readable.

One thing it gives you is a lot of tips about whether the future will be the same as the past. Will inflation, growth, inequality be similar in the next 50 years as in the past 50 years? There are some perennial factors, and some things that are actually blips (caused e.g. by the World Wars) when considered on a timescale of centuries - and many of these are not quite as I had expected. Plenty of interesting titbits about, for example, how the amount of wealth we inherit is or isn't changing as our average lifespan gets longer, and how much "gift-giving" has grown in recent years as an "alternative" to inheritance.

And the readability is enhanced with details from history and literature, such as the way authors such as Jane Austen reflect the financial certainties of their time in their prose.

(It's worth mentioning that the Financial Times briefly smudged the book's reputation by alleging some of the data was wrong. (See here for example.) However, as The Economist noted, "the analysis does not seem to support many of the allegations made by the FT, or the conclusion that the book's argument is wrong." The FT later awarded Piketty's book their business book of the year, perhaps sensing which way the wind was blowing.)

I agree with the LRB's review of the book that "nothing about the book is more impressive than the range and richness of its statistical information. [The book] both insists on the importance of data and, at least where modern societies are concerned, highlights the uncertainties involved in its collection." (Note: the LRB also takes issue with some of Piketty's interpretations - interesting review.)

The LRB review also points out that Piketty's proposed mechanism for fixing some of the problems of modern markets and global captialism - namely, a global progressive tax on capital - may be a nice theory to consider but it's so unrealistic as to be unhelpful. Piketty claims (p515) that even though it's utopian, it's worth considering, maybe even working towards. But to me it seems obviously to neglect so many extremely powerful problems. Of course the richest people have the most political power, and will fight to prevent such taxes being adopted (or if they are adopted, to build a new tax haven state on an oil-rig somewhere). Maybe this is just a practical problem, to be solved by politics. But the tax would require all forms of wealth, owned by every person on and off the planet, to be enumerated. If not, the rich and their financial engineers would transfer their assets into un-enumerated assets. This reminds me of the "information asymmetry" critique of neo-classical economics: many market theories assume that all market participants have perfect information, and this unrealistic assumption is required to prove those markets' effectiveness. Similarly, the effectiveness of the global capital tax in balancing out inequality rests really quite heavily on the idea of some tax agencies somewhere having essentially perfect knowledge. Unfortunately (and as Piketty notes) modern financial engineering means that many taxes, even progressive taxes, become a bit regressive when everyone is subject to them except for the super-rich.

Piketty also says (p519) that the main benefit of the wealth tax (charged at low annual rates, nothing too scary) is "more in the nature of a compulsory reporting law than a true tax" - in a sense, he's less interested in taxing wealth than encouraging transparency in wealth ownership. This again is a bit utopian, since of course people will be motivated to avoid some things being reported, but not so problematic, since the benefits of transparency don't require 100% transparency. And it chimes well with Piketty's insistence that it's not financial rules that can fix the world, but publicly-available information and democratic debate combined with the rule of law. Piketty points out (p570) that most businesses don't publish enough financial details for us to work out how the wealth is divided between profits and wages. If they were required to, that would empower workers. As well as economists ;)

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