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Capital in the Twenty-First Century

23 Jan 2017

Every once in a while a book comes along that many people talk about wanting to read or bragging about having read and I often find it hard to get myself excited to read them. Capital in the Twenty-First Century has come up in various discussions, radio programs, and articles over the past couple years. I have a background in economics and an interest in books that take very long term perspectives so this naturally made it on to my reading list. I have been putting it off for a while and finally just decided that it was time to get down to it. An exceptional book if only for the reason that he made the effort to collect the data and put forth a systematic analysis of wealth and income inequality throughout the world and over a span of more than 200 years. His interpretations of the data are not necessarily full-proof nor are his moral assumptions strictly universal, but this does not detract from a great piece of scholarly work.

One of the best reasons to read this book is that data is presented which dispels many commonly held misconceptions about wealth both within certain countries as well as wealth and inequality in relative terms between countries, primiarly between the US and Europe. There are certain beliefs that seem to be common knowledge among a large proportion of the population, in the US at least, which are patently false. For example, the idea that America is owned or is increasingly being owned by foreign investors, the Chinese in particular, is put forth as a sign that certain policies or facets of government or industry are failing. The reality is that net public wealth is close to zero with any foreign holdings almost perfectly offset by corresponding domestic holdings of foreign capital. We do not have other countries to fear, the only fear for the average American should be from within our borders.

The extremely short version of the book is that the relationship between the rate of return on capital, r, and the growth rate of output and labor, g, determines the level of inequality in the long run. If r > g, then without some intervening mechanism, wealth will tend to concentrate in an increasingly small minority of hands. We are most likely entering a period where r will remain basically stable and g will decrease. Therefore we are likely to see inequality get worse unless something is done to prevent this situation.

While the book tries to emphasize that income inequality is not bad in itself, there is still a decently strong predisposed viewpoint that it is morally problematic for an individual to accumulate a significantly large amount of wealth, an obscene amount in colloquial terms. The author takes as a foundational assumption that one agrees with the statement "Social distinctions can be based only on common utility." from Declaration of the Rights of Man and the Citizen. How one interprets this defines the level of wealth deemed obscene. The extremes being that any amount of inequality is obscene and no amount of inequality is obscene. The real distinction seems to come from where the wealth came from and how it is being used. To benefit common utility the most, wealth should be distributed into the hands that will make the most productive use of it. In some cases, the most productive uses are to reward someone for labor that is itself productive. The incentive to work is a useful allocation of capital. The author agrees with this sentiment. Static wealth which only serves to grow itself is what is deemed obscene. Moreover wealth that is passed down across generations either via inheritance or gift is deemed to be essentially unfair and thus this source of wealth is seen as more obscene than the wealth obtained via labor income. While many people have this viewpoint, it is not necessarily universal. Cast in these terms it makes sense that the proposed policy to remedy inequality is a progressive global tax on capital. If you make productive use of your wealth above and beyond the tax rate and inflation rate, then it makes sense for you to have the wealth that you do. On the other hand, if tax plus inflation eats away your capital because you are not using it, then this redistribution is morally correct. That is the basic gist of the argument as I read it. One might ask why a progressive tax? There are a variety of arguments that appeal to morality, empathy, and social justice. These are all economically unappealing. However, there is a decent economic argument which allows one to skirt the moral quagmire. The rate of return is an increasing function of initial stake. In other words, larger fortunes can earn a greater return than smaller fortunes, ceteris paribus. There are a variety of reasons for this, but it is more or less an empirical fact. Hence, to force capital to be used dyanmically, one must institute a progressive tax to account for the increasing baseline return on capital.

One issue I had with the book is the use of averages in certain areas. Many important parts are broken down into percentiles which allows for an accurate view into the distribution. However, within the say top 1% of the wealth distribution, we are left looking at average rates of return and the like. There are distributions in the other dimension that are also important. This issue is raised by the author and basically explained away frequently. It is very hard to present multivariate distributions in a way that is digestable in clear graphs or tables. I understand that, but some effort to even use medians or other percentiles in some places might have been nice.

Overall I highly recommend this book. If you want to understand what wealth really means and how various rich countries are really organized around labor and capital, you need to read this book.


Category: book