Wednesday, July 23, 2014

Capital in the 21st Century

In a similar vein to my last post, here is another set of thoughts on a book composed of criticism and advice for our political and economic systems. This time Capital in the 21st Century by Thomas Piketty.

I have many worries about the future of the world, the two greatest being environmental destruction and wealth inequality. Capital in the 21st Century takes an extremely detailed look at the second of these. If you care about inequality, or the world's political and economic organization, I highly recommend reading this book. It is worth the time investment, which is certainly significant given its size. The only popular economic books I have read in the last few years that perhaps match its its significance would be Debt and The Second Machine Age.

Being on Amazon and the New York Times best-sellers lists, there has already been a lot of talk about the book, and much more exhaustive reviews than what I am putting together now. Cory Doctorow in particular has a good review of the book.

Piketty looks at the distribution of wealth in Europe and America over the last 300 years, and has documented an extraordinary amount of detail. Progressives and activists such as Occupy have been railing against wealth inequality for years, if you go back to Marx, more than a century, but Piketty paints a clear picture of the details of the economic distribution in a way that has not been before. This book is more a book on economic history than economic theory. It breaks down in great detail, not just the distribution of wealth in Europe and America since the Industrial Revolution, but such details as the share of income generated through labor vs capital at various wealth levels of society, the proportion of wealth transferred through inheritance, and more.

What this historical research shows is that the 20th Century, primarily the period between the start of World War I and the 1970s, was an outlier in terms of its level of equality. Piketty attributes this to three main factors: 1) the massive destruction of capital caused by the First and Second World Wars, 2) significant economic growth, primarily caused by population growth, and 3) progressive taxation and social welfare policy that gained prominence in this time period. Since the 1970s, due to rollback of these social policies, and the thankful recovery from the world wars, inequality has steadily risen, approaching levels not seen since the Gilded Age. As population growth rates continue to hopefully decline, and barring any horrible wars, without further governmental policy inequality looks set to rise throughout the 21st century.

Though a lesser part of the book than the historical analysis, there is some economic theory that is used to make these predictions. And there are certainly economists out there that will argue the theory. Regardless, the fact that we have already slipped back in many ways to a level of economic inequality that existed before the First World War is deeply frightening to me. The current political debate is still set by an economic reality that has been disappearing for the last forty years and is increasingly unrealistic. The economic realities of the 19th Century that were assumed by popular culture of the time, that Piketty shows through works such as those from Austen and Balzac, are horribly distasteful to a modern citizen. That is the world that we are on the verge of living in if trends from the last forty years continue. We are approaching the level of economic inequality that caused Marx to produce his works. It is not the society I want to live in. Piketty has potential solutions of course, such as a return to the top income tax levels of the 1950s, and a progressive global tax on capital. I would certainly support these solutions in theory, but more importantly, I want popular opinion to realize how far we have swung back to the extreme inequalities of the Gilded Age.

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