1. Branko Milanovic
  2. David Cay Johnston

…to add to the twelve I already collected: Ryan Avent, Doug Henwood, Edward Lambert, Dean Baker, Kathleen Geier, John Cassidy, Paul Krugman, Ed Kilgore, Jacob S. Hacker and Paul Pierson, Lawrence Summers, Tim Noah, and Heather Boushey…

David Cay Johnston: Trickle-up economics: “The future will be vastly more unequal…

…Piketty predicts, thanks to tax laws that allow virtually unlimited inheritances to pass from generation to generation. This sort of out-of-control inequality recalls similar class divides in 18th and 19th century France that were reversed only by sharp-edged popular responses. The good news is that such increasing inequality is not inevitable. Piketty shows that the degree of inequality results not from natural forces or individual choices but from government policy…. In showing the crucial role of government policy in the distribution of wealth and income, Piketty throws the proposals by many conservatives and billionaires to end all taxes on capital into proper perspective….

Dynastic wealth benefits those with rich parents while limiting economic opportunity for everyone else, he shows. This is true, Piketty says, whether inheritance laws are based on primogeniture, in which the first-born male child inherits all or nearly all, or whether siblings share equally in fortunes left by their parents: “The dynamics of the accumulation and transmission of wealth automatically lead to a very highly concentrated distribution and egalitarian sharing among siblings does not make much of a difference”…. Because in the modern world the already rich need business and investment managers, and the CEOs he calls “supermanagers,” we may see a slightly broader distribution of wealth than in 18th century France or, a century later, in the Belle Époque….

Balzac… lived in a world the vast majority of us would not want to see recur, a world in which merit and hard work mattered little. Piketty argues that we are headed back in that direction, however, through misguided government policies that encourage dynastic wealth and favor returns to capital over income from labor…. To make smarter choices, however, requires understanding the financial dynamics of the modern world and the legal structures that make them possible. Piketty’s new book is an important contribution to understanding what we need to do to produce more growth, wider economic opportunity and greater social stability.


Branko Milanovic: The return of “patrimonial capitalism”: review of Thomas Piketty’s Capital in the 21st century: “We are in the presence of one of the watershed books in economic thinking….

Methodological and political changes went hand in hand: suddenly household surveys, which for decades were the bread-and-butter of economists working on inequality (including myself), were shown wanting as they failed to fully capture this new phenomenon: the ineluctable rise of the top… and the stagnation of everybody else…. Piketty’s unstated objective is nothing less than the unification of the theory of economic growth with the theories of functional and personal income distributions…. This U shaped curve of the β=W/Y ratio was known to the readers of Piketty’s previous work…. But the full significance of increasing β comes out clearly only when it is combined with the first fundamental law of capitalism and one key inequality relationship. The first fundamental law states that the share of capital incomes in total national income (α) is equal to the rate of return, in real terms, on capital (r) multiplied by β…. But if the rate of return on capital (r) remains permanently above the rate of growth of the economy (g)… then α increases by definition, and combined with the increasing β, might drive the share of capital in national income sky-high. The process has a positive feedback loop….

Using very effectively literary examples from Jane Austen and Honoré de Balzac, Piketty shows that in capital-rich societies with high returns on capital as was Europe then, it often made no sense to work but to concentrate rather on finding a rich spouse or otherwise inheriting property. The trade-off between a brilliant career, based on study and work, and a much more lavish lifestyle that could be afforded if one married a heiress is presented with unmatched clarity and brutality to the young Rastignac by the world-savvy Vautrin in Balzac’s Le père Goriot…. But why did β, after the period of the Belle Époque, 8 decline precipitously in continental Europe, UK and Japan (and less so in the US)? It is, Piketty argues, because of physical destruction of capital during the extraordinary period of the two World Wars, high taxation of inheritance and “confiscatory” income taxes (both being closely linked to the need to sustain war effort), high inflation that helped debtors vs. creditors, and finally because of the more labor-friendly political atmosphere after World War II….

Why is this a different interpretation of economic history from many others and how does it relate to the r>g inequality? Piketty’s view of the Golden Age is that it was a very special and unrepeatable phenomenon in the history of capitalism…. Now, the reinterpretation of the 20th century economic history of capitalism is obvious if we compare Piketty’s argument with those present in some influential recent books by top economists and economic historians like David Landes’ The Wealth and Poverty of Nations (1999), Angus Deaton’s The Great Escape (2013), Gregory Clark’s A Farewell to Alms (2011), and Daron Acemoglu and James Robinson’s Why Nations Fail (2013). For these authors, the entire period after the Industrial Revolution is seen as a final “enfranchisement” of man from the “brutish and short” Malthusian existence…. The problem is that this new rate g is low and will inevitably be less than the rate of return to capital. It is the distributional effects of the latter (that is, of the r>g inequality) which are deleterious for the society as a whole: they favor property-owners over labor, not working over working, make mockery of equal opportunity and meritocracy, and undermine democracy as the rich use their money to buy policies they like….

Will r always exceed g? But, the reader will ask, if the capital/output ratio increases so much, would not the marginal return to capital diminish? Would not r go down? This is obviously a soft point of Piketty’s machinery. He summons a lot of historical evidence to show that r has generally been stable during the last two centuries despite massive changes in the K/Y ratio…. Will the reader be convinced by the argument that the elasticity of substitution between capital and labor is likely to remain high?… It is difficult to say….

The well-known finding of a U-shaped income concentration curve over the last one hundred years in most capitalist countries, but especially in the UK and US, are reprised here. But they are also placed in a larger framework of a similarly U-shaped movement in the capital-output ratio and the reverse (inverted U-shaped) movement in marginal tax rates. These two forces basically determine what happens to income concentration…. He thinks that Kuznets misinterpreted a temporary slackening in inequality after World War II as a sign of a more benign nature of capitalism, while it was, Piketty argues, due to the unique and unrepeatable circumstances….

The analysis… shows the dangers of an inheritance-based system which favors those who do not need to work for their sustenance. This can be modified precisely by a tax on capital. Second, taxes on capital, whether in form of taxes on land or inheritance, have a long history, probably the longest of all taxes, precisely because some forms of capital were difficult to hide. Extending this to include all forms of capital seems logically consistent. Third, technical requirements for such a tax (which in a rudimentary form exists in most advanced economies) are not overwhelming….

I would conclude, as I began, with a personal observation. When reading Piketty’s book, it is indeed hard to go back to thinking about anything else: one gets totally absorbed in it. This is perhaps the best compliment that the author of an almost thousand-page long economics book can ever expect to get. Don’t take this book on vacation: it will spoil it. Read it a home.