Capital in the Twenty-First Century

Capital in the Twenty-First Century is a 2013 work of political economy by French economist Thomas Piketty. Piketty explores the historical evolution of wealth from the late 18th century to the present, looking at how wealth ownership changed in that time. Specifically, he asks why inequality fell between the First World War and the 1950s and why it has been increasing since. He also explores the ramifications of this growing inequality for 21st-century capitalism. This guide uses 2017 Harvard University Press edition of the text translated by Arthur Goldhammer. The book is divided into a long introduction and sixteen chapters, which are separated into four parts. Each of the analysis sections will cover first the introduction then two chapters each.

In the introduction Piketty discusses new data on wealth and income inequality that has allowed him to conduct the most wide-ranging analysis of this topic to date. He also examines past thinking on the issue. He looks at the views of David Ricardo and Karl Marx, who believed inequality would keep growing, and Simon Kuznets and Robert Solow, who believed it would stabilise. In chapters one and two, he defines the key concepts of income, capital, the capital/income ratio, and income from capital. Next, he discusses the nature of growth, looking at how low economic and demographic growth is conducive to societies dominated by past wealth.

In chapters three and four, Piketty examines the capital/income ratio from a historical perspective. He looks at how this evolved in Britain, France, Germany the US. and Canada from 1700 to the present and finds that in the first three cases the power of capital reached a peak in 1914, fell up until 1950, and has since recovered. The shocks of war, revolution, and decolonisation were primarily responsible for these changes. This also explains why the North American capital/income ratio has been more stable than Europe’s. In chapters five and six, Piketty looks at the fundamental nature of the capital/income ratio in the long run. He argues that what determines this is the rate of savings divided by growth. In the long run, a nation with low growth and high rates of saving will have a high capital/income ratio.

Chapters seven and eight analyse the concrete structure of inequality within different groups across society. That is, they look at how concentrated ownership of capital and income from labour is within the richest sections of society. Having clarified ways of measuring inequality, Piketty draws the conclusion that capital ownership is still highly unequal. Compared to 1910, a smaller proportion of the population can live off the income from capital alone. Chapters nine and ten examine the causes of, and justifications for, labour income inequality. Specifically, they look at whether the high salaries of top managers can be justified by their marginal productivity. Piketty concludes that they cannot and that institutional rules and norms governing executive compensation play a greater explanatory role. He also analyses the cause of wealth concentration which occurs, he says, when the rate of growth is less than the return on capital. When this happens, wealth will tend to accumulate to high levels.

Chapters eleven and twelve explore the nature of merit and inheritance. They conclude that while there are fewer large fortunes inherited in the 21st century, inheritance is still a significant source of inequality, and plays a critical role in one’s life chances. These chapters also go onto to look at the global distribution of wealth. Piketty discovers, on this point, that global wealth inequality is even more unequal than national wealth inequality. In chapters thirteen and fourteen, Piketty examines the role of the state in the 21st century, and how it might be utilised to tackle inequality. To do this he explores the history of the “social state”, an expanded state that became involved in education, health, and welfare. He argues that a larger state than exists at present is neither possible nor desirable. However, an increase in progressive income tax should be used to reduce inequalities and support the social state.

Finally, chapters fifteen and sixteen explore the idea of a global tax on wealth. While hard to gain international agreement on, it would have the effect of controlling the inegalitarian wealth spiral currently in progress. Further, it would be the fairest and most efficient way of clearing the developed nations’ historically high levels of public debt.