Book Review: Capital in the Twenty-First Century by Thomas Piketty
Call it what you will, my Chinese New Year holidays were “ruined” by reading Piketty’s Capital in the 21st Century. I love to read and enjoy a tremendous pleasure in reading, but some books are not a joy to read, yet they are essential — the joy comes after when you’ve summarised what you read so that it is entrenched in your mind, as I’m attempting now.
Economists are obsessed of the idea of inflation, employment and growth — and somewhere along the lines they’ve forgotten about the fundamentals of economics — distribution. Economics, after all, is a discipline to address the issue of scarcity. Piketty has a lot of balls to call out modern day economists as self-interested that they can’t tell the forest from the trees, having drowned themselves in mathematical equations that they’ve conjured up. For Piketty, economics is a social science, full of pitfalls and entrenched biases. It is the role of the economists to cut through the facts with whatever limited resources that she has at hand, and to make sense of the data at hand objectively. “Capital” is such work.
Reading “Capital” is a sobering experience. Contrary to popular belief, the dream is dead. Call it the American Dream if you will, that the next generation will do better than the last. There is no such thing, as the nature of redistribution of capital from time immemorial actually prevented such successes. This is an elephant in the room. We already know this. But the facts are solid now: the rate of return from capital accumulates, faster than wages, which causes the old age adage that the rich gets richer. A cliché, but most clichés are borne out of observed truths.
Capital has always accumulated since the 18th century when more powerful countries built their wealth from exploiting colonies. The distribution has always been unequal from that epoch as capital has always outweighed the value of income by a factor of 6–7 for most countries. There was a unique period between the two world wars in the 20th century when capital was redistributed to fund the costs of two world wars, when it fell back to a factor of 2–3. But slowly and surely, this ratio is creeping up again back nowadays to its 19th century peaks.
For a long time the world does not know anything about inflation. Economics was still embryonic and prices remain the same until the 20th century. At this time, capital was being accumulated by the wealthy, and inequality was rising. After the “respite” of the world wars, capital is becoming unequal again. At this time, it is difficult to say how the rest of the world is going to catch up with the top decile or centiles of the population, as they locked their capital gains in inheritance and tax havens, whilst top managers are earning unjustified super salaries and bonuses.
It is worrying, and it is concerning. Even if you are earning the big bucks, you should be worried — this pattern of inequality is unsustainable. Still, Piketty’s advice is extreme. The tax rates that he proposes are exorbitantly high (up to 80–90%, some even 100% but I haven’t had much chance to reflect on this) and he suggests that nations should pool their public debts together, especially in Europe. We know that these won’t happen anytime soon.
Perhaps I tried reading this book too fast. I did my best to digest everything in the book, underlining the passages that I’ve found most relevant and interesting, writing comments in the side so I can revisit these pages later, rereading sentences which seemed ambiguous to me. But some of his ideas are best to be digested slowly. It would have been good to squeeze in a work of fiction in between reading this book perhaps. Some of the topic can be absolutely dry, especially the latter parts when he spoke about taxation, but take away any part of the book and it will be a lesser work.
Regardless, I enjoyed the book immensely. He often uses examples from literature, In particular Balzac and Austen, to demonstrate the world at that time. It is interesting to note that int he 19th century, readers of the novel would know the value of wealth of their characters (about 50 times the average wage to live a “dignified life”), and after the early parts of the 20th century, the mentions of wealth disappeared altogether given that the rate of interest of these bonds lost its value from inflation. Piketty’s analysis of the conversation in Père Goriot between Vautrin and Rastignac can make you re-evaluate your life decisions.
I learned so much from this book. It is a dense read, but a necessary read. If you don’t have the time to read Capital, make sure you read the summaries or better yet, Piketty gave a Ted Talk on this some time ago. It is likely that his name will come up again as the world becomes increasingly unstable, especially from a financial perspective.
