Since its publication in English, in March, Thomas Piketty's Capital in the Twenty-First Century has been hailed as the most important economics book in decades. The Nobel laureate Paul Krugman declared that the French economic historian had "transformed the economic discourse".
Piketty, a professor at the Paris School of Economics, has become not only a bestselling author, pushing diet and self-help books out of the way to top the Amazon charts, but also a global celebrity, pictured on magazine covers as a kind of pin-up and appearing on countless US talkshows.
This sudden fame appears to have had little impact on the youthful-looking 43-year-old. Dressed in a white casual shirt and blue chinos, he makes the coffee, answers his own phone and seems unhurried as we talk for an hour in his tiny book-lined office in southern Paris.
“I’m just another academic, and I’m trying to do my job as a scholar and a social scientist,” he says. “I have no problem with the publicity as long as it induces more people to read my book. When you write a book you want people to read it. The problem, of course, is that with all the publicity you have some people who write about the book who have not even opened it, so sometimes there are some strange reviews or comments.”
As the book is almost 700 pages long, and includes numerous graphs and tables, it's perhaps no surprise that some of its most strident critics have not taken the trouble to read it. "I didn't read his book, though you don't have to in order to understand why it's mostly wrong," Keith Weiner, a Forbes contributor, blogged last month, in a post illustrated with a hammer and sickle.
Despite its length and the weight of data and technical information, the book is remarkably accessible for a work of economic history, illustrated with cultural references including the works of Balzac, Jane Austen and Quentin Tarantino.
Patrimonial capitalism
Piketty and a team of researchers spent more than a decade investigating the distribution of wealth over two centuries across the world, focusing on France, Britain and the United States. He concludes that, if the market is left to its own devices, wealth inequality could return to levels not seen in Europe and the US since before the first World War, producing a “patrimonial capitalism” where inherited wealth takes on ever greater importance.
The reason is that the return on capital has always tended to be greater than the rate of economic growth, so the share of income earned by wealth tends to increase compared with that earned by labour.
The trend was reversed in the middle of the 20th century, when economic growth outpaced the return earned by capital, partly because so much wealth had been destroyed by the two World Wars, and inequality was reduced. This has been reversed since the 1980s, however, with inequality rapidly rising once again.
“Inequality is not bad per se. Inequality up to a point can actually be useful for growth and innovation,” he says. “The problem is that, when inequality gets too extreme, first it’s not useful for growth any more. It can even have a negative impact on growth, because extreme inequality often goes with limited mobility and perpetuation of inequality across generations, which can be bad for growth.
“And extreme inequality can be a danger for our democratic institutions, because it leads to extremely unequal access to political voice and political influence.”
Piketty has provided a theoretical rallying point for progressives throughout the West who have been disappointed by both the revolutionary left and by the compromises social democrats have made with the liberal market system. In the United States outrage about increasing inequality not only spawned the Occupy movement but has also helped to elect figures such as Bill de Blasio , the new mayor of New York, and Elizabeth Warren, the Massachusetts senator. Everyone from Pope Francis and Barack Obama to the global elites who meet at the World Economic Forum, in Davos, have identified inequality as one of the greatest challenges of the age.
“I think it’s more a problem for the United States right now than for Europe. The rise of inequality has been much more spectacular in the United States, and also the influence of private money in politics is much bigger in the United States than in Europe, because most countries have laws for public financing of political parties, and the rise in inequality has been less strong,” Piketty says. “I don’t pretend that inequality always rises and has to rise. There are different forces. I’m just saying we should not just believe that natural market forces are going to be sufficient to prevent inequality from rising again to an extreme level.”
Financial Times
The most damaging criticism of Piketty's book came last month when the Financial Times ran a front-page story claiming that he appeared to have got his sums wrong in the data underpinning his conclusions, which the economist has published online.
Mistakes and unexplained entries in the spreadsheets skewed his findings, the newspaper said, adding that some of the data appeared to have been cherry-picked or constructed without an original source. It claimed that, without the alleged errors, the data showed no tendency towards rising wealth inequality after 1970 and that Piketty vastly overstated wealth inequality in Britain in recent decades.
Piketty published a detailed rebuttal of the charges on his website, insisting that he had not made mistakes in the data but had simply made methodological choices the Financial Times did not agree with and that none of the alleged anomalies undermines his fundamental conclusions.
Krugman and others came to Piketty's defence, but right-wing critics seized on the newspaper's claims, and Piketty clearly remains stung by them. "I think the way the FT used my online data was not really very constructive and was not entirely honest, because they were trying to pretend that there were mistakes, and there were no mistakes as far as I know.
“They can make somewhat different choices about data construction, but that’s not going to change the long-run evolutions I’m talking about, and they tried to pretend that it would. It’s not entirely fair,” he says. “I think instead of being afraid of my book they should be afraid of the reality. I don’t know why people are so scared of my book.”
If conservatives are scared of Piketty, it may be because of his proposed antidote to rising inequality: a global progressive tax on wealth and confiscatory levels of tax on huge incomes. Although he acknowledges that a global wealth tax is unlikely in the short term, he argues that international action against Switzerland’s bank secrecy showed that effective, co-ordinated measures are possible.
“Five years ago many people would have said that bank secrecy in Switzerland was with us forever, that Switzerland was too strong, too powerful for the rest of the world, but this is wrong,” he says. “In a way it is sad that European countries had to wait for America to act, because France and Germany and other European countries are much more threatened by a tax haven in the middle of Europe than the United States. This shows the deficiencies of our common European institutions . . . so that’s why we need a more democratic Europe.
Manifesto for Europe
With their Manifesto for a Euro Political Union last month, Piketty joined other French economists in calling for a parliament for the euro zone, whose members would be drawn from the finance committees of national parliaments, and the establishment of a redemption fund for euro-zone public debt and a common corporate-tax base with a minimum national rate of about 20 per cent, supplemented by a federal rate of 10 per cent.
He thinks that Ireland should embrace it – and that in the long run the State can’t relay on offering low corporation tax.
“I think in the long run the Irish model, like other European models, relies on high productivity of the labour force, high innovation,” he says. “You know, you cannot have a development model that’s just based on the fact that you have a lower tax rate than your neighbour and you attract some of the investment. And, as you know, some of this investment is actually just in the books . . . It’s not real investment.”
Piketty also questions the Government’s wisdom in introducing a property tax based solely on the value of the property, without taking account either of other assets or of debt, although he says it is better than no property tax at all.
“I think it’s a good beginning, but I think especially because Ireland is introducing it now in 2014 or 2015, Ireland would be well inspired to take into account mortgage and financial assets and financial liabilities as well. I think if you have a house that’s worth €400,000 but you have a mortgage of €390,000, you know you’re not really rich. Your net wealth is €10,000, and you are paying back in interest payments as much as a tenant will pay in rent. So there’s no reason why you should pay as much property tax as someone who inherited his €400,000 house or who has finished reimbursing his mortgage 20 years ago. This is not fair.”
Bondholder haircut
Fiercely critical of Europe’s austerity policies in response to the public-debt crisis, Piketty nonetheless rejects the idea that bondholders should have had to take a haircut, or discount, on their loans, a proposal favoured by many Irish critics of the response to the banking crisis.
“The haircut looks fair to some people because in a way this is saying, okay, the people who have taken a risk will pay. Except that this notion of justice is in fact, I think, an illusion, because very often some of the big guys actually manage to get rid of the bad assets early enough to reinvest in other assets, so you really don’t know who’s going to pay in the end. So I think it’s much better and much more transparent to have a progressive tax on all forms of assets.”
Piketty argues that, even if a wealth tax is set very low, it would serve an important democratic purpose in bringing greater transparency to the distribution of wealth, allowing citizens and their public representatives to make more informed decisions about it.
“The main conclusion of my book is not so much that I know how far inequality will go but rather that we need democratic institutions and more transparency about wealth dynamics, so we can adapt our policies and institutions to whatever we observe,” he says. “And maybe inequality will stop rising at a level that is acceptable, and then I will be happy. But maybe not.”
