DEMOS QUARTERLY: Piketty’s New Book

‘I don’t have time to write a short letter, so I’ve written a long one instead’. So said American statesman and polymath Benjamin Franklin. Or was it George Bernard Shaw? The source of this quotation is actually rather contested. It’s also been attributed to Churchill and Mark Twain.

Wherever it came from, this pithy aphorism captures what every decent author knows instinctively. Producing a concise, penetrating piece of writing does indeed take a lot more talent and effort than cobbling together an extended marathon of loose, ill-defined prose. This quotation sprung to mind as I recently read Economics of Inequality, a new book by the French academic de nos jours, Thomas Piketty.

In 2013, Piketty published Capital In The Twenty-First Century, a densely-written 696 page door-stopper. Pointing to a sharp rise in Western inequality, and the re-emergence of ‘patrimonial capitalism’ dominated by inherited wealth, it became a virtue-signaling status symbol – and unlikely bestseller. For months after publication, displaying Piketty’s tome casually on your coffee table, in certain circles, was almost compulsory.

The trouble is that few have the time or inclination to wade through Capital, to absorb the dozens of chapters, to make sense of countless tables and graphs. A bit like that late-1980s publishing phenomenon Stephen Hawking’s Brief History of Time (apologies to readers under 40), the book has widely purchased but not widely read. There’s a market, then, for a new, shorter Piketty, that armchair campaigners can get their restive heads around. That’s the demand the newly-published Economics of Inequality, at a slim 142 pages, is clearly designed to meet.

But it doesn’t. After I’d shelled out £16.95 and taken the book home, I came across a Note to the Reader. Having scanned it, disappointment turned rapidly into discontent. No matter that the dust-jacket describes Inequality as a ‘great companion’ to Capital, or that the cover-design is similar. ‘This book was written and first published in 1997,’ we learn inside. So this isn’t a new Piketty at all. And, despite being 15-times shorter, it’s also less readable and far less insightful than the author’s scale-tipping effort of 2013.

Piketty could – and should – have written a condensed, more direct version of his magnum opus. About now is a great time to publish it. That would have been difficult, though, as the quotation from Twain or Churchill or whoever it was attests. Shortening and sharpening a long book requires not only sweat and soul-searching but also courage, to chuck out arduously-researched and carefully-crafted tangential material that, on reflection, could have been avoided. Had he done that, Piketty would have made his insights more accessible and earned his share of the rather steep cover price. He did neither.

While much of Piketty’s recent runaway publishing success owes to timing and his impish good looks, there is no doubting Capital is a substantive book. It pushed inequality to the forefront of debate across the Western world – and deservedly so. While even I, a trained economist, found some of its technical passages tiresome, bordering on indulgent, that doesn’t take away from the force and significance of the book’s central message.

Karl Marx predicted capitalism would self-destruct, with the endless pursuit of profit causing inequality to rise ever-upward – so much so that society would eventually unravel. These gloomy Marxist nostrums were over-turned by inter-war economists such as Russian-born American Simon Kuznets – who argued, in contrast, that inequality corrects itself, becoming less acute as societies develop and become more sophisticated. Winning a Nobel Prize for his trouble, the work of Kuznets and others underpinned the broad acceptance of capitalism and ‘the American dream’, helping free markets prevail against communism in the mid-century clash of ideas.

While not necessarily wishing to re-open that ideological battle, Piketty does set out in Capital to debunk the likes of Kuznets and the general complacency about capitalism his ideas helped establish. Pointing to an increasing skewed income distribution throughout preceding centuries, Piketty says inequality only fell between the 1930s and 1980s due to unique historic circumstances. These included the loss of great fortunes during the Great Depression and Second World War and subsequent, concerted attempts at large-scale redistribution, such as America’s ‘great society’ and the creation of an over-arching welfare system in the UK.

The natural state under capitalism, though, according to Piketty, is indeed one where inequality inexorably rises. That’s because the return on capital means wealth grows far faster than both wages and the economy as a whole. So, however hard people work, and however much they educate themselves or their children, the deciding factor of the majority’s lot will, overwhelmingly, be previously accumulated assets.

As an inherent feature of capitalism, ever-rising inequality can only be tempered by heavy state intervention, says Piketty. And unless that happens, he concludes, with capitalism being fundamentally reformed, the result will be chronic social and economic instability, leading to a toppling of the democratic order.

These are powerful ideas, not least because the author backs his argument with data pointing to an escalating share of wealth across Western societies accruing to a tiny minority over recent decades. That’s why Capital became a bestseller – because it ‘legitimised’ and ‘proved’ what many people beyond academia felt to be the case anyway.

Its publication sparked fierce debates in the US about power, money and the grand bargain at the heart of American life – that a hard-driving, moneymaking culture is tolerable because anyone, if they try hard enough, can get ahead. That’s no longer true, Piketty says, because Western societies are now reverting to historic type, with low social mobility and resources and opportunities dominated by a well-connected elite who, too often, came into money by birth. The correct response, he says, is punitive taxation – including an income tax rate of up to 80 per cent and an annual 2 per cent tax on wealth.

Whatever you think of Piketty’s policy prescriptions, his descriptive analysis in Capital rests on firm empirical foundations. The book stems directly from a path-breaking academic paper he published with fellow French economist Emmanuel Saez in 2003 – Income Inequality in the United States, 1913-1998. Using a detailed data set constructed from archived tax returns, the paper established that rising Western inequality during the 1980s and into the 1990s resulted only in part from the higher wages commanded by those who’d worked hard to gain education or training – the reassuring, meritocratic Kuznets-inspired explanation. Inequality was also being driven up, the authors demonstrated, by huge gains among those at the very top. ‘That could very well spur a revival of high wealth concentration and top capital incomes during the next few decades’, the paper concluded.

Piketty unveiled, then, as early as 2003, signs of a disturbing re-concentration of income and wealth at the pinnacle of an American society dominated by a relatively small number of families heavily reliant on inherited assets. As US inequality rose further – not least due to fallout from the 2008 financial crisis, with bailed-out bankers still winning as countless ordinary families lost their homes – Piketty’s views became more sharply focused. That culminated in the publication of Capital ten years later, where he unleashed his explosive critique of a new Western ‘oligarchy’, powerfully comparing present-day America to England and France in the early 1800s, with a rigid class structure based on accumulated, inherited wealth.

How odd, then, despite this epic intellectual voyage of discovery, that this ‘new’ Piketty book – despite being ‘updated’ since 1997 – includes none of the Piketty and Saez insights now so clearly at the heart of the author’s worldview. The rush to publish, to capitalize on new fame, seems to have been so determined and brazen that the original text of Inequality – an unremarkable summary of the then conventional-academic wisdom by an anonymous 25-year-old – appears barely updated at all.

Passages in the book sit rather uneasily with the eye-catching views Piketty lays out in Capital. Technological change and the polarization of skills across Western workforces ‘surely explain a significant part of recent rises in wage inequality’, Inequality claims. No matter that, since Piketty wrote those words 18 years ago, such ideas have been largely discredited among economists, including Piketty himself, given the marked stagnation of wages among many degree-level employees.

Taxation and welfare spending ‘seem to have prevented a return to a nineteenth century rentier society’, Inequality also argues. That flatly contradicts Capital, which has at its core the argument that we are heading back to a ‘gilded age’ of semi-indentured workers and ossified social structures, the argument Piketty has been shouting from the rooftops for the last two years. It’s a shame he didn’t take sufficient time off from the lucrative lecture circuit properly to update his earlier work before passing it off as new. There are numerous tables in Inequality where the latest information, laughably, is from 1995. Showing such disdain towards readers, particularly the disingenuous cover blurb that misleads potential buyers, demeans such a distinguished thinker.

Aside from tawdry publishing tricks, I have more fundamental issues with Piketty’s work. While capitalism clearly has its faults, it’s been capitalism in various guises that has lifted, since the fall of the Berlin Wall, hundreds of millions out of poverty, not least across the former Soviet economies. That should have been acknowledged.

The 2008 Lehman collapse and its aftermath, in addition, far from highlighting the problems with capitalism, as Piketty and his many admirers maintain, actually shows what happens when you mess with capitalism so much that it mutates into something ‘cronyist’ and destructive. The financial crisis happened because ‘independent’ central banks, egged on by politicians, pumped up equity markets with cheap money. Bank regulations, designed to align incentives and keep markets relatively orderly, had meanwhile been severely diluted courtesy of Wall Street’s campaign cash. The ‘financial elite’ was then shielded, its political friends returning the favour, from the wreckage it had caused, as banks’ vast losses were shoved onto taxpayers.

None of this outrageous behavior can be laid at the door of free markets – as, at every turn in this sorry sequence of events, free markets have been traduced. Rather than too much capitalism, the financial crisis happened because there wasn’t enough. That’s not a message that sells ‘blockbuster’ economics missives. But it happens to be true.

I also don’t accept Piketty’s most fundamental assertion – that, under capitalism, inequality will inevitably rise. My view concurs, instead, with that of Joseph Stiglitz. ‘Widening and deepening inequality isn’t driven by immutable economic laws’, the Nobel prize-winning economist told me during a recent interview. ‘A well-functioning market economy doesn’t only create jobs, but should also generate increases in income that are shared’.

The key part of that argument, of course, is ‘well-functioning’. And it’s clear Western capitalism in the twenty-first century is functioning rather less well than it should. This is where Piketty, by causing a stir, has performed an important public service. Too-big-to-fail banks that extort government bailouts are anathema to free markets. Big monopoly corporations using their power to restrict competition and exploit consumers are anathema to free markets. Plummeting social mobility, with parents realizing their children won’t achieve the same quality of life they have, is anathema to free markets – undermining the social contract upon which capitalism is built, generating frustration and despondency and even civic unrest.

These trends, unfortunately, are increasingly apparent in modern Britain. The focus on inequality sparked by Piketty – in Capital if not in his newly-published re-heated volume – is helpfully bringing them to the fore. Our banking sector, now more concentrated and indebted than ever, remains a powder keg, having resisted significant reform. How will the population react to another systemic meltdown, with a cash-strapped state stumping up yet another bailout for our over-mighty financial sector? Public patience could snap. The UK’s broad cultural and political acceptance of free markets could be replaced by something rather different – not least a widening appetite, driven by anger and score-settling, for draconian regulations and sky-high taxation, all of which would be deeply counterproductive.

Even if that’s avoided, our woefully sclerotic planning system has long been driving up inequality and storing up social discontent. While home-ownership in Britain has fallen from over 70 per cent of households in 2001 to 63 per cent today, it remains quite high by international standards. Among 25 to 34-year-olds, though, that share has plunged to an astonishing degree – from 68 per cent to 39 per cent. Only 7 per cent of 16 to 25-year-olds own a property, down from 37 per cent little more than a decade ago. There is now an entire generation, the majority most of whom look set to miss out altogether on the financial and personal security, the ‘stake in society’, that home-ownership represents.

The growing gulf between those with property and the fast-rising share without is a major source of widening UK inequality. The idea of a hard-working family, often with two well-educated earners, having to rent indefinitely sounds like an inter-war throwback, but it’s the all-too-common reality of Britain today. Our planning system, in its current form, is stacked in favour of those who’ve already bought, or get parental help with what would otherwise be an impossibly large deposit.

Home-owners are often growing rich, securing ever more unearned claims on society’s resources, while myopic over-regulation, and the resultant chronic shortage of suitable properties, leaves many others – the majority of today’s prime family-forming age-group – hopelessly priced-out. That’s not only growth-stifling but also highly regressive, and increasingly so.

We must grasp the nettle and properly reform the planning system, clamping-down hard on land-banking by cynical developers, doing everything possible to make sure the private sector builds lots more homes in places where people want to live. ‘Housing policy… perhaps nowhere has Tory failure been so complete and so damaging to our people’, says Jeremy Corbyn – and, on this at least, he is right.

The UK housing market, for generations a driver of social progress and security, is now a cause of social immobility and rancor. That badly undermines free markets, and could yet see the introduction of wacky ideas such as sky-high property taxes and punitive rent controls – which would be entirely counter-productive in terms of solving the actual shortage of homes.


One of the most interesting political statements I’ve heard in recent months came from Michael Gove. Speaking on the fringe of the Conservative party conference, and introducing a variation on Victorian views of the poor, he argued that a ‘dividing line should be drawn between the deserving and the undeserving rich’.

Gove talked compellingly about the need to distinguish between ‘entrepreneurs who work hard, are creative and employ people’ – and those who ‘just play the markets, sit on each other’s remuneration committees and rig free market rules in their own favour’. If the latter aren’t checked, he argued, ‘they undermine capitalism itself’. Far from being a throwaway remark, the Lord Chancellor went on to evoke Teddy Roosevelt, the trust-busting US president who took on the corrupt and seemingly unassailable oil companies at the turn of the last century.

Iain Duncan Smith, speaking at the same event, linked Gove’s remarks directly to still-too-big-to-fail banks. ‘If the rich can’t get poorer because the system protects them, the system loses legitimacy’, said the Work and Pensions Secretary. These interventions from two big Tory beasts, while barely reported, struck me as significant.

I disagree with Thomas Piketty in many respects. Capitalism need not lead to ever-rising inequality, providing the right checks and balances are in place. Sometimes we need to prevent behavior that causes systemic instability, or involves excessive corporate greed – regulations, in other words, that face down, rather than pander to, powerful vested interests. In other areas, making markets work better means freeing them up – removing supply restrictions that unfairly favour incumbents, be they multiple property-owners, or large businesses that unfairly crush smaller firms.

The attribution of the quotation at the beginning of this piece is, indeed, contested. Along with Franklin and Twain, it’s also been attributed to Bill Clinton and Oscar Wilde. Most scholars maintain, though, that the phrase was first written by French mathematician and philosopher Blaise Pascal.

‘Eloquence is a painting of thoughts’, is another of Pascal’s beautifully-put observations. That’s certainly a virtue his countryman has shown in Capital – despite the often-technical nature of the material. I do hope Piketty takes the time and trouble to produce a properly abridged, punchier version of this book – moving on from the unfortunate re-publication of a work that’s now redundant – as much of his message matters.

Inequality does indeed appear to be rising across the Western world – in part, for the wrong reasons. Too much unearned wealth is being accumulated by Gove’s ‘undeserving rich’, and it is harming economic growth, society more broadly and perhaps even democracy. While Piketty maintains that’s the fault of capitalism per se, I say it’s because capitalism isn’t being both allowed and enabled to operate as it should.

Outcomes are being generated that are not only inefficient but also deeply unfair, in some cases disgracefully so. That undermines the social acceptance and trust that is vital not only to make markets work, but ensure their survival. So reject his analysis and hyperbole if you like. Rail against his recommendations for ultra-punitive tax rates – I certainly do. But, remember, unless capitalism works, and works well, for ordinary, hard-working people, then it is vulnerable. Piketty is right about that.

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