Thomas Piketty’s new book, Capital in the Twenty-First Century, has created quite the stir, and with its overwhelming size (700 pages) and corresponding array of commentaries and critiques, it’s tough to know where to start.
Cutting through such noise, Russ Roberts provides his usual service on EconTalk, chatting one-on-one with Piketty about the key themes, strengths, and weaknesses of the book. The interview is just over an hour, and I encourage you to listen to the whole thing.
Piketty lays out his argument quite concisely in the beginning, followed by a fruitful back-and-forth led by Roberts. For those who aren’t aware, the book chronicles a recent rise in economic inequality, wherein, by Piketty’s account, wealthy elites sit on their stashes while those at the bottom increasingly struggle to keep pace. His solution: Tax, baby, tax.
In response to such an approach, there are many areas to poke and prod, but Roberts zeroes in on one of the more fundamental and overarching questions: What about those who accumulate their wealth by helping those at “the bottom”?
As Roberts puts it in a collection of post-interview reflections: “We ought to focus on whether the wealth at the top comes from making more and more of us increasingly better off, or whether it is the result of, say, cronyism.”
For example (from the same reflections):
There is an in-between case–Liliane Bettencourt, the heiress to the Oreal fortune…I guess it doesn’t bother me that she has more and more money to spend, presumably the result of investing wisely and not consuming an inordinate amount of her principal. I presume that her investments often help others beside herself and on this question, Piketty is virtually silent in the book. He focuses on the return to capital that accrues to investors and ignores the gains to the rest of us from those who consume less and invest more.
Of course in a world of crony capitalism, some investments have perverse effects–adding to the housing stock say, rather than curing cancer. I’d like to spend more energy getting rid of the perverse incentives that encourage over-investment in housing and encourage instead, the effective use of scarce capital in other, more productive places.
Next, Piketty explains why some wealth is better off dead:
The most surprising moment of our conversation came here…
Russ: How do average people get wealthy or better off by rich people doing badly? What happened there? What’s the mechanism? [Piketty]: Oh, the simplest mechanism is that if you have a destruction of wealth, the rate of return to wealth is going to increase, and you know, this creates space for accumulation from people who start from less wealth or zero wealth and that work for labor incomes they can invest.
Piketty is implicitly assuming that there is no benefit from investments and capital created by the rich. So if their wealth is destroyed, the rate on the investments the rest of us can make will go up. The poor and middle class will have better lives when there is less investment. My thought is that yes, they might earn more on their savings accounts. They will earn a lot less from their labor though, if capital is destroyed or scarcer.
At a deeper and broader level, Piketty’s oversight does damage because it undermines the potential that the wealthy bring to the table, taking real exchanges of real value between real people and diverting them to the bureaucrat’s dynamite field.
Piketty’s warnings about the sources of economic inequality deserve our attention and serious consideration. But such a cramped approach to social diagnosis and solution-seeking removes no small amount of beauty and mystery from economic exchange, and in turn, is not likely to promote the type of responsibility, creativity, and service we’re called to assume as stewards of the earth.
