Book Review - Capital In The Twenty First Century

Book Review

Capital in the Twenty - First Century By Thomas Piketty

Submitted By: Atul Kumar Tirkey

“Capital in the Twenty First Century” is Thomas Piketty’s deep exploration of global dynamics of income and wealth distribution over the last three centuries in more than twenty countries. Thomas Piketty is a professor at the Paris School of Economics. The book was first published in French in 2013, followed by an English translation in 2014. The book has been a bestseller and has won various awards and honours including the Financial Times Business Book of the Year Award for the year 2014. The book argues that when the rate of return on capital is greater than the rate of economic over the long term, the result is concentration of wealth in the hands of few people. The data and statistics also point out that in the last thirty years the incomes of the wealthiest have surged higher, while the incomes of the large majority have stagnated. And this concentration of wealth and income at the top causes political, social and economic instability in the society. To quote it in words of Professor Piketty “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” One of Piketty’s main aim in the book is to put the issue of inequality in a broader historical context. For achieving this aim, the author traces the historical evolution of inequality from the agrarian societies of the 18th century to the second half of the twentieth century. With such broad historical context the causes of inequality are much clearer and visible. The finding is that inequality is influenced by a host of factors including economic, political, social and cultural factors. We also find that inequality is influenced by a broader set of factors associated with how capital works in capitalist societies and market economies more generally. Professor Piketty believes the trend toward greater wealth inequality is very likely to continue, because the returns from capital are likely to grow faster than the economy itself, and faster than the owners of that wealth are likely to be able to spend it. This is the "central contradiction of capitalism", which he summarises as following: "The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future."

One of the most important ideas – which is at the heart – of this book is that the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. The mechanisms pushing towards convergence leads to reduction and compression of inequalities. The main forces for convergence are the diffusion of knowledge and investment in training and skills. Professor Piketty quotes as following “Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries. “ The above statement is manifested at the present in the advances made by a number of previously poor countries, led by China. These emerging economies are now in the process of catching up with the advanced ones. By adopting the modes of production of the rich countries and acquiring skills comparable to those found elsewhere, the less developed countries have marched forward in productivity and increased their national incomes. The set of forces of divergence are those associated with the process of accumulation and concentration of wealth when growth is weak and the return on capital is high. This forces represent the principal threat to an equal distribution of wealth over the long run. At the beginning of the twenty-first century, forces of divergence seems to be gaining the upper hand. The likely decrease in the rate of growth of both the population and the economy in coming decades makes this trend all the more worrisome. According to Professor Piketty, the best and fairest solution to these problems would be to steepen the progressive taxation applied to the wealthiest individuals. But the problem is that in a world of financial globalization where there is a high degree of competition for capital— as witnessed by tax havens, it is extremely difficult to apply such tax scheme without the cooperation and coordinated efforts of the international community. And this is simply not something that is easy to achieve. This book is an absolutely well researched book. The broad time-frame that Piketty explores, and the enormous body of data that he brings together, makes this book extremely comprehensive. Also, I was impressed by how neutrally Piketty analyses the evidence he brings to the table. Finally, it can be considered as one of the finest books ever written in economics. A must read for anyone with a serious interest in economics.