A book analyzing economic inequality throughout history, where we are headed, and what we can do about it, by Thomas Piketty (translated by Arthur Goldhammer).

Summary

The fundamental thesis of the book is based on this equation:

$$r > g$$

This simple inequality illustrates the fundamental force of divergence in capital ownership. Here, $r$ is the rate of return on capital, $g$ is the overall growth rate of the economy. When $r$ exceeds $g$, capital growth will outpace output and income growth, as the capital owners only need to save a portion of their income from capital to see that capital grow quicker than the economy. In a world where $r > g$, capital essentially has the ability to form a positive feedback loop, ever-increasingly accumulating for those that possess it, which continuously amplify the level of inequality indefinitely, to potentially destabilizing levels.

This inequality is introduced near the beginning of the book, and the rest of the book essentially sets out to explain these variables (along with factors that influence them), and to justify this relationship with past data.

Has the relationship of $r > g$ held in the past? From looking at historic data, derived from various sources such as tax records, yes. In fact, since classical antiquity, $r$ has been far greater than $g$, because $g$, the real growth (from fundamental things like productivity increase), has been pretty much 0 for thousands of years. Only in the last two centuries or so did the two get closer, and inequality decreased somewhat as a result. To give a sense of their actual values today, $r$ is estimated to be around 3-4%, while $g$ is estimated to be 1.x% (no more than 2%).

Why can’t we just increase $g$ so that it at least matches $r$? After all, we have had periods of very high levels of real growth, at the level or even surpassing that of $r$, such as the era of the European rebuild after WWII, and various under-developed nations catching up to the west in the last few decades. But the book argues that these are all special, short-term circumstances, and that sustained high level (more than 2%) of real growth over the long term is impossible. Ultimately to sustain a high $g$, it requires an equally high and sustained rate of innovation, new inventions and discoveries that have massive increases in productivity, which simply isn’t possible.

So where does that leave us? Despite what one may think about the state of inequality today based on the news, we are actually in an era of low inequality. The disparity in wealth ownership was the highest during the Belle Époque era in Europe (the Gilded Age in the US), in the late 1800s. In the 20th century, inequality improved dramatically due to a number of factors:

• The two World Wars wiped out a lot of wealth for everyone, which mostly came out of the pocket of the wealthy
• The period after the wars had an abnormally high rate of real growth, $g$, so inequality did not build up very fast
• Due to changes in the labor market, a new class of relatively well-off people emerged, the executives and senior management, earning very high levels of income. This reduced the gaps in income inequality

What is there to worry about then? The author points out that in the beginning of the 21st century, inequality is on the rise again. With $g$ returning to the lower, long-term sustainable level, the difference with $r$ is enlarging. The author acknowledges that some level of inequality is fine (and probably good for societal progress), but it cannot be left unchecked.

What can we do about it? The solution proposed is a global progressive tax on capital. A potential suggestive rate the author gives is 0% for people with less than \$1M in net worth, around 0.5% for people with \$1-10M in net worth, and around 2% on the highest levels of wealth, \$10M+. This essentially brings us to a world where $r = g$, thus eliminating the force of infinitely growing inequality. It has to be globally enforced, otherwise tax havens will emerge for people to avoid the tax.

Commentary

Overall I find that this book does an excellent analysis of the problem of ever-increasing inequality. The author clearly has a high standard in data quality when looking at historic records, and most conclusions are drawn only after a comprehensive examination of many other causes.

The weakest part of the book is the last third or so, on the author’s proposed solution to the problem. A global progressive tax system is laughably unrealistic, which the author also acknowledges. Even looking past its lack of practicality, the author’s proposal, utilizing an ultimate, global-scale top down mandated set of regulations is opposite of the way that I see good, antifragile systems of governance. Central systems are prone to catastrophic failures, when you get it wrong, you get it wrong for everyone. I don’t think we even have the necessary understanding of the world economy to attempt implementing something like this.

Additionally, I think that focusing on increasing $g$ (i.e. the growth of income/output), is also important and shouldn’t just be dismissed as impossible. I suppose I’m more optimistic about our ability to innovate and progress technologically (the root driver for growth), whereas the author has resigned to the fact that high levels of growth won’t happen or won’t be sustainable (as it hasn’t been the norm throughout the last 2000 years).