First published in 2013 by French economist, Thomas Pikkety, sparking fierce debate when released in English in 2014, Capital in the Twenty First Century has taken the world by storm and may change the way we look at wealth and global inequality. The Economist even named him the modern Marx. The product of over a decade of research on the part of Pikkety and a handful of other economists, the book details the historical evolution of the concentration of income and wealth in multiple countries worldwide.
From the period preceeding the early 20th century, when privately-held wealth predominated national income, to the shocks of the early-mid 20th century, chief among them the Great Depression and both World War II, during which time global inequality dropped dramatically, to the current trajectory, whereby wealth is already at pre-war levels, and rising steadily.
It is from this evolutionary account of the data that Pikkety draws his now illustrious theory of capital and inequality, that of r > g, the historical tendency of returns on capital to exceed the rate of economic growth. Thomas Piketty's findings in this ambitious and original work is already changing the way we look at wealth and global inequality, and will continue to do so for decades to come. In this series, we will look at Pikkety's general conclusions from each chapter, as well as the data and figures from which those conclusions are drawn, bringing his revolutionary findings to our audience at Kyso. We hope you enjoy!
In his introductory chapter, Pikkety discusses different forces of convergence and divergence between and within countries in relation to the evolution of inequality. For example, while the diffusion of knowledge and skills are forces that push towards a convergrence, there are other forces that actively push in the opposite direction, towards greater inequality. These forces include the fact that high-inccome earners are able to separate themselves from the rest of the population, for a variety of reasons that we'll discuss, as well as the accumulation and concentration of wealth when growth is weak and return on capital is high.
Below we look at a timeline of the top decile's share of the US national income over the course of the last century, an extension of the data collected by Kuznets for the period 1913-1948, whose findings suggested that inequalities increase during the early stages of industrialisation, and automatically decreases as the economy enters more advanced stages of development as a larger percentage of the population enjoy the benefits of this economic growth.
The figure shows that the top decile's share of the national income dropped from 45-50% in the 1910s-1920s to less than 35% in the 1950s (the basis for Kuznet's theory). mPiketty argues that Kuznets mistook the 1930-1950 decrease in inequality for the endpoint of its development, as it rose from less than 35% in the 1970s to 45-50% in the 2000s-2010s, back at pre-WWII levels.
Pikkety later goes on to show that the dramatic increase in inequality, beginning circa 1980, is a result of a similarly explosive rise in incomes from labor and rising remunerations of top manages at an even greater rate, the reasons for which we'll discuss later.
The second figure below reveals a pattern that, according to Pikkety, exerts an even greater influence on the long-run evolution of the wealth distribution, namely, the total value of private wealth in Britain, France and Germany, expressed in years of national income.
Similar to the evolution of income inequality shown above, we observe a "U-shaped" curve. Pikkety will later go on to show that the high capital-to-income ratios over the past few decades is widely explained by a return to relatively slow economic growth, during which time private wealth has taken on a disproportionate importance in the global economy. As of 2010, aggregate private wealth is worth between 4 and 6 years of national income. Note that capital includes, among other incomes from capital, profits, dividends, interest and rents.
This inequality, written by Pikkety as r > g, where r stands for the average annual rate of return on capital, as a percentage of its total value, and g for the rate of growth of the economy, is the basis for a lot of his conclusions and policy recommendations. For one, if the return on capital remains considerably higher than the growth rate of the economy for an extended period of time, then the risk of divergence in the distribution of wealth will increase
Stay tuned for the next piece on Pikkety's extroardinary work, in which he looks at capital and income, as well as how the global distribution of income and output has evolved.