Friday Round-up: Piketty Edition

The publication of Capital in the Twenty-First Century has caught both economists and its publisher off-guard: The former are scrambling to respond to the book’s provocative arguments, and the latter is scrambling just to keep up with demand. The book has reached top-seller status on Amazon, and its author, the French economist Thomas Piketty, has embarked on a coast-to-coast tour, from Boston to Berkeley. Why is the book causing such a sensation?

Piketty is well-known as a scholar of inequality, and as Dean Baker of the Center for Economic and Policy Research puts it, his new book’s argument “is almost too simple for economists to understand”: the problem of inequality is likely to become much worse.

That’s because r > g. That formulation is Piketty’s way of saying, as Tim Noah* explains, that “the return on capital (r) almost always exceeds economic growth (g).” Paul Krugman helps explain the economic logic:

If r is less than g, dynasties are doomed to erode: even if all income from a very large fortune is devoted to accumulation, the family’s wealth will grow more slowly than the economy, and it will slowly slide into obscurity. But if r is greater than g, dynastic wealth can indeed grow to gigantic size.

Or, as Noah puts it: “Patrimonial capitalism is coming back. Being born into or marrying wealth never stopped being the easiest path to acquiring a fortune; Piketty fears it may once again become the most common path as well.” For much of the 20th century, this wasn’t true: economic growth outpaced capital accumulation, and so wealth became less and less concentrated. But now that Piketty has marshaled the data for a longer historical picture, that period appears as an exception, not the norm.

Pascal-Emmanuel Gobry warns conservatives not to dismiss Piketty’s argument:

If you want a vibrant economy that favors the entrepreneur—as conservatives do—you want an economy where it’s easy to get rich, but where it’s hard to stay rich—where rich people have to keep putting money to work, i.e. investing in young entrepreneurs and general-welfare-enhancing risky ventures.

And Baker insists that to counter the disturbing trend described by Piketty, “we will have to look to ways to reduce the rents earned by the wealthy”—to undo those “government interventions in the economy that have the effect of redistributing income upward.” Where should we look for solutions? Baker has a few suggestions: the beloved financial sector, where there is plenty of room for new taxes; cracking down on telecommunications and air travel monopolies; and a carbon tax. These may all be sound policies, but none of them seem likely to be realized in the near future. Unpleasant economic realities, in other words, have a way of colliding with unpleasant political ones.

*Disclosure: I fact-checked Noah’s 2012 book The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It.