Income inequality moved with astonishing speed from the boring backwaters of economic studies to “the defining challenge of our time.” It found Thomas Piketty waiting for it.
A young professor at the Paris School of Economics, he is one of a handful of economists who have devoted their careers to understanding the dynamics driving the concentration of income and wealth into the hands of the few. He has distilled his findings into a new book, “Capital in the Twenty-First Century,” which is being published this week. In the book, Mr. Piketty provides a sort of unified theory of capitalism that explains its lopsided distribution of rewards.
Eduardo Porter’s Economic Scene column this week discusses Mr. Piketty’s work. Following is the transcript of an email interview he conducted with Mr. Piketty last week, lightly edited for length and clarity.
Q.
Your book fits oddly into the canon of contemporary economics. It focuses not on growth and its determinants, but on how the spoils of growth are divided. In that sense, it reminds us of similar concerns in a book of similar title written 150 years ago: Karl Marx’s “Capital.” What parallels would you draw between the two?
A.
I am trying to put the distributional question and the study of long-run trends back at the heart of economic analysis. In that sense, I am pursuing a tradition which was pioneered by the economists of the 19th century, including David Ricardo and Karl Marx. One key difference is that I have a lot more historical data. With the help of Tony Atkinson, Emmanuel Saez, Facundo Alvaredo, Gilles Postel-Vinay, Jean-Laurent Rosenthal, Gabriel Zucman and many other scholars, we have been able to collect a unique set of data covering three centuries and over 20 countries. This is by far the most extensive database available in regard to the historical evolution of income and wealth. This book proposes an interpretative synthesis based upon this collective data collection project.
Q.
For much of the last century, economists told us that we didn’t have to worry about income inequality. The market economy would naturally spread riches fairly, lifting all boats. Is this not true? Are you arguing that income inequality could grow forever? How so?
A.
History tells us that there are powerful forces going in both directions. Which one will prevail depends on the institutions and policies that we will collectively adopt. Historically, the main equalizing force — both between and within countries — has been the diffusion of knowledge and skills. However, this virtuous process cannot work properly without inclusive educational institutions and continuous investment in skills. This is a major challenge for all countries in the century underway.
In the very long run, the most powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital r to exceed the rate of output growth g. That is, when rexceeds g, as it did in the 19th century and seems quite likely to do again in the 21st, initial wealth inequalities tend to amplify and to converge towards extreme levels. The top few percents of the wealth hierarchy tend to appropriate a very large share of national wealth, at the expense of the middle and lower classes. This is what happened in the past, and this could well happen again in the future.
Q.
Inequality declined in the so-called industrial world through much of the 20th century. How did that happen? Does this not argue against the notion of ever-increasing inequality?
A.
The reduction in inequality was mostly due to the capital shocks of the 1914-1945 period (destruction, inflation, crises) and to the new fiscal and social institutions that were set up in the aftermath of the World Wars and of the Great Depression. There was no natural tendency toward a decline in inequality prior to World War I. During the 20th century, rates of return were severely reduced by capital shocks and taxation, and growth rates were exceptionally high in the reconstruction period. This largely explains why inequality remained low in the 1950-1980 period.
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