Rarely does a book come along, like Karl Marx's Das Kapital, that completely alters the paradigm through which we frame our worldview. Thomas Piketty's magisterial study of the structure of capitalism since the 18th century, Capital in the 21st Century, is such a book. In this important way, he is the Marx of our new age of inequality, albeit absent the historically misguided prescription of communism.
This book is no off-the-cuff pamphlet. Piketty, a professor at the Paris School of Economics, spent 15 years mining all available data on economic growth and the accumulation of wealth since 1700. His conclusion is that the great virtue of capitalism is that its spreads around technology, knowledge and skills. But capitalism also inexorably generates ever more inequality. That is because the gap is always widening between those who only have their labor to sell and those whose "return on capital" - on the wealth they have accumulated -- grows faster than the overall economy. History shows that as economies mature, growth rates slow to a range of 1 to 1.5 percent annually while return on capital maintains at an average annual rate of 4 to 5 percent. Here is how he puts it:
A market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based. The principal destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than that rate of growth of income and output, g. Wealth accumulated in the past grows more rapidly than output and wages.
The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.
The consequences for the long-term dynamics of the wealth distribution are potentially terrifying, especially when one adds the return on capital varies directly with the size of the initial stake and that the divergence in the wealth distribution is occurring on a global scale.
For Piketty, this is "the central contradiction of capitalism."
Piketty points out that rapid growth in the 4 to 5 percent range or higher only occurs when economies are catching up, like China or the emerging economies today, or after devastating wars when assets have been destroyed and have to be rebuilt.
Otherwise, the normal situation - which was the case up until World War I and from the 1970s on after Europe and the US rebuilt after World War II - is steady, low-level growth that is slower than the accelerating accumulation of wealth in the hands of those with capital assets.
Looking exhaustively at the data, Piketty notes that the growing inequality generated by this contradiction only flattened in the US and Europe as a result of high marginal taxes on income in the wake of the two world wars. For example, between 1932 and 1980, the top federal income tax rate in the United States averaged a whopping 81 percent.
Since 1980, those rates have plummeted not only in the US, but around most of the advanced economies such as France and even Germany. As a result, Piketty sees the return to a level of inequality in the 21st Century we have not seen since before World War I.
Unlike Marx, of course, Piketty understands that state ownership or confiscatory taxes on entrepreneurs would kill the goose that lays the golden eggs. What he proposes instead is a progressive annual tax on capital that is quite small -- less than 1 percent on the low end of the wealth spectrum - so that incentives to innovative entrepreneurship are not stifled. But he proposes stiff marginal tax rates on the very high end on those with tens of millions to billions in assets who have moved beyond entrepreneurship to "rent seeking" simply by virtue of the quantity of wealth they own. Piketty makes a compelling, empirically-based case that there is little correlation between wealth at such levels and productivity increases in the overall economy.
Such a system of taxation, Piketty readily acknowledges, is an uphill political battle everywhere. Moreover, in today's global economy where capital flows easily across national borders, only large regional political entities can impose such a tax that will meaningfully reduce inequality. China and the US may be large enough on their own to do so. Despite populist arguments for a return to narrow national sovereignty in Europe as a result of the euro-crisis, Piketty makes it clear that the only hope for social justice in Europe under the regime of globalization is full integration of Europe's states into the European Union.
As leaders from Pope Francis to Barack Obama have proclaimed, growing inequality is the defining issue of our time. Much indeterminate discussion has swirled around its key causes, from job-displacing technologies to wage-deflating outsourcing of jobs.
Capital in the 21st Century clears up all the confused thinking and presents us with the most compelling analysis to date of the key dynamic that drives ever-increasing inequality. This book is more than a must read. It is a manual for action that provides a fresh framework for the new politics of the 21st Century.