Capital in the Twenty-First Century: Review


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8/10 – Voluminous Heavy Reading

As its white washed cover may have suggested, the book didn’t tried to be more entertaining than a college text book about leptokurtic distribution (replace it with the most sleep-inducing subject as you see fit). I wonder if it is more fashionable than to carry a FT for 6 months, but the book surely felt sturdy enough to survive a nuclear explosion.

Mr. Piketty made bold statements on a number of economic issues around income distribution. Critics may agree with his conclusion to different degrees,but two things almost everyone were impressed: 1) meticulous analysis of decades of data 2) elegant summarization into no more than a few charts and even fewer formulas (all charts and data used are shared here: http://piketty.pse.ens.fr/en/capital21c2). For period that information is scanty, he referred to works by novelists like Jane Austin, Honore de Balzac and alike. He carefully detailed sources, assumptions and methodologies which I, urh conveniently skipped. (do you want to be brain-dead before you read his conclusions?) I just made the fair assumption that all his researches are solid.

“…the entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future.”

As one of Thomas’s arresting statements, it says that the capital concentration is inevitable and the grim future as predicted by Karl Marx looked too promising. How? Let us start with the capital and income ratio β which is important as it measures of the size of wealth in term of annual production. β has always moved north except for the periods immediately after the world wars and pandemics when civilization suffered significant capital loss. Today the mass accumulation of private wealth has grown to be near 6 times of yearly income. Thomas went on to show that wealth distribution was inexcusably disproportional. The top 10% wealthy people were able to reap most benefits of economic growth. And the only group who have done better is the top 1%, or more dramatically the top 0.1%. The current wealth distribution in wealthy countries follows below pattern:

· Bottom 50% holds 5% of total wealth

· Top 10% holds 50% of total wealth

· Top 1% holds 20% of wealth

· Top 0.1% holds 12% of wealth

Many critics refuted Thomas’s conclusion, but these are undeniable facts. Now let me translate that into relative terms. If the bottom half is worth $1,000 on average (of course, here has a wide distribution too), the top 1% will worth $200,000 on average or 200 times of the wealth of bottom 50%! Some schools of thoughts argues that wealth distribution is meritorious. According to the theory, CEOs who are taking millions every year are actually 200 times more productive than a factory worker who works on the assembly line of iPhone. Thomas called the CEOs and alike super-managers. The book lay out hard statistics to show that executive pays are anything but meritorious. The complexity of CEOs’ work made it impossible to objectively evaluate their performance like that of an assembly worker whose productivity can be observed using substitution. The productivity of a CEO is dependent on numerous interlacing factors that personal merit, even though may have played pivotal role, is unobservable. The CEO’s superior performance may be attributed largely to wellbeing of economic environment and his predecessor’s legacy.

The book went on to make the claim that the availability of better education didn’t evidently help the situation either. Education uplift wasn’t parallel. On one end, someone made do with 6 years of education is now completing high school, on the other end, someone who graduated university are now graduating from prestigious private schools.

There is a strong force that is embedded in the capital system that continues pushing inequality to unprecedented levels.

r>g

This is taught in every economics that return on capital is higher than income growth. In other words, however hard you work, your income grow will never match the return on inherited wealth. In layman’s words, a rich dad/mother is far more important than a degree from Harvard. BAD NEWS. Now that is not something you can change. You don’t learn that from text books. So this simple law dictates that the richer will get richer at a speed that cannot be even fathomed by the poor. Mr. Piketty gave the example of school endowment fund. Prestigious Ivy leagues could hire the brightest minds to engage in most sophisticated investments that take advantage of every opportunity in the market. The millions of management fee was such an insignificant amount simply because of the size of their portfolios. The smaller schools do not have that luxury. They will have to make do with second standard services that makes mediocre returns.

American, once was hailed as an egalitarian society when Europeans first set foot on the continent is now astronomically unbalanced. Ironically, the only things keeps the society in check are the immigrants who normally came from less affluent background and as long as they see their own standard of living improve, they don’t mind much as someone is making 200 times their income. But they will want to drive a McLaren one day too, right?

In order to prevent the capital from accumulating to a catastrophic level, current income tax is inadequate. Instead, Mr. Piketty proposed a tiered worldwide capital tax system which will levy taxes on capital instead of income. Mr. Piketty sees this as the only way to deal with increasingly complex tax evasions. It sounded operationally challenging, if it is at all feasible with the fragmented geopolitical landscape. The book didn’t give much details about how to go about the plan but it was evident that Mr. Piketty placed his confidence in the democratic deliberation process.

I am not going to lie. It took a lot of discipline to finish this book. I don’t know if you have ever been on a multi-day bicycle trip. After a 6 hours grilling journey, it takes a lot of courage to put your sore buttock on the saddle again the next day. It felt like that in between the chapters and I try to find meaning in the densely printed pages in my increasingly fatigue brain. The whole book is as bullet proof in its appearance as in its rigorous writing. The sheer volume of information analyzed is jaw dropping. When I reached the last page, it felt so natural that a wealth tax is the solution to the problem. It is a very intellectual, eye-opening read on modern capitalism.

It is to Piketty’s credit to bring forward such a highly systemic analysis of this deeply rooted issue to public. It made a lot people debating – this point alone is a good reason to read. I know better than to pass any judgment on this impressive work. I will leave that to you.

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