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A SPECTER is sweeping through capitalist societies not long after it was thought that the belief in the self-destructive nature of capitalism, as prophesied by Karl Marx and other doomsayers, had been buried along with the Berlin Wall and the remains of the Soviet Union. Who is this person whose writings have created such unease on Wall Street and other corridors of wealth in the capitalist world? It is the soft-spoken French economist Thomas Piketty, whose Capital in the Twenty-First Century is raising hackles around the world.

The wealthy are right to be alarmed because this French intellectual--who arguably is the world's foremost authority on economic inequality--has called for higher taxes on both their income and wealth. Following the astonishing publishing success of Capital, Piketty has become a celebrity "rock star" economist--a former prodigy who rose quickly through the elite French university system, earned a Ph.D. in Economics at age 22 from the School for Advanced Studies in Social Sciences, and then accepted a faculty position at the Massachusetts Institute of Technology.

Piketty could have remained at MIT and churned out numerous mind-numbing mathematically oriented treatises, as most of his colleagues have done, in order to climb the academic success ladder, but he had set very different goals for himself. Piketty admired French academics such as Fernand Braudel, the historian whose empirical research methods had revolutionized the study of social sciences for European scholars. This young Frenchman's ambition, as he noted in his curt dismissal of the efforts of many American economists, was to investigate real world economic issues rather than settle for the "petty mathematical problems of interest only to themselves."

In his Introduction to Capital, Piketty expresses his disenchantment with academic economics: 'The discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation at the expense of historical research and collaboration with the other social sciences." Piketty stated that this obsession with mathematics offers only the pretense of scientific work while neglecting the more complex issues that real life provides.

Piketty is a Frenchman to be sure, but he deftly has distanced himself from the anti-capitalist and -American attitudes that have characterized so many French intellectuals. Piketty regards the anti-capitalism of the left as laziness, and has pointed out errors made by Karl Marx in Das Kapital while drawing parallels between Marx's work, which was not completed, and his own 700-page text, which includes 75 pages of footnotes, but not his technical appendix, on the Internet.

Piketty is not a political neophyte; he is a "social democrat" in the European style, meaning he is a socialist by U.S. standards. He did serve as an economic advisor for Segolene Royal, a socialist candidate for the French presidency several years ago but, afterwards, resigned as director of the Paris School of Economics--a nonpartisan research institute he founded. He remains there as a professor, though, as well as at the School for Advanced Studies in the Social Sciences.

Most Americans never had heard of Piketty before, but some were well aware of his phrase "the incredible rise of the one percent" that appeared in his earlier work. The staggering level of wealth inequality in the U.S. became the motivating force behind the Occupy Wall Street movement that swept across the nation in 2011 before fizzling out.

Piketty and his colleagues, Anthony Atkinson at Oxford University and Emmanuel Suez at the University of California-Berkeley, pioneered statistical techniques and used data sources that have made it possible to track the distribution of wealth and income for more than 20 developed nations. The most complete sources used by Piketty were drawn from the tax records of France and Great Britain--two nations that have followed similar paths of economic development.

The U.S. provided comparable data, and Piketty even evaluated the economics of slavery in the American South. His research has indicated highly inegalitarian results for every country with the exception of the U.S. during its early years when few fortunes had been amassed and the population largely was composed of poor immigrants. Today, the U.S. arguably has the most unequal distribution of income and wealth of any developed nation--and this poses immense problems.

New York Times columnist Paul Krugman, a Nobel Prize winner in Economics, who considers himself to be a social democrat in the European manner, says that Piketty's Capital is a "magnificent sweeping meditation on inequality." However, it is not just inequality that fascinates Piketty; it is the dazzling ascension of the very rich in developed nations since 1980--in a new manner that nevertheless has duplicated the pattern of great wealth and inequality that existed in Western Europe and the U.S. before 1914.

Historians refer to the period between 1870-1914 as the Gilded Age, but Piketty prefers the French term "Belle Epoque," meaning "Beautiful Era." That tumultuous time also marked the emergence of socialism, communism, organized labor, and rancorous political turmoil throughout Europe and the U.S. After World War n, increased inequality was not supposed to occur, at least for those economists who followed American economist Simon Kuznets, who had presented an overly optimistic forecast for reduced levels of inequality in the future. In 1954, during his presidential address to the American Economic Association, Kuznets speculated that the balanced forces of development, competition, and technological progress eventually would lead to less degrees of inequality and improved social harmony.

Piketty contends that Kuznets' conjecture merely was a Cold War "fairy tale" intended to convince nations to embrace capitalism and to reject the left's claims that it would enrich the plutocrats only at the expense of the workers. In fairness to Kuznets, the data supported his position, but Piketty maintains that this 30-year period was a historical aberration from the norm; afterwards, as a function of its supposed "deep" nature, capitalism once again would produce greater inequality, and inequality did rise sharply after 1980.

Piketty's Capital is an ambitious research program of principled empiricism driven by his desire to provide a cohesive intellectual framework unifying the concepts of economic growth with the pattern of income and wealth distribution, especially for those at the top of the economic pyramid. In the past, most economists believed that inequality resulted mainly from unequal incomes and that income from capital neither was important nor worthy of study.

Piketty's findings show that, at present, income from capital, not from earnings, dominates the intake for those at the highest income levels. Additionally, Piketty has shown that, during Europe's Belle Epoque and, to a lesser degree, in the U.S.'s Gilded Age, the unequal ownership of capital assets, not unequal incomes, was the principal driver of unequal income distribution.

Piketty believes the highly skewed distribution of income in the U.S. can be attributed, in part, to corporate "super managers" who often are able to set their own compensation. However, for the top one-tenth of the top one percent, ownership of capital assets remains the most important factor. Like Marx, Piketty believes that economic growth occurs as a result of capital accumulation interacting with population growth and technological progress. In contrast, Piketty contends that Marx faded to take into account the importance of technological improvement, although Marx wrote Das Kapital while residing in England during its greatest era of success after the Industrial Revolution.

Piketty apparently does not believe that Marx necessarily was wrong, only premature in arguing that the private accumulation of capital inevitably would lead to the concentration of capital in ever-fewer hands. This was labeled "the immiseration of the proletariat" and the expected outcome was to be the overthrow of capitalism. This is what Piketty expects unless his advice is accepted and his recommendations are enacted into law.

Making mistakes like Marx

At first glance, it seems that Piketty may have made the same error as Marx in assuming that the future will resemble the past simply because society would be unable to learn from its prior mistakes. In terms of the private accumulation of wealth, Piketty's forecast is consistent with Marxist theory in that capitalists inevitably will gain almost complete ownership of a nation's wealth. Piketty believes that the rate of return on the capital assets owned by the wealthy usually will exceed the overall growth rate of the economy, which implies that the rich would usually be able to reinvest some of their earnings, become even wealthier, and then pass on their riches to their heirs.

The final outcome would be what Piketty calls "patrimonial capitalism." This implies that capitalist nations would become dominated by wealthy dynasties, as was the case for Europe and for most of the rest of the world prior to the modern era.

James Pethokoukis of National Review contends that Piketty and Emmanuel Saez are the most important public intellectuals today, and that their efforts are setting the political agenda favored by the left (read, Democrats and the media). Pethokoukis dismisses Piketty's work as "soft Marxism," but he fears that it will shape the framework for the political battles that are sure to come between the "statists" (his euphemism for the left) and those who prefer, in his opinion, "to make an intellectual case for economic freedom."

Piketty has not attempted to refute the intellectual heritage of Marx, a revolutionary intellectual who predicted that capitalism eventually would collapse due to its internal contradictions. Like Marx and contemporary liberals, Piketty also is fiercely critical of the social and political injustices caused by unfettered capitalism because of its undeniable (according to its critics) tendency to produce unequal outcomes. Piketty has rejected the comfortable belief that capitalism somehow will become more benevolent. Instead, he predicts increasing inequality in the advanced nations that soon will have a destructive effect on democracy and its values.

Pres. John F. Kennedy used the phrase "a rising tide lifts all boats" to justify free enterprise during his presidency. During the 1960s, the concept worked because the U.S. was midway through a 30-year period of rapid economic growth that many Americans thought would last indefinitely. They were disappointed. After 1975, economic growth slowed and real wages stagnated.

Many fortunes had been destroyed during the the Depression and subsequent war years, but the middle class then expanded and prospered, and income inequality was reduced, or "compressed" in the jargon of economics. Piketty's work repudiates the U.S.'s postwar faith in capitalism. What is needed now, in his opinion, is for governments to act decisively to close the chasm between the richest 10% and the remaining 90%, who he claims have fallen far behind largely through no fault of their own.

As possible remedies, Piketty proposes an 80% tax on American incomes greater than $500,000, plus a wealth tax on capital assets held by individuals, and a tax on the rich in other developed nations. Until now, his tax and wealth redistribution proposals have been met with deafening silence.

What are the reasons for the widening gap between the fortunate few and the rest? Piketty does not go into detail on this issue, but there are several obvious reasons, such as the technological progress that has eliminated many well-paying jobs, as well as the steady downward pressure on real wages since globalization, as American workers must compete with their poorly paid foreign counterparts.

Most liberals feel that the increasingly high concentration of wealth is an important issue that long has been disregarded. Many believe that attacking economic inequality would be winning politics for the Democratic Party. Krugman contends that most of the critics have been unable to mount a substantial counterattack to Piketty's argument; instead, they have resorted to calling him a Marxist or, worse, another left-wing French intellectual who hates the U.S. However, whether or not you agree with his politics or his economics, his empirical work stands out as a testimonial for the importance of inequality. A number of Americans have come to believe that the nation has entered a new Gilded Age, where wealth has become increasingly concentrated in the hands of a moneyed elitist class that has distanced itself from the concerns of ordinary citizens.

James W. Thomson is a freelance writer and owner of Thomson Investments, Bellevue, Wash.
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Title Annotation:National Affairs
Author:Thomson, James W.
Publication:USA Today (Magazine)
Geographic Code:1USA
Date:Sep 1, 2014
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