Capital in the Twenty-First Century Thomas Piketty

Harvard University Press, pp.685, £29.95, ISBN: 9780674430006

If a title works once, the chances are it will work again. Half the punch of Marx’s masterwork is in its name. Better in German of course, with the kick of the K and the ominous echo of Kaput. But even in English when blocked out in red caps on a  fat spine, CAPITAL sends a thrill along any bookshelf. Its fond midwives at Harvard can scarcely have expected to sell 200,000 copies of a 600-page treatise by a French economist unknown in the English-speaking world, but that only shows we must never underestimate the beauty of telling the target audience what it wishes to hear — in this case, that Marx is back in town.

This, though, is certainly not the first impression you get from the book. Far from being a grim fulminator, Thomas Piketty is an urbane and relaxed companion, more Alain Delon than Jean-Paul Sartre. Like all economists who reach a wider audience, he has charm. He also has a superb translator in Arthur Goldhammer, who makes the book read as mellifluously as any essay by Keynes or Galbraith.

Piketty endears himself by his lack of illusions about his profession: ‘Economics has yet to get over its childish passion for mathematics.’ His confrères ought to learn more history and get out more. The trouble is that ‘economists like simple stories, even when they are only approximately correct’.

Readers may also warm to Piketty’s thoughtfulness. On page 34, he tells us that the next 70 pages contain nothing really new (he’s right) and the reader may wish to skip directly to Part Two. Then halfway through Part Two, he says that ‘readers who find these issues too technical can easily skip over the remainder of this section and go directly to the next’ (he’s right there too). Nothing is more agreeable than a teacher who lets you out of school early. Piketty also tricks out his historical analysis with references ranging from Jane Austen and Balzac, which is nice.

Any whiff of musty old-style Marxism is blown away by the author’s assurance that he belongs to a generation that came of age during the collapse of the communist dictatorships. Unlike most French lefties, he has never felt the slightest affection or nostalgia for them. ‘I was vaccinated for life against the conventional but lazy rhetoric of anticapitalism’. This is to be an after-Marx book, not a retro tribute.

For Karl Marx was wrong about a lot of things, notably in his prophecy that under capitalism the workers would go on getting poorer until the whole system collapsed under the weight of its contradictions. For all his scientific pretensions, the old man was a hasty, anecdotal, unsystematic writer who failed to make proper use of such statistics as were available to him.

According to Piketty, the dismal science did not improve much in the 20th century: ‘apocalyptic predictions gave way to a similarly excessive fondness for fairy tales, or at any rate happy endings.’ In the 1950s, the school led by the American Simon Kuznets developed the cheering theory that inequality would automatically diminish as capitalism went on its sweet way. Kuznets’s optimism was no more securely founded than Marx’s pessimism. The world just happened to be going through a ‘Great Compression’. Two world wars and the high taxes required to pay for them had destroyed private inherited wealth and slashed the take-home pay of senior managers. Never had Britain or the United States been so equal as they were in the 1970s.

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But it was only a passing phase. Over the past 30-odd years, the earnings of the fat cats have soared to unimaginable heights, and inherited wealth now looms as large again as it did in the époque which was belle only for the upper echelons. We are back where our grandparents left off. The book is littered with graphs exposing different angles of the same story: a U-shaped curve which swoops down to its low point in the 1930s and recovers all the lost ground by the end of the 20th century. As far as inequality goes, the period 1970–2014 looks pretty much like 1870–1914.

So far, this has the uncomfortable ring of truth. To misquote Hilaire Belloc, ‘Privilege resumed her reign,/which goes with bridge and women and champagne’, or in our terms, with super-yachts, dog-walkers and underground swimming pools.

What happens next, then? Piketty tells us to be ‘wary of any economic determinism’. Modestly he confesses, ‘I am only too well aware of my total inability to predict what form capitalism will take in 2063 or 2113’. Then of course he goes ahead and blithely makes his prediction, which is, more of the same. Inequality will go on getting worse, perhaps much worse.

This prediction is based on a rather thin argument which he repeats half a dozen times: that the rate of return that the rich derive from their investments is always higher than the general rate of economic growth, so that the rich go on getting richer, while the masses stagnate.

The outlook today is ‘bleak’ and ‘gloomy’: growth is slowing down to 1 per cent, while the grands héritiers are still clocking up returns of 4–5 per cent. The trouble is that even while Piketty was still celebrating his sales, all this was beginning to look a bit dated. It is not simply that he fails to take account of the risk premium which every investor has some right to expect in return for venturing his savings. In most countries things are at last looking up. The best predictions forecast growth over the next few years up in the 2–3 per cent range, while as Mervyn King points out, five-year real interest rates are at present slightly negative. Piketty’s prophecy may turn out to be as fallacious an extrapolation from the recent past as were Kuznets’s and Marx’s. For all we know, the remainder of this century may show another U-curve, making what would be a giant W over the two centuries. The truth is that we have not the faintest idea.

Piketty doesn’t make his prophecy of doom any more convincing by his devious assumption that taxes on capital will have been reduced to zero by the middle of the century. Fat chance in today’s climate of popular indignation against the fat cats. Nor does he mention the interesting fact that the rich today contribute a higher proportion of government revenue than they ever have before. Those modest top tax rates of 40 per cent (or 45–50 per cent at worst) have meant that, with the exception of a few pop stars and insatiable tycoons, the rich actually pay their taxes these days.

Yet Piketty’s solution to inequality is to push top income tax rates up to 80 pence in the pound, and to introduce a global tax on wealth of up to 5 or 10 per cent a year. Nothing is more certain than the calamitous effect such punitive rates would have on Treasury revenues and the knock-on effect on schools and hospitals as the fat cats rush for the exit. Piketty implicitly concedes as much when he says that taxes on middle incomes would have to go up substantially too.

Such a ferocious regime would only begin to work if there was no hiding place from it. Yet Piketty gaily admits that ‘it is hard to imagine the nations of the world agreeing to any such thing any time soon.’ That’s a heroic understatement, and the same surely applies to his other Big Idea, which is for a ‘Budgetary Parliament’ to draw up a European budget which would be imposed everywhere by majority vote. In his less intoxicated moments, Piketty admits that ‘the state’s great leap forward has already taken place; there will be no second leap.’ The same is surely true of the European project.

These fantastical wheezes would amount to a huge advance in state control and diminishment of freedom and enterprise. Although Piketty may have discarded the old clonking class rhetoric, this decaff Marxism would be just oppressive and intrusive as the old variety.

At the same time, Piketty pays little attention to the services already supplied through the State which extend a guaranteed form of wealth to every citizen. Our access to the National Health Service is infinitely more valuable and reliable than the scant dividends which the Barclays bosses toss their shareholders after distributing three times as much in bonuses to themselves.

Piketty rightly points out that the steepling salaries of top executives have little economic justification, but are largely a social construct, based on the mutual esteem of directors and asset managers, the corporate form of ‘crony capitalism’. But he does not bother to inquire into those reforms of corporate governance which might tilt the system in a more rational direction. Nor does he examine the back history, the way in which management consultants after the war bolstered the belief of CEOs that they were indecently underpaid. It was Arch Patton of McKinsey who first taught the fat cats how to lap.

There are plenty of ways in which executive pay can be brought back into a sensible relation with what the rest of us earn. We can even think of devices for making Amazon and Google pay their taxes. Putting tax rates back up to wartime levels is not going to happen, and it would be a disaster if it ever did, not least for the worst off, who would be hit first by the disruption of economic growth. The saving grace for low wage earners is Piketty’s proposal to give the minimum wage a generous hike, as Roosevelt did in the 1930s. But both Obama and Osborne have already thought of that one.

Most of Piketty’s other proposals, though, appear as shaky as the analysis to which they are precariously connected. After nearly 600 pages which could have been half the length, he leaves us with a disorderly heap of ideas, each of which threatens to upset the whole pile as soon as he touches it, rather like the old children’s game of Pickupsticks or Spillikins as we used to call it. Pikettysticks looks like a more dangerous game, and not so much fun.

Available from the Spectator Bookshop, £28.95. Tel: 08430 600033. Ferdinand Mount is a former political correspondent of this magazine. His many books include The New Few: Power and Inequality in Britain Now

This article first appeared in the print edition of The Spectator magazine, dated

Tags: Book review - economics, capitalism, Galbraith, Keynes, Marxism, tax rate