Thomas Piketty is a French economist whose Capital in the Twenty-First Century has swept American discourse. Four experts – Brad DeLong, Tyler Cowen, Stephanie Kelton and Emanuel Derman – take on why that is
There’s been a bizarre phenomenon this year: a young, little-known French economist has written a 700-page tome about economic inequality – dense with data, historical examples from France, and a few literary references to Jane Austen.
That’s not the strange part. This is: it’s a bestseller.
Somehow, Capital in the Twenty-First Century by Thomas Piketty has become a conversation piece among well-read people. Its graphic red-and-ivory cover is inescapable. Early in its launch, it hit No 1 on Amazon’s bestseller list and the paper version – a doorstop in punishing, heavy hardcover – sold out in major bookstores.
Piketty’s main argument is this: that invested capital – in the stock market, in real estate – will grow faster than income.
The implications of that are deep: to have invested capital, you must have money already. If you rely on income, as most people do, you will likely never catch up to the wealth of people who are already rich. The 1% and the 99% enshrined by Occupy are not an anomaly of our time, Piketty’s research suggests. It’s a structural feature of capitalism. Piketty’s work – which has been in progress for over a decade – is a natural pairing with the Occupy movement, which also questions the premises of capitalism.
You can see the appeal of such an argument, which has driven the book to become a cultural touchpoint. Seattle quoted Piketty in its minimum-wage law. The book has had so many reviews and articles that it’s possible for someone to feel as if they have read it even without cracking the cover.
Which raises the question: why this book? The themes that Piketty brings up have been enshrined in discussion about progressive economists for decades. No fewer than three Nobel Prize winners – Joseph Stiglitz, Paul Krugman and Robert Solow – have all devoted much of their careers to studying inequality. On Friday, 19 September, I moderated a panel at the Washington Center for Equitable Growth that included Solow as well as economists Brad DeLong, Tyler Cowen and Russ Roberts. For 90 minutes, they hammered out the implications of Piketty’s work — and the discussion ended with much more to say.
I decided to ask star economists and finance experts who have devoted their careers to issues of inequality and the American economy: why is Thomas Piketty a bestseller? Is he required reading? Their thoughtful responses are below, and they include some surprises – including one who has decided not to read Piketty at all.
Oh, and it’s pronounced like this: Tome-AH PEEK-a-tee. Now, over to the experts.
Stephanie Kelton is chair of the Department of Economics at the University of Missouri-Kansas City. She is also editor-in-chief of the top-ranked blog New Economic Perspectives.
What explains the Piketty phenomenon? The book, which has sold more hardcopies than its e-book alternative, commands so much real estate that it will crowd out a few old favorites when it takes a stand on your shelf. The title, Capital in the Twenty-First Century, doesn’t exactly carry the titillating allure of a bestseller like, say, Fifty Shades of Grey. It looks and sounds like what it is – a scholarly tome that sets out to investigate changing patterns of ownership in the economy’s most dominant resource, capital. Who owns the world’s stock of tangible and financial assets, where did they get them, and how did the distribution of ownership change through time?
While it is easy to see why a book like this would receive such intense interest from economists, who are engineered to concern themselves with questions like these, it is, perhaps, more difficult to understand how Capital became a book that would top the summer reading lists of thousands of beach-bound, working class adults. My own guess is that Capital was the right book at the right time.
The Occupy movement laid the groundwork for a great debate. What was happening to America? Were we witnessing the rise of a plutocracy or the emergence of a meritocracy? Chris Hayes and Joe Stiglitz made the case on the left, while Tyler Cowen and David Brooks provided a counter-narrative for the right. Both sides had a loyal following, but it was Piketty whose meticulous examination of the evidence, seemed to provide the impartial proof audiences were craving. The left was right. The wealthy owed their fortunes to their forefathers and the Congressman who wrote the loopholes for their tax accountants to exploit. It’s a conclusion that confirmed many priors, which probably explains much of its success.
Tyler Cowen is professor of economics at George Mason University and author of the recent book Average is Over.
Thomas Piketty’s Capital in the Twenty-First Century has been a hit for several reasons, most notably the quality of the work. But I’d like to focus on a neglected reason why the book has found so much support, namely it appears to strengthen the case for redistribution.
Most previous commentators focused on income inequality. Bill Gates or JK Rowling have earned more than CEOs or authors in the past, while incomes in the middle class or lower middle classes are often stagnating below what previous generations could expect. That’s a labor market issue – namely that some individuals are not very much demanded by employers.
The obvious questions are then a) how can we make low-earners more productive, and also b) how can we improve education?
Perhaps most importantly, as these issues get processed by the public there is a common attitude – whether justified or not – that many of the lower earners are partially or fully responsible for their own plight. The egalitarians don’t tend to win these policy debates.
In the simplest version of the Piketty model, wealth grows more quickly than does the economy as a whole and thus the picture changes. The relative losers are no longer low earners but rather anyone who is not a capitalist. Any disparity is due not to their shortcomings in labor markets but rather to their lack of a high initial endowment.
Furthermore redistribution will work like a charm, at least provided the redistribution is enough to give the poorer individuals some capital to invest.
If you are an activist who favors lots of redistribution, the Piketty story is a lot easier to tell yourself and to tell your audiences – and that is yet another reason for its popularity.
Emanuel Derman is a professor at Columbia University, where he directs the program in financial engineering. His latest book is Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disasters, On Wall Street and in Life – one of Business Week’s top ten books of 2011.
Economists are the new nuclear physicists, turned to by governments for advice as though they are heirs to the power of the scientists who created Hiroshima. Macroeconomists now advise central banks on monetary policy, and behavioral economists tell political parties and governments how to nudge citizens to do what politicians and economists deem to be right.
I make my living teaching finance, the branch of economics concerned with putting a value on assets such as stocks, bonds, mortgages and options.
Though I should, I can’t bring myself to read Thomas Piketty.
I wish I could. I have nothing against him or his work, which seems well-intentioned and directed at improving human welfare. I am just spiritually weary of the ubiquitous cockiness of economists, though Piketty sounds as though he’s less guilty of this than most of the pundits in the daily papers.
The best model in my field, finance, is the Black-Scholes model of options pricing, which, according to Steve Ross, an MIT economist himself, “ … is the most successful theory not only in finance, but in all of economics.” I’ve spent most of my professional life working on options theory, and I understand it well. More importantly, I understand its limitations in describing the behavior of complex human beings and markets via simple assumptions and mathematics. But limited though it is, finance is much more reliable than economics.
Economics is the study of how to utilize limited resources to achieve good ends. And good, of course, is in the eye of the beholder, defined by humans. But economists don’t agree with each other about ends or means. They can’t agree on the efficacy of money printing or austerity. They keep changing their minds every few years about conventional wisdom while at every instant appearing to be certain that they are right. My gripe with economists is not that their models don’t work well – they don’t, look at the role of central banks in the financial crisis – but that they seem so reluctant to acknowledge the riskiness of their advice. And yet, beware their fearsome unelected power. Anyone visiting from Mars last year and asking to be taken to our leader would undoubtedly expect to meet Bernanke.
As a result their public arguments have an incestuous yet masturbatory quality that is exhausting to follow. The only field more self-confidently but just as regularly wrong as economics is nutrition, whose recommendations to shun butter/margarine or red meat/carbohydrates regularly reverse themselves.
Natural scientists (physicists, chemists, biologists) have had frightful power, and not always used it well. But at least they can more or less agree about truth and efficacy. Economists cannot, except by using statistical regressions which are often flawed and prove little.
So I cannot currently bring myself to read over 600 pages by an economist. One day I do hope to read Piketty’s book.
J Bradford DeLong
Brad DeLong was a deputy assistant secretary of the treasury from 1993-1995, and is now a professor of economics at UC Berkeley, a research associate of the NBER and a blogger for the Washington Center for Equitable Growth.
I like Thomas Piketty’s Capital in the Twenty-First Century a lot. It follows Larry Summers’s advice – which I have always thought wise – that the further ahead in time we want to forecast, the further back in time we should look. It deals with very big and important questions. It takes a broad moral-philosophical view, rather than a narrow technical-economist view. It combines history, quantitative estimation, social science theory, and a deep concern with societal welfare in a way that is too rare these days.
But I thought it would be a book for a narrow audience: me and a few others. I expected people who did not have the souls of accountants to start to snore at Piketty’s numbers, numbers, numbers and more numbers.
What we can think about is why the soil was fertile: why was there the potential for a mass-audience viral explosion of interest in Capital in the Twenty-First Century rather than our standard set of viral propagation memes – cat videos and Buzzfeed’s Twenty-Seven Things You Won’t Regret When You Are Older?
I confess that I do not know. I do have a guess. My guess is that the book-buying upper-middle class of America today is greatly distressed when it looks at the world around it, specifically at two things.
The first is that our society today is largely failing its non-migrant non-college-completing majority, in that for all of our cheap electronic toys, life is no easier than it was a generation ago in spite of an enormous explosion of technology and productivity.
The second is that they now know of a plutocracy that did not use to exist and makes us very uneasy. Last generation’s Michigan governor and American Motors president George Romney lived in a large-but-not-abnormal house and bossed a company that created lots of good jobs at good wages. This generation’s Massachusetts governor and Bain Capital CEO Mitt Romney has seven houses worth perhaps $25m in total, and bossed a company whose core business model appears to have been exploiting legal anomalies like the fact that pension funds have little control over their money after it’s invested.
And because the book-buying upper-middle class does not trust the entrenched positions of America’s ideologues, they are looking for fresh thinking – which a foreigner like Piketty, whose positions are not those of any large American political faction, provides.
Now Piketty’s grand argument may be wrong. It could be that in the future, capital will turn out to complement rather than substitute for labor, and the wealth accumulation of plutocrats will generate their self-euthanasia as a social class by pushing down the rate of profit.
It could turn out that growing fortunes will be a lot harder in the future than Piketty thinks it will. It could turn out that our plutocrats as a social class will decide to play the status game of spend-their-money-and-change-the-world rather than enrich great-grandchildren that they will never see.
My guess is that the grimmer elements of Piketty’s forecast have only a 50-50 chance of coming true even if plutocrats achieve and maintain a lock on politics for the next three generations. But that is much more than enough to worry about the scenario he paints, and figure out how to guard against it.