Smith > Keynes > Freidman > Piketty?


The Top of the World

An ambitious study documents the long-term reign of the 1 percent

Doug Henwood


The core message of this enormous and enormously important book can be delivered in a few lines: Left to its own devices, wealth inevitably tends to concentrate in capitalist economies. There is no “natural” mechanism inherent in the structure of such economies for inhibiting, much less reversing, that tendency. Only crises like war and depression, or political interventions like taxation (which, to the upper classes, would be a crisis), can do the trick. And Thomas Piketty has two centuries of data to prove his point.

In more technical terms, the central argument of Capital in the Twenty-First Century is that as long as the rate of return on capital, r, exceeds the rate of broad growth in national income, g—that is, r > g—capital will concentrate. It is an empirical fact that the rate of return on capital—income in the form of profits, dividends, rents, and the like, divided by the value of the assets that produce the income—has averaged 4–5 percent over the last two centuries or so. It is also an empirical fact that the growth rate in GDP per capita has averaged 1–2 percent. There are periods and places where growth is faster, of course: the United States in younger days, Japan from the 1950s through the 1980s, China over the last thirty years. But these are exceptions—and the two earlier examples have reverted to the mean. So if that 4–5 percent return is largely saved rather than being bombed, taxed, or dissipated away, it will accumulate into an ever-greater mass relative to average incomes. That may seem like common sense to anyone who‘s lived through the last few decades, but it‘s always nice to have evidence back up common sense, which isn‘t always reliable.

There‘s another trend that intensifies the upward concentration of wealth: Fortunes themselves are ratcheting upward; within the proverbial 1 percent, the 0.1 percent are doing better than the remaining 0.9 percent, and the 0.01 percent are doing better than the remaining 0.09 percent, and so on. The bigger the fortune, the higher the return. Piketty makes this point by looking not only at individual portfolios but also (and ingeniously) at US university endowments, for which decades of good data exist. The average American university endowment enjoyed an average real return—after accounting for management costs—of 8.2 percent a year between 1980 and 2010. Harvard, Yale, and Princeton, in a class by themselves (with endowments in the $15–$30 billion range), got a return of 10.2 percent a year. From that lofty peak, the average return descends with every size class, from 8.8 percent for endowments of more than $1 billion down to 6.2 percent for those under $100 million. In short: Money breeds money, and the more money there is, the more prolific the breeding.

It was once believed, during the decades immediately following the Great Depression and World War II, that vast disparities in wealth were features of youthful capitalism that had been left behind now that the thing was reaching maturity. This theory was first enunciated formally in a 1955 paper by the economist Simon Kuznets, who plotted a curve representing the historical course of inequality that looked like an upside-down U: Kuznets‘s chart showed that disparities in wealth rose dramatically during the early years of growth and then reversed once a mature capitalist economy reached a certain (though none-too-specific) stage of development.

Kuznets‘s curve fit nicely with the actual experiences of the rich economies in what the French call the Trente Glorieuses, the “thirty glorious years” between 1945 and 1975, when economic growth was broadly shared and income differentials narrowed. In the United States, according to the Census Bureau‘s numbers (which have their problems—more on that in a moment), the share of income claimed by the top 20 percent—and within that group, the top 5 percent—declined during the glorious years. At the same time, the income of the remaining 80 percent gained.

But in the United States, the thirty glorious years were actually twenty-odd years; depending on how you measure it, the equalization process ended sometime between 1968 and 1974, again according to the census figures. Still, quibbles aside, the process of relative equalization went on for long enough that it felt like Kuznets was on to something with his curve. I say “relative” because these are still not small numbers: The richest 5 percent of families had incomes about eleven times those of the poorest 20 percent in 1974, the most equal year by this measure since the census figures started in 1947. But that number looks small now compared with the most recent ratio, almost twenty-three times in 2012.

While those census numbers—and similar statistical efforts based on surveys of households elsewhere in the world—are useful in outlining broad trends, they have a few serious problems. Most important, they don‘t account for the very rich, a topic of extreme voyeuristic and political interest. Plutocrats do not answer surveys. The Federal Reserve does a triennial Survey of Consumer Finances that makes special efforts to cover the rich, but by design the members of the Forbes 400 are excluded—for reasons of privacy, according to the survey‘s documentation. For serious analysis of the seriously rich, one needs to look at tax data, which is what Piketty (and his sometime collaborator Emmanuel Saez) has done.

Piketty‘s study is largely confined to a handful of rich countries—the United States, Britain, France, Germany, and Japan. These economies have the best data over the longest period of time—and besides, if you‘re studying wealth, these are the countries where the moneyed have disproportionately lived. The French data is particularly detailed, because the French Revolution instituted an elaborate registry of property. The French didn‘t do much to redistribute wealth—it was, after all, a bourgeois revolution—but they did a lot to catalogue it.

Most rich countries introduced income taxes in the early twentieth century, which made it possible to study the volume and structure of incomes with some precision and detail. But it‘s possible to journey further into the past for estimates of aggregate incomes and of the value of the capital stock. And indeed, much of Capital in the Twenty-First Century is devoted to outlining the contours of the value of that capital stock relative to incomes—an effective way of analyzing capital‘s relative heft over time. For Britain and France, the total value of the capital stock—owned, as is almost always the case, largely by the 1 percent (whether aristocrats or members of the bourgeoisie, whether it‘s France in 1780 or the United States in 2014)—was about seven times national income from 1700 until around 1910. (National income, roughly speaking, is the sum of all forms of income in a given economy—wages, profits, interest, dividends, and so on.) With two world wars and a depression, the capital stock fell to about three times national income. (Curiously, Piketty notes that the monetary destruction of paying for war through taxes and inflation did more damage to the capital stock than the physical destruction of combat itself.) It began to recover around 1950, but was inhibited by extremely high tax rates in the first postwar decades. As of 2010, the capital stock had recovered to between five and six times national income in Britain and France. Data begins later for Germany, but the pattern isn‘t dissimilar: a stock of capital about seven times national income in 1870, hammered down to just over two times in 1950, and a recovery to four times in 2010. The trajectory for the United States is much less dramatic: A capital stock of around three times national income in 1770 rose steadily to five times on the eve of the Great Depression, fell to about four times in 1940, but began recovering quickly, rising back steadily toward five times in 2010. The Second World War did little damage to the American rich, who largely inherited Britain‘s empire with the coming of peace and the Yalta accords in 1945.

Many interesting details emerge in Piketty‘s treatment of US economic history. Despite our distinction as the most unequal of the major economies today, America was a relatively egalitarian place (for white people) in the nineteenth and early twentieth centuries. But, speaking of white people, the liberation of the slaves after the Civil War was probably the greatest expropriation of capital in history. If one counts slaves as wealth—which, grotesquely, was how American society defined them from the country‘s founding through 1865—their value was about 150 percent of national income throughout the slavery era. And practically overnight, with Lincoln‘s 1863 Emancipation Proclamation, they were no longer someone‘s property.

After that, though, America largely lost its expropriating nerve. Not entirely so, however: Piketty reports that it was politically easier for America to institute the income tax in 1913 than it would be in European economies, given residual populist resentment of the rich. That, and endless waves of immigration, which continuously upset the economic hierarchy, kept the United States more egalitarian than Europe into the 1970s. From that point on, although the rich got richer nearly everywhere, the United States became the affluent world‘s undisputed inequality champ. It‘s also more unequal than lots of “emerging” countries, such as China and India.

Remarkably, despite those broad gyrations over the last two centuries, many continuities stand out in Piketty‘s historical narrative. One is the stability in the rate of return on capital—the same 4–5 annual percentage, decade in and decade out. Another is the preponderance of that magic 1 percent figure, which seemed like a polemical simplification in the Occupy days, but clearly has an actual historical basis.

But something has changed within that 1 percent: While it was once dominated by a population of rentiers, coupon clippers who barely worked if at all, it is now dominated, especially in the United States, by a group of star CEOs and financiers who flatter themselves that they‘re being paid for their extraordinary talents.

Economics as a discipline loves stories about equilibrium and convergence. Vast inequities should, in theory, be “competed away,” as neoclassical economics likes to say. But mostly they‘re not. Globally, poorer countries should gain on richer ones as technology and education spread and mobile capital‘s search for higher returns makes the poor less poor. That has happened to some degree, but rapidly developing economies such as India and many African nations remain much poorer than the United States or Western Europe. In the case of personal wealth, old fortunes should decline and be replaced by new ones, just as manual typewriters were replaced by electric ones, and electric typewriters were superseded by computers. But in fact old money is remarkably persistent. Yes, we‘ve seen the creation of a large number of new fortunes over the last few decades, a change from wealth‘s dark days of the mid-twentieth century. Bill Gates is the son of a well-off lawyer who was nowhere near a billionaire; Mark Zuckerberg sprang from the loins of a dentist and a psychiatrist. They are the very picture of modern new wealth. But despite those new fortunes, inheritance remains very important. David Rockefeller, worth $2.8 billion at the age of ninety-eight, is number 193 on the Forbes 400. Overall, Piketty concludes, it‘s likely that half or more of the wealth of the upper orders originates in inheritance.

And though Piketty doesn‘t explore this, I‘ve long suspected that a major force for the repeal of the estate tax in the United States has been that the billionaires of the neoliberal age—the tech and finance moguls, some famous, some barely known—have been thinking about their legacy. The scions of the second Gilded Age want to see their grandchildren on the Forbes 400, just like David Rockefeller is a ghost of the first Gilded Age. I‘m less sure whether they want to see their names on traditional foundations—maybe more the entrepreneurial kind. But it‘s clear that the political salience of the “death tax” is a reflection of a cadre of fortunes of a sort that was long out of fashion.

Piketty‘s book could have done with a pruning. It is original and very important, and deserves a wide audience. But even a connoisseur gets winded after four hundred pages, much less six hundred plus. It‘s often wordy and repetitive. But it is not in any sense heavy going. The prose is clear, and there‘s a minimum of math—Piketty, a professor at the Paris School of Economics, has little taste for conventional (meaning mostly American) economics. Early on, he is critical of his discipline‘s “childish passion for mathematics” and its lack of interest in other social sciences or culture. He often refers to novels, particularly those by the likes of Austen and Balzac, that illuminate the world of wealth—something you‘d never find in the latest number of the American Economic Review. And he takes passing swipes at prestigious US academic economists, who generally find themselves near the top of the income distribution and who, not coincidentally, believe that that distribution of income is just and efficient.

But the major frustration of the book is political. Piketty clearly shows that short of depression and war, the only possible way to tame the beast of endless concentration is concerted political action. The high upper-bracket tax rates of the immediate postwar decades couldn‘t have happened without serious fears among elites—fresh memories of the Depression, threats from strong domestic unions, competition on a global scale with the USSR, which, for all its problems, was living proof that an alternative economic system was possible. As those things waned, upper-bracket taxes were lowered, wages and benefits were cut, and capital‘s increased mobility led to increased competition among jurisdictions to offer a “favorable investment climate”—meaning weak regulations, low wages, and minimal taxes. All these trends have contributed to the concentration of capital over the last thirty years, as wealth and power have shifted upward on an enormous scale. None of these features will be reversed spontaneously. Nor will they be altered through “democratic deliberation”—several times Piketty notes the hefty political power of the owning class—or improved educational access, as Piketty actually urges at one unfortunate point. Brushing up the working class‘s skill set is no match for the power of r > g.

Starting with the title, the eternally recurrent specter of Marx hangs over this book. Early into the first page of the introduction, Piketty asks, “Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the nineteenth century?” Phrasing the question as something grounded in the past is a nice distancing technique, as the psychoanalysts say, but the answer is clearly yes. Several times, Piketty disavows Marx—just a few lines later he credits “economic growth and the diffusion of knowledge” for allowing us to avoid “the Marxist apocalypse”—but he also concedes that those prophylactics have not changed capitalism‘s deep structures and the tendency for wealth to concentrate. It seems, in other words, that Piketty‘s own research shows that the old nineteenth-century gloomster had a point.

Unlike most modern economists, Piketty at least credits Marx‘s ambition and profundity. But for Piketty, the main problem with Marx is his unequivocal call for political confrontation. Having described a process of inexorable material polarization—and with it, increasing plutocratic power over the state—Piketty remains distressingly moderate as he sounds out some of the political implications of his analysis. A major reason for his posture of socialist skepticism, he declares, is that he came of age as Soviet-style Communism was falling apart, which left him “vaccinated for life against the conventional but lazy rhetoric of anticapitalism.”

Anticapitalist rhetoric need not be lazy—and for all the empirical sophistication of Piketty‘s work, his political thinking is hardly a model of complexity or effort. He mostly aspires to contribute to rational democratic deliberation about “the best way to organize society.”

Still, while such deliberation is clearly necessary, political action cannot be factored out of that process just because we happen to have lived through the Cold War‘s unmourned collapse. It‘s energizing to see that a younger generation of political intellectuals, who were in grade school when the Berlin Wall came down, missed the anticapitalist vaccination. They might be able to take Piketty‘s data and cause some genuine trouble with it. Because serious trouble—demonstrations, strikes, insurgent political movements—is what it will take to derail capitalism‘s inevitable tendency toward concentration. Short of that, it looks like we‘ll be continuing our journey along the road to a new serfdom.

Unfortunately, for Bugman, this will be TLDNR

Correct. But given the subject matter, I may take a closer look later.


I read a couple of other reviews on this book and they were really really interesting. IIRC they were saying capitalism will just create wider and wider gaps between the top 10 or so % and the rest, that the really wealthy don't add value to society because they don't have to do anything at all if they don't want, and that the new upper managers CEOs' etc are ridiculously overpaid and add no value to their organisations.


So I bought the kindle version a few weeks ago, but haven't started it yet. I will have to put on my brains first.  But as a person who believes that economic theory is clearly wanting, I am very interested in what an alternative economic theorist has to say.

Haven't read Piketty's "Capital" but I have read David Graeber's "Debt: The First 5000 Years" with which it has been compared and linked and which has changed my view of personal and national debt. There's a facebook page called "Piketty and Graeber" that records an illuminating discussion between the 2.

At the risk of sounding 90’s and crass…derrrrrrrrrrrrrrr!

I'll be impressed when he predicts something that hasn't already happened.


Also, I didn't actually read the above. So why don't we just print more money?

I'll be impressed when he predicts something that hasn't already happened.


Also, I didn't actually read the above. So why don't we just print more money?



I'll be impressed when he predicts something that hasn't already happened.


Also, I didn't actually read the above. So why don't we just print more money?



Die what?


Spit it out, blockhead!

thank you for posting that Ivan. I will be obtaining a copy of it ASAP.  It is clear that the polarization in wealth is having an enormously destabilising effect on individual people and society as a whole. The first step in solving a problem is understanding the root causes of that problem, and it sounds like this chappy might be on to it.