“Here we have a worthy rival of classical liberalism.”

Thomas Piketty has intentionally given his latest book the title of Capital in the 21st Century,1 echoing that of Karl Marx‘s Das Capital.2 It has caught the attention of American liberals as no other economic book since John Kenneth Galbraith‘s historical effusions. Also, as anything the American left enthuses about is sure to be eagerly picked up by European socialists, Piketty is now all the rage this side of the Atlantic. Paul Krugman has helped with his fervid plug of the tome in the New York Review of Books,3 now reproduced by high circulation newspapers, such as Le Monde in Paris and El País in Madrid. The “Piketty tsunami”, as Martin Wolf of the Financial Times has called it, will not recede soon. The book is attractively written, with an abundance of historical and literary references that leaven its lengthy pages. Its very physical weight gives it authority. The statistical apparatus enshrined in its tables and graphs adorns it with a scientific aura. Its watered down Marxism chimes in well with egalitarians of all hues in the developed world. Despite some Piketty fatigue having set in, the book deserves serious examination as its arguments will be an essential part of the armory of left-leaning liberals and anti-market conservatives both in America and in Europe for a long time to come.

Professor Piketty is no newcomer to the economics profession. After obtaining a doctorate in Paris at the age of twenty-two with an abstract mathematical thesis, he was hired by MIT, where he taught for three years. MIT disappointed him. He found the “childish passion for mathematics and purely theoretical speculation” off-putting and dreamed only of coming back to Paris to work in the tradition of the great sociological and historical intellectuals such as Braudel, Levy-Strauss, and Godelier. He may have been unjust in overlooking the practical bent of economists in the United States; to be sure, if he had gone to Chicago or Madison he would have seen economics applied to real problems in society. However, his interests lay elsewhere, in the great questions of “the historical dynamics of the distribution of wealth and the structure of social classes”. Here one sees the longa manus of Marx in the universities of continental Europe. The young Piketty took that hand after it had been roughly manicured by history: at the age of eighteen he “belonged to that generation who came of age hearing of the fall of the Berlin Wall over the radio”. Marxism was not infallible but always remained an inspiration.

Back in France, he applied himself to gathering and interpreting the facts and statistics on the distribution of income and wealth. The French government helped him start the Paris School of Economics. With the backing of a bevy of research assistants and in collaboration with economists in his country and also in Britain, Italy and America, he started to write on the need to correct income inequalities and to redistribute riches. The attention and ingenuity he has applied to teasing out the realities of economic inequality from hidden data deserves strong praise. One of the distinguishing characteristics of Piketty’s research is that he is not content with observing income inequalities but has added a new dimension to social studies: the collection of previously overlooked data about heritage and patrimony. His first publication was in 1994, precisely on redistribution. In 2007 and 2010 Oxford University Press published two joint efforts of his dealing with the evolution of top incomes. In 2010 the School of Economics of Paris published his On the Long-Run Evolution of Inheritance, 1820-2050. Notice the long span of this study, an indication of his ambition and laboriousness, for he prized open previously ignored notary and estate tax records to try and give a true picture of this important element of social differences. I was certainly interested when I first read him in the Journal of Economic Perspectives of the summer 2013, for my previous Econlib column on “Poverty and Equality”.4 Little did I know that I would have to come back to Piketty so soon!

I have read the book that has so shaken the English speaking world in its original French. I am told the English translation is excellent, but I wanted to see how agile and seductive Piketty is in his mother tongue. He is both. Here we have a worthy rival of classical liberalism.

Finders keepers

The first thing to note is a quotation from the 1789 “Declaration of Rights of Man and the Citizen” on the frontispiece of the book: “Social distinctions can only be based on common utility”. This principle is generally misunderstood. What the French Revolutionists meant is that legal privileges, such as those of aristocrats or churchmen of that time, should be abolished, so that people would be equal before the law. But the way they worded it has induced later egalitarians such as Piketty to demand that wealth should accrue only to those who have striven for it. Being well-off by inheritance through no merit of the lucky person is seen as wrong, as not derived from useful service to society by the legatee and quite unrelated with merit. This has led egalitarians to suspend the principle of equality before the law by forcibly taking from the well-off to give to the poor.

The question is, should we base the right of private property on labor, as John Locke argued? Locke’s justification of property is incomplete. Much of what the self-made man or woman has put into his endeavors is inherited, such as innate intelligence, will-power, beauty, strength or sheer luck—and in the United States the right to resources underground. An egalitarian could say that such windfalls are undeserved and therefore belong to ‘society’, whose caretaker is the government. Governments always attempt to take away such unearned elements of fortune with taxes on income or property, but the essential question is who has the ultimate right to these assets. John Stuart Mill found himself in a quandary when trying to apply the justification by labor to bequest. The person of fortune should be able to leave her accumulated wealth to whoever she wanted, thought Mill; but, as he saw the good luck of the legatee as unfair, he proposed to limit the amount that any single person should be able to receive by bequest.

These questions pose themselves with urgency at present, for example, in the fracking industry. In some states in America, the owner of the land is free to contract the exploitation of locked up gas and oil underground because the underground is his. This explains the vibrancy of innovation in this new gold rush in Texas or Oklahoma, in contrast with other states, such as California and New York, or locations in Europe, where the right to fracking is suspended by mere precaution or where the underground is deemed to belong to the government.

The right of property should be vested on the first occupant or subsequent acquirer by lawful transmission or contract with no interference or eminent domain by the State. This is the principle of “finders keepers”, which young children apply instinctively. However, Locke saw this as unfair in a fully cultivated Earth: would there be any land left to occupy? The crucial answer is that, in a progressive society where new products and services are invented or ‘found’ all the time, the property should devolve on the inventor, who should be able to exploit the new asset, though not with a monopolistic patent in the case of ideas.5

Success in an open economy comes from serving the public, not from hard work or personal virtue. Egalitarians see inherited fortune as unjust. Many also criticize large salaries and generous bonuses as ‘obscene’, especially when people who receive them are not sportsmen or famous actresses but are occupied in mysterious and underhanded activities such as banking or speculation. Their basic principle is wrong or at least woefully incomplete.

The future inequality

What I have noted about the convenience of the ‘finders keepers’ principle for progressive societies goes to the heart of Piketty’s thesis. He does not see the two-way connection between the accumulation of wealth and the reward of labor, on the one hand, and economic growth and development on the other. In other words, he has no theory of growth. He is content with extrapolating negative trends—often only very recent trends. Not having a theory of growth is a surprising deficiency in such a passionate egalitarian, who above all should concentrate on discovering ways to make the progress of the poor sustainable.

Piketty mentions two factors that lead him to predict an increase in inequality of wealth and incomes in the 21st century: weak demography and stalling production. First, he stresses that when families have many offspring, there will be more children to partake in the assets bequeathed by the previous generation and so less concentration of property. But fertility, notes Piketty, seems to be on the way down all round the world. The United Nations is even predicting negative population growth around the end of the present century. He concludes that inherited wealth will therefore increase its weight in determining the class structure of society.

See EconTalk podcasts on Income Inequality for more on this topic.

Second, Piketty takes it as given that the rate of growth of the world economy will slowly subside as the century proceeds. The reasonable way in which he puts this is a revealing example of his beguiling rhetoric. After observing that the per capita rate of growth of world production went up from 0.1% in the 17th century to 2.5% in the middle of the 20th (as summarized in his table 2.5), he contends that such a rate cannot be sustained. He is not a person to exaggerate his forebodings, though. His next step is to discount a forecast by Robert Gordon6 of a 0.5% rate of growth for the second half of the present century as too pessimistic: Piketty predicts a growth rate in the region of 1% to 1.5%. He adds that such a rate of growth, though apparently small, is a compound rate and therefore a huge force for social change. His conclusion, however, is carefully downbeat and ends with a question mark: “the end of growth?” Though he willingly admits that he cannot predict the future with any certainty, he still forecasts that, as population and production will probably stall, the wealth of the upper reaches of society (or classes, as he calls them) will grow both absolutely and relatively. Q.E.D.

Piketty’s laws of capitalism

Why all this should be so, Piketty explains with his “three laws of capitalism”. Calling them ‘laws’ is disingenuous, because at bottom they are only accounting tautologies. Tautologies tell us nothing about reality. They simply define the meaning of words and as such assist us in organizing our discourse, but they cannot help us predict or refute our predictions about the world. However, for people who hanker after certainty, they create a comforting feeling of inevitability, since they bear no connection with observations of fact. They are ‘true’ by their logical form. Let me now explain these so-called laws, as they are an essential part of the hocus-pocus of Piketty.

The first of these ‘laws’ is:

(1) α = r · β

where α is the share of total income accrued by the owners of capital out of total national income and r the return on capital. The second of these ‘laws’ is:

(2) β = s / g

where s is the rate of savings and g the rate of growth of the economy. Let us see what these first two steps mean, starting with (2).

β is simply a symbol for the proportion of savings over growth. If in (2) savings are very high compared to the rate of economic growth, this will make β very large. Going back to (1), if a large β is multiplied by a high r, or rate of return on capital, then large savings multiplied by a high rate of return will give you a very large α and capitalist fat cats will grow ever fatter.

This is why Piketty needs a high β to clinch his prediction for capitalism in the 21st century. He needs the numerator of (2) on the right-hand side to be consistently larger than the denominator. He needs the inequality in (3) to hold. This is his third ‘law’:

(3) r > g

To wit, that for long stretches in history and certainly for the coming century, the rate of return on capital will in all probability be greater than the rate of growth. This third law is his principal ‘law’ of capitalism. To get his results, Piketty needs savings to grow a little more quickly than growth.

For Piketty (per capita) growth is not brought about by increasing returns from globalization, investment in physical and human capital, new discoveries, or better institutions. It follows on the diminishing returns of faltering population expansion and dead-end technology. If both of these lose speed, growth, which started to reduce after 1970, will follow the same diminishing trend during the present century. As we have seen, he does predict that g, the denominator in (2), will only be in the region of 1 to 1.5%. Piketty also needs r in (1), the rate of return on capital, to be large, so that α, the share of capital in GDP, will displace the share of labor. Does he give any economic reason why r would be consistently large in the 21st century? He does not, that I can see.

For him savings, or the accumulation of capital, are determined by social institutions and not governed by economic incentives. The large salaries of the managers of public companies are the result of collusion among company directors. The fortunes inherited and capital gains obtained by the upper one per cent or five per cent of the population are due to the wealth that the previous generation could not help accumulating over their lifetime. Also, the larger the return on capital r at a given time, the greater the amount that is bequeathed to the following generation, says Piketty after looking at the statistics of mid-19th century and present-day United States and United Kingdom data. No economic explanation is given for this irrational bent to look after the welfare of the next generation. The final conclusion of this analysis is that capitalist societies will become ever more unequal and more fractured. The only remedy is to do what Piketty told the Socialist Party of France to propose in the previous two general elections: a marginal rate of income tax of 85% and confiscatory taxes on inheritance.

No theory of population, of life-time consumption, or growth

To be able to say something about this predicted increase in inequality in 21st century capitalism, Piketty needs to be sure that world population will stabilize or even start to reduce, and that savings and the accumulation of capital will become less and less productive.

What Piketty says about the effect of weak demography on economic growth is really beside the point when the problem is per capita income, unless you have a theory to show that population density by itself fosters growth. As somebody with aspirations to be a social scientist, Piketty should propose (and falsify or verify) a hypothesis or model about the relationship between population and growth, not simply posit that population growth per se is a cause of economic growth and the lack of it, of economic decline. With the right sort of institutional arrangements, a stable number of people who live longer and live in cities can enjoy growing wealth and welfare.

Similarly, Piketty’s assertion that the greater wealth of a country will lead the rich to leave larger and larger bequests needs to be backed by a refutation of the established theory of saving and consumption: by a rejection of the theory that, when acting rationally, individuals and families one with another will tend to increase their debts when young, accumulate wealth in middle age and, in retirement, spend the greater part of what they saved. Milton Friedman‘s The Theory of the Consumption Function (1957), for example, shows that there is no necessary connection between the rate of return on capital being greater than the rate of growth of the economy, on the one hand, and inherited wealth growing apace, on the other. The two may coincide or not.7

Piketty cannot be content with basing his prediction of a fall in the rate of economic growth simply on observation of recent trends. One needs to present a theory or model of economic growth and to try to falsify it if with the kind of data Piketty so sedulously collects. Proximate causes such as physical capital accumulation and technological advance are not enough to explain growth. And even among these proximate causes, Piketty astonishingly discards human capital. “When we speak of capital we exclude human capital”. Why does he take such a controversial step? Because for him, capital is only the sum of assets that can be purchased in the market, such as stocks and shares and real estate and does not include assets without a quoted price: only the capital value of slaves can be included in the stock of capital of a capitalist economy.8 However, in a footnote of chapter one on “Income and Output” Piketty does admit that it has been well known since the fifties and sixties that physical capital only explains a small part of the long term increase in productivity and that the essential part of this increase comes from the accumulation of human capital and new knowledge. This idea of defining capital only as something that can be owned by capitalists after having been extracted or expropriated from workers is an indication of how deeply the threads Piketty’s thought are dyed Marxist red.

A theory of growth must not only pay attention to proximate causes of growth, such as physical and human capital accumulation, technological progress, international trade, and globalization, but also to fundamental causes of development. One must model these different factors and change the weights of each in the model to explain the different paths followed by nations in their progress or lack of it: lucky or unlucky coincidences in history; geographic differences and natural resources; laws, regulations, and institutions that frame individual and collective action; cultural and religious differences.9 All these cannot be subsumed under simplified Marxist ‘modes of production’ governed by physical capital.

Piketty takes refuge in the fact that he has accumulated a huge quantity of data, some from sources previously ignored by the profession. A number of critics have concentrated on checking his figures and correcting statistical mistakes. All this is well taken. However, the central criticism of his book and previous writings is that he seems to move around his evidence like a headless chicken. No reliable results can come of induction without theory.

Krugman’s backhanded compliments

This is why Paul Krugman, despite the enthusiasm of his review, gives a nuanced view of Piketty’s achievement. Over the long run, says Krugman, “the stock of capital and total income must grow at roughly the same rate”. He adds that one side or the other can pull ahead for decades at a time. To translate Krugman’s remark into Piketty’s notation s = g, the secular rate of return r must go hand in hand with the secular rate of growth g although r can be larger than g for quite long periods. Krugman adds:

Just about all economic models tell us that if g falls—which it has since 1970, a decline that is likely to continue due to slower growth in the working-age population and slower technological progress—r will fall too. But Piketty asserts that r will fall less than g.

Now, watch Krugman’s next step:

This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines […], slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen.

A wonderful Krugman contortion! So many questions are left hanging in the air. Is there a watertight causal connection between savings and the return on capital? Piketty does not say. What part of saving goes into productive investment? For Piketty, most of it is poured into speculation and real estate. Why does the secular rate of growth tend to fall more than the return on capital? Because that was the case in mid-19th century and what has been happening again from around 1970. It is all induction without theory.

Marx’s laws of capitalism

Marx is ever present in Piketty’s book and at the Paris School of Economics but in a suitably modified form to take account of the failure of the predictions of Das Kapital. Piketty admits that Marx’s prophesies did not quite pan out. The Marxian model was mechanical in a way that Piketty is careful to avoid. For Marx, the return on capital is inversely proportional to the quantity of fixed capital per worker. Since in Das Kapital the productivity of capital inexorably diminishes with the years because technology does not progress, the only way out for the besieged capitalists is to go on increasing fixed investment and taking over failed rivals. But capitalists cannot avoid increasing the amount of fixed capital per worker, since that is the only way they have to increase their gross profits. The result of such infinite accumulation is that the rate of profits falls to zero or thereabouts and the capitalist system implodes.

Piketty puts it in his own softer terms and does not present his trends as the inevitable laws they were in Das Kapital. If we take formula (2) β = s / g, Marx assumed g to be zero or near zero. In that case, β tended to infinity. If that was so, despite r tending to zero, α, the share of capital in national income in (1) was bound to grow until capitalists engrossed the whole of GDP (leaving only the bare minimum to allow workers to keep their number constant, one with another). Revolution would then follow.

Piketty is thoughtful enough to say that growth will be positive in the 21st century, but he adds that g unfortunately will grow more slowly than r the return on investment. So the death of capitalism would come from a thousand cuts rather than sudden revolution. Piketty does believe that technological advance will be weak. Or if it is not weak it will be embodied in robots that will make the economy infinitely capitalistic and totally displace flesh and bone proles. He mercifully tells us not to despair, since capitalism can be saved by reducing capital investment with the help of hefty taxes on inheritance and high marginal income tax rates.10

Absolute poverty and relative inequality

I started by noting that Piketty made a philosophical mistake when he justified private property on the basis of merit. A second fundamental mistake of his comes from not distinguishing between absolute and relative poverty and from thinking that it is enough to show that inequality increases within countries. His data on the relative increase of wealth of the top 1% or 5% of the population in advanced countries are no doubt interesting, though some have been disputed. But he simply does not deal with the fact that poverty and inequality in the world have been falling steeply since 1970. I know he trusts the figures he has laboriously teased out from income an inheritance tax statistics. But why does he say nothing about the work and conclusions of the many economists, in different universities and within the United Nations, who have reached conclusions on poverty and inequality diametrically opposed to those of his group?

At this point I would ask my readers to go back to my column on “Poverty and Inequality”, written before I had even heard of Capitalism in the 21st Century. As regards poverty head-count, the fall has been such that the Millennium Development Goal, proclaimed by the United Nations in 1990, of “halving the proportion of people with an income level below $1/day between 1990 and 2015”, had been achieved by 2012. This wondrous development must be mainly attributed to the typical capitalist phenomena of globalization and increased international trade to which Piketty gives only cursory attention.

Insufficient though such an achievement is, everyone must admit it is most welcome. Economists outside the UN have independently corroborated the Millennium results: Pinkovskiy and Sala-i-Martin11 calculate that, from 1970 to 2006 the number of people consuming less than $2 has been reduced by millions. Given that in those years world population increased by some 2.88 billion and that the number of poor should have increased because it is the poor who tend to have many children, that reduction in poverty must be proclaimed as hugely significant. It is welcome on its own terms, as signifying that fewer people suffer extreme poverty. And it is welcome in terms of equality, since such a reduction in the number of poor must have alleviated inequality at the bottom end of the scale—the most telling part from the point of view of the welfare of humanity.12 Should we really be worrying about a temporary increase in inequality in the wealthy United States when capitalism is showing itself capable or reducing poverty at such speed?

Pinkovskiy and Sala-i-Martin in their Appendix measure inequality with a number of indices, not only the Gini coefficient favored by them, but also different Atkinson Equality Indices and the Sen Welfare Index. All these show a clear reduction of inequality in the world as a whole and in its different regions. True, they also note some increase in inequality within richer parts of the world, especially in the 1990s, an increase to which they lend much less importance than Piketty.13

Piketty’s book woefully incomplete

The people who care for equality more than for competition, who worry about relative poverty more than about absolute destitution will no doubt go on looking askance at capitalism. But they should not overlook facts that run contrary to their expectations. We need to know who is right and to what degree. Piketty, faced with such empirical results as those of the Millennium Development Program and the many papers coming to contrary conclusions from his on poverty and equality, should show the “comitas eruditorum” he has in such abundance and help us make progress in the study of the relief of world poverty and the increase of freedom of opportunity for the whole of Humanity.


Thomas Piketty, Capital in the 21st Century. Belknap Press, 2014.

Karl Marx, Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production, Charles H. Kerr and Co., 1906. [Available online at: http://www.econlib.org/library/YPDBooks/Marx/mrxCpA.html.]

Paul Krugman, “Why We’re in a New Gilded Age,” in The New York Review of Books. May 8, 2014. [Available online at: http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/.]

“Poverty and Inequality,” by Pedro Schwartz. Library of Economics and Liberty, Apr. 7, 2014. [Available online at: http://www.econlib.org/library/Columns/y2014/Schwartzpoverty.html.]

The American Constitution makes a clear distinction between property in material things and rights to ideas. Article 8: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Notice the clause “for a limited time”.

Robert J. Gordon, “Is US economic growth over? Faltering innovation confronts the six headwinds”. NBER Working Paper no. 18315, August, 2012. [Available online at: http://www.nber.org/papers/w18315.pdf.]

This is also a result reached by Modigliani, F. and Brumberg, R. (1954): “Utility and the Consumption Function”. As Sala-i-Martin rightly notes in “Piketty y ‘Capital en el Siglo XXI'”, the fact that r > g in a given society does not imply that inherited wealth increases in that society, because inherited wealth could be zero in such a society.

Piketty, “What is capital” in Chapter 1 on “Income and Output”.

Daron Acemoglu. An Introduction to Modern Economic Growth. Oxford and Princeton, 2009.

These are the kinds of proposals Marx and Engels made at the end of The Communist Manifesto (1848). See Piketty’s section “Returning to Marx and the tendency of the rate of profit to fall” in chapter 6 and Part IV of the book, on “How to regulate capital in the 21st century”.

Maxim Pinkovskiy and Xavier Sala-i-Martin, “Parametric Estimations of the World Distribution of Incomes,” NBER Working Paper No. 15433, October 2009. [Available online at: http://www.nber.org/papers/w15433.]

See Pinkovskiy and Sala-i-Martin (2009), page 38 for the empirical results of their paper. Piketty should have something to say on the effect of such steep falls in poverty on inequality in the world as a whole.” Global income inequality has fallen between 1970 and 2006. This is true for the Gini coefficient, for a wide variety of Atkinson indexes and General Entropy indexes as well as the 90th-to-10th and the 75th-to-25th percentile ratios.”

This, they say, has given rise to the feeling that the degree of inequality has increased the wealthier countries. They attribute it to a diversification within the middle class in the richer part of the world, more than offset by the rise of the middle class in China and India. Pinkovskiy and Sala-i-Martin (2009), pg. 26.


*Pedro Schwartz is “Rafael del Pino” Research Professor of at San Pablo University in Madrid where he directs the Center for Political Economy and Regulation. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene.

For more articles by Pedro Schwartz, see the Archive.