Capital in the Twenty-First Century

Reviewed: William Keegan
Belknap/Harvard, 696pp, £29.95
Tablet bookshop price £27
Tel 01420 592974

Although I never met Keynes – I was eight years old when the great man died – I knew some of his Cambridge contemporaries. One of them, the late Sir Dennis Proctor, who worked as a civil servant on the wartime publication Full Employment in a Free Society, was a classicist who was bold enough to ask Keynes, a mathematician, whether one needed to be a mathematician to understand economics. “No,” was the reply, “but one does need a sense of proportion.”

This exchange comes to mind in the wake of the controversy that has followed the initial acclaim for Thomas Piketty’s analysis of modern capitalism. Everyone knows by now that his book has become a publishing phenomenon, but in spite of warm endorsements by Nobel Prize-winning economists, its statistical basis has been challenged by the Financial Times. Keynes’ insistence on a sense of proportion is relevant here. Within days, Piketty retorted that the FT’s economic editor’s statistics were themselves “deeply flawed”. This arcane dispute over data does not affect Piketty’s central argument that after a long period during and after the Second World War when there was a trend towards greater equality of income and wealth in the advanced economies, in recent decades this gap has widened considerably.

This is hardly new to students of recent economic research. But Piketty claims that his researches, going back several centuries and covering many countries, are more convincing than those of his predecessors. What Piketty has done is to capture the right moment, when there are concerns about the concentration of wealth in fewer hands, and when the injustices of modern capitalism have been worrying everybody from the Pope and the Archbishop of Canterbury to the director of the International Monetary Fund and the governor of the Bank of England. At a time when, despite the contribution of an overpaid banking sector to the financial crisis, left-wing political parties have been almost supine in their reaction, it comes to something when the heads of the IMF and the Bank of England make speeches sounding as though they are to the left of the Labour Party – oddly enough, at a conference organised by the Financial Times.

Whatever the outcome of the disputes about Piketty’s data, his case is supported by many other studies that show the trend towards increased inequality during recent decades. Where there may be room for dispute is with his belief that there could be something inevitable about this. I say “could” because he writes at one stage, “The central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of [economic] growth can in the long run have powerful and destabilising effects on the structure and dynamics of social inequality,” while at another point he acknowledges that “one should be wary of any economic determinism in regard to inequalities of wealth and income.”

As befits a book of such size, Capital is broad-ranging, both historically and geographically. There are references to what Jane Austen or Balzac can tell us about wealth in the nineteenth century to leaven the dry statistics. Before reading the book, I noticed that Piketty was being derided for advocating a “global tax on capital” as one means of redressing the balance. But in fact when we get to page 515 we find the man himself conceding that while “such a tax would provide a way to avoid an endless inegalitarian spiral and to control the worrisome dynamics of global capital concentration”, nevertheless “global tax on capital is a utopian idea”.

Piketty’s central analytical concern is that “the private rate of return on capital can be significantly higher for long periods of time than the rate of growth of income and output.” This is disputed by economists more mathematically inclined than your reviewer; but there are grounds for hope in that many of the factors that have aggravated inequality and hurt the poor have been the consequences of political decisions by right-wing ideologues. It is time for a reaction against such inegali­tarian and, to my mind, unchristian forces.

Globalisation has been an important factor in making life difficult for some workers in the advanced economies. There is a paradox in that while it has been fashionable to encourage the growth of “developing countries”, the perceived consequence has been a threat to jobs and pay. But we do not have to have a “race to the bottom”. Rather than accepting that we can no longer afford decent standards of welfare, developing countries should aspire to the best standards of European welfare states.

Piketty’s conclusion that the period of narrowing differentials of income and wealth after the Second World War was an aberration from historical inegalitarian trends might not prove inevitable, as I think Piketty realises implicitly. A political reaction – I hope it does not come to revolution – could prevent it coming to pass. There is surely a need for a revival of enlightened trade unionism. And we are already seeing a reaction against the bourgeois triumphalism that followed the collapse of Soviet Communism.

This impressive book contains the odd equation and chart that might not appeal to the general reader, but I hope this work will not go the way of A Brief History of Time – a book more talked about than read. Incidentally, congratulations to Arthur Goldhammer on his sparkling translation from the French.