In his latest book, French economist Thomas Piketty warns that modern-day capitalism leads to unsustainable levels of inequality. While he is often linked to France's Socialist Party, his writings have made him unusually popular in the US.
Thomas Piketty’s “Capital in the Twenty-First Century” has only just been translated into English – several weeks ahead of schedule, due to popular demand – and the New York Times’s star columnist Paul Krugman has already described it as “the most important economics book of the year — and maybe of the decade”.
The French economist’s current US book tour is turning into something of a red carpet event. So far this week, he has met the White House’s Council of Economic Advisors as well as Treasury Secretary Jacob Lew.
“The Democratic Party, especially the Obama administration, has been in contact with us and using our findings for a long time,” Piketty told AFP in Washington.
On Wednesday evening, he was due to give a conference at the City University of New York, along with economics Nobel Prize laureates Joseph Stiglitz and Paul Krugman.
Capitalism's inherent flaws
In “Capital in the Twenty-First Century”, Piketty warns that free-market economies will see ever growing concentration of wealth in the hands of those who already hold capital.
“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based,” he wrote.
The Paris School of Economics scholar argues that in the long run, earnings from possessions such as property and financial assets grow faster than the rest of the economy – especially workers’ wages. This, he warns, leads to deepening inequalities with serious social consequences.
The belief among free-market economists that capitalism will regulate itself and lift the general population towards higher incomes is flawed, according to Piketty, because it is based on observations made during the 20th century, a war-ridden age unlike any other.
Peace brings inequality
“The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes)”, he wrote. But in peaceful times, the rich will get richer and the poor will get poorer.
While he builds upon the work of previous scholars of income equalities, from Karl Marx – who believed the accumulation of capital would cause the end of capitalism – to Simon Kuznets – who expected inequalities to level out as economies grew – Piketty’s success is linked to the strength of his 20-year-long research on income trends. He boasts an unprecedented set of “data covering three centuries and more than twenty countries”.
Piketty’s main suggestion to break the inequality cycle is to impose a worldwide tax on capital, which he acknowledges would be very difficult to achieve.
Such proposals are of course less popular with conservative Americans than with Obama’s supporters, and Piketty’s success in East Coast liberal circles cannot be mistaken for a blanket endorsement by US economists.
Weak on policy proposals
University of Texas economist James K. Galbraith regrets that the “meticulous examination of the facts” in the French scholar's book “does not provide a very sound guide to policy”.
Even the appreciative Krugman acknowledges that Piketty’s theory does not account for the recent spectacular rise in the income of managers such as the CEOs of multinational companies, which is not derived from their existing wealth.
Still, Piketty believes his views are more readily accepted abroad than they are back home. “In the US and broadly everywhere outside France, I enjoy a less narrowly political reception,” he said in Washington.
His closeness with members of France's ruling Socialist Party have placed him firmly on the left of the French political spectrum.
In 2007, he was economic advisor to Ségolène Royal, the Socialist presidential candidate who lost the election to conservative Nicolas Sarkozy and is now France’s environment minister. He is also the former partner of Socialist politician Aurélie Filippetti, now the country’s culture minister.
He is not, however, close to President François Hollande -- whom, according to AFP, he described as “rather bad”.
Date created : 2014-04-16