Reviewing Thomas Piketty's Theory of Capital
Updated: May 7, 2022
Capital in the Twenty First Century by Thomas Piketty. Translated by Arthur Goldhammer. Cambridge: The Belknap Press of Harvard University Press, 2014. 685pp. Rs.1495. Hardback, ISBN: 9780674430006.
Sociologists have been interested in understanding the dynamics of social inequalities and its changing forms historically. For instance, it was Karl Marx, who propounded a very critical yet politically influential analysis of the workings of capitalism and its implications via alienation, exploitation and deepening class inequalities. Similarly, Max Weber made an attempt to explain the workings of capitalism with the emergence of ‘rational enterprise’ i.e. bureaucracy. The recent writings of sociologists such as Mike Savage, Charles Tilly, David Graeber, Richard Sennett and Goran Therborn, analyzed functioning of the mechanisms of social inequality in the contemporary societies. Moreover, economists (e.g. Simon Kuznets, Joseph Stiglitz, Amartya Sen) have also been studying the dynamics of capitalist economy, economic inequalities, globalization, laws of market, changing role of state and so on. Thus, the problem of inequality is central in social science in general, e.g. whether it is the economic meltdown of 2007-8, or is the slogan of Occupy Wall Street movement (We are 99 %, who is 1 % !) or it is through rising social movements (particularly in Global South) against the neoliberal destruction of collectivities. It is in this backdrop that Piketty’s Capital appeared. It has been widely read and praised for its lucid yet critical analysis of inequality, wealth distribution and capitalism in the contemporary world. Piketty, in his international bestseller, has explained the dynamics of contemporary capitalism while tracing the patterns of the distribution of income & wealth between and within countries e.g. France, Germany, Britain and also America over the past two centuries. He presents quantitative data collected from tax-records (which allow long-term perspective), historical data provided by World Top Income Database (WTID) and builds on Kuznets’ pioneering work evolution of income inequality in America. Also interesting is his usage of distribution tables to analyze inequalities instead of economists’ conventional tool i.e. Gini coefficient. One of the strength of his work is aggregation of national statistics from various sources and their depiction through large time-series. He demolishes the myth of ‘meritocratic values’ and principles of justice’ usually attributed to American society, by showing that top decile own 72 % of wealth, whereas the bottom half just 2 %, and hence is becoming a society of ‘supermanagers’. The sharp increase in concentration of income is due to rapid increase in ‘supersalaries’ of the top decile.
He draws on the economic analysis of capital/income ratio; and proposes an empirical pattern of inequality which is shaped by ‘forces of convergence’ and ‘divergence’. The main argument of the book is about the ‘central contradiction of capitalism’ and Piketty explains the force of ‘divergence’ by the formula of inequality: r>g, r stands for annual rate of return on capital and g stands for rate of growth of the economy. If the income from capital exceeds the income from labor, it results in the increased share of capital in the national income. The return on capital is usually higher than the economic growth rate. It follows from this argument that inherited wealth grows faster than income. His work also challenges the meritocratic values and principles of equality and liberty so fundamental to the modern day democracies. He realized the inherent tendencies of the capitalism towards inequality and therefore, the threat to liberal democracies lies within the dynamics of capitalism. Piketty reaffirms the critique of capitalism when he argues that inequalities won’t disappear even if there is completely free market economy at work.
The first section is about the concepts used in the book: national income, capital, capital/income ration and overall global distribution of income and production as well as population growth since industrial revolution. The second part is an elaboration of Piketty’s own unique way of analyzing income growth data of countries America, Britain, Germany, and France. He argues that the major point to be kept in mind is how the growth of capital is not guided by any romantic notion of ‘natural growth’ and must be seen how development towards technology and democratic rationality has underlying political forces. Piketty attributes the reduction in inequalities to the two world wars, depression, and inflation but have not shown any interest to discuss how wealth distribution differed in socialist economies and capitalist US economy during 1960’s and 1970’s.
Post 1970’s the inequalities of wealth, and the growth of capital has returned to its extreme form. With his empirical-historical data, Piketty examined the dynamics of capital/income ratio at the country level and the overall growth of national income in the context of economic and political changes of two world wars. It shows how the Europe’s return to patrimonial capitalism is nothing new as it had the similar past in the nineteenth century.
The third section describes how the two world wars and public policies have played role in reducing inequalities in the twentieth century. This section also explains how the inequality begins to rise after 1970s-80s within the changed institutional and political context. Piketty focuses on explaining the relative importance of inherited wealth over the income from labour. For instance in his analysis of structure of inequality, he says that ‘inequality with respect to capital is always greater than inequality with respect to labor’ (p.244). According to Piketty, this aspect can be found in all the societies and it tells about the nature of economic and social processes which shape the dynamics of capital accumulation and the distribution of wealth. Piketty traces interestingly also the literary depiction of inequalities in novels of Jane Austen and Balzac. The last section of the book is about Piketty’s policy recommendation to deal with structures of inequality via a global wealth tax on capital, which according to Piketty himself is a utopian ideal. It’s paradoxical that Piketty does not bother to explain what will be the source of this ‘force of convergence’ and the material (political) conditions, which are required for the emergence of ‘global wealth tax’.
Let’s have the final response as a sociologist. Even though Piketty begins his work with mentioning the labor conflict at the Marikana mines in South Africa, he soon loses his focus on ‘class’, ‘social movements’, ‘neoliberal state’, and immerses himself in the vast economic data. Piketty’s work although mentions that we must consider the ‘political nature’ of inequalities but he never explores the socio-political dynamics. It also calls in question the label he uses for his approach (as political economy analysis). For instance, when he asserts that wealth inequalities reached to lowest ebb during the World Wars, he did not explore the socio-political conditions under which these policy changes happened. Piketty’s work also avoids any theoretical engagement with Marxists writings that have long sought to explain the mechanism and dynamics of capital. This work fails to connect with important traditions of critical theory on the question of inequality, citizenship and democracy as well.
However, in spite of the above mentioned concerns and limitations, Piketty’s text provides a new narrative about the growing (universality) inequalities of wealth under capitalism, and that too within the context of current (hyper) obsession with the discourses of the ‘failure of grand narratives’. It thus brings back to the heart of social science knowledge, i.e. the historical analysis of the dynamics of inequalities in the liberal capitalist democracies and the ongoing social transformations. It also affirms that social inquiry is capable of uncovering the structures of domination and inequality with its systematic application of the methods of research.
Dr. Suraj Beri