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Piqued by Piketty?

28 April 2014

Valade Baudard de Sainte James copyThomas Piketty’s new book may have a claim to being the most important, novel, readable and intelligent work published this century. Yet it is not about art, literary criticism, philosophy, politics or history (although it impinges on all of these): Le Capital au XXIe siècle is, dare I say it, a lengthy tome about that much derided subject that used to be called political economy (before E. C. Bentley made the term rhyme with John Stuart Mill’s natural bonhomie). But, although the author has heeded Miss Prism’s advice and judiciously omitted the chapter on the Fall of the Rupee, what he has delivered (in 969 pages in the French edition, rather fewer in English) is quite sensational enough.

I don’t intend to summarise his argument as my strongest advice is to buy the book and read it yourselves. If you are too lazy, you can study the author’s own lecture slide-pack, but do at least start with the introduction also freely available on his site. I’m quite sure you will want to continue. I hope – but rather doubt – that the prime minister will give copies to every member of his cabinet for their summer reading list.

You will have seen reviews (Martin Wolf in the Financial Times and Paul Krugman in the New York Review of Books are both worth reading), most if not all recognising the significance of his achievement, not least in presenting for the first time a comprehensive analysis of the distribution of wealth based on a profound investigation into tax records in a great many countries. One of the unexpected by-products of the French Revolution was a depth of information of unparalleled historic continuity in the author’s native France, but working with others he has extended this to provide a broadly global account of his subject with matchless authority.

His book considers the importance of capital (which he shows is best understood as a multiple of national income, and which, despite a dramatic drop accounted for by two world wars, has now recovered to historic highs) and the inequality with which it is distributed (which inheritance threatens to return to alarming concentrations last seen in the Ancien Régime and the Belle Époque).

His analysis reduces some extremely complicated issues to relatively straightforward concepts combined in the most elemenatry mathematics ever seen in an economics treatise (introduced with withering observations on the habits of most professional economists who delight in the opposite approach). It is the first time I have seen Marx explained in terms of a mathematical singularity more familiar from cosmology. As the author himself is aware, reducing multidimensional phemonena to single parameters is a rather hazardous business, and my broad unease here is that the author occasionally does just this.

There are only a handful of tiny blemishes. For the urgently awaited second impression, the publishers could correct Mr Darcy’s first name: Jane Austen’s hero celebrated a real family whose accumulation of vast wealth commenced in the fifteenth century, and which was rather more recently the subject of an important legal case on capital transfer tax avoidance – a topic considered all too briefly in Piketty (though its importance will not diminish if his recommendations are implemented).

Instead of reviewing the book, one could quite constructively review the reviews: not all are up to the standard of the FT or NYRB. Perhaps one of the surprises is that there has not so far been more open hostility, but I predict you will see quite a lot of that soon once the full danger of Piketty’s message has sunk in. One economics editor in a major national newspaper seemed simply not to have read Piketty’s lucid explanation of why “supermanagers” are paid too much, and resorted to trotting out the tired old nonsense about the need for incentives. No intelligent person can still seriously hold that belief: but the fact that some who do are still employed in journalism is to my mind a significant contributor to the survival of the kleptocracy.

Where many reviewers have a point however (and where I too disagree with Piketty) is in the “what is to be done?” section. Of course this was the problem with Marx too: brilliant analysis of the problem (based on the inadequate information then available), rotten prescription for how to deal with it. (Indeed Piketty’s analysis is not far away from Marx’s, once he realized that even a little growth avoids the black hole Marx predicted.) What Piketty concludes is that we need a global wealth tax.

There is too much to say on why this isn’t quite the right answer. Partly his argument is unconvincing because, like many abstract prescriptions for taxation, it is difficult to work out the detail: statements like “capital is a better indicator of the contributative capacity of very wealthy individuals than income” may have some validity, but the broad brush they run over asset-rich, cash-poor individuals opens the door to the viciousness of the mansion tax (remember that politicians don’t do centiles, and what might be good for the superwealthy tends to be applied to broader groups).

My view is that there is a far simpler solution, and one I have already advocated in this blog: 100% death duties. Indeed Piketty’s book seems to me to offer the strongest possible argument in favour of my proposal. Rather than taxing wealth that has already been accumulated, far better (and politically easier) to change the fundamental culture in which children expect to inherit. It is much easier to stop someone receiving someone else’s property than to take away what they already have.

Much the same point arises with supermanagers’ remuneration. We need shareholders to block these packages before they are awarded, not states to try to tax them when it is too late (and when, if the packages were really required for staff retention, a tax would simply gross-up demands to the further detriment of shareholders.)

Piketty’s clarity of thought illuminates many contemporary debates. Most recently I have attacked George Osborne’s abolition of annuities on a number of grounds: but Piketty’s equation by = μmβ says it far more succinctly. Here by is the economic flow of inheritance as a proportion of national income (which he shows is a BAD THING), while μ is the average wealth at death (which will be zero if funds are annuitised). So you don’t even need to ask what m and β are. Simples.

Whether or not you agree with Piketty’s recommendations, his analysis uniquely illuminates these vexed debates concerning the most fundamental issues before society. It is difficult to disagree with his conclusion that inequality can go in either direction, and that what happens depends on what policy choices our politicians make. This has some analogies with climate change: there is no magic law of nature that will rescue us from the consequences of bad choices. Unless of course you are one of those reviewers who thinks Piketty has failed to explain why inequality is bad. That’s like criticising the Rembrandt catalogue raisonné for failing to explain why art is important (a question better directed at the culture secretary).

I said above that this book impinges on many subjects, including art history. I don’t simply mean the opportunity to reproduce above the fine pastel by Jean Valade of the financier Baudard de Sainte-James (1736–1787), celebrated  for his “luxe insolent”, and of whom Mme Vigée Le Brun (herself no revolutionary) deplored the fact that “la révolution n’est point arrivée à temps pour punir M. de Sainte-James d’avoir étalé tant de magnificence.” But more profoundly, it is not by coincidence that the popularity of pastel as an exclusive, elitist statement (see my post) coincides with the very periods when inequality of wealth distribution was at its most extreme: the Ancien Régime and the Belle Époque. If you believe Piketty’s only-slightly-less-apocalyptic-than-Marx vision, perhaps the silver lining will be a resurgence of interest in the medium.


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  1. The Piketty fallacy | Neil Jeffares

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