Thomas Piketty has just published an interesting follow-up to his epic Capital in the 21st Century (a book important enough to already have its own wikipedia page). Perhaps the most surprising claim he makes is that commentators have put too much emphasis on the role of “r > g” in his analysis of the dynamics of inequality:
… the way in which I perceive the relationship between r > g and wealth inequality is often not well-captured in the discussion that has surrounded my book…
I do not view r > g as the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century.
For an example of that overemphasis, see this delightful Colbert Report t-shirt:
Piketty goes on to explain that r > g determines the possible steady state wealth inequality in the long run, but does not entirely govern the magnitude of inequality, nor does it govern dynamics in the short run. He highlights, for example, how much of the recent income inequality in the US has been driven by labor incomes, the analysis of which has nothing to do with r (the rate of return on capital) and whether or not it’s significantly bigger than g. Instead, education and corporate governance take center stage:
[T]he rise of top income shares in the United States over the 1980–2010 period is due for the most part to rising inequality of labor earnings, which can itself be explained by a mixture of two groups of factors: 1) rising inequality in access to skills and to higher education over this time period in the United States, an evolution which might have been exacerbated by rising tuition fees and insufficient public investment; and 2) exploding top managerial compensation, itself probably stimulated by changing incentives and norms, and by large cuts in top tax rates. (72-73)
This is the same story we’ve been hearing ever since Piketty and Saez released their first working paper on top income shares in the US, as discussed by Paul Krugman as early as 2002 (for a history of income inequality debates and data, see here). Piketty’s book expands the focus of his earlier work to look at more countries over a longer time period, and places much more emphasis on long run dynamics of wealth inequality. The US story links up to that bigger picture, but is distinct from it – a point Piketty argues has been missed by his critics.
More generally, Piketty argues that institutions and events drive changes in inequality, interacting with shifts in r and g:
To reiterate, this argument does not imply that the r − g effect is the only important force that matters in accounting for historical variations in wealth inequality…. Most importantly, it is really the interaction between the r − g effect and the institutional and public policy responses—including progressive taxation of income, wealth, and inheritance; inflation; nationalizations, physical destruction, and expropriations; estate division rules; and so on—which in my view, determines the dynamics and the magnitude of wealth inequality. (76)
As some have already noted, Piketty writes about r > g as one of his three “laws of capitalism” and a “fundamental force for divergence” in his book (see for example Acemoglu and Robinson’s critique in the same issue), and in interviews he emphasized the role of r > g. So, this paper reads as a bit of a walking back of the strongest version of his claims. That said, I think his argument remains quite consistent. Capital in the 21st Century closes with a sweeping proposal for global wealth taxation and other progressive reforms designed precisely to modify the relationship between r, g, and inequality. If Piketty were truly an economic determinist, these proposals would be nonsensical.
In this essay, Piketty returns to those calls for global wealth taxation and adds another (shall we say “real utopic”?) policy proposal: democratized ownership. Inspired by the German model, which places more corporate control in the hands of workers seemingly without sacrificing efficiency, Piketty advocates broader institutional reforms alongside wealth taxation:
As I look back at my discussion of future policy proposals in the book, I may have devoted too much attention to progressive capital taxation and too little attention to a number of institutional evolutions that could prove equally important, such as the development of alternative forms of property arrangements and participatory governance. One central reason why progressive capital taxation is important is that it can also bring increased transparency about company assets and accounts. In turn, increased financial transparency can help to develop new forms of governance; for instance, it can facilitate more worker involvement in company boards. (87)
It will be interesting to see how this latest essay will be read, and to what extent it will change the conversation around the book and inequality more generally.