Piketty, Capital and Growth: Arguing First Principles
All the world—and not just the world of economic academia—is abuzz with talk of the work of Thomas Piketty, whose new work, “Capital in the 21st Century” has just been translated in English. And it’s easy to see why. As we seek to expand inclusive growth, understanding the economic drivers is imperative.
The book is a tremendous accomplishment in its sweeping historical and social analysis. This is a much-welcomed trend in economic research as it relies not only on economic principles, but anthropological, psychological, and political analyses as well.
The central conclusion is that there is no natural tendency toward greater equality in the market economy. The relatively high degree of equality seen in the post-Second World War decades is due primarily to the destruction of inherited wealth, and secondarily to introduction of progressive taxation. The First and Second World Wars did much of the work in destroying old wealth that passed from one generation to the next. But post-war the punitive death duties introduced in the U.K. and elsewhere in Europe also helped wipe out inherited wealth.
There are some controversial aspects to his work. One of Piketty’s pivotal observations is that capital has grown faster than the economy in recent decades. While this is empirically correct, he then makes the leap that a greater degrees of inequality will result if left unchecked.
What is ignored in his analysis is why capital should grow faster than the economy. I see this as a direct consequence of the rise of the knowledge economy. Today, capital is rarely passive and certainly not homogeneous. Increasingly capital embodies knowledge, and knowledge in turn empowers capital to be more productive.
Treating capital as homogeneous is the original error that Marx committed, which contributed to the complete collapse of the Marxian analysis, including its prediction of the inevitability of the triumph of communism. I believe Piketty has made the same mistake in a more spectacular way. Capital has become more “intelligent” in the last several decades: just think of the difference between capital invested in government bonds and capital invested by venture capitalists that helped launched game-changing businesses like Amazon, Google, and tens of thousands innovative businesses that never made it to media headlines.
Piketty shows no recognition of the knowledge economy and implications for capital. Instead he recommends imposing a global wealth tax and more progressive taxation. This is unrealistic to begin with, as well as wholly unimaginative. It could end up destroying the very basis of today’s prosperity—our ability to invest in knowledge and to make it to work more productively. The alternative to the current state of affairs is not to stifle the power of the knowledge economy, but to make it inclusive.