In a tour de force of economic analysis that has swept Washington, a 42-year-old French economist has upended conventional wisdom about the causes and consequences of inequality. Tom Piketty’s new book, “Capital in the Twenty-first Century,” quickly hit the New York Times best seller list and earned its author a seat at the table with President Obama’s top economic advisors.
Piketty argues that we have badly misread the ebb and flow of inequality over time. Most people have been lulled into a trap of thinking that relatively low rates of inequality were, until recently, the norm. This error is certainly understandable, for demographic reasons: Most people alive today either came of age in the immediate post World War II years, when inequality was much lower than it is now, or they were taught in school by people whose understanding of economics was formed during this period. This overemphasis on the recent past led to the impression that the low inequality of the 50’s, 60’s and 70’s was somehow “natural”– and that today’s high inequality is an aberration caused by deregulation and tax-cutting fever.
Piketty argues that we have it backwards: the mid-20th century was in fact an aberration with unusually broad prosperity and low inequality. What is happening now is merely a return to the way western economies have worked for most of the past 500 years.
By making this argument, buttressed with reams of data from multiple countries over several centuries, Piketty positions himself squarely against mainstream economic thinking. The mainstream view holds that inequality will arise, but will gradually decline over time as wealthy people dissipate their holdings among descendants, new technologies dethrone global corporations, and rising education levels boost earning power worldwide. He argues that while some forces like these tend to reduce concentrated wealth, there are other, stronger forces at work. Over time, he says, the return on capital exceeds the total growth rate of most modern economies and as a result, those who have capital tend to get more of it.
In Piketty’s view, inequality grows steadily and consistently until wars or other major geopolitical forces intervene. World War II destroyed the European aristocracy and its wealth. It demolished factories everywhere but in the U.S. And this destruction led to a vibrant period of growth, during which the fruits of the post-war boom were shared unusually broadly. But over time the traditional pattern reasserts itself, until another global shock intervenes. This could take centuries.
Piketty’s argument has major implications for government policy. It provides solid empirical evidence for rejecting the trickle-down argument that low taxes and low regulations will somehow result in broad prosperity. It supports the case that strong government intervention is needed to prevent inequality from reaching levels that limit growth and destabilize society. Piketty’s solution is appealing but politically-challenging: a progressive global tax on wealth, starting at the level of 1 Million euros. Not surprisingly, Piketty’s scholarship is under relentless attack by libertarian and conservative think tanks and their allies.
In a sense, Piketty’s work is the intellectual companion and counterpart to the work begun by Occupy. Occupy deserves credit for introducing the idea of the 99% vs. the 1%. This powerful frame provided a solid moral foundation for politicians and others who want to challenge inequality but are afraid of the “class warfare” critique. Piketty’s work provides an intellectually robust framework for understanding just why inequality has soared, and why laissez faire solutions are doomed to fail. It’s an essential part of any discussion of class structure in America today.
David Brodwin is a co-founder and director of the American Sustainable Business Council. Follow him on Twitter @davidbrodwin.