Capital in the Twenty First Century

I’ll confess I didn’t finish it (audible tells me I made it about three-quarters through). It is, however, a great book, but it does not make for great listening. This one (and it is the first book I’ve thought this about) really should be read on paper.

The central thesis of the book is that the return on capital generally exceeds the rate of economic growth, and when economic growth is slow (as it has been for much of human history) that this leads to a natural tendency for societies to develop extreme inequality.

I’ve long had a “rich-get-richer” argument playing out in my head, but through a slightly different mechanism, which plays out like this: as people get wealthier, their ability to take risk with their capital increases; as this “risk appetite” increases, they are able to devote a more substantial share of their capital to higher-risk assets with a higher expected return; this, then, would lead to a higher overall return to their investments. Think of a person initially holding only cash, then saving up enough money for a down payment on a home, and then to investing their savings in liquid stocks and bonds. Each class of investment (cash, real estate, equities) is riskier and higher-returning than the last, and this sequence leads to an increasing return on increasing capital. Wealthier people are invested in all these asset classes and more, such as hedge funds or privately-held companies.

So it was no surprise to me that there should be runaway effects to wealth inequality. But the rationale Piketty lays out are quite different. I must confess that I did not completely understand the reasons that returns to capital (as a whole, not the varying allocations of capital that I describe above) ought to generally be at a rate faster than economic growth. But the data show convincingly that it is now, and has usually been so. The result is runaway wealth inequality that has only been tempered throughout human history by capital-destroying calamities, such as world wars, that bring people back to an equal footing.

Where Piketty really succeeds, if you ask me, is in linking this argument to the literature describing the extremely stratified societies of, for example, Victorian England. He saying “watch out, these crazy societies could one day be reborn”. I hope he’s wrong, but he’s given ample reason to fear that he might be right.