50Minutes - Book Review: Capital in the Twenty-First Century by Thomas Piketty: Understand inequality in the modern world

Capital in the Twenty-First Century , the 2013 bestseller by Thomas Piketty, deals with the historical dynamic of income and assets that has existed since the Industrial Revolution and still persists today. With a title that deliberately recalls Karl Marxs work on the accumulation of capital in the 19 th century, Piketty provides us with his analysis of the economic situation at the beginning of the 21 st century, with the advantage of having quantitative data at his disposal that would have been unimaginable at the time of classical economists.

The result of 15 years of compiling statistical data on over 20 countries work which led to the creation of the World Top Income Database (WTID) and many research collaborations, this work is an excellent reference point for those who want to improve their understanding of the transformations in capital, labour and the global economy over the last 300 years. Additionally, thanks to its historical distance, the study puts our current economic situation into stark perspective; it even calls, as we will see, for a paradigm shift.

Its premise? Left to itself in a period of weak economic growth, capitalism leads to a concentration of capital in the hands of a very rich minority, thus incessantly increasing inequality. In 50 minutes, this guide will present the books main arguments and the solutions suggested by the author.

Key information

• Reference edition: Piketty, T. (2014) Capital in the Twenty-First Century . Trans. Goldhammer, A. Massachusetts: Harvard University Press.
• Author: a French economist, specialising in the study of economic inequality, born in Clichy in 1971.
• Field: the ideas developed by Piketty can be likened to those of interventionism or Keynesian theory (which recommends the intervention of government powers in a countrys economy).
• Key words:

• Capital: the total holdings, financial or otherwise, owned by an entity (person, family, business, country, etc.), that constitute assets and can generate income. Thus, assets and capital are used synonymously in the book.
• National income: the total income of a country, whether it comes from within its borders or from abroad, with money sent abroad subtracted. National income is different from gross domestic product (GDP), which is the total of all production in a countrys territory, even if income is being sent abroad. Thus, for example, oil producers have a much higher national income than GDP, while developing countries, on the other hand, have a higher GDP than national income. The rich countries of the OECD, in turn, generally have a national income that is 1-2% higher than their GDP.
• Inflation: general and sustainable increase of living costs.

Born in Clichy in 1971, Thomas Piketty has been a professor of economics as well as a director of studies at EHESS (School for Advanced Studies in the Social Sciences) in Paris since 2000. From 2005 to 2007, he was also responsible for founding and then directing the PSE (Paris School of Economics). He has written many academic articles and several books dedicated to economic development and the matter of distributing wealth. His work Capital in the Twenty-First Century reached the status of a global bestseller, with several hundred thousand copies sold worldwide, not only in Europe but also in the United States and Asia.

Piketty places himself in a macroeconomic perspective on a global level. In doing so, he tries to add his contribution to the general reflection that followed the crisis of 2008-2009 on the workings of financial instability.

The crisis of 2008

In 2007, the subprime mortgage crisis broke out. Subprime mortgages were issued by American banks in large quantities after 2001 to barely solvent households who wanted to purchase a house. These high-risk loans were then sold to different financial stakeholders who bought them not with the aim of keeping them, but of reselling them with capital gain. But when many borrowers of subprime loans were unable to repay their debts and had their houses repossessed and resold to pay back the banks, this reduced the value of property everywhere, including for serious borrowers. Through a domino effect, this property crisis led to the collapse of the financial sector and ended up causing serious problems in the global economy the following year.

The crisis led to a reconsideration that is still underway currently of the dominating paradigms in economics: the theoretical concepts based on neoclassical doctrine and a methodology that relies mostly on mathematical models. While we have been able to observe the development of new approaches which often starkly differ from neoclassical principles since the early 2000s, the discipline taught at university is still very much attached to this trend dating from the end of the 19 th century, which contributes to a dominant model that is often out of synch with an evolving society. The collapse in 2008 highlighted these shortcomings, by illustrating the disciplines inability to predict or even explain crisis phenomena.

Neoclassical theory

Neoclassicism is an economic trend that dates back to the end of the 19 th century, and which seeks to give scientific legitimacy to economics through mathematical models that illustrate ideal situations. These depend on several theoretical assumptions:

• economic phenomena are the result of individual behaviour (microeconomic focus);
• economic actors are rational ( homo economicus ) in their search for satisfaction (or utility);
• the actors have all the necessary information before acting.

Piketty therefore joins the concerns of his time (reporting the recent evolutions of our system on a global level and trying to understand the reasons behind the current instability), although his work does not conform to normal ways of economic thinking. First of all, his study is much broader than most general studies, both on a geographical and temporal level as well as in terms of the amount of data it is based on. Additionally, his point of view that redistribution and accumulation of capital are major elements of a working modern society is atypical. His methodology, on the other hand, is just as close to economics as it is to history or sociology.

This work is not only aimed at specialists, but also at a broader public that would like to broaden their knowledge of these subjects.